Episode 28. Arbitration

To arbitrate, or not to arbitrate—that is the question.

When it comes to insurance contracts, arbitration used to be the norm. But we're seeing more and more challenges to arbitration clauses. 

Listen to Bob’s advice on how to analyze the enforceability of arbitration clauses, so you don’t beat your head against the wall until you’re ready to shuffle off this mortal coil.

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Transcript

Hello everybody. Let's talk arbitration. Most of the time when a claims adjuster is

dealing with an arbitration provision, it's an agreement between the insured and the

claimant for arbitration. Sometimes we also deal with judicial arbitration.

The difference between judicial arbitration and contractual arbitration is in the name.

In a contract, arbitration is part of the agreement between the parties.

In a judicial arbitration scenario, it's the court determining as a matter of its

discretion or law that a matter should be arbitrated. So the claims professional is

looking at the issue of whether to comply with the arbitration provision,

whether to oppose the arbitration provision,

and just how the case is going to be resolved.

There seems to have been, and I emphasize have been, a trend toward arbitration

because the thinking was it was less expensive and it was faster.

In my experience neither of those things are true. In fact it can take longer and

be more expensive. So you really have to think carefully about whether you want to

arbitrate a liability dispute. Most insurance policies do not contain arbitration

provisions. So there's not much of a likelihood that you would be addressing

arbitration in the context of an insured versus insured dispute.

In fact, at last count, at least 20 states and two U .S.

territories prohibit the arbitration of insurance disputes.

In states like Arkansas, Georgia, Kansas, Kentucky,

Missouri, Montana, Nebraska, Oklahoma, Rhode Island,

South Carolina, South Dakota, and Vermont, the prohibition against arbitrating insurance

disputes appears as an Deception to the statute otherwise validating contractual

arbitration clauses But there are some other states Hawaii Louisiana,

Maine Massachusetts, Virginia, Washington Puerto Rico and the US Virgin Islands that

have statutes that statutes that expressly prohibit arbitration agreements in in

insurance contracts. And interestingly, in defining what is an insurance contract,

these often include reinsurance. So now we're looking at three species of arbitration.

Arbitration between the insured and the claimant, arbitration between the insured and

the insurer, and arbitration between an insurer and a reinsurer.

The reinsurance industry has long favored arbitration over litigation for resolving

disputes, but Seedance, meaning the insurance company that's being

reinsured, have begun challenging the enforceability of the arbitration clauses and

provisions in the reinsurance contracts. So what I want to do here is give you a

template for analyzing such challenges and these apply to some extent not only to

the reinsurance and insurance arbitration context, but also if you have an arbitration

agreement between insured and insurer and to a lesser extent the arbitration between

the insured and the claimant. The place to begin in evaluating an arbitration

provision and its enforceability is to determine whether the contract is interstate or

international. This is because different federal acts apply depending on the nature of

the contract. And those federal acts interplay differently with state law on

insurance. For example, the Federal Arbitration Act applies to interstate contracts and

establishes a national policy favoring arbitration when the parties contract for that

mode of dispute resolution. But standing alone, the FDA does not apply to

international reinsurance contracts. However, the Convention on the Recognition and

Enforcement of Foreign Arbitrable, or arbitral awards, also known as the New York

Convention, extends the protections of the FAA and presumably the policy underlying

the FAA favoring arbitration to international agreements.

Now even though the FAA and the New York Convention govern respectively all

interstate and international insurance and reinsurance contracts that contain an

agreement to arbitrate, as mentioned, at least 20 states prohibit arbitration of

insurance disputes. So the next step in the enforceability analysis concerns

preemption. The standard preemption rules do not apply to state statutes that regulate

the business of insurance, that's established by the McCarran Ferguson Act.

Instead, state law regulating insurance is said to inversely preempt conflicting

federal law. So that's a new concept that lots people haven't heard about,

inverse preemption. Inverse preemption depends on whether the state law specifically

relates to the business of insurance. State statues of the Arkansas variety,

remember those that have an exception to the statute otherwise validating contractual

arbitration clauses,

have been held to be statutes of general applicability,

rather than statutes specifically directed at the insurance industry. And therefore,

you might not have inverse preemption. And arbitration may be available.

Accordingly, the federal acts should govern the enforcement of the arbitration

provisions. when you have an Arkansas -style statute.

