2014 INSURANCE & REINSURANCE LAW REPORT...The Insurance and Reinsurance Law Report is published by the Global Insurance & Financial Services Practice Group of Sidley Austin LLP. This

2014 INSURANCE & REINSURANCE LAW REPORTINSIDE:

RECENT DEVELOPMENTS IN LIFE INSURANCE UNCLAIMED PROPERTY LAW

WAL-MART IS TRICKLING DOWN – UNEVENLY – TO CLASS ACTIONS AGAINST INSURANCE COMPANIES

NAIC CREDIT FOR REINSURANCE UPDATE

RECENT DEVELOPMENTS IN PRE-JUDGMENT CHALLENGES TO ARBITRATOR BIAS

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2014 INSURANCE & REINSURANCE LAW REPORT

CONTENTS

4 RECENT DEVELOPMENTS IN LIFE INSURANCE UNCLAIMED PROPERTY LAW

8 WAL-MART IS TRICKLING DOWN – UNEVENLY – TO CLASS ACTIONS AGAINST INSURANCE COMPANIES

14 NAIC CREDIT FOR REINSURANCE UPDATE

26 RECENT DEVELOPMENTS IN PRE-JUDGMENT CHALLENGES TO ARBITRATOR BIAS


By Thomas D. Cunningham and Jen C. Won

Every state has unclaimed property laws that declare property abandoned after

a certain dormancy period. The property is then turned over to the state, which

tries to find the rightful owner. But in many instances no one steps forward,

and the state retains beneficial use of the money. With budgets becoming

increasingly stretched, state regulators have shown renewed vigor in enforcing

unclaimed property laws. Several states and their contingency fee-based audi-

tors are increasingly targeting the life insurance industry, including small to

mid-sized life insurers, through unclaimed property audits and market conduct

examinations. These actions have brought to the fore the question: must life

insurers affirmatively search for potentially deceased insureds or permit their

regulators to do so? This article highlights some of the statutory, contractual

and litigation elements of that question as respects unclaimed property law.

Historical Unclaimed Property Practices

Laws requiring abandoned or unclaimed property to be turned over or

“escheated” to the state have existed since feudal times. Modern statu-

tory unclaimed property regimes generally are based on one of three Uniform

Unclaimed Property Laws, enacted in 1954, 1981 or 1995. These statutes are

custodial in nature, such that the state holds the property for its rightful owner

and attempts to return it to the owner. Under these laws, the state stands in the

shoes of the true owner. That is, the state’s rights in the unclaimed property are

derivative of those of the owner, and the state can only take whatever interest

the owner has in the property. Accordingly, the state can only escheat property

that is due and payable by the holder to the owner.

Outside of insurance, the trigger for unclaimed property laws is generally

based on loss of contact with the property owner. This makes sense because

it is clear to whom such property belongs and when it is due and owning. For

example, deposits in a bank account or credits on a gift card belong to the

respective owners and not the bank or gift card issuer. Moreover, such monies

are immediately due and payable upon demand. Thus, if the bank or gift card

issuer has lost contact with the owner of those funds and the dormancy period

has expired, the holder is to report those monies and escheat them to the state.

The same is not true for life insurance. Under most life insurance policies and

the laws regulating them, a life insurer’s obligation to pay death benefits arises

only after being notified that an insured has died and receiving due proof of

death. Accordingly, for life insurance proceeds, “property” is defined as the

amount “due and payable” under the terms of a life insurance policy. Life

insurance proceeds due and payable are “presumed abandoned” for unclaimed

property law a set number of years (typically three to five) after the obligation

to pay arose. Absent such notice and due proof of death, no death benefits are

due and payable and so there is nothing to escheat. But what if the insured

dies and no claim is ever made? To address that situation, a second trigger for


Under most life insurance policies and the laws regulating them, a life insurer’s obligation to pay death benefits arises only after being notified that an insured has died and receiving due proof of death.

[…] must life insurers affirmatively search for potentially deceased insureds or permit their regulators to do so?

4

escheatment has developed for life insurance proceeds. When the insured on

a life insurance policy attains or would have attained the “limiting age” (i.e.,

the age by which actuaries assume an insured has died, typically around 100

years old), state unclaimed property laws require the life insurer to escheat any

death benefits associated with that policy. The life insurance industry and its

regulators operated for decades with this common understanding of when life

insurance proceeds become unclaimed property.

Changing Landscape in Unclaimed Property Laws

Over the past few years, however, certain contingency fee unclaimed prop-

erty auditors and the states retaining them have grown dissatisfied with this

approach. These entities have taken the position that life insurers must use

the Social Security Administration’s Death Master File (“DMF”) to ascertain

whether insureds are deceased and benefits are payable under life insurance

policies, or to permit the states and their outside auditors to achieve the same

result by themselves using the DMF and reporting the results to life insurers.

These obligations, some insurers respond, have no basis in law and are contrary

to the terms of life insurance policies and statutes, which require settlement

and payment of death benefits only upon receipt of a claim and due proof of

death, for which an insurer may require a certified death certificate.

