Impartial, Independent, Neutral Arbitrators v. Non-Neutral Party Appointed Advocates[dagger]

I.

ISSUE

In reinsurance arbitrations should the panel be impartial, independent and neutral or, except for the umpire, should the other panelists be party-appointed advocates?

II.

HISTORICAL BACKGROUND

Reinsurance occurs when an insurance company insures or transfers all or a part of the original risk business it has written to another insurer, referred to as the reinsurer. The insurer making the transfer is referred to as the reinsured or cedent. This reinsuring transaction results in their sharing of the risk of any losses arising out of the original coverage afforded to the insured.

The concept in some respects is similar to a bookmaker seeking to reduce its risk exposure by transferring some of the bets it has accepted and placing all or a part of them with another bookmaker. We leave to your imagination how any dispute between unlicensed bookmakers might be resolved.

Generally, any dispute between a cedent and its reinsurer is resolved by going to arbitration. Reinsurance arbitrations are customarily the final frontier in the resolution of the proliferating number of disputes between cedents and reinsurers; however, in recent years the courts have become increasingly more involved.

My personal introduction to reinsurance and its related disputes occurred more than forty years ago. At that time my law firm was asked to represent certain London reinsurance underwriters. Though the underwriters wished to consult with counsel there existed a desire on their part, along with those of the other parties involved, to resolve any dispute in a more congenial and less confrontational manner than the attitude that exists today in the insurance and reinsurance industry!

At that time lawyers in America handled few cases concerning reinsurance disputes. There was little American case law so that when necessary we searched for precedents in United Kingdom court decisions.

As a young lawyer my reinsurance learning curve began under the tutelage of both underwriters and brokers. Unlike today, there were few reinsurance texts available for us to study and we relied for our education upon the knowledge and experience of the people working daily in both the insurance and reinsurance market.

All the parties participating in the negotiations for reinsurance (the cedent, its broker and the reinsurer) were presumed to be acting with "utmost good faith," and the reinsurance contract was acknowledged to be an "honorable undertaking"! An atmosphere of cordiality existed that encouraged any disagreements arising out of reinsurance transactions be resolved during informal discussions, often while sitting at a coffee table in the old Captains Room at Lloyds or during a visit to the conference room of the Lloyds broker who had placed the reinsurance. The efforts made at these meetings usually resulted in a satisfactory business solution to the problem.

Should these informal attempts by the parties fail then sometimes in a further effort to resolve matters they would request a respected neutral and independent market underwriter to informally review the matter and express a confidential opinion on the issues. The opinions expressed by the underwriter sometimes formed the basis for resolution of the disputes. Failing these efforts the parties would then take their disagreement to arbitration using a panel comprised of neutral and independent market persons who were aware of the customs and practice within the reinsurance underwriting market.

It was rewarding to engage in extensive discussions with many experienced underwriters, claims persons, and brokers. A number of these individuals worked in the market during and prior to World War Two and their familiarity with the origins of "contract wording" aided our understanding the origin and meaning of various terms and conditions, and why a word or clause was selected for use in different reinsurance contracts.

Over many years London market reinsurance underwriting and claims operations developed numerous customs and practices that impact upon most underwriting transactions. These include terms and conditions that while not specifically mentioned in the Placing Slips or Cover Notes, are implied to have been incorporated into the transaction and would later appear in the written reinsurance contract.

As noted above it was a basic premise early on in the London market that should their informal efforts to find a business solution to a reinsurance dispute fail, it would be preferable to have the matter decided by arbitration before an independent, neutral and impartial panel of individuals familiar with the operations of their specialized market.

As evidence of this intention, arbitration clauses were introduced into most reinsurance contracts. Many such clauses directed that the arbitrators appointed by the parties be active or retired underwriters, or executives of insurance, reinsurance, or brokerage companies. The London market arbitration clauses anticipated that since laws of the United Kingdom and elsewhere required arbitrators be independent, neutral and impartial, such would be the controlling premise in reinsurance arbitration.

Over time and subject to few exceptions, whether a reinsurance contract was prepared in the London, European, American or another reinsurance market it would contain an arbitration clause. Eventually the clauses expanded the pool of candidates for arbitrator to include an active or retired claims person who was an executive officer or a lawyer having at least ten years of experience in reinsurance.

