Southern District of New York Vacates Reinsurance Arbitration Award Based Upon Party Arbitrator Bias and Non-Disclosure

The United States District Court for the Southern District of New York recently vacated an arbitration award against reinsurers based upon the “evident partiality” of the cedent’s party-appointed arbitrator in failing to disclose his significant contacts and relationships with the cedent and its principals.  Certain Underwriting Members at Lloyd’s of London v. Insurance Company of the Americas, No. 16-CV-323 (VSB) and Certain Underwriting Members at Lloyd’s, London Subscribing to Treaty No. 0272/04 v. Insurance Company of the Americas, No. 16-CV-374 (VSB) (S.D.N.Y. March 31, 2017).  Rosenthal Lurie & Broudy represented the Treaty No. 0272/04 underwriters (hereinafter referred to as the “third-layer reinsurers”) in these consolidated matters.

The underlying arbitration proceeding involved a dispute as to whether coverage existed for two workers’ compensation claims under a clash catastrophe excess of loss reinsurance agreement.  The arbitration panel consisted of three arbitrators, one appointed by the cedent, another appointed by the first and second-layer reinsurers, and an umpire.  After a four-day hearing, the arbitration panel found in favor of the cedent.  The first and second-layer reinsurers were ordered to pay alleged losses of more than $2.5 million.  In addition, the award provided that in the event one of the claims exceeded $5 million, the third-layer reinsurers would be liable under a separate reinsurance agreement.

The first and second-layer reinsurers subsequently filed a motion to vacate the arbitration award in the Southern District of New York, followed by a separate motion to vacate or modify the award by the third-layer reinsurers.  The cedent filed cross-motions to confirm the award.  The reinsurers argued, among other things, that the award should be vacated due to the “evident partiality” of the cedent’s party appointed arbitrator, one of the grounds for vacatur under the Federal Arbitration Act^[1].  The court stated that vacatur for evident partiality is appropriate “where a reasonable person would have to conclude that an arbitrator was partial to one party to the arbitration.” 

In this case, during the initial organizational meeting and again at the outset of the arbitration hearing, each of the panel members were asked to disclose their relationships with the cedent, the first and second-layer reinsurers, and individuals involved in the arbitration so that potential conflicts of interest could be properly evaluated.  The arbitrator appointed by the cedent disclosed only that he had met the cedent’s then-Chairman ten years earlier in conjunction with a failed business deal but claimed not to have had an ongoing relationship with him.  He also claimed that he had no business relationships with the cedent.  

The court concluded, however, that these disclosures were lacking, finding that there was “clear, unrebutted” evidence that the arbitrator had failed to disclose material relationships with principals of the cedent and the cedent itself, and that those undisclosed relationships were significant enough to demonstrate evident partiality.   Specifically, the court pointed out that the cedent’s arbitrator had neglected to disclose that: (1) he is the President and CEO of a company which operated out of the same office suite and address as the cedent; (2) he had hired the Treasurer of the cedent as his company’s Chief Financial Officer; (3) another officer of the cedent was listed on his company’s website; (4) his company shared the same national claims manager with the cedent; and (5) his company’s counsel was a former director of the cedent.  

The court found particularly “troubling” the arbitrator’s failure to disclose his relationship with the cedent’s Treasurer during the arbitration hearing.  The arbitrator had hired the Treasurer to be the CFO of his company only a few months before the hearing.  According to the court, even though the Treasurer attended the hearing as the cedent’s representative and testified during it, neither the arbitrator nor Treasurer disclosed or acknowledged the relationship, suggesting that they were hiding it from the other arbitrators and first and second-layer reinsurers.

In addition, the court rejected the cedent’s argument that a lesser standard of evident partiality, if any, should apply to a party-appointed arbitrator in a tripartite arbitration.  Citing to Scandinavian Reinsurance Co. v. Saint Paul Fire & Marine Ins. Co., 668 F.3d 60 (2^nd Cir. 2012), a case which also involved party-appointed arbitrators, the court stated that the question here was “whether the facts that were not disclosed suggest a material conflict of interest” such that “a reasonable person would have to conclude that an arbitrator was partial to one party to the arbitration.”  (emphasis in original).  Because “the facts [the cedent’s arbitrator] failed to disclose were significant,” the court found vacatur to be appropriate.

A link to an article in Mealey’s Litigation Report (registration required) discussing the ruling can be found here.

^[1]Both groups of reinsurers raised additional arguments in support of their respective motions to vacate and/or modify the award. For example, the third-layer reinsurers argued, among other things, that: (1) they never received notice of the arbitration proceeding and, therefore, their interests were not represented before the arbitration panel; and (2) the panel issued a ruling regarding a matter -- the third-layer reinsurers’ liability -- not properly brought before it. Because the court found that evident partiality alone warranted vacatur, it declined to fully consider these other arguments.