Some states, such as New York, Maryland and Kentucky, have enacted rules

or laws requiring DMF searches. Other states have enacted no such laws, but

arguably sought to achieve the same result by undertaking seriatim unclaimed

property audits or market conduct examinations of life insurers on potential

violations. To this end, a task force from the National Association of Insurance

Commissioners (“NAIC”) has announced multi-state market conduct exami-

nations of more than 40 life insurers respecting unclaimed property law and

unfair claim practices and thereafter has announced settlements with 18 of

those insurers. The settlements, called Global Resolution Agreements, gener-

ally require the companies to perform DMF searches on a regular basis and

generate monthly reports for review.

Litigation Developments

This increase in regulatory activity has also spawned increased litigation.

State regulators, as well as private litigants, have alleged that life insurance

companies have breached their duties of good faith and fair dealing and have

not complied with state unclaimed property laws in failing to cross-check their

in-force business against the DMF. In response, some insurers have challenged

certain aspects of recently enacted legislation and regulatory audits. To date,

however, every court to have considered the assertion that life insurers are

obliged to conduct DMF comparisons or otherwise affirmatively search for

potentially deceased insureds in the absence of an express rule or statute has

rejected it.

These entities have taken the position that life insurers must use the Social

Security Administration’s Death Master File (“DMF”) to ascertain whether

insureds are deceased and benefits are payable under life insurance policies, or

to permit the states and their outside auditors to achieve the same result by themselves using the DMF and

reporting the results to life insurers.

These obligations, some insurers respond, have no basis in law and

are contrary to the terms of life insurance policies and statutes [...]

To date, however, every court to have considered the assertion that life

insurers are obliged to conduct DMF comparisons or otherwise affirmatively

search for potentially deceased insureds in the absence of an express

rule or statute has rejected it.

5SIDLEY AUSTIN LLP 2014 INSURANCE AND REINSURANCE LAW REPORT

Private Litigation Against Insurers

In one such case, Andrews, private plaintiffs filed class action complaints alleg-

ing that their insurers breached their duty of good faith and fair dealing by

failing to use the DMF in identifying possible deaths of policyholders. Andrews

v. Nationwide Mutual Insurance Company, No. 979891, 2012 WL 5289946 (Ohio

Ct. App. Oct 25, 2012). The court rejected the argument, noting that the

life insurance contracts “expressly require[d] ‘receipt’ of ‘proof of death.’”

Use of the terms “receiving” and “receipt” “demonstrate[d] [the life insur-

ers’s] passive role” in establishing proof of death, the court found. The court

expressly refused to “import additional unspoken duties and obligations” into

the contracts. Likewise, in Total Asset Recovery Servs., LLC v. MetLife, Inc., No.

2010-CA-3719 (Fla. Cir. Ct. Aug. 20, 2013) (appeal pending), a court held that

Florida “has not adopted a law requiring [insurers] to consult the Death Master

File” or “to engage in elaborate data mining of external databases . . . in connec-

tion with payment or escheatment of life insurance benefits.”

More recently, in Feingold v. John Hancock Life Ins. Co., No. 13-2151 (1st Cir.

May 27, 2014), the First Circuit upheld the dismissal of a beneficiary’s claim that

a life insurer had an affirmative duty to search the DMF. In reaching this deci-

sion, the Circuit Court held that language in the policy requiring submission of

a proof-of-death form before paying a claim was consistent with state law. Id.

at *13. The court also rejected the argument that the plaintiff could bootstrap

common law claims against the insurer based solely on its signing of a Global

Resolution Agreement. Id. at *9.

Litigation Involving Regulators

In West Va. ex rel. Perdue v. Nationwide Life Ins. Co., No. 12-C-287 (W. Va. Cir.

Ct. Dec. 27, 2013), a West Virginia court considered several lawsuits filed by

the West Virginia State Treasurer against life insurers for failure to turn over

unclaimed life insurance proceeds to his office. The allegations were that each

insurer’s statutory duty of good faith and fair dealing required it to conduct

annual examinations of life insurance policyholders to determine if they are

deceased or three years past the limiting age. The West Virginia Treasurer

alleged that such information is readily available by searching the DMF or

other third party databases. The court began its analysis with West Virginia’s

Unclaimed Property Act (“UPA”). That law, it found, defines “property” as

respects life insurance proceeds as “an amount due and payable under the

terms of an annuity or insurance policy, including policies providing life insur-

ance.” Id. at 5. Only property “presumed abandoned” must be turned over

or reported to the administrator, the court noted. As respects life insurance

proceeds, property is “presumed abandoned” under West Virginia unclaimed

property law “three years after the obligation to pay arose or, in the case of a

policy or annuity payable upon proof of death, three years after the insured has

attained, or would have attained if living, the limiting age under the mortality

table on which the reserve is based.” Id. at 5-6. Turning next to the insurance

laws, the court noted that the West Virginia Insurance Code requires life insur-

ance policies delivered or issued in the state to include language conditioning

RECENT DEVELOPMENTS IN LIFE INSURANCE UNCLAIMED PROPERTY LAW6

an insurer’s liability upon the presentation of a claim, which in turn required a

claimant to provide an insurer with notice giving rise to liability under a policy.

Id. at *6.

