Michigan Federal Court Enjoins Arbitration Proceeding Because of Possible Misconduct

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Star Ins. Co. v. Nat’l Union Fire Ins. Co., No. 13-13807, 2013 U.S. Dist. LEXIS 130379 (E.D. Mich. Sept. 12, 2013).

This case has made some headlines and includes accusations that ex parte communications took place.  Of course, ex parte communications are regularly allowed at various points in reinsurance arbitration proceedings.

While the federal court in Michigan recognized that courts generally lack jurisdiction to review arbitration proceedings until a final award is issued, the court found that the facts in this case fell into the exception to the rule. As the court said, the case raises serious questions concerning a potential breach of the arbitration clause of the reinsurance contract. The court found that the plaintiffs raised credible issues concerning fundamental fairness of the proceedings and the integrity of the arbitration proceeding going forward.

Here, the arbitration clause required that all disputes would be decided by active or retired disinterested officials of insurance or reinsurance companies not under control of either party to the agreement. This, of course, is a pretty typical sentence in a reinsurance contract arbitration clause. A “panel scheduling order,” as the court called it, stated that “ex parte communications with any member of the panel shall cease upon the filing of the parties’ initial pre-hearing briefs.” According to the facts as set out by the court, a hearing was held after which an interim final award was issued on liability and questions of damages were left open for further submissions and decision.

According to the court, on the day the interim final award was issued, counsel for the reinsurer had an ex parte telephone conference with the reinsurer’s party-appointed arbitrator about the interim final award (as apparently shown in his time entries produced to obtain an award of attorney fees). The interim final award required that the parties provide certain documentation, which the cedents did, which was followed by more ex parte communications the next day between reinsurer’s counsel and party-appointed arbitrator. Thereafter, a motion was filed by the reinsurer’s counsel to strike the cedents’ submissions. Apparently, two of the three arbitrators (allegedly without the knowledge of the cedents’ arbitrator) granted the motion to strike. The cedents filed an emergency motion to clarify and asked for time to re-submit documents. The panel, again allegedly without the cedents’ arbitrator, granted the request for more time and clarified the documents required.

The court went on to describe other relationships between the reinsurer and its counsel, which the court found questionable (you can read the decision if you are interested).  Ultimately, the cedents went to court to vacate the interim final award and moved to stay the arbitration after the arbitration panel refused that relief (with the cedents’ arbitrator dissenting).

The question the court had was whether the arbitration clause was breached and whether a stay was appropriate to allow for that question to be researched and resolved. Essentially, the cedents argued that instead of submitting the matter to a three-person panel, decisions were made by a two-person panel in violation of the contract (and the ARIAS U.S. Code of Conduct).

In granting the injunction, the court found that under Michigan law (which was the choice of law in the contract), all the cedents had to do was prove the fact of ex parte communications to prevail on a request to remove a panel member. Thus, the court found that the cedents would prevail on the merits and granted the preliminary injunction (there is a lot more to the opinion so we recommend you read it). The court finished off with the following: “Although there is a strong federal policy favoring arbitration, the public interest lies in the integrity of the arbitration process and in upholding arm’s length, negotiated contracts.”

There are differing views as to whether ex parte communications should be allowed in reinsurance arbitrations. This case now brings the issue to a public head. The order has been appealed.  We will see whether the circuit court of appeals feels as strongly about this as the district court.

Topics:  Arbitration, Ex Parte, Judicial Misconduct, Reinsurance

Published In: Alternative Dispute Resolution (ADR) Updates, Civil Procedure Updates, General Business Updates, Insurance Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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