Matter of American Home Assur. Co. (Clearwater Ins. Co.)

Matter of American Home Assur. Co. (Clearwater Ins. Co.), 2013 N.Y. Misc. LEXIS 103 (N.Y. Sup. Ct. Jan. 15, 2013)

Issues Decided: (1) Whether disagreement between arbitrators is a condition precedent to appointing an umpire (or third arbitrator); and (2) What method of appointing an arbitrator should be used.

Background

American Home Assurance Co. and National Union Fire Insurance Company (collectively “American Home”) petitioned the court to appoint an umpire (or third arbitrator as the case may be) in three arbitrations involving separate reinsurance treaties with Clearwater Insurance Company, formerly known as Odyssey Reinsurance Corporation (“Clearwater”).

In the arbitrations, each party had appointed a party-appointed arbitrator; however, the arbitrators had failed to reach an agreement on a potential umpire.

New York’s Civil Practice Law Rules (“CPLR”) 7504 states that in the event the selection method for appointing an umpire failed, the court, upon application of a party, shall appoint an arbitrator. However, CPLR 7504 does not contain any specific instruction on the criteria for the appointment of an umpire. Naturally, each party advocated that its own method of selection was the superior method.

Holding

First, the court rejected Clearwater’s claim that disagreement between the party-appointed arbitrators was a condition precedent to the appointment of an umpire. Although the authority of an umpire, unlike that of a third arbitrator, may be limited to only those issues where the arbitrators disagreed, the court ruled that the umpire should be present from the outset of the arbitration in order to facilitate the umpire’s purpose.

Second, the court outlined a new approach for the appointment of an umpire or third arbitrator in arbitration proceedings. The selection process combined elements of the “ranking” method and the “strike and draw” method. Each party’s appointed arbitrator nominates a slate of five candidates. Each arbitrator then strikes three of the five arbitrators from the other’s list. The remaining candidates are then ranked in order of preference. The candidate who receives the highest cumulative ranking shall be appointed as the umpire. In the event the candidate who receives the highest ranking is unable or unwilling to serve, the candidate with the next highest ranking shall be appointed as umpire (and so on). If there is a tie for the highest cumulative ranking, the umpire will be drawn by random lot.

Finally, the court noted that despite the fact that all three arbitrations would feature the same three arbitrators, nothing in the court’s decision was to be construed as consolidating all three arbitrations.

*Justin G. Martin is an associate at the law firm of Bazil McNulty that focuses on complex reinsurance litigation.

Service Partners, LLC v. American Home Assurance Co.

Service Partners, LLC v. American Home Assurance Co., 2011 WL 2516411 (C.D. Cal. June 20, 2011)

Issues Decided: Jurisdiction under Federal Arbitration Act and ability to remove arbitrator before rendering an award.

In Service Partners, LLC v. American Home Assurance Co. the District Court for the Central District of California held that barring a contractual basis to challenge an arbitrator’s qualification in the arbitration agreement, it is not proper for a district court to entertain a challenge to an arbitrator’s qualifications or partiality until after the arbitration has concluded and an award has been rendered.

This dispute arose under a Payment Agreement for Insurance and Risk Management Services between plaintiff Services Partners and defendant American Home (the “Agreement”). The Agreement was effective on July 30, 2001 and contained an arbitration provision specifying the following arbitrator qualifications: “. . . all arbitrators must be executives or former executive officers of property or casualty insurance or reinsurance companies . . . or risk management officials in an industry like Yours . . . and not under the control of either Party to this agreement.” The Agreement further specified that if one party failed or refused to appoint an arbitrator or if the two arbitrators failed to agree on a third arbitrator either party could make application to a Justice of the Supreme Court of New York and that court would appoint the additional arbitrator or arbitrators. The Agreement also stated that the arbitration was to be governed by the Federal Arbitration Act (the “FAA”).

On July 6, 2010 plaintiff demanded arbitration and named its arbitrator. Defendant raised questions about plaintiff’s arbitrator’s ability to serve and refused to proceed unless plaintiff selected a new arbitrator. Defendant established that plaintiff’s arbitrator was a former executive of defendant’s parent company, AIG, and that he recently served as a party arbitrator and a litigation consultant and expert witness for defendant. Plaintiff refused to replace its arbitrator and filed a motion to compel arbitration in federal court in the Northern District of California. Defendant challenged the motion on two principal grounds: (1) plaintiff’s party-appointed arbitrator should be disqualified; and (2) the venue provision in the Agreement required the Supreme Court of New York, not a federal court in California, to decide the issue. Plaintiff contended that the FAA governed the dispute and that there was nothing in the Agreement or in federal law permitting defendant to disqualify a named arbitrator who met the qualifications specified in the Agreement before entry of an arbitration award.