Reading the UPA and the Insurance Code in conjunction, the court found that

“receipt of due proof of death” required to be in each of the subject policies

was the trigger giving rise to an “obligation to pay” under the UPA. Absent

statutorily required receipt of due proof of death, the court found, there were

no life insurance proceeds “due and payable” and hence no “property.” Thus,

the court found, the “State Treasurer’s argument that the UPA applies to life

insurance proceeds before those proceeds meet the definition of ‘property’ and

before they are ‘presumed abandoned’” must fail. Id. at *7. Furthermore, the

court found, the argument that the UPA imposes an affirmative duty to search

the DMF is inconsistent with the UPA’s limiting age trigger, which expressly

provides a mechanism for unclaimed life insurance proceeds to be remitted

in the event the insurer never receives due proof of death from a claimant.

Id. at *8. Under the UPA, the “only two statutory triggers for the unclaimed

property dormancy period are receipt of due proof of death and the limiting

age.” Id. Based upon the “clear and unambiguous” language of the UPA and the

Insurance Code, the court found that defendants “have no obligation to sur-

render the life insurance proceeds under the UPA until the obligation to pay

arises – either upon receipt of due proof of death or once the insured reaches

the statutorily imposed limiting age” and dismissed the case. Id. at *9.

Other lawsuits challenging regulator actions respecting life insurer unclaimed

property audits or market conduct examinations are pending in California and

Illinois.1 Decisions in these cases should shed further light on the important

question of what obligation, if any, do life insurers have to affirmatively search

for deceased policyholders in the absence of an express rule or statute.

1 E.g., Chiang v. American National Ins. Co., Case No. 34-2013-00144517 (Sup. Ct. Cal. Oct. 9, 2013); Chiang v. Kemper Corp., et al., Case No. 34-2013-00148154 (Sup. Ct. Cal. Oct. 16, 2013); United Ins. Co. of America, et al. v. Boron, et al., Case No. 13-20383 (Ill. Cir. Ct., Sept. 4, 2013).

Decisions in these cases should shed further light on the important question

of what obligation, if any, do life insurers have to affirmatively search

for deceased policyholders in the absence of an express rule or statute.




By Eric S. Mattson

Think back to elementary school. Some of you will remember teachers who

thought it was a good idea – sound discipline, even – to punish the entire class

when a few kids misbehaved. Class actions, when improperly certified, are kind

of like that, only in reverse: an entire class of individuals, including people who

suffered no harm and were subjected to no misconduct, can obtain a windfall

because a handful of people within the class arguably suffered harm. And the

consequences to the legal system and defendants alike can be dire.

Mind you, class actions are not supposed to work like that. In general, a class

should be certified only when the claims of everyone in the class can be fairly

and efficiently resolved by adjudicating the claims of a single class represen-

tative. As one court put it, “As goes the claim of the named plaintiff, so go the

claims of the class.” See Sprague v. General Motors Corp., 133 F.3d 388, 399 (6th

Cir. 1998) (describing “typicality” requirement of Rule 23(a)(3)). In other words,

if everyone in the class is truly “in the same boat” vis-à-vis the defendant, then

the legal outcome for one can fairly stand as the binding legal outcome for many.

“If everyone in the proposed class is, in some sense, the victim of the same

wrong (though, perhaps, to varying degrees), then it would seem straightfor-

ward for the court to recognize that cohesiveness by way of class certification.”

Richard A. Nagareda, Class Certification in the Age of Aggregate Proof, 84 N.Y.U.

L. Rev. 97, 102 (2009).1

Why is this principle so important? One reason is that the class certification

device, a procedural tool, cannot be used to change the substantive law. Elements

of claims do not magically disappear in class actions, and defendants do not

lose their right to assert affirmative defenses just because a class is certified.

Indeed, the Rules Enabling Act, 28 U.S.C. § 2072 – the statute that authorizes the

Supreme Court to promulgate rules (including Rule 23, the foundation of class

action practice in federal courts) – comes with a critical limitation: The rules

“shall not abridge, enlarge or modify any substantive right.” 28 U.S.C. § 2072(b).

Of late, courts around the country have been taking these principles more

seriously than in years past. Gone are the days when courts would routinely

assume the truth of the allegations in a complaint when deciding whether to

certify a class. In Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541, 2551-52 (2011),

and again in Comcast Corp. v. Behrend, 133 S. Ct. 1426, 1432 (2013), the Supreme

Court emphasized that a class action plaintiff “must affirmatively demonstrate

his compliance” with the requirements of Rule 23. In Wal-Mart, the Court tight-

ened the requirements for demonstrating the existence of “questions of law or

fact common to the class” under Rule 23(a)(2); in Comcast, it tightened the Rule

23(b)(3) requirement for showing that common questions “predominate over

any questions affecting only individual members” of the putative class.

1 Available at http://ssrn.com/abstract_id=1247720

In general, a class should be certified only when the claims of everyone in the class can be fairly and efficiently resolved by adjudicating the claims of a single class representative.

[…] the class certification device, a procedural tool, cannot be used to change the substantive law.

8

Understandably, the legal commentariat has closely scrutinized Wal-Mart and

Comcast, which, taken together, have tilted the playing field in favor of class

action defendants. But the vast majority of class actions never reach the Supreme

Court, and despite the enactment of the Class Action Fairness Act of 2005, 28

U.S.C. § 1332(d), and its expansion of federal jurisdiction over class actions,

many class actions are still adjudicated in state courts. Out in the trenches –

in state courts, in federal district courts and in federal appellate courts – the

results have not been as one-sided as they have been in Washington, D.C.

