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

Panel Limits on Depositions and Hearing Testimony Did Not Amount to Arbitral Misconduct

Deposition discovery disputes seem to abound in arbitrations these days, and there are often times when panels must rein in the parties to preserve both the efficiency and cost-effectiveness of the process. Likewise, there are occasions when parties seek to introduce fact and expert testimony that the panel deems to be beyond the scope of a witness's direct knowledge or expertise. The question of when such limitations amount to arbitral misconduct thwarting a party's right to a full and fair hearing was addressed in a recent Massachusetts federal district court decision, which offers some timely insights into the practical boundaries of deposition discovery and hearing testimony.

In this case, OneBeacon America Insurance Co. (“OneBeacon”) filed a motion to vacate an arbitration award in favor of Swiss Reinsurance America Corp. (“Swiss Re”) alleging that the arbitrators were guilty of misconduct for refusing to allow certain deposition discovery and limiting the testimony of a fact and an expert witness during the hearing.  The underlying dispute concerned whether OneBeacon had met its per occurrence retention under a reinsurance treaty with Swiss Re when it aggregated as a single occurrence various losses arising under several OneBeacon policies on which it had paid, or would be paying, non-products asbestos and silica bodily injury liability claims on behalf of six different policyholders.  The treaty defined “occurrence” to include “injuries to one or more than one person resulting from infection, contagion, poisoning or contamination proceeding from or traceable to the same causative agency.”  If OneBeacon’s aggregation and cession of these non-products bodily injury losses were allowed under the treaty, Swiss Re would be liable for a $9 million recovery.  The panel denied the relief sought by OneBeacon on the ground that the insureds’ asbestos and silica non-products bodily injury losses could not be aggregated on the basis that the mere presence of asbestos or silica is the “same causative agency.”  It was during the arbitration proceedings leading up to that award that the panel made two significant evidentiary rulings – one involving the scope of OneBeacon’s deposition discovery and the other limiting its fact and expert witness testimony at the hearing. 

During discovery, OneBeacon sought to take depositions from former and current Swiss Re employees, insurance agents, reinsurance brokers, and others to prove that industry custom and practice supported its position that non-product asbestos and silica bodily injury liability claims may be aggregated into a single occurrence to meet the treaty’s per occurrence retention.  It argued that such broad discovery was necessary because “industry members often use technical vocabulary and shorthand when entering agreements, which permit parties to leave their intentions unexpressed.”  Swiss Re objected primarily on the ground that such depositions were unnecessary because the central issue was a matter of contract interpretation for the panel to decide. 

In responding to these contentions, the panel chose a creative middle ground.  It permitted limited discovery on industry custom and practice during the summary disposition phase of the arbitration by requiring the parties to designate one corporate representative as the “person most knowledgeable” with regard to industry custom and practice concerning causative agency and aggregation and the parties’ course of dealings under the treaty.  OneBeacon identified a group of six Swiss Re employees from which Swiss Re selected one – an Asbestos Pollution and Health Hazard Unit claims handler – as the person most knowledgeable, and he was the witness subsequently deposed by OneBeacon.  The Swiss Re claims handler testified that he was unaware of any industry custom or practice with respect to applying the “causative agency” provision to non-products asbestos claims.  Significantly, the testimony of OneBeacon’s own corporate representative turned out to be consistent with that of Swiss Re’s as were several articles it had submitted and a comment appearing in its SEC Form 10-K.  The panel found that there was no course of dealing between the parties or industry custom with respect to the cession of asbestos non-products bodily injury claims and that the parties’ course of dealing and industry custom and practice regarding asbestos products bodily injury claims versus asbestos non-products claims could not be “conflated.”  In the absence of any course of dealing or custom or practice, the panel denied further discovery by OneBeacon on these topics. 

Moving to vacate the panel’s adverse award, OneBeacon contended that it was denied a full and fair hearing when the panel limited its deposition discovery and refused to allow it to develop evidence proving that its interpretation of the treaty was consistent with industry custom and practice.  Specifically, the cedent alleged that the single corporate representative deposition was inadequate, that the Swiss Re employee had no personal knowledge about industry custom and practice for billing asbestos losses, and that he had failed to educate himself on the topic by reference to documents or interviews of other Swiss Re employees.  In ruling against OneBeacon on this point, the district court found that the Swiss Re employee had indeed reviewed documents in anticipation of his deposition and had ten-plus years of experience in asbestos claims handling and relevant continuing education.  Hence, the claims handler’s alleged lack of awareness, according to the court, was more likely attributable to the fact that no such industry custom and practice existed.  Mindful of the exceedingly narrow standard for judicial review (“The standard for reviewing an arbitration decision is extremely deferential to the arbitrator, embodying ‘one of the narrowest standards of judicial review in all of American jurisprudence.’”), the court agreed that any further discovery on the subject would have been “little more than a fishing expedition.”  In analyzing the merits of OneBeacon’s arbitrator misconduct allegation, the judge considered whether the panel’s actions showed a “neglectful disregard” for the evidence or acted so as to “grossly and totally block” OneBeacon’s right to be heard.  Concluding that the panel’s action did not rise to the level of misconduct, the court found that the panel’s ruling was within its broad procedural discretion.

OneBeacon’s second misconduct allegation was leveled at the panel’s limitations on the testimony of one of its fact witnesses and an expert witness.  The panel allowed OneBeacon’s fact witness to testify about only what he saw and heard regarding the issues and not about his understanding of the treaty.  Its expert witness was precluded from testifying about underwriting intent and industry custom and practice, although the panel did accept into evidence the written reports offered by both parties’ experts.  In its motion to vacate, OneBeacon contended that the panel’s testimony limitations, again, blocked its right to a full and fair hearing.  Distinguishing the precedents cited by OneBeacon in support of its position (generally involving arbitrations in which one party was entirely precluded by a panel from presenting any evidence at all), the court found that OneBeacon had “plentiful” opportunities to present extensive testimony and other evidence over the course of the three-day hearing.  The panel’s limitation of the fact witness’s testimony to what he saw and heard and exclusion of his opinions was appropriate as was its restriction of the expert’s testimony to her experience with a similar treaty but not on underwriting intent, an area in which that she admitted she lacked expertise.

As panels are increasingly embroiled in time-consuming and costly discovery disputes such as the scope of the parties’ depositions and hearing testimony, it is reassuring to know that the federal courts, at least, are inclined to give panels fairly wide latitude to impose reasonable limits so long as they do not “grossly and totally block” a party’s right to a full and fair hearing.  In this case, the panel clearly sought to strike an equitable balance so that reasonable deposition discovery and hearing testimony was permitted consistent with preserving two important benefits of arbitration over litigation, its efficiency and cost-effectiveness.

OneBeacon America Insurance Co. v. Swiss Reinsurance America Corp., Civil Action No. 09-CV-11495-PBS, 2010 U.S. Dist. LEXIS 136039 (D. Mass. Dec. 23, 2010).

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