Patton Boggs Reinsurance Newsletter- March 2013: New York Court Grants Cedent's Request to Appoint Umpire

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In re American Home Assurance Co. and Clearwater Ins. Co., No. 653079/12, 2013 N.Y. Misc. LEXIS 103 (N.Y. Sup. Ct. Jan. 15, 2013).

A New York state motion court granted a cedent's petition to appoint an umpire to preside over a series of reinsurance disputes through a combination of the ranking and "strike and draw" methods. The disputes arise out of three reinsurance treaties, one of which provided for the appointment of an umpire should the party-appointed arbitrators disagree on resolving the dispute. The cedent sought the appointment of a single umpire from among the three individuals that its party-appointed arbitrator previously proposed. The reinsurer opposed the petition, and requested that an umpire be selected for each arbitration from among its list of three individuals. Each party had appointed its arbitrator, but the party-appointed arbitrators failed to select an umpire as provided in the treaties.

In granting the petition in part to appoint an umpire, the court noted that while it was undisputed that the two arbitrators failed to select an umpire, the reinsurer objected to the appointment of a court appointed arbitrator on two grounds. First, the court rejected the argument that the court was not permitted to appoint an arbitrator under New York law, CPLR 7504, because the CPLR was not referenced in the treaties. The court held there was no need for the treaties to refer to the CPLR because a contract generally incorporates the state of law in existence at the time of its formation. The CPLR mechanism for appointment of an arbitrator existed well before the formation of the treaties.

Second, the court rejected the argument that CPLR 7504 should not apply because the cedent was to blame for a breakdown in the selection of the umpire. The court rejected this argument because CPLR 7504 provides for the court appointment of an arbitrator "if the agreed method fails or for any reason is not followed..." The court noted that the cedent demonstrated that the parties' agreed method of appointing the umpire had failed.

The court next focused on the selection method for the umpire as neither the reinsurance treaties nor CPLR 7504 set forth any substantive criteria for the appointment of the umpire. The cedent urged the court to appoint the umpire from among the three individuals that its arbitrator proposed, or alternatively, that the court use the ARIAS-US ranking method. The reinsurer urged the court to use the strike and draw method or, alternatively that the court appoint the umpire from among the three individuals it proposed.

The court instead adopted Justice Feinman's approach in Lexington Ins. Co. v. Clearwater Ins. Co., No. 651280/2011 (N.Y. Sup Ct., Jan. 6, 2012), which used the ranking method, but modified it to incorporate aspects of the strike and draw method. But to avoid the possibility of a tie, the court added that the umpire must be drawn by random lot in the event of a tie in the rankings of the umpire or third arbitrator.

The arbitration clause in one of the treaties raised the issue of whether the selection of an umpire, before a disagreement among the arbitrators arises at the hearing, is premature because, as the reinsurer contended, the umpire can only be appointed after a dispute arises among the party appointed arbitrators during the hearing. In holding that appointment of the umpire did not have to await a dispute between the arbitrators at the hearing, the court went with the practical approach of choosing the umpire at the outset of the arbitration to avoid the added expense of conducting additional arbitrations should the party-appointed arbitrators disagree.

In conclusion, the court ruled that an umpire was to be chosen within 60 days as follows: Each side shall nominate five candidates, and each side may then strike three of the five candidates on the other's list. Each side shall next rank the remaining candidates in order of preference, and the candidate with the highest cumulative ranking shall be appointed the umpire. In the event of a tie for the highest cumulative ranking, the umpire will be drawn by random lot.

Finally, the court cautioned that its order should not be read as consolidating the arbitrations under the three separate treaties simply because the method of appointing the umpire and third arbitrator are the same for all arbitrations.
Court intervention in the appointment process can be avoided if arbitration clauses are drafted to address stalemates in the appointment process. In this case, the court adopted a hybrid approach that joined a ranking method with the traditional strike and draw method, including a tie-breaker.

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