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United States Life Ins. Co. v. Superior National Ins. Co.

Issue Discussed: Power of Arbitrators

Submitted by Michael P. Mullins

Date Promulgated: January 4, 2010

Issue: Whether an arbitration panel violated Section 10 of the FAA by conducting ex parte meetings with panel-retained experts.

In an action to vacate an arbitration award, the Ninth Circuit ruled that an arbitration panel’s ex parte meeting with panel-retained experts did not violate the Federal Arbitration Act (“FAA”). U.S. Life reinsured Superior National Insurance Company and other insurers (collectively, “SNICIL”). U.S. Life alleged that SNICIL had engaged in improper claims handling practices, resulting in bills to U.S. Life in excess of the amounts due under the reinsurance contract. The parties agreed to arbitrate the claim and selected a three-person panel in the usual fashion, with each party selecting an arbitrator and the two arbitrators selecting a neutral third member. After a hearing in which each of the parties presented their own expert testimony, the panel was unable to reach a decision and advised the parties that two panel-appointed experts would be retained to review the bills at issue.

The panel determined that it would meet privately with the panel-retained experts (the “ex parte meeting”). After the ex parte meeting, however, the panel-retained experts’ written conclusions were shared with the parties, a two-day hearing was held for the parties to question the experts, and pre-and post-hearing briefs were allowed. The panel ultimately issued an award unfavorable to U.S. Life, which filed an action to vacate the award under §10(a)(3) of the FAA because of the ex parte meeting. Section 10(a)(3) of the FAA provides, in relevant part, that a U.S. court may vacate an arbitration award “where the arbitrators were guilty of misconduct in… refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced.”

The Ninth Circuit held that the arbitrator’s ex parte meeting with the experts was neither a refusal to hear evidence pertinent and material to the controversy, nor misbehavior prejudicing the rights of the parties. The Court began its analysis by noting that arbitration is not governed by the federal courts’ strict procedural and evidentiary requirements, and held as follows:

• The panel had authority to adopt its own rules of procedure, and it did.

• The panel’s ex parte meeting with the panel-retained experts was not a refusal to hear pertinent and material evidence because, although the parties were not privy to what occurred during the ex parte meeting, the panel gave the parties ample opportunity to discover and critique the conclusions and qualifications of the panel-retained experts.

• While the parties did not specifically stipulate to the ex parte meeting, they did allow the panel to adopt such other processes and procedures as the panel deemed fair and appropriate.

In reaching its holding, the Ninth Circuit expressly disagreed with caselaw from the Fifth Circuit stating that “[a]rbitrators cannot conduct ex partehearings or receive evidence except in the presence of each other and of the parties, unless otherwise stipulated.” The Ninth Circuit found this prohibition to be too broad in light of the Supreme Court’s holding in Hall Street — i.e. that the FAA provides the exclusive grounds for vacating an arbitration award — because the FAA does not expressly prohibit ex parte contacts.

* Mike Mullins is a partner in the Boston law firm of Choate, Hall & Stewart LLP, where he specializes in litigating insurance and reinsurance disputes.