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

Arbitrators, Not the Court, Must Decide Scope of Counterclaims to Be Resolved In an Arbitration

It is not unusual for a party drawn into an arbitration to assert counterclaims that may expand the scope of the proceeding beyond what the petitioner originally envisioned.  For example, a cedent may demand arbitration against a reinsurer focusing on one particular unpaid loss, but the reinsurer may file a more expansive counter-demand critical of the cedent’s global handling of loss cessions or seeking resolution of other disputed losses ceded under the treaty.  This was the scenario confronting a Pennsylvania federal district court in the context of cross-motions to compel arbitration after the parties had reached an impasse over umpire selection.

In this case, the cedent initially demanded arbitration against its reinsurer concerning one specific unpaid loss.  In response, the reinsurer filed a counter-demand asserting that the cedent had “mismanaged the operation of the [treaty] and . . . engaged in a pattern of inconsistent reinsurance loss cessions” and that the dispute was not limited to settlement payment to any one insured “but rather involves a systemic breach of [the cedent’s] duties and obligations under [the treaty].”  Subsequent to its initial demand, the cedent filed an additional four separate arbitration demands seeking payment on four other specific losses.

The parties each appointed their party-arbitrators but reached an impasse over umpire selection because the cedent objected to the arbitration’s expanded scope due to the reinsurer’s counter-demand.  The parties sought court intervention on cross-motions to compel arbitration, and the reinsurer further requested that the four other arbitrations be stayed until the first one was resolved on the theory that resolution of its defenses in that arbitration would likely resolve the remaining ones.

The district court succinctly dispatched both parties’ motions on the ground that it lacked authority to stay any of the five pending arbitrations.  The treaty’s “broad” arbitration clause provided for the arbitration of “any dispute . . . in connection with this agreement” and that New York’s arbitration law would control.  That arbitration law, according to the court, was analogous to Section 1 of the Federal Arbitration Act, which limits judicial intervention to the determination of whether there is a valid arbitration agreement covering the dispute.  That leaves the scope and timing of the arbitration entirely up to the arbitrators to determine.  Thus, the arbitrators in the first arbitration are free to decide (1) whether the cedent’s claim should be paid; (2) whether the reinsurer’s counter-demands provide a defense to that claim; and (3) whether the reinsurer is entitled to affirmative relief which might affect the other claims at issue. 

Unless the parties agreed to some other reasonable resolution, the court ruled that the four other arbitrations must proceed and that each panel was free to determine the impact of the first panel’s decision.  The court also suggested that perhaps the arbitrators in the initial arbitration might “arrive at a sensible arrangement, if the parties are unable to do so.” 

If the first panel was persuaded to issue a confidentiality order shielding its decision from the other four panels, the permissible scope of the reinsurer’s counter-demand could be addressed anew by each subsequent panel, potentially leading to diverse results.

Century Indemnity Co. v. New England Reinsurance Corp., Civ. Action No. 04-MC-00089, 2004 U.S. Dist. LEXIS 15404 (E.D. Pa. July 19, 2004).

 

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