Historically, it has always been observed that, pursuant to their contract, it is the parties arbitration clause and their intentions as expressed therein that determine the procedures controlling the arbitration process. While most of these arbitrations were of an "ad hoc" nature without specific guidelines in place, it was generally recognized that the London market and other international arbitration clauses contemplated that even though the parties appointed the arbitrator, he or she would be an individual who was independent, neutral and impartial.

In the absence of the parties mutual agreement to the contrary, the established institutional arbitrational organizations provided, particularly in international arbitrations, for the independence, neutrality and impartiality of presiding arbitrators in their procedural rules.1 Provisions such as these have been adopted for use by the 1975 Inter-American Convention on International Commercial Arbitration, the UNCITRAL Arbitration Rules - Rules of the United Nations Commission on International Trade Law, the Court of Arbitration of the International Chamber of Commerce ("ICC") and the London Court of International Arbitration ("LCIA").2

Both initially and during the arbitration process, an arbitrator's independence and neutrality must be maintained. According to the Rules of the LCIA, "[a] party-nominated arbitrator is not, however, the representative of the party which nominates him or her. He or she must confirm and maintain his or her independence and impartiality."3

The position uniquely preferred by some American lawyers of choosing when possible the use of party-appointed, non-neutral advocates reflects a less desirable concept to foreign insurers. In their own nations or when engaged in international arbitrations under various international treaties, such as the UNCITRAL Treaty, they expect and adhere to the requirements of independence and neutrality of the panel. The United States is a signatory to the UNCITRAL Treaty and, absent mutual party intervention, its provisions remain controlling where applicable.

The International Centre for Dispute Resolution is the international division of the American Arbitration Association ("AAA") and, where adopted, its Rules under Article 7 require that "[ajarbitrators acting under these rules shall be impartial and independent."4

Recognizing the need for uniformity in the conduct of reinsurance arbitration, as well as due to concern expressed about perceived arbitration abuses, these institutions formulated rules that may be adopted at the option of the parties and used as guidelines in the conduct of reinsurance arbitration proceedings.

Some old reinsurance contracts stated that the parties should follow the Rules of the American Arbitration Association; however, it was not unusual for the lawyers to agree that the language did not mandate that the arbitration be conducted under the auspices of the AAA. Accordingly, they would progress with an ad hoc proceeding, and if a procedural issue arose during the arbitration, it was understood that they would look to these rules for guidance in resolving the issue.

Despite the presence or absence in the contract wording of any requirement as to the neutrality or independence of the party-appointed arbitrator, some parties and their lawyers here in America preferred an agreement to appoint a non-neutral arbitrator, with only the umpire or third arbitrator being neutral and independent.

Even when a treaty requires that an international arbitration panel be composed entirely of neutrals, some lawyers are willing to waive the requirement. These lawyers are accustomed to working with a party-appointed, non-neutral arbitrator whose very non-neutrality enables them to confer ex parte during the proceedings. These communications are something that would be prohibited if that person was acting in the capacity of a neutral. There are further comments on this issue later in this article, but it is appropriate to note that in an international arbitration such ex parte communications are forbidden:

No party or anyone on its behalf shall have any ex parte communication relating to the case with any arbitrator, or with any candidate for appointment as party-appointed arbitrator except to advise the candidate of the general nature of the controversy and of the anticipated proceedings and to discuss the candidate's qualifications, availability or independence in relation to the parties, or to discuss the suitability of candidates for selection as a third arbitrator where the parties or party designated arbitrators are to participate in that selection. No party or anyone acting on its behalf shall have any ex parte communication relating to the case with any candidate for presiding arbitrator.5

III.

INCREASE IN THE NUMBER OF ARBITRATIONS

During the 1980s, for a variety of reasons, there developed a significant increase in the number of reinsurance disputes. Cumulatively, billions of dollars are involved in these disputes. These events have resulted in a large number of arbitrations and litigations. There now exists in America a considerable body of case law regarding reinsurance.

Judges who had never heard the term reinsurance, much less of reinsurance customs and practice, are being asked for interpretations of reinsurance wording. They are required, along with jurors, to choose between the proffered testimony of several alleged experts in insurance and reinsurance. There are many viewpoints within the insurance industry concerning whether the courts are correct in their interpretations. What is clear is that experienced underwriters, claims personnel, brokers or attorneys knowledgeable in reinsurance matters are not deciding many reinsurance disputes.

While reliance on the arbitration process is preferable in the resolution of reinsurance disputes, many insurance spokespersons, while not happy with the extent of the courts' involvement, do seriously question the use of non-neutral arbitrators.

