One of the most vexing issues facing parties in reinsurance arbitrations is whether the other side’s party-appointed arbitrator qualifies under the arbitrator criteria set forth in the arbitration clause of the reinsurance agreement. The issue is frustrating because sometimes the arbitrator criteria is not as clear as it should be, which leaves room for creative appointments. It is also frustrating because when a counter-party appoints an arbitrator that arguably does not qualify, there is very little that the other party can do about it.
Collateral disputes over the qualifications of the arbitration panel may seem to be a great waste of time and money, but given the existing party-appointed system of advocate-arbitrators that has yet to be replaced by a neutral panel system, the make-up of an arbitration panel is seen as critical to a successful outcome. For this reason, parties are sometimes hesitant to go forward with panel selection when the other side appoints an arbitrator that may not qualify under the criteria established by the arbitration clause.
If a party believes that the opposing party’s arbitrator is not qualified, the party may object to the appointment and request the other party to replace its arbitrator with a qualified candidate. If the other party refuses, the objecting party must decide whether to challenge the appointment or go forward with umpire selection under a reservation of rights.
In a recent case, a Massachusetts federal court had an opportunity to address an objector’s challenge to a party-appointed arbitrator as part of a pre-award petition to remove the arbitrator and enforce the arbitration agreement. That challenge failed.
In John Hancock Life Ins. Co. U.S.A. v. Employers Reassurance Corp., No. 15-cv-13626, 2016 U.S. Dist. LEXIS 80592 (D. Mass. Jun. 21, 2016), the cedent sought to remove the reinsurer’s arbitrator because the arbitrator had previously worked for the cedent’s affiliate. The cedent interpreted the arbitration clause as precluding any arbitrators from having worked for the parties or their affiliates. The reinsurer took the position that the arbitrator ceased working for the company before it became affiliated with the cedent and that the two companies are no longer affiliated. Thus, there was a disagreement about corporate history of the cedent and its one-time affiliate and whether the prohibition in the qualifications section of the arbitration clause applied to individuals who had worked for entities that were once, but are no longer, affiliates.
In justifying its pre-award petition for removal of the reinsurer’s arbitrator, the cedent argued that the prohibition on judicial intervention is limited to pre-award challenges for arbitrator bias and that there is an exception for pre-award judicial removal of an arbitrator based on the failure to meet the criteria specified in the arbitration clause. The court rejected this argument and distinguished the very few out of district cases that had reached that conclusion.
The court noted that based on the express terms of the Federal Arbitration Act (“FAA”), “challenges to a party-appointed arbitrator, such as allegations of bias, are properly considered by courts only at the conclusion of the arbitration.” The court found that both the 5th Circuit and 2d Circuit had rejected the cedent’s exception argument and sided with those courts and “the multiple district courts that have rejected the argument that courts have jurisdiction to remove an arbitrator pre-award simply because the challenge to the arbitrator invokes a qualification set out in the arbitration agreement.” The court stated that the FAA provides no express authorization for pre-award judicial intervention regardless of the grounds for removal and that FAA Section 5 of the FAA specifically does not provide authority for judicial inquiry into a particular arbitrator’s qualifications. The court also rejected the cedent’s FAA policy argument, finding that the policy objectives of the FAA call for a close reading of the language of the FAA and the authority granted by the FAA to the courts.
In denying the relief and directing the parties to proceed to arbitration, the court noted that Section 5 requires the parties to follow the method provided for in the arbitration agreement for panel selection and where that process has been honored, the authority of the courts under Section 5 ends. At bottom, the court held that it did not have the authority under the FAA to remove the reinsurer’s arbitrator prior to the conclusion of the arbitration.
Contrast this decision with the Second Circuit’s summary order without precedental effect in Odyssey Reins. Co. v. Certain Underwriters at Lloyd’s London, No. 14-2840-cv, 2015 U.S. App. LEXIS 15052 (2d Cir. Aug. 26, 2015), where the court allowed incidental consideration of umpire qualifications in the context of appointing an umpire because of an impasse under Section 5. A pre-award challenge to remove a party-appointed arbitrator based on qualifications may be seen as different from a pre-award request to appoint an umpire when the parties have reached an impasse because of challenges to umpire candidate’s qualifications.