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Reinsurance Arbitrators and Their Obligations

Larry Schiffer | January 22, 2021

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Over the years, I have written several articles and blog posts about reinsurance arbitration and the concerns of arbitrator bias and prejudice from multiple repeat appointments. Recently, there have been several cases in the United States and the United Kingdom addressing implicit bias, repeat players, and the need for disclosures in commercial and international arbitrations.

I thought I would use this opportunity to provide some additional thoughts on the subject in the context of reinsurance arbitration.

Basic Arbitrator Ground Rules

Arbitrators of commercial disputes generally adhere to a similar set of rules. Arbitrators must be disinterested in the dispute. What this means is that the arbitrators should have no economic or business interest in the outcome of the dispute. Arbitrators should decide the dispute based on the facts and arguments presented. Arbitrators should be fair and objective, allow for the parties to present their evidence and arguments, and should consider all positions before coming to a decision.

In most commercial arbitrations, arbitrators must be neutral and impartial. In other words, even if the arbitration agreement permits each side to select an arbitrator, those party-appointed arbitrators must still act impartially.

Arbitrators should disclose any relationships or interests in the parties, counsel, other arbitrators, or witnesses that might be perceived by an observer as evidence of potential bias. This includes prior appointments or engagements by any of the parties or their affiliates.

Are Reinsurance Arbitrators Different?

While reinsurance arbitrators are no different than other commercial arbitrators, the common perception among reinsurance parties and arbitrators is that party-appointed arbitrators are permitted to be predisposed to the positions of the appointing party in a traditional reinsurance arbitration proceeding. This predisposition concept has been stretched to its breaking point over the last 25 years.

Some reinsurance arbitrators believe that it is their obligation to advocate for their appointing party's position in deliberations and during the arbitration hearing. Others believe that they must rule for their appointing party no matter what the evidence shows. Yet others have no qualms about being appointed by the same party and/or the same law firm dozens of times. These do not represent a majority view, but enough arbitrators believe in some or all of these positions.

Several years ago, I attended a meeting of a local bar association alternative dispute resolution committee where a lawyer for an insurance company explained to the gathering of commercial arbitration specialists how reinsurance arbitration works. When the in-house lawyer explained the party-appointed system of arbitrator appointments in reinsurance arbitrations and mentioned that these arbitrators did not have to be neutral and impartial, there was an audible gasp in the room.

While there may be other industries where there are predisposed or advocate party-appointed arbitrators, I think they are far and few between, making reinsurance arbitration pretty much unique.

Why Predisposition Does Not Mean Advocacy

While under old-style traditional reinsurance arbitration provisions, a party-appointed arbitrator does not have to be neutral and impartial, that does not mean that a party-appointed arbitrator should be an advocate for the arbitrator's appointing party. The old-style arbitration provision typically provides as follows.

All arbitrators shall be active or retired officers of insurance or reinsurance companies, or Lloyd's London Underwriters, and disinterested in the outcome of the arbitration.

Note that disinterestedness is the only criteria, not neutrality or impartiality. Contractually, neutrality and impartiality are not requirements, yet everyone agrees that the third arbitrator or umpire must be neutral and impartial. So, where does the notion of predisposition come from?

One of the sources is the 1977 American Bar Association/American Arbitration Association Code of Ethics for Arbitrators in Commercial Disputes (ABA/AAA Code). The ABA/AAA Code was revised effective on March 1, 2004. The 1977 ABA/AAA Code suggested that all arbitrators should be neutral but accepted that some types of arbitrations allow for nonneutral party-appointed arbitrators. In providing guidance for nonneutral party-appointed arbitrators, the 1997 ABA/AAA Code stated the following.

Nonneutral arbitrators may be predisposed toward the party who appointed them but in all other respects are obligated to act in good faith and with integrity and fairness.

Nonneutral arbitrators are permitted to be predisposed toward deciding in favor of the party who appointed them.

Closer to reinsurance disputes, the original ARIAS·US Guidelines for Arbitrator Conduct provided as follows.

Although party-appointed arbitrators may be initially predisposed toward the position of the party who appointed them (unless prohibited by the contract), they should avoid reaching a final judgment until after both parties have had a full and fair opportunity to present their respective cases and the panel has fully deliberated the issues. It is preferable that arbitrators advise the appointing party, when accepting an appointment that they will ultimately decide issues presented in the arbitration objectively. Party-appointed arbitrators are obligated to act in good faith with integrity and fairness, should not allow their appointment to influence their decision on any matter before them, and should make all decisions justly.