The twenty-first century promises an even more dramatic increase in the number of reinsurance disputes and arbitrations. The existence of large shortfalls in recoveries will trigger disputes between ceding companies and under-reserved reinsurers. Existing tensions between insurers and reinsurers are escalating as they concern themselves with bad reinsurance debts and some reinsurers' failure to track their reserves for asbestos and other liabilities with those of the cedent.6

IV.

DISPUTE OVER NEUTRAL ARBITRATORS

As noted, many reinsurance contracts contain mandatory arbitration clauses.

Industry representatives who question the continued effectiveness of using arbitration to resolve reinsurance disputes cite as a concern the appointment of a non-neutral arbitrator with whom the parties and their lawyers continue to communicate until either the hearing commences, or in some instances, until the arbitrators retire to decide the issues.7

In Kathryn P. Broderick's article appearing in this issue, she describes three major pitfalls of neutral panels in reinsurance arbitrations and states "that a movement to allneutral panels in United States reinsurance arbitration would entail a dramatic change from the status quo."8

In addition to the earlier observations concerning international attitudes on neutrality it is worth taking notice of the Code of Ethics for Arbitrators in Commercial Disputes 2003 Revision. The Code was jointly promulgated by the American Bar Association and the American Arbitration Association and became effective March 1, 2004. The revised Code sets the ethical standards for not only lawyers, but for all other persons who undertake to act as commercial arbitrators. It is the controlling definitive statement of the obligations, duties, and conduct expected from arbitrators during the entire arbitration process.9 In order to appreciate the scope and impact of the Code, it is recommended that it be read in its entirety.

This article will reference certain portions of the Code to indicate the general support and intentions that favor the neutrality of the arbitration panel. While recognizing that Canon X of the Code contains an exemption from certain of the ethical provisions contained therein, I believe it does so in recognition of the existence under American law of the parties' right to agree to the use of a non-neutral arbitrator. This is a concept that this article does not support for the variety of reasons that are being elaborated upon herein.

A. The Code of Ethics for Arbitrators in Commercial Disputes - Selective Excerpts

Preamble

. . .

. . . Persons who act as arbitrators . . . undertake serious responsibilities to the public as well as to the parties. Those responsibilities include important ethical obligations.

. . . [T]his code sets forth generally accepted standards of ethical conduct for the guidance of arbitrators and parties in commercial disputes . . .

. . . .

Note on Neutrality

. . . The sponsors of this Code believe that it is preferable for all arbitrators including any party-appointed arbitrators to be neutral, that is, independent and impartial, and to comply with the same ethical standards. This expectation generally is essential in arbitrations where the parties, the nature of the dispute, or the enforcement of any resulting award may have international aspects. However, parties in certain domestic arbitrations in the United States may prefer that partyappointed arbitrators be non-neutral and governed by special ethical considerations. These special ethical considerations appear in Canon X of this Code.

This Code establishes a presumption of neutrality for all arbitrators, including party-arbitrators, which applies unless the parties agreement, the arbitration rules agreed to by the parties or applicable laws provide otherwise. This Code requires all party-appointed arbitrators, whether neutral or not, to make pre-appointment disclosures of any facts which might affect their neutrality, independence, or impartiality. This Code also requires all party-appointed arbitrators to ascertain and disclose as soon as practicable whether the parties intended for them to serve as a neutral or not. If any doubt or uncertainty exists, the party-appointed arbitrators should serve as neutrals unless and until such doubt or uncertainty is resolved in accordance with Canon IX. This Code expects all arbitrators, including those serving under Canon X to preserve the integrity and fairness of the process.10

It is submitted that the drafters of this Code of Ethics, while acknowledging that in some American arbitrations the parties might agree to the appointment of non-neutral arbitrators, clearly favor, as do I, the appointment of a neutral, independent, and impartial arbitrator.

In her "Pitfall No.l," Ms. Broderick makes the following assertion:

[P]arty-appointed arbitrators in a tripartite system such as that customarily employed for reinsurance disputes typically interact extensively with the parties appointing them throughout much of the arbitration. Replacing the present tripartite system with a system of all-neutral panels would almost certainly eliminate such communication."

Why is there a problem in eliminating this unlimited access between counsel or a party with their appointed arbitrator? How is the fairness in the hearing enhanced by allowing any continuing ex parte dialogue between counsel and the arbitrator? Would it not be an abuse of the arbitration process to permit lawyers to confer at will with their arbitrator during this dispute resolution process?