Forum and Jurisdiction

Defendant argued that since plaintiff’s arbitrator was not qualified, it was akin to not nominating anyone. Therefore, according to defendant, plaintiff failed to make an appointment under the terms of the Agreement and the matter should properly be decided by the New York Supreme Court. Plaintiff contended that, under the Agreement, the New York Supreme Court had only limited jurisdiction when a party failed to appoint an arbitrator or the two appointed arbitrators failed to select an umpire.

The District Court found that the Agreement did indeed limit the jurisdiction of the Supreme Court of New York to the two instances described by plaintiff and that limited jurisdiction did not include disputes over the qualifications of named arbitrators. Instead, the Court determined that those disputes fell under the FAA, which governed every other procedural aspect of the Agreement. The Court concluded that it was the proper forum for adjudicating the motion to compel arbitration under the FAA. In a footnote the Court further stated that diversity between the parties and the amount in controversy qualified the venue in Federal District Court.

Qualification and Ability to Remove an Arbitrator Before the Rendering of an Award

Defendant contends that because plaintiff’s arbitrator previously worked for defendant’s parent company and served as a party-appointed arbitrator for defendant he was intimately aware of defendant’s litigation “playbook information.” Those facts, defendant argued, should disqualify plaintiff’s arbitrator. Plaintiff countered that the arbitrator met all of the prerequisites for qualification specified in the Agreement and that its party-appointed arbitrator was not under the control of either party. Additionally, plaintiff contended that there were no provision in the Agreement allowing either party to challenge the other’s appointed arbitrator.

The District Court found that the Agreement did not permit one party to disqualify the other’s named arbitrator as it specifically lacked any such statement or provision. Had defendant wished to provide for such an opportunity, as drafter of the Agreement, it could have explicitly done so. The Court further noted that the clear terms of the Agreement precluded the appointment of an arbitrator who “is under the control of either Party.” As that provision was expressed in the present tense, the Court interpreted it to mean neither arbitrator could currently be under the control of either party. Citing the principle of Contra Proferentem, the Court held that any ambiguity in that provision of the Agreement should be construed against the defendant as the drafting party and the Court refused to disqualify the plaintiff’s named arbitrator.

Finally, the Court found that without a contractual provision covering disqualification, it was not proper to entertain defendant’s challenge to plaintiff’s named arbitrator on the grounds of qualifications or partiality until after the conclusion of the arbitration and the rendering of an award. See Aviall, Inc., v. Ryder System, Inc., 110 F.3d 892 (2nd Cir. 1997). With specific reference to the FAA, the Court noted, “By its own terms [9 U.S.C. Sec. 10] authorizes court action only after a final award is made by the arbitrator. Further, ‘even where arbitrator bias is at issue, the FAA does not provide for removal of an arbitrator from service prior to an award, but only for vacatur of any award.” Gulf Guar. Life Ins. Co., v. Connecticut Gen. Life Ins. Co., 304 F. 3d 476, 490 (5th Cir 2002). Therefore, the Court refused to disqualify plaintiff’s named arbitrator and granted plaintiff’s motion to compel arbitration. * John R. Cashin is the Regional General Counsel for the Middle East and Africa at Zurich Insurance Company, based in Dubai, United Arab Emirates. He is an ARIAS Certified Arbitrator. At Zurich his responsibilities include oversight of business operations for compliance with local governance rules, laws and regulations in the Middle East and African jurisdictions where Zurich provides insurance products. He joined Zurich in 2004 from the law firm of Stroock & Stroock & Lavan LLP in New York City. Prior to his law firm practice he served as Deputy Superintendent of the New York State Insurance Department and spent twenty years in the reinsurance brokerage business.

* Andrew D. Shapiro is a partner at Butler Rubin Saltarelli & Boyd LLP, where he specializes in reinsurance litigation and arbitration.

Canadian Reinsurance Co. v. Lloyd’s Syndicate

Canadian Reinsurance Co. v. Lloyd’s Syndicate, PUM 91 (1995), 17 C.C.L.I (3d) 165, 6 B.L.R (3d) 102 (Ontario Court of Justice, 1995)

Issue Decided: What factors should be considered by a Court in selecting an umpire.

The parties asked the Court to appoint an umpire for an arbitration yet to be held. The Court identified a number of factors to be considered in the empanelling process, noting that it has jurisdiction to rule on the motion in accordance with sections 11(4)(b) and 11(5) of the International Commercial Arbitration Act, R.D.O. 1990, c. I-9 (“ICAA”), as well as under the Model Law.

The parties each provided a list of proposed umpires to the Court. The most pertinent factors addressed by the Court were the relevance of experience in the reinsurance industry, and the nationality of the umpire.