This article discusses two starkly different approaches to class certification

taken this past year by two different state supreme courts. Both cases were

brought against insurance companies over claims-handling practices, but the

similarities end there. The cases illustrate the fact that, while the balance of

power in class actions has shifted in favor of defendants, cases that should not

be certified as class actions still can be.

Class Actions Against Insurance Companies

Insurance companies have been regular targets of class actions for nearly two

decades. The subjects of these lawsuits have been many and varied, ranging

from “vanishing premium” policies to senior citizen annuity sales; from the use

of the Ingenix database to the use of “retained asset accounts”; and from the use

of “aftermarket” auto parts to the receipt of “revenue sharing.” It would be a

mistake to underestimate the creativity of the plaintiffs’ class action bar when

it comes to crafting legal theories to pursue against the insurance industry.

With some notable exceptions (such as claims under the Telephone Consumer

Protection Act, 47 U.S.C. § 227), class actions against insurance companies

tend to fall into one of two categories. The first involves how the product was

sold. Was the purchaser misled in some material way when buying a policy?

The second involves whether promised benefits were actually provided. Is the

company somehow short-changing policyholders?

The two cases discussed in this article fall into the latter category; that is, they

involve claims that insurance companies somehow short-changed their policy-

holders in the claims-handling process. In one case, we will see, the court took

the teachings of recent Supreme Court jurisprudence seriously; in the other,

the court purported to follow Wal-Mart, but in reality did not.

Ohio

Our first case involved a claim that State Farm did not tell policyholders with

damaged windshields about all of the benefits they could receive. Rather than

paying to replace the windshields, State Farm paid to repair some of them with

a chemical compound that was supposedly an inferior fix. Cullen v. State Farm

Mut. Auto. Ins. Co., 999 N.E.2d 614, 618 (Ohio 2013). According to the plaintiff,

State Farm’s claim representatives relied on a company-prepared script to per-

suade policyholders to choose the repair option rather than the replacement

cost of the windshield (minus any deductible). Id. at 618-19.

[…] while the balance of power in class actions has shifted in favor of

defendants, cases that should not be certified as class actions still can be.


Ohio’s class action rule is “virtually identical” to Rule 23, so Ohio courts, like

many other state courts, look to federal authorities for guidance on whether

a class should be certified. Id. at 622. The Ohio Supreme Court relied on Wal-

Mart and Comcast to set the stage for its holding that myriad contested issues

were individualized, and that these issues precluded certification. This ruling

was unquestionably faithful to those Supreme Court cases and the “all in the

same boat” principles underlying them.

State Farm pointed out, and the court agreed, that it could not be liable “if an

individual class member knowingly chose windshield repair – but individual

consent and knowledge cannot be proven with common evidence.” Id. at 626.

Similarly, “if a windshield repair could return a vehicle to preloss condition

. . . State Farm’s liability would be subject to individual examinations of each

vehicle, not common questions.” Id.

As for the claim that State Farm systematically failed to inform policyholders

of their options, the court found that “policyholders had various individual,

unscripted conversations” with claim representatives and others, “and there is

no common proof of what any individual policyholder knew when consenting to

windshield repair.” Id. As a result, “[d]etermining whether State Farm breached

any obligations to insureds necessarily entails an individualized inquiry into

each of these communications.” Id.

The court went on to find other fatal dissimilarities in the claims of class

members. Id. at 626-28. In so doing, it adhered to the principle that class cer-

tification is a procedural device. It is not supposed to be used to turn losing

claims into winners, or vice versa. For example, in the State Farm case, if a

class member had a losing claim because he consented, with full knowledge,

to a repair rather than a replacement, then his claim could not succeed merely

because someone else (the class representative, perhaps) did not consent.

It is no answer to this to say, as some plaintiffs’ lawyers do, that class actions

facilitate the prosecution of small claims that would never be prosecuted unless

they could be aggregated into class actions. It’s true that one of the justifications

for class actions is that they make small claims marketable through the device

of aggregation. But this cannot change substantive law. “[T]he class action

was never designed to serve as a freestanding legal device for the purpose of

‘doing justice,’ nor is it a mechanism intended to serve as a roving policeman

of corporate misdeeds or as a mechanism by which to redistribute wealth.”

Martin H. Redish, Wholesale Justice: Constitutional Democracy and the Problem

of the Class Action Lawsuit 22 (Stanford University Press 2009). Instead, it is

“an elaborate procedural device designed to facilitate the enforcement of pre-

existing substantive law.” Id. The State Farm opinion provides a good example

of a court following these principles.

The Ohio Supreme Court relied on Wal-Mart and Comcast to set the stage for its holding that myriad contested issues were individualized, and that these issues precluded certification.

WAL-MART IS TRICKLING DOWN – UNEVENLY – TO CLASS ACTIONS AGAINST INSURANCE COMPANIES10

Montana

We now move west to Montana. In contrast to Ohio’s approach, Montana’s

supreme court has issued an opinion that turned a blind eye to individualized

issues and, despite purporting to follow Wal-Mart, certified a class that cannot

be squared with that precedent.

The case is Jacobsen v. Allstate Insurance Co., 310 P.3d 452 (Mont. 2013). Like

the Ohio case, Jacobsen involved the theory that an insurance company sys-

tematically short-changed its policyholders in the claims process. The theory

was based on Allstate’s use of claims guidelines that, according to the court, was

designed to “fast track settlements and reduce the amount paid out on claims.”

