Reinsurance Newsletter - September 2013: California Federal Court Orders Completion Of Umpire Selection Process So Panel Can Resolve Procedural Issues


Granite State Ins. Co. v. Clearwater Ins. Co., No. C 13-2924 SI, 2013 U.S. Dist. LEXIS 118413 (N.D. Ca. Aug. 19, 2013).

In a very recent case, a California federal court partially denied the petition and denied the cross-petition of the cedents and reinsurer, respectively, to appoint an umpire and compel arbitration.  Instead, the court ordered the parties to complete the existing selection process for the one arbitration demanded and allow that panel to resolve issues concerning consolidation and application of the honorable engagement clause. 

The dispute arises over asbestos losses and the cession of a settlement to three reinsurance contracts.  The reinsurer paid some of the cessions, but then stopped paying, which resulted in a demand for arbitration.  Party-appointed arbitrators were named and after a very long delay, umpire candidates were proposed.  The selection process stalled, however, when issues arose over whether there should be one or three arbitrations (over three reinsurance contracts in dispute) and over which honorable engagement clause should apply among the reinsurance contracts.  The cedents wanted an umpire appointed in a single arbitration and the reinsurer wanted three umpires in three arbitrations or a single arbitration using its preferred honorable engagement clause.

In partially denying the cedents’ petition and denying the reinsurer’s cross-petition, the court ordered the parties to finish the selection process they started on the only arbitration that was demanded and then have the selected panel address the procedural issues of multiple v. consolidated arbitrations and the application of the honorable engagement clause.  To do otherwise, said the court, was to overstep the court’s authority under the FAA.  The court pointed out that procedural issues like consolidation and application of a particular contractual provision were for the arbitration panel to decide and not for the courts.  Under the FAA, sections 4 and 5 grant the courts limited power to either require the parties to arbitrate as agreed under section 5 or to appoint an arbitrator when there is an impasse under section 4.  Neither section, said the court, authorizes the court to decide “the two scope-of-the-arbitration agreement” questions posed by the reinsurer.  Because compliance with the parties’ chosen method of appointing the umpire was not impossible, the court ordered compliance under section 4.  The court rejected the notion that it could order three appointments because there had only been one arbitration demand and under section 4, the court can only order parties to proceed on disputes where a demand for arbitration has been made.

Thus, rather than completely stand down and let the parties fend for themselves (which some courts have done in these situations), this court at least made the parties finish the selection process they started to allow the selected panel to address the procedural issues that were beyond the power of the court to address under the FAA.

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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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