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Note: In order to lay off risk on its insurance obligations, Century Indemnity Company (Insurer/ Reinsured) purchased reinsurance polices from AXA Belgium (Reinsurer), a reinsurance company. The reinsurance agreement provided that disputes would be submitted to arbitration. When a dispute arose regarding the documentation that must accompany claims under the reinsurance policy, Insurer/Reinsured commenced arbitration.

In connection with the arbitration proceedings, the Arbitral Panel ordered Reinsurer to provide "clean, unconditional, irrevocable and evergreen letters of credit." Accordingly, Reinsurer obtained a standby LC in excess of US$1 million. The Final Award provided that "the letters of credit posted by [Reinsurer] as ordered by this Panel shall be adjusted annually, on or before December 31 of each year."

Insurer/Reinsured had the Final Award confirmed in the U.S. federal court in Philadelphia and when Reinsurer allegedly refused to pay further claims, Insurer/Reinsured moved in that court for an order holding Reinsurer in contempt instead of seeking relief from the Arbitral Panel. Reinsurer claimed a right of offset and filed a cross-motion to stay the litigation pending resolution of an arbitration it had commenced and an action to compel arbitration that it had commenced in the federal courts in New York.

The District Court of Eastern Pennsylvania, Diamond J., denied Insurer/Reinsured's motions and denied Reinsurer's motions for partial satisfaction and its motion to stay as moot, allowing the New York litigation to continue.

The Judge observed that Insurer/Reinsured, "[h]aving gone through (and paid for) an arbitration, now faces the prospect of another arbitration ... . [Reinsured] could have avoided its evident frustration had it asked the Panel - either during the 2006 arbitration or in the twelve months following the Panel's Award - to determine its entitlement to those reimbursements it believed it was owed by [Reinsurer]." In attempting to explain the situation, the Judge stated, "In recent years, as [the parties] have mediated, arbitrated and litigated their contractual rights and obligations, their disagreements have grown so bitter that in the instant dispute, the Parties cannot seem to agree on the time of day. That the Parties' motions, cross-motions, and crosscross- motions generate more heat than light has made this matter especially difficult."

In the course of the dispute, it appears that Insurer/Reinsured drew US$971,520.77 on the standby.

[JEB/eml]

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