Id. at 455. The guidelines accomplished this goal, the court said, by encouraging

claims adjusters to establish contact with claimants quickly and to work with

them in an empathetic manner to resolve their claims. Id. at 458. What seemed

most bothersome to the court was the alleged use of an “attorney economics”

script that was allegedly intended to dissuade claimants from hiring lawyers.

Id. at 458-59. This was done, according to the court, because “represented

claimants generally received higher settlements.” Id.

The court acknowledged in passing that the plaintiff’s “requested relief and

alleged bases for damages are not entirely clear.” Id. at 464. Let’s pause and con-

sider that statement for a moment. If the requested relief and basis for damages

are unclear, how can a class be certified? One of the fundamental questions of

class certification is whether the claims can be fairly and efficiently resolved on

a classwide basis. If it is not clear what claims and theories are actually at issue,

then it is hard to see how a class can be certified. Yet in Jacobsen, it was.

The court glossed over this problem and allowed plaintiff to proceed based on

the idea that class members may have suffered “actual harm” because Allstate

engaged in “an alleged zero-sum economic plan systematically reducing claims

payments to increase profits.” Id.; see also id. at 467. But even if this is so, it

begs the question of whether a class can be certified. Even if “the allegedly

unlawful conduct caused harm to the class as a whole,” as the court suggested

(id. at 468-69; emphasis added), that is a different issue than whether the claims

of every individual in the class can fairly be resolved in a single proceeding.

It assumes, without proof, that everyone in the class is in the same boat. For

instance, if Allstate gave a class member a fair and speedy resolution of his

claim, what injury has that claimant suffered? The court never answers this

question, but the answer seems obvious: no injury at all. Yet because a class

was certified, that same claimant, having already received a fair, speedy resolu-

tion of his claim, could obtain an additional payment – a windfall – if the claims

adjustment program is ultimately determined to be unfair at some “macro”

level.

The Montana court stated that “[t]he individual context of any one [claim resolu-

tion] is not relevant” to its ruling, nor is the fact that “not all class members have

suffered actual harm or an unfair adjustment.” Id. at 472. This is impossible

to square with Wal-Mart’s statement that “[c]ommonality requires the plaintiff

to demonstrate that the class members ‘have suffered the same injury.’” 131 S.

If it is not clear what claims and theories are actually at issue, then

it is hard to see how a class can be certified. Yet in Jacobsen, it was.


Ct. at 2551 (quoting General Telephone Co. of Southwest v. Falcon, 457 U.S. 147,

157 (1982)). And it confirms that the Montana court was open to changing the

substantive law via the procedural tool of class certification, so that individuals

with losing claims may nevertheless recover merely because they are members

of a certified class. Regrettably, the Montana opinion proves the truth of this

observation from one class action scholar: “[T]he modern class action may give

rise to as much harm as good; if not properly controlled it may wreak havoc on

the legal system and the values that underlie it.” Redish, supra, at 1-2.

Conclusion

Class certification is a critical issue, sometimes bordering on outcome-deter-

minative, in any putative class action. If a class is certified, the exposure to the

defendant can grow exponentially and may create pressure to settle, even if the

claims are weak. The Supreme Court has tightened the way the rules governing

class certification are applied, and to some extent, that guidance has been fol-

lowed around the country, in both federal and state courts. The Ohio opinion

well illustrates the effect of those Supreme Court opinions. The Montana

opinion shows that the battle is far from over.

WAL-MART IS TRICKLING DOWN – UNEVENLY – TO CLASS ACTIONS AGAINST INSURANCE COMPANIES12



By Charlene C. McHugh

Although it has been more than two years since the National Association of

Insurance Commissioners (“NAIC”) amended its credit for reinsurance model

laws, the NAIC remains active in assisting state insurance regulators with pro-

cedural aspects of the new laws. By way of background, in November 2011, the

NAIC adopted amendments to its Credit for Reinsurance Model Law (#785) and

Credit for Reinsurance Model Regulation (#786) (“CFR Model Laws”). In 2014,

the RTF will re-examine the current (reduced) collateral requirements set

forth in the Model to determine whether changes are needed (raising or lower-

ing collateral amounts). When the Model was drafted, new collateral amounts

were set with the intent that they be reviewed within two years of their use

by Certified Reinsurers. Since 2011, a number of states have adopted the CFR

Model Laws or are in the process of doing so. New York and Florida (property-

casualty only) had already amended collateral requirements by the time the

CFR Model Laws were passed.

The CFR Model Laws allow for a reduction in posted collateral from an unau-

thorized reinsurer that is approved by states as a “Certified Reinsurer.” In

deciding whether to certify a reinsurer, state insurance regulators evaluate a

number of factors, including whether a reinsurer is domiciled in a jurisdiction

the state considers to be a “Qualified Jurisdiction” (i.e., one that “effectively”

regulates reinsurers domiciled in the jurisdiction). States that have begun

certifying reinsurers include Connecticut, Florida, New Jersey and New York.

Since passing the CFR Model Laws, the NAIC through its Reinsurance (E)

Task Force has been providing a forum for multiple-state review of Certified

Reinsurer applications and has also created a process to help states determine

what constitutes a “Qualified Jurisdiction.”

