iUNITED STATES LIFE INSURANCE V. SUPERIOR NATIONAL INSURANCE CO. (CIVIL ACTION NO. 07-55938 JANUARY 4, 2010)
Ten years ago, US Life requested arbitration pursuant to the reinsurance contract seeking: (1) rescission or reformation of the contract because the insurers misrepresented the reserves during the underwriting process and (2) damages for the insurers’ bad faith performance. The arbitration panel bifurcated the arbitration into two phases, the first addressing rescission and reformation and the second determining whether the insurers engaged in improper handling of claims that resulted in bills to US Life in excess of the amounts due under the reinsurance agreement.
In the first phase, the panel reformed the agreement so that US Life became liable for only 90% of the risks insured by the underlying policies because of the insurers’ failure to be forthright during the contract formation period. In the second phase, the panel found that all amounts billed prior to December 6, 2006 were due and all post-December 6, 2004 bills were required to be paid within thirty days of receipt. In addition to interest, the panel directed US Life to disgorge its actual investment earnings of all monies due under the reinsurance agreement as of June 30, 2004.
The United States District Court for the Central District of California confirmed the award and US Life sought review in the 9th Circuit Court of Appeals.
The Ninth Circuit affirmed the award, rejecting US Life’s contention that the panel refused to hear material evidence regarding the insurers’ handling of the claims by closing the meeting of the panel with the neutral experts. Although an ex parte meeting between an arbitrator and a neutral expert is not a routine arbitration practice, the panel had the authority to adopt its own rules of procedure. The panel gave each of the parties an adequate opportunity to present evidence and arguments. The impact of the panel’s ex parte meeting with the reviewers was mitigated by the notice, extensive correspondence, and other, more inclusive procedures. The court held that the panel did not engage in misconduct, that the parties were provided with a fundamentally fair arbitration and that the arbitration award rested on a plausible interpretation of the governing arbitration documents.
IMPACT (ARBITRATION): The course and conduct of an arbitrator is usually discussed and agreed to by the parties before the evidentiary portion of the arbitration. Usually, the parties know the extent of discretion an arbitrator has with respect to communications among parties and witnesses. As such, practitioners should understand the procedural conduct of the arbitration panel in advance of any final determination to minimize possible issues of misconduct.
For a copy of this decision, click here: http://tinyurl.com/rr-February-2010-Edition
