Why arbitrate and not litigate?
Since reinsurance is characterized as a contract of utmost good faith between knowledgeable parties, the resolution of disputes is most effectively accomplished by experts in the business utilizing experience of the participants combined with custom and practice of the industry. The parties themselves establish the forum and procedure for resolution, and thus are not bound by rules of civil procedure, evidence, jurisdiction, and legal precedent. In most instances, proceedings are generally faster and less costly than litigation, and remain confidential. Additionally, there is a very limited right to challenge a final arbitration award in court, thus reducing considerably the possibility of lengthy and costly appeals.
How are arbitrators selected?
The general rules for arbitrator and umpire appointment are contained in the reinsurance contract itself. These provisions typically specify the qualifications required of arbitrators, timing of arbitrator and umpire selection, penalties for non-compliance with appointment provisions, and umpire selection procedures.
A typical clause specifies that arbitrators shall be 'active or retired officers of insurance or reinsurance companies.' It is generally felt that executive officer experience is necessary for an understanding of the role of reinsurance in the business of insurance, and the mutual responsibilities of the parties.
Parties and their counsel typically select arbitrators based on their comfort level with the background and arbitration experience of the individual. Two organizations publish directories of arbitrators-the Reinsurance Association of America and ARIAS-US. The latter offers certification of arbitrators based on industry experience, training in the arbitration process, and service on arbitration panels.
Reinsurance agreements specify time limits for selection of arbitrators, umpires, and conducting the hearing. Are these always observed?
These vary according to which item is at issue. The most realistic deadlines, and those with the most precise compliance, are the initial steps in the process. Contracts typically specify that upon notice of a demand for arbitration, if either party does not name its arbitrator within the specified period (often 30 days), the opposing party can name both. Doing so would provide an advantage, and most parties would exercise that right, resisting any latitude. Thus, a party not conforming to the arbitrator appointment provision does so at its own peril.
Once each side has named its arbitrator, the provisions for umpire selection are frequently modified by mutual agreement of the parties. Timetables for the organizational meeting and hearing dates are subject to schedules of panel members, counsel, and the parties as well as the required period for discovery, briefing, depositions, and other preparation. In general, an arbitration can be expected to take about one year from initial demand to conclusion of the hearing. In complex disputes, the process can sometimes encompass several years.
How large is the pool of potential arbitrators?
Most reinsurance contracts require that arbitrators be active or retired officers of insurance or reinsurance companies. Individuals active in the industry may have ongoing relationships with other companies, or may in the future, creating potential conflicts of interest. Executives also may find that the time requirements for arbitration preclude participation. Thus, most arbitrators tend to be retired senior executives who choose to make themselves available for dispute resolution.
Since there are significant amounts at issue, parties usually look for individuals with whom they have a certain comfort level, who have the time and willingness to commit to the process, and who can participate effectively with other panel members and counsel.
The Reinsurance Association of America and ARIAS-US both maintain lists of arbitrators, including biographies and arbitration experience. ARIAS-US offers training seminars for the conduct of arbitrations, and certifies arbitrators based on industry experience, seminar attendance, and service on arbitration panels.
How are arbitrator appointments challenged, and what are grounds for removal?
A panel member may be challenged by several different means at varying times in the life of an arbitration proceeding. Grounds for disqualification are generally limited to:
- Conflict of interest
- Bias or partiality
- Lack of full and frank disclosures of associations with parties or attorneys
- Personal interest in the matters in dispute
If the basis for disqualification is discovered prior to selection of the umpire, the opposing party or their arbitrator may ask the person to withdraw. If unsuccessful, the challenging party may file an objection with the panel for resolution at the organizational meeting. If not resolved there, the objection must usually wait until the close of the arbitration.
Challenged arbitrators should consider seriously any reasonable basis for withdrawal, due to the cost and time involved in arbitration and in deference to the integrity of the process.
How do arbitrators 'draw lots' to select the umpire?
