New York Supreme Court Takes a New Approach to Umpire Selection in Reinsurance Arbitrations
In ad hoc arbitrations, the parties appoint the arbitrators without the assistance of an administrating institution. Ad hoc arbitrations instead rely on the courts to resolve differences relating to the appointment, replacement, or authority of the arbitrators. In administered arbitrations, on the other hand, arbitrators are appointed under the supervision of professional bodies like the American Arbitration ("AAA"), the International Chamber of Commerce ("ICC"), and the London Court of International Arbitration ("LCIA").
Most U.S. reinsurance arbitrations are ad hoc arbitrations.1 Thus, the parties to a reinsurance arbitration are left with the arbitration agreement itself for guidance on umpire selection with any gaps to be filled by either the Federal Arbitration Act, or in some instances, state law. The lack of rules and procedures not only means that each panel can set their own rules on an ad hoc basis, but it also means that the parties have a significant amount of room for pre-arbitration panel selection disputes. To the extent that reinsurance agreements set forth a panel selection procedure at all, many require the party-appointed arbitrators to agree on a third arbitrator (neutral), and if they cannot agree on a neutral, reinsurance agreements require the strike and draw method.
The generalities of reinsurance arbitration clauses open the door to gamesmanship and mischief with respect to panel selection. For example, what happens if a party nominates candidates that are perceived to be predisposed to rule in a certain way? Or what happens if a party refuses to nominate a slate of umpire candidates at all? Finally, what if a party nominates potential umpires that are currently engaged by that party as party-appointed arbitrators? The parties are left to seek the assistance of the courts.
While federal courts generally have held that challenges to the party-appointed arbitrators or the umpire after the panel is selected can be brought only after the arbitration is completed, there is a burgeoning new area of litigation relating to umpire selection.2 Crossing the litigation threshold brings uncertainty that neither party anticipated: that is, a court could name an umpire on its own, select one from one of the slates provided by the parties, or order the parties to follow a procedure that will lead to the selection of an arbitrator.
When recently faced with an impasse in the arbitrator selection process, the New York Supreme Court in American Home Assurance Co. v. Clearwater Insurance Co.3 developed a hybrid selection process that incorporated aspects of both the ARIAS-US "ranking" method and the "strike and draw" method generally contained in most reinsurance treaties.
On August 31, 2012, American Home Insurance Company and National Union Fire Insurance Company of Pittsburgh, P.A. petitioned the New York Supreme Court under New York law and the Federal Arbitration Act to appoint an umpire in connection with three reinsurance treaties. Two of the treaties required arbitration before three arbitrators: one appointed by each party and a third arbitrator to be selected by the party-appointed arbitrators. The third treaty mandated arbitration before two party-appointed arbitrators and, in the event that they failed to agree, the decision would go to an umpire selected by the party-appointed arbitrators. None of the treaties prescribed the method to be applied by the party-appointed arbitrators for selecting the umpire or third arbitrator.
Each party appointed its own arbitrator for the three proceedings, but the two party-appointed arbitrators failed to agree on an umpire or third arbitrator as required by the treaties. American Home Insurance Company and National Union Fire Insurance Company of Pittsburgh (the petitioners) sought the appointment of an arbitrator from among the three candidates proposed by their party-appointed arbitrator. In the alternative, the petitioners proposed use of the ranking method prescribed by ARIAS-US: each side names five nominees, strikes 2 from the other party's list, then ranks the six names, and the nominee with the highest cumulative ranking wins. Clearwater Insurance Company (the respondent) opposed the petition, and, in the alternative, asserted a "cross claim" seeking appointment of an umpire or arbitrator from the list prepared by its own party-appointed arbitrator. Alternatively, the respondent advocated the "strike and draw" method for umpire selection, where each side names 3 nominees, strikes 2 from the other side, then chooses the winner by random lot from the two remaining nominees.
At the outset, the New York Supreme Court affirmed its authority to appoint an arbitrator under New York state law. It rejected the respondent's position that the court cannot appoint an arbitrator unless indicated by the treaties, stating that "the mechanism of the court appointment of an arbitrator existed well before the formation of these reinsurance treaties." The court did not address its authority under the Federal Arbitration Act, 9 USC § 5.
The court then examined the parties' proposed approaches, after first determining that neither state law nor the reinsurance treaties provided a method for selecting the umpire or third party arbitrator. Instead of choosing one of the parties' proposals, the court developed a new approach that incorporates aspects of both the ARIAS-US "ranking" method and the "strike and draw" method. Under the court's approach, each party-appointed arbitrator nominates 5 candidates, strikes 3 candidates from the other party's list, and ranks the remaining candidates. The highest ranked candidate is appointed. In the event of a tie, a coin toss determines the winner.
The court ordered the parties to apply its approach to select an umpire or third arbitrator for all three arbitration proceedings. As to the third treaty, the court rejected the respondent's argument that a full arbitration before the two party-appointed arbitrators must be held before an umpire is selected, even though the parties would only look to the umpire if the two arbitrators disagreed. Instead, the court determined that a disagreement as to the method of appointing an umpire qualified as a disagreement requiring an umpire's appointment.
1While most reinsurance arbitrations either expressly or implicitly loosely follow the ARIAS-US Code of Conduct, ARIAS is not a governing authority like the AAA and the ARIAS Practical Guide, in contrast to the AAA and UNICTRAL Rules, does not provide a mechanism for ARIAS to appoint arbitrators and umpires in the event of a dispute.
2Section 5 of the Federal Arbitration Act permits a court to select an umpire in the event that the parties are impasse. The FAA does not provide the court with any particular guidance as to how to accomplish this leaving the courts to fashion their own solutions on a case-by-case basis.
3American Home Assurance Co. v. Clearwater Insurance Co., No. 653079/2012 (N.Y. Sup. Ct. Jan. 15, 2013)