Occasionally, the same party-arbitrator is appointed by one side to serve in separate but related reinsurance disputes involving, for example, different layers of a reinsurance program governed by separate treaties. These multiple appointments rarely trigger pre-award disqualification motions due to bias, partiality, or lack of disinterestedness because the federal courts have routinely held that such challenges must await post-award proceedings. However, imaginative pre-award disqualification motions aimed at avoiding this prevailing rule do surface from time-to-time such as the novel breach of contract theories proffered in a recent Illinois federal district court case.
The insurer in that litigation had ceded certain risks to a reinsurer pursuant to a 1998 variable quota share agreement. Although the final treaty wording was not subsequently prepared, the quota share slip did reference the inclusion of an arbitration clause, and the parties agreed to look to and rely on the previous year’s treaty for that wording. The arbitration clause was fairly typical requiring tripartite arbitration before “disinterested” arbitrators. In addition to the 1998 quota share agreement, the insurer was also protected by a 1998 excess of loss (“XOL”) treaty.
In 2006, disputes arose, and the insurer demanded arbitration under both of the 1998 reinsurance agreements. The reinsurer counter-demanded arbitration and appointed the same party-arbitrator in both matters. It also requested that the disputes be consolidated, but the insurer rejected this request. Subsequently, the 1998 XOL arbitration panel heard and also rejected the reinsurer’s consolidation motion, resulting in two separate arbitrations. The 1998 quota share arbitration was put on hold, and no arbitration panel was convened.
In the XOL arbitration, the parties and the panel executed the standard ARIAS-U.S. Confidentiality Agreement, which provided that “arbitration information,” broadly defined, should be kept confidential during and after the conclusion of the arbitration proceeding. About four months after the XOL arbitration ended in March 2009, the reinsurer’s arbitrator contacted the insurer’s arbitrator for the quota share arbitration about selecting an umpire. The insurer objected raising concerns about the duties of the reinsurer’s arbitrator under the Confidentiality Agreement and whether she was “disinterested” as required by the arbitration clause. When the reinsurer’s arbitrator did not withdraw, the insurer filed a pre-award action in federal district court seeking (1) her disqualification in the quota share arbitration; (2) a finding that the reinsurer was in breach of the Confidentiality Agreement for appointing the same arbitrator in the second arbitration; and (3) enjoining the reinsurer from proceeding in the quota share arbitration if its party-arbitrator remained on the panel. The reinsurer cross-moved to dismiss all of the insurer’s claims for failure to state a claim upon which relief can be granted under Federal Rule of Civil Procedure 12(b)(6) and petitioned the court to appoint an umpire and compel the insurer to resume the arbitration.
First, the Illinois federal district court addressed the insurer’s disqualification motion. Citing the prevailing rule that “[t]he time to challenge an arbitration, on whatever grounds, including bias, is when the arbitration is completed and an award rendered,” the court agreed that the insurer’s motion to disqualify the reinsurer’s arbitrator for lack of disinterestedness was tantamount to a challenge for bias or lack of qualification, actions that typically must be brought post-award. The novel twist here was that the insurer argued that its pre-award challenge was timely because it was based on a breach of the contractual “disinterestedness” requirement in the arbitration clause. The court, however, dismissed this prong of the insurer’s motion as “premature” concluding that the insurer’s breach of contract claim was essentially the same as challenging the arbitrator on the ground of bias or partiality, which is generally not permitted pre-award.
Next, the court considered the insurer’s two anticipatory breach of the Confidentiality Agreement theories, repudiation and “inevitability.” Because the reinsurer’s party-arbitrator had not made any unequivocal statements suggesting that she intended to breach the first arbitration’s Confidentiality Agreement, the court found this argument to be factually unsupported. As for the second “inevitability” prong, the insurer sought to persuade the court that the reinsurer’s arbitrator must inevitably disclose confidential information regarding the 1998 XOL panel’s decision-making process to the 1998 quota share panel. By taking the appointment in the second arbitration, the reinsurer’s arbitrator had undertaken a voluntary act which would place her in a position where she must breach the Confidentiality Agreement. The problem with this theory was that insurer was unable to detail any facts making disclosure “inevitable” such that the arbitrator would be unable to perform her duties as party-arbitrator without breaching the Confidentiality Agreement. The court opined that the reinsurer’s arbitrator could present her views to the second panel without necessarily referencing what happened in the prior arbitration and noted that she had not expressed any concern over her ability to keep that information confidential. “The mere fear of a future breach in this case,” according to the court, “is not a cause of action.”
Having denied the insurer’s disqualification motion, the court addressed the reinsurer’s petition that an umpire be appointed and that arbitration be compelled. The arbitration clause required that each party appoint its arbitrator within 30 days, and within 30 days of the party-arbitrators’ appointment, they were to agree on an umpire. Failing that, the arbitrators were to exchange slates of three umpire candidates, strike two, and then draw lots. While there was no specific deadline for the slate exchange, the reinsurer did send three names to the insurer, but there was no response. The court, mindful of the 30-day time frames referenced in the arbitration clause, held that the insurer’s more than four-month delay amounted to a lapse in naming the umpire. Therefore, pursuant to § 5 of the Federal Arbitration Act, it appointed by lot one of the reinsurer’s three umpire candidates, and ordered the parties to proceed with the arbitration.
Although the insurer’s pre-award efforts to disqualify the reinsurer’s arbitrator failed in this case, its alleged breach of contract claims grounded in the arbitration clause’s “disinterested” requirement and anticipatory breach of the Confidentiality Agreement are novel theories that, under the right circumstances, could succeed in circumventing the prevailing rule that all such challenges must await post-award proceedings. For example, under a very similar factual scenario, pre-award disqualification was granted by the same Illinois federal district court (albeit by a different judge) for lack of disinterestedness when it was proven that the arbitrator had actually breached the prior arbitration’s Confidentiality Agreement, thereby rebutting the presumption that the arbitrator “could disregard knowledge he already had.” Trustmark Insurance Co. v. John Hancock Life Insurance Co., No. 09 C 3959, 2010 U.S. Dist. LEXIS 4698, *12 (N.D. Ill. Jan. 21, 2010) (arbitrator held not “disinterested” in second related arbitration because court found that he breached the first arbitration’s Confidentiality Agreement).
Trustmark Insurance Co. v. Clarendon National Insurance Co., Case No. 09 C 6169, 2010 U.S. Dist. LEXIS 8078 (N.D. Ill. Feb. 1, 2010).