The facts of the proposed arbitration were to be complex, involving a $17 million insurance settlement paid by the Applicants for asbestos-related bodily injury claims, and a subsequent indemnity claim by the Applicants under retrocession coverage provided by the Respondents/Cross Applicants, which required resolution of the insurance dispute as a condition precedent to a right of action of arbitration.

The Respondents/Cross Applicants preferred an umpire with experience in the reinsurance industry, while the Applicants argued that an umpire with such a background would create a real or perceived bias.

Justice Dunnett held that it was appropriate to appoint an umpire who had experience in the reinsurance industry.

Section 11(5) of the ICAA mandated that consideration be given whether the nationality of the umpire should be different from those of the parties. The Applicants argued that as the arbitration was to proceed in Toronto, the Respondents/Cross Applicants were deemed to have accepted the empanelling of a Toronto umpire with knowledge of Ontario law. The Applicants did business in Canada, and had appointed an arbitrator with such residency and knowledge. The Respondents/Cross Applicants had appointed an arbitrator resident in London. The syndicates engaged in business in the London market.

The Court held that the parties did business throughout the world, and that the element of nationality the Court had to take into account was satisfied by appointing an umpire from a country other than Canada or England. Justice Dunnett chose three possible candidates from the lists provided.

*Paul Bates is the principal of Bates Barristers in Toronto, Ontario, and is an ARIAS-U.S. certified arbitrator. Paul has extensive experience in insurance and reinsurance law, as well as a broad range of commercial litigation matters.

Certain Underwriters at Lloyd’s London v. Argonaut Insurance Company

Issue Decided: Contractual deadline to appoint arbitrator in reinsurance arbitration; choice-of-law; New York Convention

The United States Court of Appeals for the Seventh Circuit has ruled that a party’s appointment of an arbitrator was invalid because the party failed to make the appointment within 30-days as required by the reinsurance treaties. Because the New York Convention applied to the arbitration agreement, the court held that the party could not resort to state law that would extend the appointment period due to a holiday. Certain Underwriters at Lloyd’s London v. Argonaut Insurance Company, No. 06-3395, 2007 WL 2433139 (7th Cir. Aug. 29, 2007).

In this case, the reinsurer requested that the cedent designate its arbitrator within 30 days as required by the reinsurance treaties. When the cedent failed to designate its arbitrator by the 30-day deadline, the reinsurer selected the second arbitrator in accordance with the terms of the treaties. The cedent argued that it was not bound by the strict 30-day deadline because the 30th day was a Sunday and the 31st day was a U.S. federal holiday. The cedent appointed its arbitrator on the 32nd day. In response, the reinsurer petitioned a federal court for an order confirming its appointments of two arbitrators.

According to the Seventh Circuit, “the most significant issue presented by this case” is what substantive law should apply since the reinsurance treaties lack a choice-of-law provision. The cedent argued that the court should apply California law (which arguably extended the time for appointment of the arbitrator due to the federal holiday). The reinsurer argued that dispute should be resolved by a federal common law rule of decision.

The Seventh Circuit agreed with the reinsurer, particularly because the parties’ arbitration agreement fell within the New York Convention. The court explained that “a critical objective” of the Convention is the uniform treatment of arbitration agreements to facilitate efficient international arbitration. Given this goal of uniform treatment of arbitration agreements, the court concluded that the parties’ dispute over the appointment of the second arbitrator should be resolved by a federal common law rule rather than by a state law rule of decision. Otherwise, if state law governed, the court would permit necessarily “non-uniform results.” As a matter of federal common law, the court held that, in the absence of a choice-of-law provision calling for application of a particular state’s law, the parties “are to be bound to the explicit language of arbitration clauses” and cannot resort to “state-specific exceptions that would otherwise extend clear contractual deadlines.” “[D]eadlines included in arbitration agreements under the Convention will admit of no exceptions. Thirty days must mean thirty days.”

* Paul Janaskie is a partner and Sergio F. Oehninger 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.

ANCON Insurance Company (UK) Limited v. GE Reinsurance Corporation

ANCON Insurance Company (UK) Limited v. GE Reinsurance Corporation, No. 06-2106 CM, 480 F.Supp.2d 1278 (D.Kan. 2007)

On a motion for Summary Judgment before a US Magistrate Judge the interpretation and application of the so-called adverse selection clause was contested in ANCON v. GE Reinsurance (“GE Re”). The plaintiff, ANCON, sought an order compelling arbitration against the defendant, GE Re, and confirming the appointment of plaintiff’s party arbitrator. GE Re also sought an order compelling arbitration, but sought the court’s appointment of its nominee as ANCON’s party appointed arbitrator and a declaration voiding the purported appointment of ANCON’s original nominee.

