Academic journal article Defense Counsel Journal

Reinsurance Arbitrations from Start to Finish: A Practitioners' Guide

Academic journal article Defense Counsel Journal

Reinsurance Arbitrations from Start to Finish: A Practitioners' Guide

Article excerpt

MANY REINSURANCE agreements contain arbitration clauses, and often they provide that any disputes relating to the agreement will be resolved by disinterested insurance or reinsurance executives who are to interpret the reinsurance agreement as an honorable undertaking, resolving disputes according to industry custom and practice rather than legal principles.

A typical arbitration clause provides:

If any dispute shall arise between the reinsured and the reinsurer with reference to the interpretation of this contract or their fights with respect to any transaction involved, the dispute shall be referred to three arbitrators. . . . [The] arbitrators shall consider this contract an honorable engagement rather than merely a legal obligation; they are relieved of all judicial formalities and may abstain from following the strict rules of law. The decision of a majority of the arbitrators shall be final and binding on both the reinsured and the reinsurer.(1)

Arbitration provisions are included in reinsurance agreements with the hope that disputes can be resolved quickly and efficiently by persons knowledgeable about the reinsurance industry. In practice, the process has been less streamlined than originally envisioned because cedents and reinsurers have turned to the courts to litigate about whether they have to arbitrate, how the arbitration should be conducted and whether they have to live with the resolution of the arbitrators. The result has been the development of a significant body of decisional law that should be valuable to help counsel form strategic judgments for arbitration proceedings.

PRELIMINARY ISSUES

A. What Law Governs

Most reinsurance agreements constitute contracts involving interstate commerce and thus fall within the ambit of the Federal Arbitration Act, 9 U.S.C. [section] 1, et seq.(2) For all contracts covered by the FAA, federal "common" law governs questions of the interpretation, construction, validity, revocability and enforceability of the contractual arbitration provisions.(3) Federal law, however, directs a court to the relevant state law to determine whether the parties in fact have agreed to arbitrate their disputes.(4)

At times, the interplay between the McCarran-Ferguson Act, 15 U.S.C. [section] 1012(b), and the FAA creates issues unique to the insurance and reinsurance industries. Some courts, notably those in New York, interpret their state's legislative framework for handling the affairs of insolvent insurers and reinsurers as vesting exclusive jurisdiction in that area in the state court responsible for overseeing the liquidation or rehabilitation. Under this reasoning, McCarran-Ferguson bars application of the FAA and, accordingly, enforcement of arbitration provisions.(5) Courts in other states, which do not have such restrictive legislative schemes, have enforced arbitration agreements and either compelled liquidators or rehabilitators to arbitrate or enforced demands by liquidators to arbitrate.(6)

Courts also have relied on McCarran-Ferguson Act to uphold state statutes or common law doctrines that do not permit insurance or reinsurance agreements to contain arbitration provisions.(7)

B. Where May Disputes Be Litigated

The FAA does not confer federal question jurisdiction.(8) Thus, absent some other basis for federal jurisdiction, such as diversity of citizenship, disputes over an arbitration clause must be litigated in state court. Where federal jurisdiction is present, the general federal venue rules apply.(9)

ENFORCING RIGHT TO ARBITRATE

A. What Claims Must Be Arbitrated

The FAA and cases interpreting it create a substantial body of federal substantive law favoring the enforcement of arbitration agreements.(10) When a contract contains an arbitration provision, there is a presumption of arbitrability that is overcome only by a showing that the dispute in question is outside the coverage of the arbitration clause. …

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