Reinsurance arbitrations from start to finish: a practitioners' guide.

• Author: Hummer, Paul M.

MANY REINSURANCE agreements contain arbitration clauses, and often they provide that any disputes relating to the agreement will be resolved by disinterested insurance or reinsurance executives who are to interpret the reinsurance agreement as an honorable undertaking, resolving disputes according to industry custom and practice rather than legal principles.

A typical arbitration clause provides:

If any dispute shall arise between the reinsured and the reinsurer with reference to the interpretation of this contract or their fights with respect to any transaction involved, the dispute shall be referred to three arbitrators. . . . [The] arbitrators shall consider this contract an honorable engagement rather than merely a legal obligation; they are relieved of all judicial formalities and may abstain from following the strict rules of law. The decision of a majority of the arbitrators shall be final and binding on both the reinsured and the reinsurer.(1)

Arbitration provisions are included in reinsurance agreements with the hope that disputes can be resolved quickly and efficiently by persons knowledgeable about the reinsurance industry. In practice, the process has been less streamlined than originally envisioned because cedents and reinsurers have turned to the courts to litigate about whether they have to arbitrate, how the arbitration should be conducted and whether they have to live with the resolution of the arbitrators. The result has been the development of a significant body of decisional law that should be valuable to help counsel form strategic judgments for arbitration proceedings.

PRELIMINARY ISSUES

1. What Law Governs

   Most reinsurance agreements constitute contracts involving interstate commerce and thus fall within the ambit of the Federal Arbitration Act, 9 U.S.C. [section] 1, et seq.(2) For all contracts covered by the FAA, federal "common" law governs questions of the interpretation, construction, validity, revocability and enforceability of the contractual arbitration provisions.(3) Federal law, however, directs a court to the relevant state law to determine whether the parties in fact have agreed to arbitrate their disputes.(4)

   At times, the interplay between the McCarran-Ferguson Act, 15 U.S.C. [section] 1012(b), and the FAA creates issues unique to the insurance and reinsurance industries. Some courts, notably those in New York, interpret their state's legislative framework for handling the affairs of insolvent insurers and reinsurers as vesting exclusive jurisdiction in that area in the state court responsible for overseeing the liquidation or rehabilitation. Under this reasoning, McCarran-Ferguson bars application of the FAA and, accordingly, enforcement of arbitration provisions.(5) Courts in other states, which do not have such restrictive legislative schemes, have enforced arbitration agreements and either compelled liquidators or rehabilitators to arbitrate or enforced demands by liquidators to arbitrate.(6)

   Courts also have relied on McCarran-Ferguson Act to uphold state statutes or common law doctrines that do not permit insurance or reinsurance agreements to contain arbitration provisions.(7)

2. Where May Disputes Be Litigated

   The FAA does not confer federal question jurisdiction.(8) Thus, absent some other basis for federal jurisdiction, such as diversity of citizenship, disputes over an arbitration clause must be litigated in state court. Where federal jurisdiction is present, the general federal venue rules apply.(9)

   ENFORCING RIGHT TO ARBITRATE

1. What Claims Must Be Arbitrated

   The FAA and cases interpreting it create a substantial body of federal substantive law favoring the enforcement of arbitration agreements.(10) When a contract contains an arbitration provision, there is a presumption of arbitrability that is overcome only by a showing that the dispute in question is outside the coverage of the arbitration clause.(11)

   As explained by one federal district court:

   There is nothing discretionary about [Section 3 of the FAA]. It states that district courts shall at the request of a party to an arbitration agreement refer the parties to arbitration. McCreary Tire & Rubber Co. v. CEAT, S.p.A., 501 F.2d 1032, 1037 (3d Cir. 1974) (emphasis in the original). The court can refuse to compel arbitration only when there is "positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute." United Steelworkers of Am. v. Warrior and Gulf Navigation Co., 80 S.Ct. 1347, 1353 (1960).(12)