Such communications are nothing more than an effort to obtain a running account of how effectively the lawyers are presenting their case, and asking the arbitrator: "How am I doing?" They want to know the impact that their evidence is having on both the neutral umpire and the other arbitrator. This need for access by some lawyers to their appointed non-neutral arbitrator serves as a "security blanket" that may afford the attorney some assurance that he or she is trying the case to the best advantage.

Having such ex parte access to their arbitrator/advocate inhibits the ability of the other panel members to candidly discuss the evidence and case developments among themselves. How forthcoming would an umpire be in discussing his or her reactions to the evidence if it is known that later that evening the party-appointed, non-neutral arbitrator will be dissecting and analyzing the umpires every comment with the lawyer?

A non-neutral arbitrator is exposed to extensive discussions about the case with both counsel and the party representative during the selection process. On these occasions information and documents are either made available or discussed with the candidate for nonneutral party advocate. It would not be unusual for some degree of bonding to occur with the party concerning his or her position on the issues.

An issue exists as to whether such an appointee may feel obliged to try, if the communication sessions during the hearing fail to produce a winning strategy, to then obtain some type of "split the baby" decision. Additionally, during these periods of ex parte communications both the lawyer and party representative may seek to aid or perhaps guide their arbitrator in deciding the future areas of inquiry following the resumption of the hearing.

During the selection process the party and its counsel are seeking a candidate for arbitrator who is sympathetic to their position. A negative reaction from such a person is usually followed by a further search until they have a person appointed whom they are satisfied is willing to advocate their position on the issues.

There is presently no lack of candidates waiting to be called for an interview and who wish to have the opportunity to serve as a non-neutral.

The argument is raised that if limited to appointing only neutrals, then appointing counsel will lose the opportunity to consult in detail with the candidate about his or her opinions concerning the issues in the case and to be educated by the candidate. If counsel feels a need for an expert consultation or to be educated on some aspect of reinsurance practice he or she can always consult with an expert.

B. Pitfall No. 2: "Loss of An Advocate on The Panel"12

Why is there any need to seek out a candidate who will then be perceived as a nonneutral hired gun whose purpose is to again argue and repeat the same position that the lawyer and his witnesses have been espousing throughout the arbitration hearing?

Is it reasonable to expect a party-appointed, non-neutral who is acting as an advocate to be able, at the end of the hearing, "to vote his or her conscience" when he or she has been communicating, consulting, planning, discussing, reviewing, and analyzing all of the events and evidence both before and during the hearing with counsel. Can such a person suddenly, after taking the case under advisement, become an "impartial adjudicator" who at the end of the day will then be capable to vote his or her conscience?

Instead of the non-neutral acting as "[t]he presence of an advocate on the panel guaranteeing a fair process,"13 why not just trust an appointed independent, neutral and impartial arbitrator? If we are talking about a "fair process," I suggest that an independent observer watching a party-appointed non-neutral doing what is expected of him or her before, during and after each day's session consulting with counsel would have to wonder where the fair hearing was being held.

Those lawyers who worry about not being able to communicate with their non-neutral, party-appointed advocate are like the character in the Verizon Wireless commercial who walks around asking, "Do you hear me now?" In expressing his or her need to communicate throughout the arbitration process with the non-neutral arbitrator/advocate the lawyer is repeatedly asking, "How am I doing?" One would expect that a lawyer with this concern must be very upset with a judicial code that would not permit him or her during a trial to daily have lunch with a juror in order to ask the burning question, "How am I doing?"

C. Pitfall #3: "Loss of Access to Information on the Reasons for the Panels Decision. "14

This concern can be addressed in the reinsurance contract. The parties prior to the commencement of the arbitration can also address it by agreeing that the arbitration panel shall render "findings of fact and a reasoned decision." The rationale for the award will then be clear to the parties.

The argument is made that many "arbitrators make no secret of their disinclination to issue such awards, and some have even stated that they will refuse to serve on a panel if a request for such an award is made."15 Any candidate who refuses to serve on a panel if required to provide a reasoned award should be excused. There is no acceptable reason why an arbitration panel should not provide a "reasoned decision."

A "reasoned decision" ensures the parties that the panel understood the issues in dispute and also aids in deciding if the panel participants were indeed qualified to hear and determine the dispute. If the arbitrator's lack of competency is made evident by the decision, then the party can avoid selecting that individual in future cases. The parties may request the panel to make any specific findings in addition to requiring their issuance of a reasoned decision.