Under various reinsurance contracts ANCON provided reinsurance coverage to GE Re over the period 1982 through 1985. The reinsurance agreements provided for arbitration of disputes by a tripartite panel with each party selecting its own arbitrator and the two arbitrators so appointed selecting the umpire. The arbitration provisions also contained the following language: ‘‘If either party refuses or neglects to appoint an arbitrator within thirty days after the receipt of written notice from the other party requesting it to do so, the requesting party may appoint two arbitrators.’’ On Feb 2, 2006 GE Reinsurance demanded arbitration and addressed its demand to Cavell Management Services Limited (“Cavell”) which ANCON had engaged in 2003 to handle the run-off of its business. Cavell received the demand on Feb 7, 2006 but did not notify ANCON of the demand until Feb 17, 2006. Cavell had also mistakenly date stamped the demand as received on Feb 13, 2006, while the signed Federal Express receipt bore the Feb 7, 2007 date of delivery.

On March 13, 2006 ANCON’s counsel electronically transmitted a letter to GE Re’s counsel stating the name of its appointed arbitrator. After receiving the letter GE Re’s counsel confirmed through Federal Express that Cavell received the arbitration demand on Feb 7, 2006. GE Re’s counsel then advised ANCON’s counsel that its purported appointment should have been made by March 8, 2006 and was, therefore, untimely and that GE Re had appointed two arbitrators. On March 22, 2006 ANCON sued GE Re in the District Court of Kansas. On April 6 GE Re filed a counterclaim to compel arbitration but seeking an order confirming its right to appoint two arbitrators under the terms of the arbitration agreement’s adverse selection clause. The parties filed cross-motions for summary judgment to determine whether GE Re was entitled to designate ANCON’s party appointed arbitrator.

ANCON argued that the court should confirm its appointed arbitrator regardless of the fact that the appointment was untimely by five days. Stating that the overriding purpose of the arbitration agreement was to have a fair and balanced panel to hear the dispute, ANCON asserted the adverse selection clause is subservient to this goal. ANCON reasoned further that if the parties intended that time were to be of the essence, they could have expressly made it so in the agreement. In support of its arguments, ANCON cited a set of out of district cases, notably from the Southern District of New York(S.D.N.Y.). [See: In re Utility Oil Corp., 10 F. Supp. 678 (S.D.N.Y. 1934); Lobo & Co. v. Plymouth Navigation Co. of Monrovia, 187 F. Supp. 859 (S.D.N.Y. 1960); Compania Portorafti Commerciale, S.A. v. Kaiser Int’l Corp., 616 F. Supp. F. Supp. 236 (S.D.N.Y. 1985); New England Reins. Corp. v. Tennessee Ins. Co., 780 S. Supp. 73 (D. Mass. 1991); Texas E. Transmission Corp. v. Barnard, 285 F.2d 536 (6th Cir. 1960).]

GE Re argued that the adverse selection provision should be strictly enforced to give effect to the purpose of the Federal Arbitration Act which is to give the same effect to the terms of an arbitration agreement as to the terms of other contracts. GE Re also cited several out of district cases in support of its position. [See Universal Reins. Corp. v. Allstate Ins. Co., 16 F.3d 125 (7th Cir. 1993); Evanston Ins. Co. v. Gerling Global Reins. Corp., No. 90-3919, 1990 WL 141442 (N.D. Ill. Sept. 24, 1990); Employers Ins. Of Wausau v. Jackson, 527 N.W.2d 681 (Wis. 1995); Nat’l Planning v. Achatz No. 02-0196, 2002 WL 31906336 (W.D.N.Y. 2002).]

The court found the rationale articulated in the cases relied upon by ANCON to be better reasoned and far more persuasive than the rationale of the cases relied upon by GE Re. With references to the holdings of two SDNY cases (In Re Utility Oil and Lobo & Co.), the Magistrate determined that where the party has acted in good faith, “the parties agreement should be interpreted and enforced with its dominant purpose in mind which is to secure resolution of the parties’ dispute by an impartial arbitration panel such that both parties have confidence in the outcome. A strict ‘hypertechnical’ enforcement of the agreement would lead to a result in which ANCON would have little confidence.”

Further, the court was unpersuaded that GE Re was in any way prejudiced by such an outcome as GE Re will receive what it bargained for, a tripartite panel consisting of GE Re’s appointed arbitrator, ANCON’s appointed arbitrator and a third chosen by the first two.

* John R. Cashin is General Counsel – Group Reinsurance at Zurich Financial Services, Zurich, Switzerland. He is an ARIAS Certified Arbitrator. At Zurich his responsibilities include insurance regulation, reinsurance claims, reinsurance litigation, arbitration and contract wording. He joined Zurich in 2004 from the law firm of Stroock & Stroock & Lavan LLP in New York City. Prior to his law firm practice he served as Deputy Superintendent of the New York State Insurance Department and spent twenty years in the reinsurance brokerage business.