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Preclusive Effect of an Arbitration Award in a Reinsurance Dispute

Larry Schiffer | December 20, 2023

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Most reinsurance contracts contain an arbitration clause requiring that all disputes between the parties concerning the reinsurance contract or its operation must be resolved by arbitration. The end result of an arbitration proceeding is a written decision issued to the parties by the arbitration panel, generally called an arbitration award. A final arbitration award is binding on the parties, and, in the United States, a final arbitration award generally is not subject to appeal. Yes, a party can seek to confirm, modify, or vacate an arbitration award in court, but the grounds for vacating an arbitration award are very narrow and difficult to satisfy.

So, what happens after an arbitration award is issued and the parties have another dispute over the same reinsurance contract but involving a different period of time and different reinsured policies and claims? Does the first arbitration award preclude the party that brought the second dispute from bringing the second dispute? And, who decides whether the arbitration award has a preclusive effect on future proceedings? Is it the court, or is it another arbitration panel?

Before answering these questions, let's look at some background on arbitration awards in reinsurance disputes.

The Nature of Arbitration Awards

During a reinsurance arbitration, the arbitration panel may issue several rulings on procedural or substantive matters. Whether you call those rulings "awards" or just rulings, only certain awards are enforceable in court. For example, if a dispute has multiple parts, and the parties ask the arbitration panel to rule on one of those parts, is that interim ruling an "award" that can be enforced in court?

This question often arises on requests for dispositive motions on threshold issues, motions that in court would be called motions for partial summary judgment. An arbitration panel ruling on a dispositive motion on the threshold issue may not resolve the dispute, but may narrow the dispute significantly.

At the end of the arbitration hearing, however, the arbitration panel in a reinsurance arbitration will issue a written final arbitration award. Sometimes the final award is simple—party A owes X dollars to party Y. Sometimes the final award after hearing is an "interim final award" because issues concerning claims, costs, or attorney fees or other collateral issues are still outstanding and require additional submissions. Typically, those "interim final awards" become final by their own terms if the additional submissions are not made within the time prescribed by the arbitration panel. Other times an "interim final award" will be followed by a "final award" that often subsumes the interim award and definitively resolves all issues presented to the arbitration panel.

Enforceability of Arbitration Awards

Nearly all (but not every) reinsurance arbitration falls under the jurisdiction of the Federal Arbitration Act (FAA). This is because most reinsurance contracts involve "commerce," meaning "commerce among the several States or with foreign nations, or in any Territory of the United States or in the District of Columbia, or between any such Territory and another, or between any such Territory and any State or foreign nation, or between the District of Columbia and any State or Territory or foreign nation. . . ." FAA § 1.

Under sections 9, 10, and 11 of the FAA, parties may petition either federal or state courts of general jurisdiction to confirm, vacate, or modify an "award," if the arbitration clause in the reinsurance agreement states that "a judgment of the court shall be entered upon the award made pursuant to the arbitration."

The word "award," however, is not defined by the FAA, but there are plenty of cases that address the issue. Suffice it to say that the courts will only entertain motions to confirm or vacate awards if those awards are deemed "final."

Finality of Arbitration Awards

To be "final," an arbitration award must resolve the issues presented on the merits. If the award does not adjudicate an issue that has been submitted to the arbitration panel and leaves matters open, then the award is not final and generally the courts will not entertain a motion to confirm or vacate.

Stated differently, if an arbitration award conclusively disposes of a separate and independent claim, even if it does not dispose of all the claims submitted to arbitration, it likely will be considered final and subject to limited judicial review. Awards that are procedural orders, which regulate the conduct and administration of the arbitration, are typically not subject to judicial review.

For example, if the arbitration panel in a reinsurance dispute issues a scheduling order, that is a procedural ruling that is not a final arbitration award. Courts will rarely, if ever, interfere with an arbitration panel's scheduling order. If the arbitration panel issues an order finding that the cedent's claims can be aggregated, that likely will be considered a final award because it disposes of a separate and independent claim in dispute.

The Preclusive Effect of an Arbitration Award

Now that we understand the nature of a final arbitration award, we can go back to the questions posed above concerning the preclusive effect of an arbitration award. It is well settled that a final arbitration award precludes the parties from relitigating the same issues. A reinsurance arbitration award, which may be reduced to a judgment in court, has the same preclusive effect as a final judgment in court.

