Evolving issues in reinsurance disputes: the power of arbitrators.

• Author: DiUbaldo, Robert W.

INTRODUCTION

Due to its efficient and cost-effective nature, arbitration is often the preferred approach for resolving reinsurance and other complex commercial business disputes. (1) For this reason, reinsurance contracts, as well as many other commercial agreements, often contain arbitration clauses requiring that any and all disputes arising under the contract be resolved by arbitration. (2) The Federal Arbitration Act ("FAA") governs most reinsurance arbitrations in the United States. (3)

Arbitration is a creature of a contract, and the powers that arbitrators possess originate from the parties, who agree to confer specific powers on the arbitrators--either through an arbitration clause in the contract or through a separate agreement. (4) Typically, arbitration clauses found in reinsurance agreements confer broad power on arbitrators with respect to certain procedural or substantive issues. (5) As discussed below, where an arbitration clause enumerates specific powers to arbitrators, it is rare that parties challenge an exercise of those powers. Parties often challenge an arbitrator's actions, however, where the arbitrator acts in a manner not expressly provided for in the contract. In such instances, courts will look to the language of the parties' contract, as well as the FAA, to determine whether an arbitrator has exceeded his powers. (6)

Cases discussed in this Article suggest that courts often struggle to grasp the extent of arbitral powers pursuant to the interplay between arbitration agreements contained in reinsurance contracts, industry custom and practice, and the FAA. The result has been contradictory and often inconsistent decisions in this area of the law.

This Article examines emerging areas of the law governing certain procedural powers of arbitrators that has impacted and will continue to impact reinsurance arbitrations, as well as other commercial disputes. Specifically, the Article focuses on an arbitrator's powers with respect to the following procedural issues: (i) consolidation; (ii) non-party discovery; (iii) confidentiality; (iv) summary adjudication; and (v) the enforceability of a hold harmless agreement.

1. CONSOLIDATION

   The issue of whether multiple disputes among related parties should be consolidated often arises in reinsurance arbitrations, where many contracts involve several reinsurers sharing a certain risk ceded to them by a single insurer, known as a cedent. (7) Until recently, the majority of case law has not supported consolidation, absent specific language in the parties' contract. (8)

   A sample consolidation clause in a reinsurance contract may appear as follows: "If more than one reinsurer is involved in an arbitration where there are common questions of law or fact and a possibility of conflicting awards or inconsistent results, all such reinsurers will constitute and act as one party for purpose of this clause." (9)

   A party seeking to enforce consolidation in an arbitration agreement may petition the court to do so pursuant to section 4 of the FAA, which provides that "[a] party aggrieved by the alleged failure, neglect or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court ... for an order directing that such arbitration proceed in the manner provided for in such agreement." (10) Although the language of this statute seems clear, courts have interpreted it in a variety of ways.

   Early interpretations of section 4 held that an arbitration panel lacked the authority to order consolidation. In Del E. Webb Construction v. Richardson Hospital Authority, the Fifth Circuit held that under section 4 of the FAA:

   The question of consolidation ... is for the district court because the court must determine only whether the contract provides for consolidated arbitration, a question free of the underlying facts. Moreover, it is unclear how separate arbitrations could be consolidated by one of the arbitrators. In short ... under [section] 4 of the Federal Arbitration Act the sole question for the district court is whether there is a written agreement among the parties providing for consolidated arbitration. (11) Other courts have held that consolidation was only appropriate with the parties' consent or if the contract expressly provided for consolidation. (12)

   A new line of cases, however, has emerged from the Supreme Court's decision in Howsam v. Dean Witter Reynolds, Inc., in which the Court held that "issues of procedural arbitrability, i.e., whether prerequisites such as time limits, notice, laches, estoppel, and other conditions precedent to an obligation to arbitrate have been met, are for the arbitrators to decide." (13) Thus, "'procedural questions which grow out of the dispute and bear on its final disposition' are presumptively not for the judge, but for an arbitrator, to decide." (14)

