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Borst v. Allstate Insurance Company

Issue Discussed: Bias/Evident Partiality

Submitted by Paul Janaskie, Steven McNutt

Date Promulgated: June 13, 2006

Issues addressed: Evident partiality of party-appointed arbitrator; disclosure of arbitrator’s relationship with a party; pre-award challenges to an arbitrator’s impartiality; extent of discovery in arbitration.

The Wisconsin Supreme Court has vacated an arbitration award in a dispute between Allstate Insurance Company (“Allstate”) and a policyholder because the arbitrator selected by Allstate also regularly serves as an attorney for Allstate. Borst v. Allstate Ins. Co., 2006 Wisc. LEXIS 364 (Wis. June 13, 2006). The court held that the arbitrator’s “substantial, ongoing attorney/client relationship with Allstate” demonstrated “evident partiality” prohibited by Wisconsin law and that the arbitrator’s “full disclosure” of his relationship with Allstate did not eliminate his evident partiality.

The court also held that, under Wisconsin law, all arbitrators, including party-appointed arbitrators, are presumed to be impartial unless the arbitration agreement or the arbitration rules specified by the parties allow for non-neutral arbitrators. The court further determined that pre-award challenges to an arbitrator’s impartiality are permissible.

In addition, the court ruled that, under Wisconsin law, the parties are restricted to statutorily-authorized depositions in arbitration, and cannot propound written interrogatories or requests for production of documents unless the parties expressly agree to such discovery.

Background

A policyholder sought vacatur of an arbitration award that was rendered in an arbitration with his insurer, Allstate Insurance Company, regarding uninsured motorist coverage. The insurance contract required arbitration of coverage disputes. The insurance contract provided that each party would select an arbitrator, and the two arbitrators would select a third arbitrator. The insurance contract did not mention anything regarding the neutrality of any of the arbitrators.

For its selection of an arbitrator, Allstate selected a lawyer whose law firm represented Allstate on a continuing basis. The policyholder objected to the arbitrator selected by Allstate. The arbitrator, however, insisted that he could act impartially, and he and the other arbitrator selected the third arbitrator and proceeded with the arbitration. After the arbitration panel rendered its award, the policyholder moved to vacate the award in Wisconsin state court.

Presumption of Neutrality

As an initial matter, the Supreme Court ruled that Wisconsin law requires an arbitrator to be impartial, including party-appointed arbitrators, unless the parties’ contractual agreement or the arbitration rules provide otherwise.

The court distinguished this present case from an earlier case precedent that seemed to suggest that a party-appointed arbitrator is presumed partial to the party that appointed him. Unlike the present case, though, the earlier case had an arbitration provision that called for “a third, independent arbitrator” whose decision would be final and binding if the three arbitrators could not reach a decision. Given this contract language in the earlier case, the court determined that the earlier precedent was not contrary to its present decision “that all arbitrators are presumed impartial.”

The court stated that the presumption of neutrality for all arbitrators, including party-appointed arbitrators, “puts Wisconsin in line with ‘the recent trend away from non-neutral party-appointed arbitrators and the heightened expectations of independence and neutrality of commercial arbitrators.’”

Evident Partiality

The court then examined whether the arbitration award had to be vacated because of “evident partiality” of Allstate’s appointed arbitrator. The court concluded that “the fact that [Allstate’s appointed arbitrator] had a substantial, ongoing attorney/client relationship with Allstate leads us to conclude, as a matter of law, that [Allstate’s appointed arbitrator] demonstrated evident partiality such that the arbitration award must be vacated.”

Reviewing its own precedent as well as Justice White’s concurrence in the United States Supreme Court case Commonwealth Coatings Corp. v. Continental Cas. Co., 393 U.S. 145 (1968), the Wisconsin Supreme Court stated that the standard for “evident impartiality” as follows: an arbitration award must be vacated “if based on evidence that is clear, plain, and apparent, a reasonable person would have serious doubts about the impartiality of the arbitrator.”

Full Disclosure of Arbitrator’s Relationship with Party

The Wisconsin Supreme Court rejected Allstate’s argument that its appointed arbitrator satisfied the neutrality requirement because he had disclosed his attorney-client relationship prior to the arbitration. According to the court, “[u]nder Allstate’s view then, Allstate’s corporate counsel could serve as an arbitrator, as long as this relationship was disclosed. This example demonstrates the fallacy of Allstate’s position.”

Pre-Arbitration Award Challenge to Arbitrator’s Impartiality

The court also considered the “more difficult issue” of whether a party must await the arbitration award before it challenges the appointment of an arbitrator. The court concluded that pre-award challenges are permissible because the present case “provides an example of a situation where a pre-arbitration challenge is necessary and efficient.”

No Discovery Permitted Beyond Statutorily Authorized Deposition

The Wisconsin Supreme Court addressed the extent of discovery permitted in arbitration; i.e., whether the parties were limited to depositions authorized by the Wisconsin Arbitration Act, or whether the parties could propound written interrogatories and document production requests in addition to taking depositions. The court concluded that under Wisconsin law arbitrators have “no inherent authority to dictate the scope of discovery, and absent an express agreement to the contrary, the parties are limited to [statutorily authorized] depositions.”

* Mr. Janaskie is a partner and Mr. McNutt is an associate in the Insurance and Reinsurance Practice Group of Hunton & Williams LLP. They represent cedents and reinsurers in a wide range of reinsurance and insurance coverage matters.