Certified Reinsurer Application Review

The Reinsurance Financial Analysis Working Group (“RFAWG”) was created to

address specific applications by reinsurers that have already been approved as

Certified Reinsurers in Florida, Connecticut, New York and New Jersey. RFAWG

provides a forum for multi-state review of Certified Reinsurer applications and

for “peer review” by state insurance regulators of decisions made by other

states on applications. Peer reviews allow states to access diligence already

conducted by other states during the approval process. RFAWG has reported

that, as of year-end 2013, of the twenty-one reinsurer applications that had

been peer reviewed, eighteen were approved and two were still pending. One

application was denied (so that the reinsurer, certified in one state, must seek

individual approval in all other states).


In deciding whether to certify a reinsurer, state insurance regulators evaluate a number of factors, including whether a reinsurer is domiciled in a jurisdiction the state considers to be a “Qualified Jurisdiction” (i.e., one that “effectively” regulates reinsurers domiciled in the jurisdiction).

Since passing the CFR Model Laws, the NAIC through its Reinsurance (E) Task Force has been providing a forum for multiple-state review of Certified Reinsurer applications and has also created a process to help states determine what constitutes a “Qualified Jurisdiction.”

RFAWG provides a forum for multi-state review of Certified Reinsurer applications and for “peer review” by state insurance regulators of decisions made by other states on applications. Peer reviews allow states to access diligence already conducted by other states during the approval process.

14

Qualified Jurisdiction ProcessTo assist states in determining whether a reinsurer’s domicile is a “Qualified

Jurisdiction,” the NAIC adopted a written process in August 2013 for devel-

oping and maintaining a list of qualified jurisdictions (Qualified Jurisdiction

Process). In drafting the Qualified Jurisdiction Process, the NAIC recognized

the importance of consistency among states and took into account that some

states (e.g., Florida and New York) had already, in effect, made decisions on

certain countries when they certified 29 reinsurers domiciled in Bermuda, the

UK, Switzerland, and Germany. An “expedited review” is used for jurisdictions

that have already been vetted by states that granted Certified Reinsurer status

to reinsurers domiciled in those jurisdictions.

Qualified Jurisdiction Working GroupThe NAIC created a specific group to perform the jurisdictional analysis –

the Qualified Jurisdiction Working Group of the Reinsurance (E) Task Force

(“Working Group”). The Working Group is responsible for:

• initiating the evaluation process and coordinating the review of a

jurisdiction;

• making a preliminary determination as to whether the

jurisdiction under consideration meets the Qualified Jurisdiction

Process’ Standard of Review and is deemed acceptable to be

included on the NAIC List of Qualified Jurisdictions;

• communicating this information in written form to the

supervisory authority of the jurisdiction under review;

• considering any response from the jurisdiction, and then

preparing a final report for recommendation to the Reinsurance

Task Force and ultimately the NAIC’s Executive/Plenary

Committees; and

• coordinating the process for ongoing and periodic reviews.

Once a jurisdiction is approved, it is added to the NAIC’s List of Qualified

Jurisdictions (if not approved, reapplication is allowed at the NAIC’s discretion).

A Qualified Jurisdiction must agree to share information and cooperate on a

confidential basis with US state insurance regulatory authority with respect to

all certified reinsurers domiciled within that jurisdiction. The NAIC has also

created a Memorandum of Understanding (“MOU”) template for negotiation by

the NAIC with the Qualified Jurisdiction; the MOU will memorialize confiden-

tiality safeguards with respect to information shared between jurisdictions.

After approval, a Qualified Jurisdiction is subject to re-evaluation every five

years. Further, Qualified Jurisdictions are required to notify the NAIC of “any

material change in the applicable reinsurance supervisory system” that may

affect the status of the Qualified Jurisdiction. U.S. jurisdictions are expected

Once a jurisdiction is approved, it is added to the NAIC’s List of Qualified

Jurisdictions (if not approved, reapplication is allowed at the NAIC’s

discretion). A Qualified Jurisdiction must agree to share information and

cooperate on a confidential basis with US state insurance regulatory authority

with respect to all certified reinsurers domiciled within that jurisdiction.


to notify the NAIC if they receive notice of any such material change, or any

“adverse developments with respect to enforcement of final US judgments” that

may affect the status of the Qualified Jurisdiction.

Expedited Review Process

The Qualified Jurisdiction Process allows for expedited review of a jurisdic-

tion, after which the jurisdiction is designated as a Conditional Qualified

Jurisdiction. The expedited process facilitates the certification of reinsurers

domiciled therein until a complete evaluation is completed. Because certain

states have already approved reinsurers in Bermuda, Germany, Switzerland

and the UK, an expedited review procedure was used by the NAIC in analyzing

such jurisdictions. At year-end 2013, the NAIC announced that it had completed

its expedited review and had granted these jurisdictions Conditional Qualified

Jurisdiction status.

Standard of Review and Evaluation Methodology

The Qualified Jurisdiction Process emphasizes that jurisdictional evaluations

are intended to be “outcomes-based” comparisons to financial solvency regu-

lation under the NAIC ‘s accreditation program, adherence to international

supervisory standards and relevant international guidance for recognition of

reinsurance supervision. The Standard of Review for a jurisdiction’s qualifica-

tion is that the NAIC must reasonably conclude that:

• the jurisdiction’s reinsurance supervisory system achieves

a level of effectiveness in financial solvency regulation that

is deemed acceptable for purposes of reinsurance collateral

reduction;

• the jurisdiction’s demonstrated practices and procedures with

respect to reinsurance supervision are consistent with its

reinsurance supervisory system; and

• the jurisdiction’s laws and practices satisfy the criteria required

of Qualified Jurisdictions as set forth in the CFR Model Laws.

