Earlier this year, the United States Supreme Court denied certiorari in an arbitration case where the Ninth Circuit Court of Appeals vacated an arbitration award based on a failure to disclose ownership interest in the ADR provider and the ADR provider’s having administered a significant number of arbitrations for one of the parties to the underlying dispute (the “repeat player” issue). There have been many articles and blog posts on this case, but I thought I would revisit the issue in the context of reinsurance disputes where repeat players are not unusual.
In Monster Energy Co. v. City Beverages, LLC, 940 F.3d 1130 (9th Cir. 2019), the Ninth Circuit vacated an arbitration award:
We conclude, given the Arbitrator’s failure to disclose his ownership interest in JAMS, coupled with the fact that JAMS has administered 97 arbitrations for Monster over the past five years, that vacatur of the Award is necessary on the ground of evident partiality. We therefore reverse the district court and vacate the Award.
The Ninth Circuit’s opinion turned on the combination of the two issues: the lack of disclosure of ownership interest and the non-trivial relationship between the ADR provider and the party. These two issues, found the court, resulted in the reasonable impression of bias and required vacatur. Either issue, standing alone, might not have been enough for vacatur. Nevertheless it is worth discussing the “repeat player” issue.
In reinsurance disputes, the parties are finite. There only are a relatively small group of reinsurers that appear adverse to a somewhat larger, but still finite, group of cedents. Moreover, when disputes involve business managed or owned by runoff entities, there are even fewer in the group. Repeat players happen all the time in reinsurance disputes, especially with active parties with lots of disputes. Thus, if a ceding company is running of a large book of asbestos claims, the likelihood of repeat disputes with various reinsurers will occur. Those situations are well-known and typically disclosed.
One of the big differences in reinsurance disputes, however, is that most reinsurance arbitrations are ad hoc and do not rely on repeat engagements by an ADR provider. Thus, the issue in Monster Energy is not an issue that generally appears in reinsurance arbitrations.
Where the repeat player issue also appears is in the ranks of the arbitrators. This also was not an issue in Monster Energy. There are a limited number of individuals that are qualified and typically serve as arbitrators in reinsurance disputes. Under the party-appointed reinsurance arbitration mechanism, certain arbitrators appear with some non-trivial frequency as party-appointed arbitrators for certain parties. Those repeat relationships are required to be disclosed by the party-appointed arbitrators at or before the organizational meeting.
Where there is full and robust disclosure, the reasonable impression of bias is addressed. Moreover, multiple courts have recognized that in industry arbitrations like reinsurance, the parties purposefully select arbitrators with deep knowledge of the parties and the industry. Thus, a complaint about bias must be more than the existence a repeat player and must demonstrate actual bias in the making of the award.
There has been some movement away from the “traditional” pre-disposed party-appointed system of reinsurance arbitration toward neutral panels as evidenced by the ARIAS Neutral Panel Rules. Those rules seek to eliminate repeat players from the neutral panel selection process in an effort to eliminate the reasonable impression of bias. To avoid or mitigate the repeat player bias issue, more parties need to incorporate the Neutral Rules into their reinsurance contract arbitration provisions.
The issues raised in the petition for certiorari concerning the split in the circuits on the proper evident partiality standard for vacatur may one day reach the United States Supreme Court. Whether that ruling will affect reinsurance arbitrations will depend on the scope and breadth of the ultimate ruling. Nevertheless, if the reinsurance dispute community moves with conviction toward neutral panels, any ruling on evident partiality should have a limited effect.