When these codes are read in context, it is clear that while a predisposition toward the appointing party and its position is permissible, good faith, integrity, and fairness are paramount. And, in the reinsurance context, a full and fair opportunity for the party to present its case must be allowed before an arbitrator makes up his or her mind about what final decision should be reached. In other words, deliberations should be fair and objective, and party-appointed arbitrators should decide the case based on the facts and evidence presented objectively and in a fair manner without being influenced by who appointed them to the arbitration panel.

The development of party-appointed advocate arbitrators, in my view, takes the notion of predisposition too far and ignores the obligation of good faith and fairness. Unfortunately, when appointment as a reinsurance arbitrator changed from an honorable undertaking by industry executives into a full-time vocation for some, the explicit and implicit pressures on party-appointed arbitrators caused subtle and less than subtle changes in the behavior of some party-appointed arbitrators. As more party-appointed arbitrators felt it necessary to advocate for their appointing party, other parties expected their arbitrators to do the same to level the playing field. This spiral led to the perception of bias and unfairness in the traditional reinsurance arbitration system.

Arbitrator Disclosures

The issue of arbitrator disclosures made the headlines recently in the United Kingdom when the UK Supreme Court issued a decision critical of the lack of disclosure of a subsequent appointment by an eminent insurance and reinsurance arbitrator. Halliburton Co. v. Chubb Bermuda Ins. Ltd., No. [2020] UKSC 48 (Nov. 27, 2020). All of the arbitrator ethical codes and rules require arbitrators to disclose all relationships and contacts with the parties, lawyers, affiliates, witnesses, other arbitrators, and others relevant to the dispute that might be perceived as evidence of possible bias.

The reason for broad disclosure is to avoid the appearance or impression of bias. Disclosure is required up front and during the arbitration proceeding. The continuing duty to disclose involves subsequent appointments that might give the impression of favoritism or bias.

The complexities of modern reinsurance relationships have put a strain on disclosures because it is not often clear who is the real party in interest in a dispute. With the proliferation of legacy books of business both on the property and casualty and life sides of the industry, disputes are often brought in the name of one party, but the real party in interest could be a different party and the business, and therefore any disputes, may be managed by yet a third party.

Disclosures also require cooperation from the lawyers and the parties. Arbitrators cannot make disclosures if the responsible and relevant parties are not revealed to them by the lawyers and the parties. But as revelations come to light, the continuing duty to disclose is triggered, and disclosure is required.

Because of the case law on disclosures and the criticisms from the courts aimed at well-known arbitrators for failing to disclose, it is incumbent on all arbitrators to make robust disclosures early and often. And clearly on a continuing basis. Err on the side of disclosure. If the arbitrator in the UK Supreme Court case had disclosed his subsequent appointment, no one would have batted an eye, and there would never have been a dispute.

Avoiding the Problem

Problems of potential bias will never go away, but there are several ways to address the situation. First, as stated above, regardless of the form of arbitration, robust, complete, and continuing disclosures by arbitrators must occur. In the reinsurance community, many of the lawyers and arbitrators (and parties for that matter) know each other through ARIAS or otherwise. Disclosures of a relationship generally will not result in an appointment challenge unless it is significant evidence of a lack of impartiality. But failure to disclose an unknown relationship that may lead to an impression of bias will affect how lawyers will react to that arbitrator in the future.

Second, arbitrators should think about whether excessive multiple appointments by a party or by a law firm or lawyer is a good long-term strategy. Being viewed as the "house" arbitrator is probably not a title any arbitrator wants to receive. Counsel and parties ought to consider this point as well. There will always be repeat players in reinsurance disputes because the number of participants is finite and much smaller as a group than in many other industries. But heavily overweighting appointments toward one party or one lawyer/law firm is problematic.

Finally, moving to an all-neutral panel—like most of the rest of the commercial and international arbitration world—is a way to remove much of the potential for bias. And, by an all neutral panel, I mean a panel that has no party-appointed arbitrators and where all three arbitrators are selected in a neutral manner. The ARIAS·US Neutral Panel Rules for the Resolution of US Insurance and Reinsurance Disputes goes farther than any other procedure in attempting to eliminate bias and repeat players from the arbitrator selection process. While not perfect, the Neutral Panel Rules reduce the probability of bias and eliminate most of the subconscious and overt issues associated with party-appointed arbitrators for reinsurance disputes.

But neutrality alone does not solve the problem, as can be seen from the UK Supreme Court case mentioned above. Under English law, all arbitrators, even if party-appointed, must be neutral. Yet, the failure to disclose a subsequent appointment led to a court challenge. While the law in the United States does not allow for many, if any, challenges prior to the issuance of the final arbitration award, a failure to disclose a consequential relationship could result in a challenge to the final award and, under the right factual circumstances, to its vacatur.

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