The preclusive effect of an arbitration award is important in the reinsurance arena because very often disputes arise between the same parties on the same contract, but concerning later claims. Additionally, it is common that similar disputes arise between a ceding insurer and multiple reinsurers on the same contract. Depending on the result of the first arbitration, either the ceding insurer or a different reinsurer may wish to raise the prior arbitration award in the second arbitration for purposes of preclusion.

A Recent Example

A recent case decided by the Illinois federal court illustrates how these issues arise and how the courts rule on these issues. In National Cas. Co. v. Continental Ins. Co., No. 23 cv 3143 (N.D. Ill. Nov. 15, 2023), the parties entered into three reinsurance agreements during a 6-year period, each with the same arbitration clause. A dispute arose between the parties over the manner in which the ceding insurer was billing losses and whether the methodology was permitted under the definition of loss occurrence.

The ceding insurer separately arbitrated the dispute with two reinsurers, and in 2017, final awards were issued and confirmed in court. A new dispute arose under the same provisions as the 2017 disputes. The ceding insurer once again brought two separate arbitration proceedings, and the two reinsurers brought this action for injunctive and declaratory relief seeking to preclude the ceding insurer from pursuing the second set of arbitrations. The ceding insurer moved to compel arbitration, and the reinsurers moved to stay the arbitrations so that the preclusion issue would be addressed by the court.

In granting the ceding insurer's motion to compel and denying the reinsurers' motion to stay, the court found that the preclusive effect of the 2017 awards on the current proceedings or on future arbitrations was within the scope of the arbitration clauses and, therefore, the arbitrators must decide what, if any, effect the prior awards have on the parties' disputes.

The court set forth the standard for a motion to compel arbitration: (1) an enforceable written agreement to arbitrate, (2) a dispute within the scope of the arbitration agreement, and (3) a refusal to arbitrate. Here, the court found that the parties agreed that there was an enforceable written agreement to arbitrate in the form of the arbitration provisions of the reinsurance contracts. The parties also agreed that the scope of the arbitration clause was broad.

The court stated that the issue before the court was a narrow inquiry into the arbitration clause's scope: whether a dispute over the preclusive effect of a prior arbitration is arbitrable. "More specifically, when a federal court order confirms an arbitration award, is the preclusive effect of that award on a subsequent arbitration a matter for the court or the arbitrator to decide?"

The court noted that there was a narrow exception to the presumption of arbitrability, but that it did not apply in this situation. Instead, the court held that "[i]t is well settled in the Seventh Circuit, and other circuits, too, that the preclusive effect of a prior arbitral award—whether or not confirmed by a court—is a defense subject to arbitration.

This is how the court disposed of the reinsurers' arguments:

  • Cloaked as a "threshold question of arbitrability," the Reinsurers ask the Court to disregard well-established law, and to determine the preclusive effect of the 2017 Awards on the New Arbitrations. But deciding that question would require the Court to inappropriately delve into the merits of the claims, assessing the presence of all prerequisites for collateral estoppel. This the Court cannot do.

  • * * *

  • Any dispute—whether old or new—concerning "the interpretation of [the parties'] Contract or their rights with respect to any transaction involved" is subject to arbitration. . . . It will be for an arbitration panel to determine what impact, if any, the 2017 Awards have on the current and future disputes.

Ultimately, the court granted the motion to compel arbitration and sent the parties back to their respective arbitration panels to address whether the 2017 awards have any preclusive effect on the current disputes. The court also dismissed the complaint without prejudice rather than staying the litigation because there was nothing further for the court to decide.

Concluding Thoughts

The interesting thing from a reinsurance disputes perspective is that one of the reasons arbitration clauses appear in reinsurance agreements is to obtain a confidential business resolution to disputes with a final and binding award. Where there are subsequent disputes over issues previously resolved by arbitration, seeking judicial intervention seems outside the scope of what the parties agreed to do. On the other hand, raising a subsequent dispute over issues previously decided also seems outside what the parties agreed, and quick court intervention seems appropriate.

The rub here is that the policy in the United States is that there is a presumption in favor of arbitration for any dispute within the scope of a broad arbitration clause, which leaves issues of preclusion to the arbitrators to decide. That presumption restricts the ability of the courts to intervene, even if judicial intervention might be most expeditious. Thus, in most cases, the result discussed above should prevail.

That leaves the parties no choice but to resolve the preclusion issue before the new arbitration panel. The party seeking preclusion then has to convince a reinsurance arbitration panel that a decision made by another panel should be followed and enforced. That could be a tough ask because many reinsurance arbitrators are not interested in other proceedings and wish only to consider the facts relevant to the dispute at hand. Quite the conundrum.


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