V.

CONCLUSION

It is submitted that a reinsurance arbitration using party-appointed, non-neutral arbitrator/advocates, that allows ex parte communications, and, in the absence of a concern for the preservation of trade secrets, is unwilling to issue a reasoned decision will not result in a fair hearing. The international rule favoring the use of neutral panels to ensure fair hearings should be adopted as a due process rule in America.

There have been many voices raised in the insurance and reinsurance industry questioning the continued use of the arbitration process to resolve reinsurance disputes. Many insurance industry officials have expressed their lack of trust in the current process, and they contend that some arbitrations are merely contrived "dog and pony shows" directed by lawyers who often have a stable of "actors" frequently playing different roles in their arbitrations.

Those objecting to the use of a non-neutral appointee have questioned the law firm's repeated use of the same individual as an arbitrator, as a consultant and as an expert witness. Likewise they question the efforts made by the firm to have such individuals' names submitted for the role of umpire. Is there room for doubt as to whether the party or its lawyer will suggest that the party-advocate propose an umpire not thought to be more disposed to the client's position in the arbitration?

There is a solution to this lawyer and party created dilemma - independency, neutrality and impartiality of the panel. The panelist may be appointed by the parties or by an independent institutional organization. Fairness would be assured. It works in international arbitration and when used it also works here in America.

Independent, neutral and impartial - the terms sound right. And adhering to the Code of Ethics for Arbitrators in Commercial Disputes, 2003 Revision, will ensure that regardless of the outcome of the arbitration the parties will at least know that they have been afforded a fair hearing.

[dagger] Submitted by the author on behalf of the FDCC Alternative Dispute Resolution Section.

1 See The Rules of Procedure of the Inter-American Commercial Arbitration Commission IACAC.

2 These Rules may be found at www.law.fsu.edu or www.adrworld.com.

3 London Court of International Arbitration Rules, available at http://www.lcia-arbitration.com/lcia/#2 (as of June 20, 2004).

4 American Arbitration Association: International Arbitration Rules, art. 7, § 1 (2003), available at http://www.adr.orgindex2.1.jsp?Spssid=15747&JSPsrc+upload\LIVESITE\Rules_Procedures \National_International\..\..\facusArea\international\AAAl 75current.htm#Impartiality (as of June 20,2004).

5 Id. at § 2.

6 Bus. INS., Feb. 9, 2004 quoting a Standard & Poor's Corp. report.

7 see Linda Dakin-Grimm & M. Benjamin Valeric, A case Against Reinsurance Arbitration?, CONSULTING LITIGATION & EXPERT WITNESS secTION QUARTERLY CPCU SOCIETY Vol. 9 No. 4, Dec. 2002; Anthony M. Lanzone, Abuses In Reinsurance Arbitrations - Do they Really Exist?, INS ADVOCATE Vol. 115 No. 5 Feb. 2, 2004.

8 see Kathryn P. Broderick, Pitfalls In Moving To All-Neutral Reinsurance Arbitration Panels, 54 FF.D'N DEF. & CORP. COUNS. Q. 373 (2004)

9 It may be read online at http.www.abanet.org/leadership/2004/dj/107.pdf.

10 Id.

11 Broderick, supra note 8, at 376.

12 Id. at 377.

13 Id.

14 Id. at 378.

15 Id.

Anthony M. Lanzone is a 1953 graduate of St. John's University School of Law. He became a member of the New York Bar that same year. He is admitted to practice before the United States Supreme Court and various Federal Appellate and District Courts. Mr. Lanzone is know for his legal activities in both domestic and international insurance and reinsurance matters in respect of which he served as trial counsel in litigation, arbitration and mediation cases. He now acts solely as a neutral arbitrator and mediator. Over the years he has authored articles and given lectures on a number of insurance, reinsurance and arbitration issues. Mr. Lanzone has been active as a member of the Federation of Defense & Corporate Counsel and has been a speaker at many of its conventions. He is also a member of the American Bar Association and its Section on Alternate Dispute Resolution; the New York State Bar Association; the Association of the Bar of the City of New York; the Defense Research Institute; the International Bar Association; ARIAS U.K., and is a certified arbitrator by ARIAS U.S. The Reinsurance Association of America also lists Mr. Lanzone as a neutral.

Copyright Federation of Defense & Corporate Counsel, Inc. Summer 2004
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