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Trustmark Insurance Co. v. John Hancock Life Insurance Co. (7th Cir. 2011)

Issue Discussed: Confidentiality

Submitted by Amy S. Kline, Caitlin M. Piccarello

Date Promulgated: January 31, 2011

Issues Decided: Whether an arbitrator who had served on prior related arbitration panel was “disinterested”.

Summary:

The Seventh Circuit reversed the decision of the Northern District of Illinois that a party-appointed arbitrator’s service on the panel of a prior related arbitration rendered him ineligible to serve on the subsequent panel. The Court held that knowledge, even if gained during a prior confidential proceeding, did not amount to a disqualifying “interest.” The Court also held that the only possible injury in proceeding with the arbitration was delay and out of pocket costs, neither of which arose to the level of irreparable harm. Background: Trustmark Insurance Co. (“Trustmark”) and John Hancock Life Insurance Company (“John Hancock”) were parties to certain reinsurance agreements. A dispute arose concerning certain contracts that Trustmark claimed it did not reinsure. In March 2004, an arbitration panel issued an award supporting Hancock’s view of Trustmark’s obligations. After the award was issued, Trustmark refused to indemnify Hancock arguing that the arbitration award “governed all of the party’s dealings.”

Hancock commenced a new arbitration proceeding. Hancock sought to appoint the same arbitrator who had participated in the March 2004 arbitration. A dispute arose between the parties as to whether the same arbitrator could preside over the second arbitration, what weight (if any) to give to the March 2004 award and whether a confidentiality agreement governing the March 2004 arbitration precluded the new arbitrators from knowing the details of the March 2004 arbitration.

District Court Proceeding:

Trustmark filed an action in the Northern District of Illinois arguing that Hancock could not appoint the same arbitrator who had presided over the March 2004 proceeding because he was not “disinterested” and that only a judge (not an arbitration panel) could interpret the confidentiality agreement. The Court agreed with Trustmark and enjoined the arbitration. The Court held that Trustmark could not “be forced to arbitrate issues that it did not agree to arbitrate” and thus allowing the arbitration to proceed would cause irreparable harm. Hancock appealed to the Seventh Circuit.

Seventh Circuit:

The Seventh Circuit reversed. On whether an injunction should have been ordered, the Court held that Trustmark had not demonstrated irreparable harm. The Court reasoned (1) that Trustmark had agreed to arbitrate whether the contracts provide reinsurance for certain risks, and (2) the “only potential injury” that would result from proceeding in arbitration was delay and out-of-pocket costs. The Court stated that “[l]ong ago the Supreme Court held that the delay and expense of adjudication are not ‘irreparable injury’ – if they were, every discovery order would cause irreparable injury.” In reaching this conclusion, the Court notably added that “the sort of argument Trustmark advances in its effort to establish ‘irreparable injury’ is frivolous.”

The Seventh Circuit “could [have] stop[ped] here.” It chose, however, to also address the merits of whether Hancock’s party-appointed arbitrator was “disinterested.” The Court noted that “the district court’s decision leaves a cloud over this arbitration and the reputation of [the] arbitrator . . . , a reputation that Trustmark seems determined to tarnish.”

The Court found that the arbitrator was “disinterested.” The term “disinterested” – when used with respect to an adjudication – “means lacking a financial or other personal stake in the outcome.” The fact that the arbitrator had knowledge about the March 2004 arbitration did not make him “interested” because “[k]nowledge acquired in a judicial capacity does not require disqualification.” To the contrary, the Court credited the finding that “private parties often select arbitrators precisely because they know something about the controversy.”

Finally, the Court found that the lower court erred in holding that the arbitrators could not construe the confidentiality agreement. The 7th Circuit reasoned that “among the powers of an arbitrator is the power to interpret the written word, and this implies the power to err; an award need not be correct to be enforceable.”

*Amy S. Kline is a Partner and Caitlin M. Piccarello is an Associate at Saul Ewing LLP. As members of the firm’s Insurance Practice Group, they represent cedents and reinsurers in arbitration and litigation matters.