   Courts have consistently applied this broad federal mandate to order reinsurance disputes to arbitration.(13) For example, the Seventh Circuit directed the parties to arbitrate a reinsurer's set-off claim with an insolvent insurer, although the right to set-off was created by statute, not by the express terms of the reinsurance agreement that contained the arbitration provision.(14) It reasoned that as a matter of law statutory rights are implied terms of the contract. Similarly, a federal court in Illinois compelled arbitration of disputes arising from an agreement retroactively terminating a reinsurance agreement, although the agreement in issue did not contain an arbitration clause, reasoning that the dispute arose at least partly under the terminated reinsurance agreement that did contain an arbitration provision.(15)

   Courts have been less than consistent, however, in their approach to whether commercial tort claims, such as fraud in the inducement, misrepresentation, conspiracy, etc., which often are raised in the course of reinsurance disputes, must be arbitrated.(16) At times, a court will conclude that some, but not all, of the claims at issue are subject to arbitration.(17) Of course, the parties always have the option of agreeing to arbitrate all their claims, including those that would not be arbitrable but for that agreement. When they cannot agree, however, a court has the power to decide whether to stay the litigation over those claims that are not arbitrable pending a resolution of those claims that can be arbitrated. A stay of litigation is likely when there is a reasonable possibility that arbitration of some claims will moot or otherwise resolve the remaining claims.(18)

   Decisions of the arbitrators may have res judicata or collateral estoppel effects on any claims that are not arbitrated.(19)

2. Who Must Arbitrate

   As a rule, parties to a contractual arbitration provision and their agents or successors in interest are bound to arbitrate.(20) Courts even will go to some lengths to find that the parties have agreed to arbitrate. The Second Circuit, for example, compelled arbitration of a dispute under a contract that incorporated by reference another agreement that included an arbitration provision.(21)

3. Waiver of Right to Arbitrate

   Federal substantive law evidences a strong bias against finding an implied waiver of the right to compel arbitration.(22) Implied waiver may be found if the party demanding arbitration previously participated in litigation over the disputes sought to be arbitrated, provided that enforcing an arbitration agreement will demonstrably prejudice an opposing party or there has been "litigation of substantial issues going to the merits."(23) Mere delay in asserting the right to arbitration usually will not support a finding of waiver.(24) Some courts have found that waiver is an issue to be determined by the arbitrators.(25)

4. Multiple Arbitrations

   It is not uncommon for parties to a reinsurance relationship to have entered into sever different reinsurance agreements, which typically may cover different risks or different time periods. The Second Circuit has held that, absent consent of the parties, a district court may not order the arbitrations consolidated, thus raising the specter of multiple arbitration proceeding between the same parties.(26) A subsequent decision by the Second Circuit, however, leaves open the possibility that a trial court may exercise its "equitable powers" to consolidate multiple arbitration proceedings.(27)

   SELECTING ARBITRATORS

   Courts have strictly enforced time limits for the appointment of arbitrators.(28) The Seventh Circuit, for example, held that a cedent had the right to appoint both arbitrators where reinsurer was three days late in its designation of an arbitrator.(29) Courts also have enforce contractual provisions that govern the location of the arbitration or the means of selecting a arbitrator.(30)

   Arbitration provisions typically identify certain minimal criteria the arbitrators must meet, such as being disinterested current or former officers of an insurance or reinsurance company. Courts are divided on the propriety of judicial review of an arbitrator's qualification or apparent biases prior to the arbitration hearing. Many courts have refused to hear prehearing challenges, leaving the litigant with little choice but to proceed to arbitration and raise challenge to any subsequent award.(31) Some courts, however, have entertained prehearing challenges.(32) At least one court, while not disqualifying any arbitrator, did imply into the arbitration agreement an obligation on the part of the arbitrators to complete "disclosure" statements to enable the parties to confirm that the arbitrators were in fact disinterested.(33)

   PROCEDURAL MATTERS

   Because the duty to arbitrate is contractual, courts are generally supportive of whatever contractual limitations the parties place on the process. For example, in Volt Information Sciences Inc. v. Board of Trustees of Leland Stanford Jr. University(34) the U.S. Supreme Court upheld the California Court of Appeal's decision to construe a contractual provision to mean that the parties intended the California rules of arbitration, and not the FAA, to govern their contract. The decision to uphold the arbitration clause as written was, according to the Court, entirely consistent with the purpose of the FAA to enforce arbitration...