by ~ Jessica Park (Email) (Web Site)
In an October 2013 decision, Allstate Insurance Co. v. OneBeacon American Insurance Co., 2013 WL 5604299 (D. Mass. Oct. 8, 2013), the United States District Court for the District of Massachusetts denied a motion that sought to enjoin a reinsurance arbitration and dismiss the umpire on the ground that the integrity of the arbitration had been corrupted by a disclosure of the umpire nomination process. The court's decision illustrates the difficulty of challenging an arbitrator's impartiality before the issuance of a final award and also reflects the oft-seen reluctance of courts to become involved in reinsurance arbitration proceedings.
The issue arose in the course of an arbitration between Allstate and OneBeacon, which was conducted pursuant to a procedural protocol between the parties. The protocol called for an umpire selection process whereby each party would appoint an arbitrator, each party's arbitrator would name three umpire candidates, each arbitrator would strike two of the names chosen by his or her counterpart, and the umpire would be chosen from the remaining candidates by lot. Appointment of party arbitrators and selection of an umpire proceeded according to the protocol. Then, in advance of the organizational meeting, OneBeacon submitted a position statement with an addendum containing information from which it could be determined that OneBeacon had proposed the candidate who was ultimately selected as umpire. Allstate requested that the umpire withdraw based on a concern that this knowledge of his nomination would "fundamentally corrupt the integrity of the process," but the umpire declined to step down.
Allstate then initiated the District Court action and filed a motion seeking to enjoin the arbitration and remove the umpire. Allstate contended that the disclosure of the umpire nomination information contravened the parties' procedural protocol, ran afoul of reinsurance industry custom and practice, and violated ARIAS rules that recommended that "the individuals named [as umpire] not be advised of which Party initiated their selection." The court, however, declined to issue an injunction. Noting that a preliminary injunction is "an extraordinary and drastic remedy," the court applied the "familiar" four-part standard for determining whether an injunction should be granted: whether the movant is likely to succeed on the merits, whether the moving party will suffer irreparable harm in the absence of preliminary relief, whether the equities tip in favor of an injunction, and whether an injunction is in the public interest.
The court found that the first prong of the test, likelihood of success on the merits, had not been demonstrated for two reasons. First, though the Federal Arbitration Act (FAA) requires that any agreement on the "method of naming or appointing an arbitrator" must be followed, the court found that the disclosure of who had nominated the umpire did not violate any specific provision of the parties" arbitration protocol. Because ARIAS guidelines had not been explicitly incorporated into the parties' agreement, the court found that those standards were unpersuasive. Nor did the court find that the disclosure of the selection process violated the protocol's requirement of a "disinterested" umpire or its prohibition on ex parte communications with umpire candidates.
Second, the court noted that pre-award challenges to the impartiality and neutrality of an arbitrator are not permitted under the FAA. Because the request for an injunction and removal of the umpire were sought to "maintain the impartiality and neutrality of the umpire selection process," the court viewed it as a claim of arbitrator bias that was not permitted prior to the rendering of an award.
The court similarly found that the second prong of the test, the likelihood of irreparable harm, had not been met. The harm alleged was the position of being forced to participate in an arbitration process that was claimed to be non-neutral and flawed. The court found, however, that such alleged harm was not irreparable since a legal remedy was available in the form of a post-award challenge to the arbitration proceeding.
Finally, with respect to the balance of equities and the public interest, the court found that the equities of the situation did not favor an injunction and that the issuance of an injunction in this matter, a "technical skirmish over arbitration procedure between two reinsurance companies, does not rank high in terms of the public interest." The court therefore denied the motion for a preliminary injunction as well as a request that was similarly pending for a permanent injunction.
Ms. Park is an associate at Sugarman, Rogers, Barshak & Cohen, P.C. She may be reached at park@srbc.com.
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