In evaluating a jurisdiction, the Working Group uses a specific Evaluation

Methodology set forth in the Qualified Jurisdiction Process, which considers

the jurisdiction’s:

• laws and regulations;

• regulatory practices and procedures;

• requirements applicable to US-domiciled reinsurers;

• regulatory cooperation and information sharing;

• history of performance of domestic reinsurers;

• enforcement of final US judgments; and


The Qualified Jurisdiction Process emphasizes that jurisdictional evaluations are intended to be “outcomes-based” comparisons to financial solvency regulation under the NAIC ‘s accreditation program, adherence to international supervisory standards and relevant international guidance for recognition of reinsurance supervision.

16

• allowance of solvent schemes of arrangement.

The specific laws, regulations, and regulatory practices are outlined below in

Appendices A and B.

Conclusion

States that have adopted reinsurance collateral reform (thus far, nineteen

states and at least five with pending bills) are beginning to process applications

for Certified Reinsurers, and many are using the NAIC’s uniform, multi-state

process. At year-end 2013, the NAIC announced that it will now review the

regulatory supervisory systems of Ireland and France, which have requested

approval as Qualifying Jurisdictions. It is expected that additional jurisdic-

tions, such as Japan, will be considered in the near future.

Appendix A: Laws and Regulations

1. Examination Authority

Does the jurisdiction have the authority to examine its domestic

reinsurers? This description should address the following:

a. Frequency and timing of examinations and reports.

b. Guidelines for examination.

c. Whether the jurisdiction has the authority to examine

reinsurers whenever it is deemed necessary.

d. Whether the jurisdiction has the authority to have complete

access to the reinsurer’s books and records and, if necessary,

the records of any affiliated company.

e. Whether the jurisdiction has the authority to examine officers,

employees and agents of the reinsurer when necessary with

respect to transactions directly or indirectly related to the

reinsurer under examination.

f. Whether the jurisdiction has the authority to share confidential

information with U.S. state insurance regulatory authorities,

provided that the recipients are required, under their law, to

maintain its confidentiality.

2. Capital and Surplus Requirement

Does the jurisdiction have the authority to require domestic

reinsurers to maintain a minimum level of capital and surplus to

transact business? This description should address the following:

a. Whether the jurisdiction has the authority to require reinsurers

to maintain minimum capital and surplus, including a

description of such minimum amounts.

b. Whether the jurisdiction has the authority to require additional

capital and surplus based on the type, volume and nature of

reinsurance business transacted.


c. Capital requirements for reinsurers, including reports and a

description of any specific levels of regulatory intervention.

3. Accounting Practices and Procedures

Does the jurisdiction have the authority to require

domestic reinsurers to file appropriate financial

statements and other financial information? This

description should address the following:

a. Description of the accounting and reporting practices and

procedures.

b. Description of any standard financial statement blank/

reporting template, including description of content/disclosure

requirements and corresponding instructions.

4. Corrective Action

Does the jurisdiction have the authority to order a

reinsurer to take corrective action or cease and desist

certain practices that, if not corrected or terminated, could

place the reinsurer in a hazardous financial condition?

This description should address the following:

a. Identification of specific standards which may be considered

to determine whether the continued operation of the reinsurer

might be hazardous to the general public.

b. Whether the jurisdiction has the authority to issue an order

requiring the reinsurer to take corrective action when it has

been determined to be in hazardous financial condition.

5. Regulation and Valuation of Investments

What authority does the jurisdiction have with

respect to regulation and valuation of investments?


a. Whether the jurisdiction has the authority to require a

diversified investment portfolio for all domestic reinsurers as to

type, issue and liquidity.

b. Whether the jurisdiction has the authority to establish

acceptable practices and procedures under which investments

owned by reinsurers must be valued, including standards under

which reinsurers are required to value securities/investments.

6. Holding Company Systems

Does the jurisdiction have laws or regulations with respect

to supervision of the group holding company systems of

reinsurers? This description should address the following:

NAIC CREDIT FOR REINSURANCE UPDATE18

a. Whether the jurisdiction has access to information via the

parent or other regulated group entities about activities or

transactions within the group involving other regulated or

non-regulated entities that could have a material impact on the

operations of the reinsurer.

b. Whether the jurisdiction has access to consolidated financial

information of a reinsurer’s ultimate controlling person.

c. Whether the jurisdiction has the authority to review integrity

and competency of management.

d. Whether the jurisdiction has approval and intervention powers

for material transactions and events involving reinsurers.

e. Whether the jurisdiction has authority to monitor, or has prior

approval authority over:

i. Change in control of domestic reinsurers.

ii. Dividends and other distributions to shareholders of the

reinsurer.

iii. Material transactions with affiliates.