   Post-Howsam decisions have interpreted consolidation as a procedural issue best left in the hands of arbitrators. (15) For example, following the Howsam decision in 2002, the First Circuit held in Shaw's Supermarkets, Inc. v. United Food & Commercial Workers Union, Local 791 that the issue of whether multiple grievances before the American Arbitration Association should be consolidated into a single proceeding was for the arbitrator, not the court, to decide. (16) The First Circuit also relied on the Supreme Court's 2003 decision in Green Tree Financial Corp. v. Bazzle, where the Court held that arbitrators should decide procedural questions and issues of contract interpretation. (17)

   In 2004 the United States District Court for the District of Massachusetts cited Shaw Supermarkets, Inc. with approval in Employers Insurance of Wausau v. First State Insurance Group and noted that "[u]nder Howsam ... this [consolidation] is a procedural matter for the arbitrator." (18)

   This trend continued in 2005 when several federal district courts held that consolidation was an issue of contract interpretation and arbitration procedure--matters that parties would expect arbitrators to decide. (19) In Certain Underwriters at Lloyd's v. Century Indemnity Co., the Eastern District of Pennsylvania refused to consolidate multiple arbitrations brought by members of a reinsurance program against their reinsurer, Lloyd's, because the reinsurance contracts at issue did not explicitly provide for consolidation. (20) The program members did not move the Court to compel consolidation of multiple arbitrations, but rather initially submitted a single demand for arbitration against Lloyd's. (21) Lloyd's challenged this procedure, arguing that it had not consented to consolidation and that the reinsurance contracts did not provide for this option for resolving disputes between the parties. (22) The Court held that, although the program members did not seek an order consolidating the disputes, there was no contractual language supporting consolidation and, even if there was, such a request must be directed towards the arbitration panel. (23)

   Over the past two years, courts appear to have erased whatever doubts remained as to whether consolidation is an issue properly left to arbitrators. (24) In a case of first impression, the Seventh Circuit held in Employers Insurance Co. of Wausau v. Century Indemnity Co. that the question of whether an arbitration agreement between a reinsurer and its reinsured prohibited consolidated arbitration was a procedural one for the arbitrators to determine. (25) Relying on the Supreme Court's decision in Howsam and the First Circuit's decision in Shaw's Supermarkets, Inc., the Seventh Circuit characterized consolidation as a "procedural issue" and a "matter of contract interpretation" that an arbitration panel is well suited to address. (26)

   Similarly, in Certain Underwriters at Lloyd's v. Cravens Dargan & Co., the Ninth Circuit, citing Howsam and Green Tree, noted that under the FAA, "courts may only decide certain gateway matters, such as whether the parties have a valid arbitration agreement at all or whether a concededly binding arbitration clause applies to a certain type of controversy." (27) The appellate court affirmed the district court's decision that it was for the arbitrators to decide whether a single arbitration panel should resolve multiple reinsurance disputes. (28)

   Other recent decisions have further cemented an arbitrator's powers with respect to consolidation. In In re Allstate Insurance Co., the court ordered a panel of arbitrators to decide whether disputes arising from two reinsurance contracts should be consolidated and noted that "submitting the question of consolidation to an arbitration panel comports with the strong federal policy favoring out-of-court resolution of arbitrable controversies." (29) In another case, the Third Circuit relied upon Green Tree and Howsam, and held that the issue of consolidated or separate arbitration proceedings concerns matters of contract interpretation, not arbitrability, and thus was an issue for arbitrators to decide. (30) Additionally, in Dockser v. Schwartzberg, the Fourth Circuit, while specifically ruling on a different issue, noted that procedural questions should be remitted to arbitrators, specifically citing consolidation. (31)

   Based on the cases discussed above, it appears that the consolidation issue has now been resolved in favor of preserving that power for arbitrators. Indeed, the First, Third, Fourth, Seventh, and Ninth Circuits, as well as a district court in the Second Circuit, have held that this issue is properly left for arbitrators to decide. (32) An underlying theme in the recent decisions is that courts are wary of imposing their own views of efficiency in arbitral disputes, thus interfering with parties' agreements to arbitrate. Supreme Court decisions in Howsam and Green Tree have provided courts addressing this issue with ample precedent.

   Although the law is becoming more settled in this area, practical problems remain. For...