In re Insurance Co. of North America

Issue Discussed: Replacing an Arbitrator / Umpire

Submitted by Eric A. Haab, Jennifer L. Travers

Date Promulgated: December 12, 2008

In re Insurance Co. of North America, 2008 WL 5205970 (S.D.N.Y. Dec. 12, 2008)

Issue Decided: Resignation or death of a party-appointed arbitrator prior to a partial final award by the arbitration panel.

In In re Insurance Co. of North America, the Southern District of New York ruled that an arbitration proceeding must begin anew if one arbitrator of a panel must resign before the panel provides its final decision. While the court noted that the general rule in the Second Circuit is that “where one member of a three-person arbitration panel dies before the rendering of an award and the arbitration agreement does not anticipate that circumstance, the arbitration must commence anew with a full panel”, the court still stated that its holding was “based on the unique facts of this case.”

Background

Insurance Company of North America and INA Reinsurance Company (“INA”) reinsured Public Service Mutual Insurance Company (“PSMIC”). A dispute arose after PSMIC settled an environmental liability claim and allocated the loss pro rata across fifteen policies it issued to its insured over a fifteen year period. After receiving its portion of the reinsurance bill, INA disputed PSMIC’s method of allocating the settlement costs pro rata.

Pursuant to the parties’ reinsurance contracts, each party chose an arbitrator and those arbitrators selected an umpire. Following discovery, PSMIC moved for summary judgment, seeking payment of the entire balance it claimed was due from INA. After oral argument, the arbitration panel issued a partial judgment — deciding in favor of PSMIC on the question of which state’s law applied, but leaving the issue of whether PSMIC’s allocation was unreasonable or made in bad faith undecided until a complete hearing. Prior to that hearing date, INA served a motion for reconsideration of the panel’s Summary Judgment Order. Before that motion was fully briefed, INA’s appointed arbitrator resigned from the panel citing health problems. As a result, PSMIC requested that INA appoint a replacement arbitrator. INA filed suit to compel a new arbitration.

Holding

As an initial matter, the Court stated that the general rule in the Second Circuit is that “where one member of a three-person arbitration panel dies before the rendering of an award and the arbitration agreement does not anticipate that circumstance, the arbitration must commence anew with a full panel.” However, the Court also acknowledged an exception to this general rule when the arbitration panel “had issued a ‘partial final award.'” Citing two Second Circuit cases, PSMIC argued its arbitration was exactly the type that fit into the exception.

Turning to Trade & Transport v. Natural Petroleum Charters, 931 F.2d 191 (2d Cir. 1991), the first case cited by PSMIC in support of its argument, the Court distinguished this case from PSMIC’s situation. At the suggestion of the district court involved, the panel in Trade & Transport bifurcated the arbitration issues and ordered a “partial final award” as to one of those issues. Although the losing party filed a motion for reconsideration, the panel denied the motion and stated that, with respect to the partial award, the panel was functus officio. One year after the denial of the motion for reconsideration, one of the party-appointed arbitrators died. The Trade & Transport court refused to order a new arbitration relating to the partial final award because that award “conclusively decide[d] every point required by and included in the first part of the parties’ modified submission.” Distinguishing this set of facts, the PSMIC Court found that the panel’s Summary Judgment Order was not a final judgment, as the arbitrators had not yet ruled on PSMIC’s request for damages, and the motion for reconsideration still pending made the panel’s Summary Judgment Order non-final. Id. at *5. Accordingly, the PSMIC Court determined the Summary Judgment Order was merely an “interim decision on a matter of law.” Id.

The court also distinguished PSMIC’s second cited case, Zeiler v. Deitsch, 500 F.3d 157 (2d Cir. 2007). The court in Zeiler did not require a new arbitration after one of the party-appointed arbitrators resigned from the panel. However, the Zeiler arbitration involved a unique arbitration panel consisting of three Jewish rabbis for a religious tribunal whose purpose was to unwind a complex business relationship over several years. The Zeiler court refused to start the arbitration anew finding that the issue was one of contract interpretation and that the Jewish ‘Zabala’ method of arbitration allowed for the two remaining rabbis to continue the arbitration without the presence of a third arbitrator. Accordingly, the Court distinguished Zeiler, finding that PSMIC and INA’s arbitration was not an “ongoing and complex arbitration” like that in Zeiler — instead, it was a simple insurance coverage dispute. Further, unlike Zeiler, the reinsurance contracts at issue did not provide for any procedure in the event of the death or resignation of an arbitrator.

The court acknowledged that the Second Circuit’s general rule could lead to potential abuse by a losing party who wants a “second bite at the apple” and arranges for its arbitrator to resign. In this case, however, the court noted that there was no evidence of misconduct by INA and that both parties agreed that INA’s arbitrator needed to resign for serious health problems. Additionally, the court emphasized that its decision is “expressly premised on the unique facts of this case where the resignation occurred while pending before the panel was a motion for reconsideration of an order that itself cannot be fairly considered a ‘partial final award.'” Accordingly, the court ordered that INA and PSMIC each have the opportunity to choose a new arbitrator, and for the arbitration to start anew.

*Eric Haab and Jennifer Travers are partner and associate, respectively, in the insurance/reinsurance group of Lovells LLP. They each represent cedents and reinsurers in disputes involving a wide variety of issues.