Reinsurance and Insurance Arbitrator and Umpire Ronald S. Gass
ARIAS-U.S. Certified Arbitrator and Umpire
AAA Roster of Neutrals
Reinsurance and Insurance Dispute Resolution Services Consultant

New York Court Decides Whether Party-Arbitrators Must First Disagree Before Appointing the Umpire

Fortunately, most modern reinsurance arbitration clauses provide for the timely and orderly designation of the umpire by the two party-arbitrators prior to the organizational meeting and certainly long before any evidentiary hearing is held.  However, a rare form of industry contract wording persists that provides for party designation of the two arbitrators and only if they disagree on the award is the umpire to be selected or “called in” to resolve their dispute.  This awkward choreography is more often than not ignored by parties, and umpire selection typically proceeds apace before any dispute arises between the party-arbitrators.  Then again, there are parties who perceive some tactical advantage in strict enforcement of such outmoded clauses and insist that the umpire cannot be appointed by the two arbitrators unless and until a disagreement arises between them, which may not occur until after the evidentiary hearing.  This was the interesting issue recently presented to the Supreme Court of New York, which relied, in part, on arbitration precedents dating back to the 19th century to reject this impractical approach to umpire selection and its obvious arbitral inefficiencies. 

In this case, the parties were embroiled in multiple New York-based arbitrations arising under three separate reinsurance treaties.  The first treaty’s arbitration clause provided in pertinent part:

All disputes or differences arising out of this Agreement shall be submitted to the decision of two arbitrators, one to be chosen by each party and in the event of the arbitrators failing to agree, to the decision of an umpire to be chosen by the arbitrators.  [Emphasis added.]

If either party failed to appoint an umpire within one month of a written request by either of them to do so, or if the arbitrators failed to appoint an umpire within one month of being requested by either of them to do so, the umpire was to be appointed by the New York Supreme Court at the request of either party.  The other two treaties had more typical arbitration clause wording.  They provided that the parties’ dispute was to be referred to three arbitrators, “one to be chosen by each party and the third by the two so chosen.”  If either party refused or neglected to appoint an arbitrator within thirty days after receipt of written notice from the other party, the requesting party may nominate two arbitrators, who were to choose a third.

Pursuant to these three treaties, the parties appointed the same two party-arbitrators in each of the three arbitrations; however, owing to an apparent stalemate over umpire (or third arbitrator) selection, the umpires had not yet been appointed.1  Resorting to the New York Supreme Court to break this deadlock, the insurer argued that New York CPLR § 7504 of the state arbitration law was applicable.  This statute authorizes the court to appoint an arbitrator “if the agreed method fails or for any reason is not followed, or if an arbitrator fails to act and his successor has not been appointed.”  Rejecting the reinsurer’s argument that this statute was inapplicable because it was not specifically mentioned in the reinsurance treaties, the Supreme Court ruled that the mechanism for court appointment of an arbitrator existed well before the formation of these mid-1970s treaties and that a contract generally incorporates the state of the law in existence at the time of its formation.  It also did not matter that the reinsurer blamed the insurer for the dispute over umpire selection because the statute provided for court appointment of an arbitrator if the agreed method failed or “for any reason” was not followed.

Of course, each party offered different approaches to umpire appointment for the court’s consideration.  The insurer proposed that the umpire or third arbitrator be appointed from the slate of three candidates its arbitrator had proposed to the reinsurer’s arbitrator, or alternatively that the ARIAS-U.S. ranking method be applied. 2  The reinsurer recommended a strike and random draw (by a coin toss) methodology, arguing that this was the usual and customary procedure in reinsurance arbitrations or, alternatively, that the court appoint any one of the three candidates on its arbitrator’s slate but not necessarily the same person for each of the three arbitrations (i.e., it was not seeking to consolidate these arbitrations).

With regard to the treaty that arguably required that there be a dispute between the party-arbitrators before an umpire could be selected, the reinsurer contended that the full arbitration had to be held before the two arbitrators before an umpire was selected because the two arbitrators had not yet failed to agree on the resolution of the parties’ dispute.  As framed by the court, the issue was twofold:  (1) whether the umpire can be appointed before a disagreement among the party-arbitrators arose, and (2) whether the umpire can be appointed and be present at the hearing held before the two arbitrators.             

