Concerns about bias and prejudice from multiple repeat appointments have plagued party-appointed arbitrators for years. This is true of international arbitration, commercial arbitration and, of course, insurance and reinsurance arbitration. Recently, there have been several cases in the United States and the United Kingdom addressing implicit bias, repeat players and the need for robust disclosures in commercial and international arbitrations. In the reinsurance world, where most arbitrations still follow the old party-appointed advocate arbitrator formula, these concerns are magnified.

So where do we go from here? Should we move away from the party-appointed advocacy system and truly embrace neutral arbitration? Until that day, it is important to reexamine the rules of engagement in the party-appointed arbitrator context.

Basic Arbitration Concepts

All commercial arbitrators must be disinterested in the dispute. What this means is that arbitrators must have no economic or business interest in the outcome of the dispute. Arbitrators should decide the dispute based on the facts and arguments presented. Arbitrators should be fair and objective, allow the parties to present their evidence and arguments, and should consider all positions before coming to a final decision.

In most commercial and international arbitrations, arbitrators must be neutral and impartial. In other words, even if the arbitration agreement permits each side to select their arbitrator, those party-appointed arbitrators must still act impartially.

Arbitrators should disclose any relationships with or interests in the parties, counsel, other arbitrators, or witnesses that might be perceived by an objective observer as evidence of potential bias. This includes prior appointments or engagements by any of the parties or their affiliates.

Are Reinsurance Arbitrators Different Than Commercial Arbitrators?

Insurance and reinsurance arbitrators are no different than other commercial arbitrators. The common perception among arbitrators and parties is that party-appointed arbitrators are permitted to be predisposed to the positions of the appointing party in a traditional reinsurance arbitration proceeding. While this is generally true, the predisposition concept has been stretched to its breaking point over the last 25 years.

Some reinsurance arbitrators believe that it is their solemn obligation to advocate for their appointing party's position in deliberations and during the arbitration hearing, including aggressively questioning witnesses from the other side. Others believe that they must rule for their appointing party no matter what the evidence shows. Others have no qualms about being appointed by the same party and/or the same law firm dozens of times. These do not represent a majority view, but enough arbitrators believe in some or all these positions.

Several years ago, I attended a meeting of a local bar association alternative dispute resolution committee where a well-known in-house lawyer for a significant insurance company explained to the gathering of commercial arbitration specialists how reinsurance arbitration works. When the in-house lawyer explained the party-appointed advocacy system in reinsurance arbitrations and mentioned that these arbitrators did not have to be neutral and impartial, there was an audible gasp in the room.

While there may be other industries where there are predisposed or advocate party-appointed arbitrators, I think they are far and few between, making reinsurance arbitration pretty much unique.

Why Predisposition Does Not Mean Advocacy

While under old-style traditional reinsurance arbitration provisions a party-appointed arbitrator does not have to be neutral and impartial, that does not mean that a party-appointed arbitrator should be an advocate for the arbitrator's appointing party. The old-style arbitration provision typically provides as follows:

  • All arbitrators shall be active or retired officers of insurance or reinsurance companies, or Lloyd's London Underwriters, and disinterested in the outcome of the arbitration.

Note that disinterestedness is the only criteria, not neutrality or impartiality. Contractually, neutrality and impartiality are not requirements, yet everyone agrees that the third arbitrator or umpire must be neutral and impartial. So where does the notion of predisposition come from?

One of the sources is the 1977 American Bar Association/American Arbitration Association Code of Ethics for Arbitrators in Commercial Disputes (the "Ethics Code"). The Ethics Code was revised effective March 1, 2004. The Ethics Code suggested that all arbitrators should be neutral but accepted that some types of arbitrations allow for non-neutral party-appointed arbitrators. In providing guidance for non-neutral party-appointed arbitrators, the Ethics Code stated:

  • Nonneutral arbitrators may be predisposed toward the party who appointed them but in all other respects are obligated to act in good faith and with integrity and fairness.
  • Nonneutral arbitrators are permitted to be predisposed toward deciding in favor of the party who appointed them.

