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

3rd Circuit Rules that Consolidation Is for the Arbitrators, Not the Court, to Decide

Consolidation of arbitrations arising under multiple years and layers of the same reinsurance program continues to be a hot topic in the federal courts. Consistent with the current trend in U.S. Supreme Court and other circuit court decisions, the U.S. Court of Appeals for the Third Circuit ruled in a reinsurance dispute involving asbestos losses arising under multiple years and layers of two separate reinsurance programs that the procedural issue of consolidation should be decided in the first instance by the arbitrators and not the court.

In this case, the insurer’s asbestos losses were ceded to certain Lloyd’s reinsurers under two reinsurance programs – a Comprehensive Catastrophe Excess of Loss Treaty consisting of six contracts covering different time periods between 1972 and 1985 and several layers and a Special Casualty Contingency Excess of Loss Treaty consisting of two contracts covering different time periods between 1974 to 1982. When the reinsurers failed to pay these losses, the cedent sent two arbitration demand letters, one for each program. In response, the reinsurers filed two actions in New Jersey federal district court, one for each reinsurance program, seeking an order that there must be a total of eight separate arbitrations because none of the contracts provided for the consolidation of these arbitration proceedings.

Hearing the reinsurers’ two pending lawsuits together, the district court concluded that the issue of consolidation must be decided by an arbitrator, not the court, and issued an order denying the reinsurers’ petitions and granting the cedent’s cross-motions to compel arbitration. It directed the reinsurers to appoint a single party-arbitrator in response to each one of the cedent’s two arbitration demands and for the parties to identify a single umpire in response to each arbitration demand, all without prejudice to the reinsurers applying to each arbitration panel for the same or similar relief they sought in the court proceeding and to each respective panel’s power to grant that relief. The reinsurers appealed to the Third Circuit.

Seeing no reason why this procedural issue should not be resolved in arbitration, the Third Circuit affirmed the district court’s order concluding that the question of consolidation was for an arbitrator to decide, citing as precedent two U.S. Supreme Court decisions, Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002), and Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003), both of which involved procedural issues other than consolidation. The Third Circuit observed:

“As in Green Tree, the question here is ‘not whether the parties wanted a judge or an arbitrator to decide whether they agreed to arbitrate a matter,’ but rather ‘what kind of arbitration proceeding the parties agreed to.’ In this case, the parties agree that they agreed to arbitrate the matter – the question is merely whether they agreed to individualized or consolidated proceedings as a matter of procedure. Therefore, ‘any doubt’ here about the ‘scope of arbitrable issues should be resolved in favor of arbitration.’” [Citations omitted.]

By affirming the district court’s order, the Third Circuit required the parties to proceed with two separate tripartite arbitrations, with each panel deciding for itself whether there will be one or multiple arbitrations under the two reinsurance programs.

Certain Underwriters at Lloyd's London v. Westchester Fire Insurance Co., 489 F.3d 580 (3rd Cir. 2007).

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