Reinsurance Newsletter - September 2013: Good News For Arbitrators From The Supreme Court?

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Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064 (2013).

In a non-reinsurance case, the United States Supreme Court recently defined the scope of the limited judicial review provided for under Section 10(a)(4) of the Federal Arbitration Act (“FAA”).  Section 10(a)(4) permits a court to vacate an arbitration award where the arbitrator has exceeded his or her powers (“Where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made”).  Because this ground is one of the few grounds that parties to a reinsurance dispute may use to challenge an arbitration award, a Supreme Court decision on this ground is relevant to reinsurance disputes and to reinsurance arbitrators.

In this case, which involved class action arbitration procedures that typically are not an issue in reinsurance disputes, the Court clearly defined the limited judicial review provided for under Section 10(a)(4). In essence, the Court held that as long as an arbitrator construes the contract, it doesn't matter whether the arbitrator's construction is wrong. An arbitrator cannot be said to have exceeded his or her powers if all the arbitrator is doing is interpreting the contract. If the arbitrator renders an award that is not based on interpreting the contract, but imposes the arbitrator’s view of sound policy, that will exceed the arbitrator’s powers and would be subject to judicial review under Section 10(a)(4) said the Court. Notably, the Court in this case implied that the arbitrator likely got it wrong, but performing the contract interpretation task poorly is not a basis to vacate an arbitration award. “The arbitrator’s construction holds, however good, bad, or ugly” said the Court. Thus, by choosing arbitration, the parties must now live with that choice, which includes the chance that the arbitrator may perform the contract interpretation task poorly.

For arbitrators, the lesson is that when crafting an award it is essential to interpret the reinsurance contract and not impose the panel’s view of what it considers sound policy.  In other words, rough justice does not cut it if the contract is abandoned and is not being interpreted when issuing an award.  The potential good news for arbitrators is that if they construe the contract, their decisions should not be subject to review under Section 10(a)(4) even if their construction is off the mark.  That good news for arbitrators may be bad news for the parties who rely on arbitrators to interpret reinsurance contracts properly.