There was a split in New York authority on the issue, with one trial court concluding that the umpire should be appointed before, and be present at, any arbitral hearing, and another holding that, in the absence of any disagreements between the two arbitrators, the arbitration clause cannot be invoked to appoint the umpire prematurely, overlooking the obvious procedural inefficiency argument, i.e., that the entire matter would have to be reheard so that the umpire would have a sufficient evidentiary basis to resolve the two arbitrators’ disagreements.  In this case, the Supreme Court opted for the much more efficient approach of appointing the umpire to hear all of the evidence presented by the parties prior to any disagreement arising between the arbitrators, thereby avoiding the wasted time and expense of having to conduct more than one evidentiary proceeding in the event that the party-arbitrators subsequently disagreed.  Delving into the 19th century roots of New York and other states’ commercial arbitration case law, the court found ample precedent to support the pre-hearing and pre-disagreement appointment of umpires notwithstanding conflicting contract wordings.

Regarding the two other treaties incorporating more typical umpire selection clauses, the court addressed how the parties’ umpire selection impasse should be resolved.  Noting that CPLR § 7504 does not set forth any specific substantive criteria for the court to follow in the appointment of umpires and that the treaties also did not do so, the Supreme Court looked to other judicial precedents for guidance.  Citing Lexington Insurance Co. v. Clearwater Insurance Co., Index No. 651280/2011 (N.Y. Sup. Ct. Jan. 6, 2012), in which a combined ranking and random draw method was used, the Supreme Court opted to modify the judge’s methodology slightly.  While the Lexington Insurance court chose to break any umpire ranking ties with a coin toss, which under the ARIAS-U.S. method would normally result in the winning candidate being appointed the umpire, the judge in that case apparently ruled that the winner of the toss was the party, not that party’s umpire candidate, thereby entitling that side to choose the umpire unilaterally (it is unclear from the context if the winning party’s choice was necessarily limited to its top ranked umpire candidate).  The Supreme Court rejected this element of the Lexington Insurance court’s approach and instead adhered to the ARIAS-U.S. method, i.e., in case of a rankings tie, the candidate selected by the party winning the random draw would be appointed the umpire.  The court extended this protocol to all three treaties at issue with the caveat that it was not ordering any of them to be consolidated notwithstanding the parties’ appointment of the same party-arbitrators in each.

Arbitration clauses employing “call in the umpire” or “if failing to agree, the arbitrators shall chose an umpire” language are unequivocally antiquated and should be eliminated from every contract drafter’s sourcebook.  As the New York Supreme court rightly concluded, it is simply impractical to delay umpire appointment until after a dispute arises between the two party-arbitrators, and it is certainly neither cost- nor time-effective for all concerned to rehear the evidence initially presented to the arbitrators so that the newly appointed umpire can resolve the dispute.  It also ignores the reality that there are plenty of pre-hearing matters about which the party-arbitrators might disagree such as motions regarding consolidation (as could have been presented in this case), prehearing security, discovery, and summary disposition, which frequently arise long before any evidentiary hearing on the merits and more often than not are made subsequent to arbitration panel formation either during or shortly after the organizational meeting. 

National Union Fire Insurance Co. v. Clearwater Insurance Co., 39 Misc. 3d 184, 958 N.Y.S.2d 870 (N.Y. Sup. Ct. Jan. 15, 2013).

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Footnotes

[back] 1. Resolution of umpire selection stalemates is a frequent subject of judicial applications seeking relief pursuant to the Federal Arbitration Act, 9 U.S.C. § 5, and similar state arbitration statutes.  E.g., National Casualty Co. v. OneBeacon American Insurance Co., Civ. Action No. 12-11874-DJC, 2013 U.S. Dist. LEXIS 92840 (D. Mass. July 1, 2013); Ronald S. Gass, Federal Court Breaks Umpire Selection Deadlock, 13 ARIAS-U.S. Quarterly 34 (2006).

[back] 2. See ARIAS-U.S. Umpire Selection Procedure (eff. 1/1/00), Section C – “Candidate Ranking and Umpire Selection” at http://www.arias-us.org/index.cfm?a=318.  Briefly, the parties start with a pool of ten umpire candidates who have all completed umpire questionnaires.  Each side selects five names and then simultaneously exchanges its candidate roster with the opposing side.  Next, the parties simultaneously strike two candidates from the other’s roster leaving a slate of three names per side.  If there is a single match, that person is appointed the umpire.  If there is more than one match, the parties draw lots or use some other agreed method to break the tie.  If there are no matches, the parties rank the six names in order of preference from “1” through “6,” with “1” being the most preferred candidate.  The name with the lowest combined numerical ranking is appointed as the umpire.  In the event of a numerical tie, the parties will draw lots or use some other agreed method.

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