Arbitration Process Issues

A California appellate court has affirmed a trial court’s decision to disqualify an arbitrator and vacate an arbitration award based on the arbitrator’s failure to disclose his ties to the plaintiffs’ insurer. Plaintiff, Advantage Medical Services (“AMS”) was insured by two Lloyd’s of London syndicates. The arbitrator and his law firm represented several protection and indemnity clubs that obtained reinsurance through various Lloyd’s of London syndicates.

The court held that disclosure of the arbitrator’s ties to AMS’s insurer “could cause a person aware of the facts to reasonably entertain a doubt that the proposed neutral arbitrator would be able to be impartial.” As such, the court affirmed the trial court’s decision to vacate the arbitrator’s interim award in favor of the plaintiffs. Additionally, the appellate court held that “the statutory right to petition a trial court to vacate an arbitration award based on an arbitrator’s failure to make required disclosure cannot be waived by the [AAA] rule stating its determinations regarding disqualification are conclusive.” Advantage Medical Services v. Hoffman, No. 05CC7459 (Cal. Ct. App. March 3, 2008).

This post written by Lynn Hawkins.

The California Court of Appeal recently answered the question of when a nonsignatory to a reinsurance treaty containing an arbitration clause can compel arbitration against a signatory to that agreement. In 1979 and 1980, respectively, Allianz Global Corporate and Specialty Company (AIC Global) issued excess umbrella insurance policies to its insured (MacArthur Company). Thereafter, Clearwater Insurance issued two facultative certificates to AIC Global reinsuring the MacArthur policies. The facultative certificates did not contain an arbitration clause. In 1982, Clearwater entered into two excess reinsurance treaties with AIC Global’s sister company, Allianz Underwriters Insurance Company (AUIC Underwriters). Both of these treaties contained arbitration clauses. AIC Global and AUIC Underwriters subsequently settled asbestos liability claims made against MacArthur, and made a cash call to Clearwater, which refused to pay. AUIC Underwriters then filed an arbitration demand against Clearwater, adding AIC Global as a co-petitioner. After Clearwater contested the arbitration vis-à-vis AIC Global and filed a counterdemand, AUIC Underwriters and AIC Global petitioned a California trial court to compel arbitration. The trial court granted the petition, and Clearwater appealed.

On appeal, the parties disputed the application of the doctrine of equitable estoppel, which sometimes allows nonsignatories to invoke arbitration clauses to compel signatories into arbitration when the signing party has signed an agreement to arbitrate but attempts to avoid arbitration by suing the nonsignatory defendant for claims that are based on the same facts and are inherently inseparable from claims against a signatory defendant. The Court of Appeal determined that the evidence submitted insufficiently substantiated an “integral relationship” between AIC Global and AUIC Underwriters, since there was no showing of how these two companies were jointly involved in the negotiation of either the MacArthur policies or the Clearwater reinsurance agreements. The court also determined that there had not been a showing that AIC Global’s claim was “intertwined” with the 1982 treaties containing the arbitration clause. On this record, the Court of Appeal reversed and directed the trial court to set aside its order compelling Clearwater to arbitrate with AIC Global. Clearwater Insurance Co. v. Superior Court, Case No. B200692 (Cal. Ct. App. Jan. 31, 2008).

This post written by Brian Perryman.

A Pennsylvania district court has held that a non-signatory insured is obligated to arbitrate claims against a reinsurer pursuant to the reinsurance contract’s arbitration provision. The plaintiff, a psychiatrist, purchased malpractice insurance from Transatlantic Reinsurance Company (“TRC”) using Legion Insurance as a fronting company. The insured later was sued for malpractice. Legion initially defended the action, but subsequently withdrew and a judgment was issued against the plaintiff.

Thereafter, Legion was declared insolvent and ordered into liquidation. Following a court ruling that Legion’s insureds could assert direct actions against TRC, the plaintiff filed an action against TRC for Legion’s breach of contract and breach of the duty of good faith and fair dealing and bad faith. The plaintiff also alleged bad faith against TRC for its own conduct.

TRC moved to compel arbitration arguing that as a third party beneficiary of the reinsurance contract, the plaintiff was bound to arbitrate the dispute. TRC also argued that the plaintiff was equitably estopped from disavowing the arbitration provision while simultaneously seeking to invoke the benefits of the agreement. The court granted TRC’s motion to compel arbitration finding in favor of TRC on both arguments. Doeff v. Transatlantic Reinsurance Company, Case No. 07-2110 (USDC E.D. Pa. Dec. 14, 2007).

This post written by Lynn Hawkins.