Reinsurance contracts often provide that the party-appointed arbitrators 'draw lots' to select an umpire after their respective lists of candidates are narrowed to one person per side.
The Procedures for the Resolution of U. S. Insurance and Reinsurance Disputes specifies methods for umpire selection, which may be included in the reinsurance contract, or mutually agreed upon by the parties to existing contracts (such agreement is usually more likely before a dispute arises). It also refers to the drawing of lots as the final step in umpire selection. Liberally interpreted as pulling a name from a hat or picking the long straw, this becomes impractical when the two are in different cities.
Arbitrators often devise innovative methods to accomplish the same purpose. In practice, any event can be utilized, the outcome of which is random and incapable of influence by the parties. One method is to agree that the candidate of party A is 'even'; party B is 'odd.' An event is chosen, such as the closing number of the Dow Jones Industrial Average or the total runs scored in a specified professional baseball game the following day. If the closing number (last digit) or total runs is even, that candidate is selected; the same for an odd number.
A few safeguards should be applied:
- The event should be one the outcome of which is available from the national press.
- The event must be clearly stated, i. e., the Dow Jones Average for 30 Industrials that closed yesterday at 9576.83; the Yankees-White Sox game tonight provided it is not postponed.
- The agreement should be outlined in writing (e-mail or fax) and affirmed in writing by both arbitrators prior to the selected event.
Once the selection has been made, there should be written notification to the umpire that he/she has officially been appointed.
What laws apply to arbitrations? If there is no governing law specified in the contract, how is this determined?
The Federal Arbitration Act provides the procedural context for the arbitration. Some contracts specify which state’s laws apply; more frequently this issue is not addressed. When the contract is silent and there are substantive issues to be decided, arbitrators will usually apply case law that seems most relevant to the issues and facts, regardless of the state of origin.
What types and extent of discovery are allowed, and how are discovery or procedural issues resolved?
Contracts of reinsurance are universally silent on discovery; timing and location of the arbitration are generally the only procedures addressed. In practice, discovery is virtually always a part of the process, typically consisting of document production and depositions. When there is disagreement regarding either the scope of discovery or issues regarding procedure, the panel must decide. Disputes of this nature are typically presented either in written submissions or oral arguments during a conference call. Physical meetings are uncommon due to the cost and scheduling of the parties, counsel, and panel members.
Procedural issues may be resolved with the use of several tools:
- Procedures for the Resolution of Insurance and Reinsurance Disputes, which is posted in full on this site.
- The ARIAS-US guidelines for arbitrators.
- State and federal rules of civil procedure.
The informality of arbitration often encourages innovation. Party B may resist production of a document requested by Party A on the basis of privilege. The panel may order that B submit the disputed item to the 2 arbitrators for a decision; if they cannot agree, the umpire decides.
How does a party contest whether a dispute is subject to arbitration?
Disputes occasionally arise questioning whether the parties have in fact entered into an agreement that requires that the dispute be arbitrated. In these cases the challenging party must turn to a court of competent jurisdiction, which can be either state or federal. Case law it indicates that courts are often asked to determine the scope of arbitration clauses - determining the types of disputes that are arbitrable.
How can an arbitration award be enforced if the losing party refuses to comply with the panel’s order?
Most parties will comply with the order of a panel, rather than incurring additional costs in an appeal, knowing there are limited grounds to vacate an arbitration award. When a party does not comply, the order can be confirmed and enforced by a court with jurisdiction over the party that is in noncompliance.
Can arbitration awards be appealed? If so, how?
There is virtually no appeal of an arbitration award in the sense of challenging factual findings or application of the law by an arbitration panel. A party may file an application with a court to vacate an arbitration award.
Under the Federal Arbitration Act (FAA), Typical grounds for requesting that an award be vacated are:
- Refusal to allow a party to present its case
- Conflict of interest
- Bias of a panel member
The FAA also establishes grounds for when a party can ask a court to order the panel to clarify its ruling.