Conversely, the inverse preemption doctrine is more likely to apply to interstate

reinsurance contracts than to international reinsurance contracts.

Courts considering inverse preemption of the FAA tend to limit themselves to the

three criteria of the McCarran -Ferguson Act. When considering international arbitration

agreements and the preemptive effect of state law on the New York Convention,

these same courts generally take a more expansive view, finding that the McCarran

-Ferguson Act was not intended to regulate international commerce and therefore does

not apply to the New York Convention.

Accordingly, the prevailing view among the cases is that inverse preemption will not

apply to international arbitration agreements. Even where inverse preemption applies,

there is an argument for not applying state anti arbitration provisions to insurance

contracts. The apparent primary motivation behind the anti -arbitration provisions in

the insurance contract context is to protect consumers against contracts of adhesion.

This concern does not apply in the reinsurance contracts because reinsurance contracts

are not considered contracts of adhesion.

Overcoming statutory hostility to insurance arbitration agreements will not protect

parties to a reinsurance contract, for example, from undermining their own arbitration

provision with other inconsistent contractual terms. For example,

in Continental Casualty vs. Commercial Risk Reinsurance Company in Illinois case,

the court found that the reinsurance dispute was not subject to mandatory arbitration,

even though the reinsurance contracts contained an arbitration provision. The parties

had undermined their arbitration clause through a commutation agreement that stated it

was to be interpreted, construed, enforced, and otherwise governed by and in

accordance with the laws of the state of Illinois, and that the parties would submit

to the exclusive jurisdiction of the state and federal courts in the state of

Illinois. Thus, the specific provisions overcame the contractual arbitration provision.

Similarly, in claimant versus insured arbitration circumstances,

you have the argument that the arbitration provision is not enforceable or that

arbitration really should not be compelled because one or both of the parties have

acted inconsistently with the intent to arbitrate.

That also could apply in a situation where there's a contractual arbitration provision

between the insured and the insurer.

Now a key benefit of arbitration in lieu of litigation is the confidentiality of

positions and results the arbitration affords. This is particularly important for

insurers in

both contexts, in the context of litigating with their insured, or in the context of

litigating with their reinsurer. The interest in confidentiality of results can be one

undermined if one party seeks judicial confirmation of the arbitration award,

but usually not if it's just a dollar amount. If it's a declaratory relief,

you need to be very careful about confirming the arbitration award and coming up

with some sort of an agreement where it cannot be put into the public domain.

Federal courts have subject matter jurisdiction to confirm the arbitration award under

both the FAA and the New York Convention and federal courts often do not like to

seal records or have the basis for their confirmation hidden

from the public and Therefore, you might want to seek confirmation under state law,

which might be more amenable to sealing the record or the judgment,

or just having a judgment that is what we call a net judgment,

judgment for the plaintiff, judgment for the defendant, rather than a statement of

reasons and an interpretation of the policy.

To rebut the presumption of public access and to seal judicial records such as the

results of a reinsurance arbitration, the proponent of secrecy must show that the

material is the kind of information the courts will protect and that disclosure will

work a clearly defined and serious injury to the parties seeking the protection.

Broad allegations of injury are insufficient. The movement movement must show specific

and serious injury. In century indemnity company versus certain underwriters at

Lloyd's, the court granted the plaintiff's motion to seal the arbitration award,

finding a significant privacy interest and a tendency to promote voluntary execution

of private arbitration agreements were a legitimate purpose. Both parties to the

arbitration had agreed to keep the results confidential, including the ceiling of the

arbitration award in any action to confirm it as a judgment. This case then teaches

that before going into arbitration or agreeing to arbitration between a an insurer

and it's insured between two insurance companies or between an insurer and a

reinsurer some effort should be made to have a similar agreement that everything will

be kept confidential in promoting the confidentiality of the proceeding,

including keeping the matters decided in the arbitration confidential,

even in connection with a motion to enforce the arbitration award.

So in summary, international arbitration agreements challenged by state anti -arbitration

provisions are more likely to be enforced than our interstate arbitration agreements

in the context of insurance and reinsurance disputes. Where this occurs,

however, demonstration of specific and serious injury may outweigh the presumption of

public access to judicial records resulting in the litigation proceeding under seal.

So that's That's it for Coverage Council is in this week. Thank you very much for

tuning in, and until next week, this is Bob Salander, signing off.