In most reinsurance arbitrations, parties routinely execute hold harmless agreements, often modeled after the standard ARIAS form, either prior to or at the panel organizational meeting. But what happens when one party refuses to sign it? Some panels may be willing to proceed with just one party’s hold harmless indemnification; otherwise, the arbitration typically grinds to a halt. In an interesting new Illinois federal district court case, the central issue was whether an arbitration panel could properly require the parties to sign a hold harmless agreement under the American Arbitration Association’s Commercial Arbitration Rules. The court not only answered that question in the affirmative but ordered both parties to sign it.
A dispute arose between the trustee in bankruptcy for an insolvent insured and its worker’s compensation insurers over their use of certain collateral posted by the insured as security for the payment of its claims and expenses under the policies. Because the trustee believed that the collateral was well in excess of what the insurers needed to satisfy the insolvent’s present and future obligations under the agreement, he initiated a bankruptcy court action to compel the insurers to return the excess funds. Because the parties’ agreement called for an AAA arbitration, the bankruptcy court stayed the proceeding and compelled the parties to arbitrate their dispute
After selecting a three-member panel, the parties received a hold harmless agreement from the arbitrators for execution prior to the organizational meeting. The hold harmless included the typical prohibition against the parties initiating any actions against the arbitrators in connection with their services in the arbitration and agreement to indemnify and hold them harmless against any and all expenses, costs, and fees that may be incurred, including their reasonable hourly fees, in connection with any action arising out of the arbitration.
At the organizational meeting, the trustee informed the panel that he refused to sign hold harmless agreement because it was “against his better judgment” as a trustee in bankruptcy and “arguably in contravention of his duties” to the insured’s creditors. Consequently, the panel declared that it could not proceed with the arbitration without it. After a several month stalemate, the trustee returned to the bankruptcy court seeking reconsideration of its prior arbitration order issued nearly 3½ years earlier. That court subsequently vacated its order compelling arbitration, and the insurers filed this appeal to the federal district court.
In reversing the bankruptcy court’s order to vacate, the district court observed that the panel’s requested hold harmless “really codifies (or perhaps, more accurately, solidifies) the immunity accorded to arbitrators as a quasi-judicial body.” It quoted a 2006 New York appellate decision emphasizing the important arbitral immunity principle underlying the hold harmless:
“[G]iven that the hold harmless agreement demanded by the arbitrators gives them no more protection than they are already entitled to under the prevailing rule that arbitrators are immune from liability for acts performed in their arbitral capacity compelling execution of such agreement is not to add a term in the parties’ arbitration agreement but, rather, under governing Pennsylvania law, to enforce a necessarily implied obligation.” [quoting Indemnity Insurance Co. of North America v. Mandell, 817 N.Y.S.2d 223, 224 (N.Y. App. Div. 2006)]
Without such a broad grant of arbitral immunity, arbitrators would be dissuaded from serving. Suing an arbitrator would be tantamount to a litigant, dissatisfied with the outcome of a lawsuit, suing jurors. If there were a tainted arbitration decision, the district court observed that § 10 of the Federal Arbitration Act would provide appropriate relief without subjecting arbitrators to “the hazards sought to be averted by their caselaw immunity – and by hold harmless agreements.”
In reversing and remanding this case to the bankruptcy court, the district court held that the panel’s hold harmless agreement requirement reasonably and properly served to facilitate the arbitration proceedings to which the parties had agreed when they signed the insurance agreement. To further emphasize this point and perhaps to express its displeasure with the trustee’s conduct in this case, the court went so far as to order the trustee and the insurers to sign the panel’s hold harmless agreement and “to proceed with the long-delayed arbitration forthwith.”
Pacific Employers Insurance Co. v. Moglia, Case No. 05 C 1366, 2007 U.S. Dist. LEXIS 21967 (N.D. Ill. Mar. 27, 2007).