Scandinavian Reins. Co. Ltd. v. St. Paul Fire & Marine Ins. Co. (2nd Cir. (N.Y.) Feb. 3, 2012)
The Second Circuit recently reversed a district court’s vacatur of an arbitration award, holding that there was insufficient evidence to support a finding of “evident partiality” of two of the arbitrators.
Plaintiff Scandinavian and defendant St. Paul entered into a specialized type of reinsurance contract known as a stop-loss retrocessional agreement. Pursuant to the agreement, St. Paul ceded to Scandinavian some of the reinsurance liabilities that St. Paul had assumed from other insurance companies. In exchange for Scandinavian’s assuming these liabilities, St. Paul became obligated to pay premiums to Scandinavian, by retaining those funds within an “experience account” from which any liabilities would first be paid out. Only if the experience account became fully depleted would Scandinavian have to pay St. Paul out of its own funds.
In January 2002, Scandinavian entered into “run off,” thereby ceasing to underwrite new business. St. Paul also entered into run-off later the same year. After St. Paul requested that Scandinavian indemnify it for much of its loss, two disputes emerged concerning the agreement’s interpretation. First, the parties disputed whether the agreement limited the volume of liability assumed by Scandinavian. Second, the parties could not agree on whether the agreement provided for a single experience account or three separate experience accounts.
Per the agreement, the parties submitted their disputes to arbitration. Each of the arbitrators made initial disclosures to the parties. The arbitral panel, consisting of two party-selected arbitrators and an umpire, concluded that the agreement was valid and should be enforced according to its terms, thereby exposing Scandinavian to an aggregate limit of approximately $290 million in liability. The panel also ruled in favor of St. Paul on the number of experience accounts.
Scandinavian filed an action to vacate the arbitration panel’s award based on two of the arbitrator’s “evident partiality.” Specifically, Scandinavian argued that the fact that two of the three arbitrators on the panel had failed to disclose their concurrent service in an arbitration involving “a common witness, similar disputed issues and contract terms, and the company that succeeded to the business of St. Paul” reflected bias by those arbitrators in St. Paul’s favor. The district court agreed and vacated the arbitration award.
The Second Circuit reversed, noting that “evident partiality” did not exist simply because two arbitrators served together in a separate arbitration. The Second Circuit also rejected Scandinavian’s argument that the Court should infer partiality by virtue of the arbitration panel ruling in St. Paul’s favor. Rather, the Court stated that “the fact that one party loses at arbitration does not, without more, tend to prove that an arbitrator’s failure to disclose some perhaps disclosable information should be interpreted as showing bias against the losing party.”
The Second Circuit's Decision can be found here
Carrie Appler and Jeffrey Kingsley