Reinsurance arbitration clauses often provide for the selection of the umpire using the “pick 3, strike 2, and draw lots” methodology; however, there are many variations on this theme. In an interesting recent case, the parties in a reinsurance arbitration referred umpire selection to a Connecticut federal district court in accordance with the treaty’s arbitration clause. The magistrate judge then applied several key criteria to select the “most qualified” umpire from the parties’ list of candidates after the party-arbitrators became deadlocked.
This dispute arose when the reinsurer refused to pay the cedent its share of a settlement of certain Enron Corporation/Mahonia/JPMorgan Chase bond losses on the ground that the Enron bonds were not surety bonds but financial guaranty insurance that could not be properly ceded to the reinsurance treaty under New York insurance law. After the party-arbitrators were appointed and several months had elapsed, they were unable to agree on an umpire.
The arbitration clause anticipated this contingency and provided that the umpire be selected from a list of six candidates (three to be named by each side) in accordance with an unusual three-prong process: (1) by a judge of the federal district court having jurisdiction over the geographical area in which the arbitration was to take place; (2) if the federal court declined to act, by the state court having general jurisdiction in such area; or (3) if the state court declined to act, by the arbitrators who would resort to the more traditional “strike 2 and draw lots” method. Given the deadlock, the parties invoked the first prong of the arbitration clause and submitted their candidate list to the federal district court.
Citing Section 5 of the Federal Arbitration Act (regarding federal court appointments of arbitrators or umpires when parties are deadlocked or one side defaults) as the court’s authority for selecting the umpire in this case, the magistrate judge first took stock of “the qualities and characteristics desirable in an umpire for this type of reinsurance arbitration.” Given the sparse case law interpreting Section 5, he examined the arbitrator qualification requirements in the treaty for guidance, i.e., they all must be “disinterested active or former officials of insurance or reinsurance companies or underwriters at Lloyd’s, London, not under the control and without past employment or directorial relationships to either party to this Agreement.” Second, the umpire’s familiarity with the custom and practice of the applicable insurance and reinsurance business must be considered. Third, the candidate must be impartial because it was “axiomatic” that the umpire be impartial so that the panel’s decisions will be fair and based upon the merits of the dispute and not the personal influence or identity of the disputants. Fourth, the umpire must be able to manage the arbitration process in an organized, efficient, and fair manner, with the judge citing the ARIAS-U.S. Code of Conduct and observing that this factor was “especially important” here because the arbitration clause did not provide for the American Arbitration Association or similar entity to serve as administrator.
Applying these criteria to the list of six candidates presented by the parties, the court immediately eliminated two of the reinsurer’s candidates because they lacked any experience as arbitrators. The reinsurer’s third candidate did have extensive insurance and reinsurance industry experience as a senior officer, director, and counsel to a reinsurer; had served as either an umpire or arbitrator in over 150 arbitrations; had some familiarity with the subject matter based on his prior umpire experience; and was an ARIAS-U.S. certified arbitrator and umpire (although this last factor was not cited by the court).
Despite these qualifications, the judge found that this umpire candidate’s prior arbitration experience involving both parties and his previous role as an expert for the reinsurer several years before called his “neutrality into question.” He had had five prior arbitrations involving the cedent (two as party-arbitrator for a party adverse to the cedent; two as umpire; and one as sole arbitrator) and the reinsurer (one as party-arbitrator for the reinsurer; one as umpire; and one as an expert witness for the reinsurer). It was this candidate’s prior service as an expert witness for the reinsurer and its counsel that, according to the judge, gave “rise to a business relationship that especially concerns the court.” Because of it, “the court is not certain that he could reasonably be expected to be impartial,” and “the mere impression of possible bias is enough for the court to pass on his appointment as umpire.”
As for the cedent’s three candidates, each had served or was serving as an executive of an insurance or reinsurance company, had significant arbitration experience, and was an ARIAS-U.S. certified arbitrator and umpire. However, the court found that one of the three was the “most experienced” having served as a party-arbitrator in about 30 reinsurance disputes and as an umpire or sole arbitrator in about 90. Although that candidate was an actuary and challenged by the reinsurer as lacking the necessary experience in underwriting surety bonds or financial guaranties, the court appointed him as the umpire after finding that his extensive experience in both the insurance and reinsurance industry and as a reinsurance arbitrator “makes up for this alleged shortcoming.”
In re Travelers Indemnity Co. v. Everest Reinsurance Co., Ruling on Petition to Appoint Arbitration Umpire, Civil 3:04 MC 196 (TPS) (D. Conn. Oct. __, 2004) (Smith, Magis. J.)
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