New Case on Consolidation in Reinsurance Arbitrations
It’s pretty clear in most jurisdictions that the question of whether disputes under multiple reinsurance contracts should be consolidated is a question for the arbitrators and not the court. What’s less clear is how the parties get an arbitration panel in place to address the consolidation issue. A California federal court recently addressed this issue.
In Employers Ins. Co. of Wausau v. The Hartford, No. 2:18-cv-07240-CAS-AGR, 2018 U.S. Dist. LEXIS 205345 (C.D. Calif. Dec. 3, 2018), the court was faced with a barrage of procedural maneuvers seeking to resolve an impasse between the parties on deciding whether a dispute under various reinsurance contracts should be consolidated. The underlying loss arose out of settlement payments made by the affiliated cedents for the same underlying insured’s claim. The problem is that the settlement was ceded by three different cedent affiliates to 19 reinsurance contracts covering eight reinsurance programs. The arbitration provisions were not the same and the venue for arbitration was not the same in the various groups of reinsurance contracts.
The cedent, understandably, sought a consolidated arbitration before one panel and sent a single arbitration demand asking the reinsurer to name one arbitrator to form a single panel. The reinsurer responded by proposing three arbitrations and appointed 3 arbitrators broken down by the 3 cedent affiliates. The cedent appointed a single arbitrator, and the 3 arbitrators for the reinsurer asked the cedent’s arbitrator to select umpires for the 3 arbitrations. The cedent refused and asked that a single panel be appointed to decide how the matter should be consolidated.
The reinsurer filed 4 petitions to compel arbitration in various jurisdictions and the cedent moved to compel appointment of a single arbitrator and to stay the other pending proceedings.
The court denied the cedent’s application and granted the reinsurer’s petition to appoint an arbitrator in the proceeding before it. In reaching its determination, the court noted that the cedent was correct that the issue of whether there can be a consolidation of the disputes into a single arbitration is a question for the arbitrators and not the court to decide. Under section 4 of the Federal Arbitration Act, the court held that it had the power to compel the parties to proceed to arbitration in accordance with the terms of their agreements. This court only had one agreement before it and it compelled arbitration based on the arbitration clause in that one agreement.
The court rejected all of the cedent’s other arguments on consolidation. The court noted that it cannot compel the reinsurer to form a single arbitration panel based on the single arbitration demand from affiliated companies. Nor could it compel arbitration in contravention of the jurisdictional limitations agreed to by the parties. In responding to the practicality of a consolidated arbitration, the court stated that it could not expand the written agreement even if it would achieve greater efficiency. In other words, even though there may be merit to a consolidation in a particular format, the court can’t order it if it is not provided for in the arbitration clause itself.
The court ordered the parties to proceed to arbitration under the umpire selection procedures set forth in the reinsurance contract the court had before it. In other words, the two party-appointed arbitrators on this contract had to select an umpire or go to the arbitration clause’s drawing lots provision. In a footnote, the court reminded the parties that if there is a lapse in the naming of the umpire, upon motion the court would designate and appoint the umpire under section 5 of the FAA. The court also stated that once the two party-appointed arbitrators choose the umpire, the proceedings can begin and the panel can consider the cedent’s consolidation application.
Finally, this court refused to stay the other proceedings in other courts and noted that the cedent did not adequately explain why the possibility of inconsistent results warranted a stay. The inconsistent results could be from the multiple requests to compel arbitration under the separate agreements and then the consolidation requests made to those courts and eventually to arbitration panels. Given the rulings here, and barring any appeal, coordination by the parties with each other on the other proceedings will avoid any inconsistencies.