Northwestern Nat. Ins. Co. v. Insco, Ltd.
Issue Discussed: Replacing an Arbitrator / Umpire
Submitted by Jennifer R. Devery, Stephanie V. Corrao
Date Promulgated: May 12, 2011
Northwestern Nat. Ins. Co. v. Insco, Ltd., 2011 WL 1833303 (S.D.N.Y. May 12, 2011)
Issues Decided: Whether the Federal Arbitration Act requires a court to appoint a replacement arbitrator after a party’s initial arbitrator resigns, instead of allowing the party to appoint its own replacement, where the contract is silent on the method for replacement.
In Northwestern Nat. Ins. Co. v. Insco, Ltd., the United States District Court for the Southern District of New York denied Northwestern National Insurance Company’s (“NNIC”) petition to appoint a replacement arbitrator for respondent Insco, Ltd. (“Insco”) pursuant to section 5 of the Federal Arbitration Act (“FAA”). The Court held that allowing Insco to appoint a replacement arbitrator was consistent with the terms of the parties’ Reinsurance Agreement and the underlying goals of arbitration to amicably determine disputes by having an arbitration panel that is as mutually acceptable as possible. In so holding, the Court was not persuaded by NNIC’s arguments that allowing a party to replace its own arbitrator on a sitting panel would create an incentive to manipulate the arbitration process. More specifically, in 2009, a dispute arose under a 1978 Reinsurance Agreement between NNIC and Insco and, as a result, NNIC demanded arbitration. Pursuant to the Agreement’s arbitration clause, NNIC and Insco each appointed an arbitrator, after which an umpire was selected by lot. At the organizational meeting in February 2010, the arbitrators disclosed their possible conflicts of interest and the parties accepted the panel as constituted. However, by late 2010, a dispute arose concerning possible conflicts of interests that occurred subsequent to the organizational meeting regarding each of the party-appointed arbitrators. On February 15, 2011, three days before oral argument on NNIC’s summary judgment motion in the arbitration proceedings, Insco requested that all three arbitrators resign on the basis of apparent partiality. Although the Insco-appointed arbitrator resigned that same day, neither the umpire nor the NNIC arbitrator resigned. The following day, Insco again requested a new panel and stated that it would name a new party-appointed arbitrator. On February 18, 2011, NNIC filed the petition at issue seeking court appointment of an ARIAS-certified arbitrator to replace Insco’s arbitrator. Insco informed NNIC’s counsel on March 4, 2011 that it had appointed a replacement arbitrator, and NNIC objected on the grounds that Insco did not have authority under the Reinsurance Agreement to appoint a replacement arbitrator.
The FAA states that the parties’ agreement regarding appointment of arbitrators and umpires must be followed. 9 U.S.C. § 5. However, the FAA further provides that if the parties do not provide a method for appointment, or if an arbitrator or umpire is not appointed for various other reasons, “the court shall designate and appoint” one. The Court cited numerous cases supporting the court’s authority to appoint a replacement arbitrator, but emphasized that where the replacement was for a party-appointed arbitrator, courts defer to the party’s selection. The Court found significant that neither party could point to a case in which a court imposed a replacement arbitrator on a party that had already selected someone else. The Court explained that it was appropriate to defer to the party’s selection, if possible, because the underlying goal of arbitration agreements is “aimed at amicable determination of disputes with results which both parties will be willing to accept.”
NNIC argued that the Court should reject Insco’s attempt to replace its arbitrator because the Reinsurance Agreement did not expressly provide for a method of replacement and Insco allegedly had acted in bad faith to delay the arbitration. Unpersuaded by NNIC’s arguments, the Court found significant that Insco was not requesting an entirely new panel and that it chose its replacement from the same ARIAS-certified pool from which NNIC requested that the Court make its selection. The Court distinguished Ins. Co. of N. Am. v. Public Service Mut. Ins. Co., 609 F.3d 122, 132 (2d Cir. 2010), where the Second Circuit raised concerns that a party might seek to manipulate the arbitration proceedings by forcing the resignation of its appointed arbitrator following an adverse ruling in order to get a second bite at the apple before a new panel. The Court explained that such concerns were not present here, where Insco only sought to replace its own arbitrator and not the entire panel. (In so holding, the Court did not discuss the fact that prior to the court litigation, Insco had initially requested that the entire panel resign.)
Finally, the Court held that allowing Insco to replace its arbitrator was consistent with the parties’ intent that each be permitted to choose a party-appointed arbitrator, notwithstanding the lack of a specific provision in the Reinsurance Agreement addressing the selection of a replacement arbitrator.
* Jennifer R. Devery and Stephanie V. Corrao are partner and associate in the Insurance/Reinsurance Group of Crowell & Moring LLP. They each represent insurance companies in insurance and reinsurance disputes involving a broad spectrum of issues.