Closer to reinsurance disputes, the original ARIAS·U.S. Guidelines for Arbitrator Conduct ("Code of Conduct") provided as follows:

  • Although party-appointed arbitrators may be initially predisposed toward the position of the party who appointed them (unless prohibited by the contract), they should avoid reaching a final judgment until after both par­ties have had a full and fair opportunity to present their respective cases and the panel has fully deliberated the issues.  It is preferable that arbitra­tors advise the appointing party, when accepting an appointment that they will ultimately decide issues presented in the arbitration objectively. Party-appointed arbitrators are obligated to act in good faith with integri­ty and fairness, should not allow their appointment to influence their deci­sion on any matter before them, and should make all decisions justly.

When these provisions are read in context, it becomes clear that while a predisposition toward the appointing party and its position is permissible, good faith, integrity and fairness are paramount. And in the reinsurance context, a full and fair opportunity for the party to present its case must be allowed before an arbitrator makes up his or her mind about what final decision should be reached. In other words, deliberations should be fair and objective, and party-appointed arbitrators should decide the case based on the facts and evidence presented and in a fair manner without being influenced by who appointed them to the arbitration panel.

Arbitrator Disclosures

The issue of arbitrator disclosures made the headlines recently in the UK when the UK Supreme Court issued a decision critical of the lack of disclosure of a subsequent appointment by an eminent insurance and reinsurance arbitrator. Halliburton Co. v. Chubb Bermuda Insurance Ltd., No. [2020] UKSC 48 (Nov. 27, 2020). All the arbitrator ethical codes and rules require arbitrators to disclose all relationships and contacts with the parties, lawyers, affiliates, witness, other arbitrators, and others relevant to the dispute that might be perceived as evidence of possible bias.

The Code of Conduct in Canon IV requires broad disclosure of any interest or relationship likely to affect the arbitrator's judgment. Importantly, the Code directs that "[a]ny doubt should be resolved in favor of disclosure." Leading modern day ADR organizations such as NAM (National Arbitration & Mediation) have incorporated these historical guidelines into their administrative rules and procedures.  For example, in NAM's Comprehensive Dispute Resolution Rules and Procedures (the "NAM Rules"), an arbitrator must disclose immediately to NAM circumstances that create a conflict of interest or that may cause the arbitrator to be biased or unfair (NAM Rules, No. 22(H)). Moreover, the parties and their representatives are charged with performing conflict checks to identify any potential conflicts or associations and inform NAM of that information as soon as it is discovered (NAM Rules, No. 23(B)).

The reason for broad disclosure is to avoid the appearance or impression of bias.  Disclosure is required up front and during the arbitration proceeding. The continuing duty to disclose involves subsequent appointments in other matters that might give the impression of favoritism or bias.

The complexities of modern reinsurance relationships have put a strain on disclosures because it is not often clear who is the real party in interest in a dispute. With the proliferation of legacy books of business both on the property/casualty and life sides of the industry, disputes are often brought in the name of one party, but the real party in interest could be a different party.  Moreover, the disputes may be managed by yet a third party. This is the reason why Canon I, Comment 5 of the Code of Conduct was amended.  Canon IV, Comment 2 (b) of the Code of Conduct also addresses this issue as follows:

  • The purpose of this rule is to require disclosure of the relationships between the candidate and the parties as well as the candidate and either parties' counsel or third party administrator or manager; such relationships that must be disclosed include appointments as an arbitrator where the party's counsel and/or the party's third-party administrator or manager acted as counsel or third-party administrator or manager for a party making the appointment

Disclosures also require cooperation from the lawyers and the parties. Arbitrators cannot make disclosures if the responsible and relevant parties are not revealed to them by the lawyers and the parties.  This is why the "Purpose" section of the Code of Conduct contains the following statement:

  • Though these Canons set forth considerations and behavioral standards only for arbitrators, the parties and their counsel are expected to conform their own behavior to the Canons and avoid placing arbitrators in positions where they are unable to sit or are otherwise at risk of contravening the Canons.

As revelations come to light, the continuing duty to disclose is triggered and disclosure is required. The NAM Rules are even clearer about the responsibility of the parties and their representatives to disclose any issues immediately (NAM Rules, No. 23(B)).

Because of the case law on disclosures and the criticisms from the courts aimed at well-known arbitrators for failing to disclose, it is incumbent on all arbitrators to make robust disclosures early and often. And clearly on a continuing basis. Err on the side of disclosure as the Code of Conduct admonishes. If the arbitrator in the UK Supreme Court case had disclosed his subsequent appointment, no one would have batted an eye and there never would have been a dispute.

