In a rare instance of a court overturning a reinsurance arbitration award on the basis of a party-appointed arbitrator's "evident partiality," the U.S. District Court for the Northern District of Illinois denied a reinsurer's motion for summary judgment to confirm an award on the ground that its party-appointed arbitrator failed to disclose a "substantial" prior attorney-client relationship with that reinsurer.
At the organizational meeting, the reinsurer's party-appointed arbitrator represented to the best of his recollection that he had known the reinsurer "over the years" as well as its parent company and that he was the reinsurer's party arbitrator in two other pending matters. Nearly a month later, he supplemented his earlier disclosures in a letter to the parties stating that he had "neglected" to disclose that he had provided "limited corporate advice" to the reinsurer's subsidiary and had recommended that his former law firm be retained to represent that subsidiary in an arbitration involving wholly unrelated issues. That "limited corporate advice," according to the federal court's findings, amounted to more than 400 hours of work performed over four years during the time the arbitrator was a partner in the law firm to whom he had referred the reinsurer. He had also performed "a great deal of the legal work" himself as the billing partner, and the court found that he was counsel of record for the reinsurer, not its subsidiary, in the unrelated arbitration.
Describing the burden of demonstrating "evident partiality" under Section 10(a)(2) of the Federal Arbitration Act as a "substantial task" for a party (something more than a mere appearance of bias but less than a showing of actual bias) and noting the general reluctance of courts to set aside arbitration awards due to an arbitrator's failure to disclose a relationship with a party, the district court observed that arbitrators are required to disclose any dealings that might give rise to the appearance of bias and that they should err on the side of disclosure to prevent attacks on their decisions.
In assessing the candor of the disclosures in this case, the court concluded that the arbitrator's failure to disclose the extent of his prior attorney-client relationship with his appointing reinsurer established "the kind of intimate professional relationship that casts serious doubt on [his] impartiality," and "[h]is behavior deprived 'the parties who are in the best position to judge an arbitrator's partiality, a chance to reject or accept an arbitrator with full knowledge of the arbitrator's connections.'" [Quoted case citation omitted.]
Rejecting the reinsurer's contention that the cedent had waived its right to assert evident partiality by failing to raise it after the arbitrator's supplemental disclosure letter, the court ruled that there was no waiver in this case because the arbitrator's supplemental disclosure was "misleading, far from complete, and . . . does not clearly disclose a prior attorney/client relationship with [the reinsurer]." Thus, the cedent was not unreasonable in accepting his disclosure at the time, but to the extent that the arbitrator understated or misrepresented his relationship with the reinsurer, the cedent did not waive its right to raise the issue.
Sphere Drake Insurance Limited v. All American Life Insurance Co., Case No. 01 C 5226, slip op. (N.D. Ill. May 17, 2002).