Can We Avoid the Problem?

Problems of potential bias will never go away, but there are several ways to address the situation. First, as stated above, regardless of the form of arbitration, robust, complete, and continuing disclosures by arbitrators must occur. In the reinsurance community, many of the lawyers and arbitrators (and parties for that matter) know each other through ARIAS or other industry organizations. Disclosures of a relationship generally will not result in an appointment challenge unless it is significant evidence of a lack of impartiality. But failure to disclose an unknown relationship that may lead to an impression of bias will affect how lawyers will react to that arbitrator in the future.

Second, arbitrators should think about whether excessive multiple appointments by a party or by a law firm or lawyer is a good long-term strategy. Being viewed as the "house" arbitrator for a particular party is probably not a title any arbitrator wants to receive. Counsel and parties ought to consider this point as well. There will always be repeat players in reinsurance disputes because the number of participants is finite and much smaller as a group than in many other industries. But heavily overweighting appointments toward one party or one lawyer/law firm is problematic.

Finally, moving to an all-neutral panel—like most of the rest of the commercial and international arbitration world—is a way to remove much of the potential for bias. And by an all-neutral panel I mean a panel that has no party-appointed arbitrators and where all three arbitrators are selected in a neutral manner. The ARIAS·U.S. Neutral Panel Rules for the Resolution of U.S. Insurance and Reinsurance Disputes ("Neutral Rules") goes farther than many other procedures in attempting to eliminating bias and repeat players from the arbitrator selection process. While not perfect, the Neutral Rules reduce the probability of bias and eliminate most of the subconscious and overt issues associated with party-appointed arbitrators for reinsurance disputes.

Another example of the emphasis on neutral panels is found in the NAM Rules. Rule No. 22(G) states:

  • NAM has emphasized the importance of neutrality and impartiality in the Arbitration process to its Arbitrators. NAM may, in its sole discretion, disqualify an Arbitrator if circumstances exist that create a conflict of interest or cause the Arbitrator to be unfair or biased, unless the parties agree to permit the Arbitrator to preside over the matter.
  • Examples of such circumstances include: i. the Arbitrator has a personal bias or prejudice concerning a party or has personal knowledge of disputed facts; ii. the Arbitrator has served as an attorney to any party; iii. the Arbitrator is a material witness regarding the dispute or the Arbitrator or a member of the Arbitrator's family has a direct financial interest in the outcome of the case; iv. the Arbitrator or a member of the Arbitrator's family is a party to the case or is appearing as a representative for one of the parties to the case.

Under Rule No. 22 of the NAM Rules, NAM forwards identical lists of candidates to the parties and the parties strike several and rank the remainder and NAM will appoint based on the parties rankings. Most importantly, "[i]n making the appointment, NAM shall secure the appointment of independent and impartial Arbitrator(s). No Arbitrator(s) shall act as an advocate for any party and no Arbitrator, whether before or after appointment, shall advise any party on the merits or outcome of the dispute." (NAM Rules, No. 22(f)).

But neutrality alone does not solve the problem as can be seen from the UK Supreme Court case mentioned above. Under English law, all arbitrators, even if party-appointed, must be neutral. Yet the failure to disclose a subsequent appointment led to a court challenge. While the law in the US does not allow for many, if any, challenges prior to the issuance of the final arbitration award, a failure to disclose a consequential relationship could result in a challenge to the final award and, under the right factual circumstances, to its vacatur.

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This article is based on my Expert Commentary, "Reinsurance Arbitrators and Their Obligations," published by IRMI.com, January 2021. The article was originally published in the ARIAS-U.S. Quarterly, Q3, 2021 and is republished here, with amendments and with permission.

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Larry P. Schiffer is a member of NAM's (National Arbitration and Mediation) Hearing Officer Panel and is available to arbitrate and mediate insurance and reinsurance cases throughout the United States. Mr. Schiffer is one of the foremost authorities on insurance/reinsurance and has a wealth of knowledge and experience that spans both the property and casualty and the life and health markets. He has provided counsel and advice on a wide variety of insurance and reinsurance issues that include coverage, insolvency, commutations and recaptures, due diligence for corporate transactions and investments, reinsurance audits and inspections, cyber insurance, claims analysis and related issues.

For any questions or comments, please contact Jacqueline I. Silvey, Esq. via email at [email protected] or via telephone at (800) 358-2550.