7. Risk Management

Does the jurisdiction have the authority to require its domestic

reinsurers to maintain an effective risk-management function

and practices? This description should address the following:

a. Whether the jurisdiction has Own Risk and Solvency

Assessment (ORSA) requirements and reporting.

b. Any requirements regarding the maximum net amount of risk

to be retained by a reinsurer for an individual risk based on the

reinsurer’s capital and surplus.

c. Whether the jurisdiction has authority to monitor enterprise

risk, including any activity, circumstance, event (or series of

events) involving one or more affiliates of a reinsurer that, if not

remedied promptly, is likely to have a material adverse effect

on the financial condition or liquidity of the reinsurer or its

insurance holding company system as a whole.

d. Whether the jurisdiction has corporate governance

requirements for reinsurers.

8. Liabilities and Reserves

Does the jurisdiction have standards for the

establishment of liabilities and reserves (technical

provisions) resulting from reinsurance contracts?



a. Liabilities incurred under reinsurance contracts for policy

reserves, unearned premium, claims and losses unpaid, and

incurred but not reported (IBNR) claims (including whether

discounting is allowed for reserve calculation/reporting).

b. Liabilities related to catastrophic occurrences.

c. Whether the jurisdiction requires an opinion on reserves and

loss and loss adjustment expense reserves by a qualified actuary

or specialist for all domestic reinsurers, and the frequency of

such reports.

9. Reinsurance Ceded

What are the jurisdiction’s requirements with

respect to the financial statement credit allowed for

reinsurance retroceded by its domestic reinsurers?


a. Credit for reinsurance requirements applicable to reinsurance

retroceded to domestic and non-domestic reinsurers.

b. Collateral requirements applicable to reinsurance contracts.

c. Whether the jurisdiction requires a reinsurance agreement

to provide for insurance risk transfer (i.e., transfer of both

underwriting and timing risk).

d. Requirements applicable to special purpose reinsurance

vehicles and insurance securitizations.

e. Affiliated reinsurance transactions and concentration risk.

f. Disclosure requirements specific to reinsurance transactions,

agreements and counterparties, if such information is not

provided under another item.

10. Independent Audits

Does the jurisdiction require annual audits of domestic

reinsurers by independent certified public accountants or similar

accounting/auditing professionals recognized in the applicant

jurisdiction? This description should address the following:

a. Requirements for the filing of audited financial statements

prepared in conformity with accounting practices prescribed or

permitted by the supervisory authority.

b. Contents of annual audited financial reports.

c. Requirements for selection of auditor.

d. Allowance of audited consolidated or combined financial

statements.

e. Notification of material misstatements of financial condition.

f. Supervisor’s access to auditor’s workpapers.

g. Audit committee requirements.


h. Requirements for reporting of internal control-related matters.

11. Receivership

Does the jurisdiction have a receivership scheme for the

administration of reinsurers found to be insolvent? This should

include a description of any liquidation priority afforded to

policyholders and the liquidation priority of reinsurance

obligations to domestic and non-domestic ceding insurers

in the context of an insolvency proceeding of a reinsurer.

12. Filings with Supervisory Authority

Does the jurisdiction require the filing of annual and interim

financial statements with the supervisory authority?


a. The use of standardized financial reporting in the financial

statements and the frequency of relevant updates.

b. The use of supplemental data to address concerns with specific

companies or issues.

c. Filing format (e.g., electronic data capture).

d. The extent to which financial reports and information are

public records.

13. Reinsurance Intermediaries

Does the jurisdiction have a regulatory framework for

the regulation of reinsurance intermediaries?

14. Other Regulatory Requirements with respect to Reinsurers

Any other information necessary to adequately describe

the effectiveness of the jurisdiction’s laws and regulations

with respect to its reinsurance supervisory system.

Appendix B: Regulatory Practices and Procedures

1. Financial Analysis

What are the jurisdiction’s practices and procedures with

respect to the financial analysis of its domestic reinsurers?

Such description should address the following:

a. Qualified Staff and Resources

The resources employed to effectively review the financial

condition of all domestic reinsurers, including a description

of the educational and experience requirements for staff

responsible for financial analysis.

b. Communication of Relevant Information to/from Financial

Analysis Staff

The process under which relevant information and data

received by the supervisory authority are provided to the


financial analysis staff and the process under which the

findings of the financial analysis staff are communicated to the

appropriate person(s).

c. Supervisory Review

How the jurisdiction’s internal financial analysis process

provides for supervisory review and comment.

d. Priority-Based Analysis

How the jurisdiction’s financial analysis procedures are

prioritized in order to ensure that potential problem reinsurers

are reviewed promptly.

e. Depth of Review

How the jurisdiction’s financial analysis procedures ensure

that domestic reinsurers receive an appropriate level or depth

of review commensurate with their financial strength and

position.

f. Analysis Procedures

How the jurisdiction has documented its financial analysis

procedures and/or guidelines to provide for consistency

and continuity in the process and to ensure that appropriate

analysis procedures are being performed on each domestic

reinsurer.

g. Reporting of Material Adverse Findings

The process for reporting material adverse indications,

including the determination and implementation of appropriate

regulatory action.

h. Early Warning System/Stress Testing

Whether the jurisdiction has an early warning system and/or

stress testing methodology that is utilized with respect to its

domestic reinsurers.

2. Financial Examinations

What are the jurisdiction’s practices and procedures

with respect to the financial examinations of its domestic

reinsurers? Such description should address the following:

a. Qualified Staff and Resources

The resources employed to effectively examine all

domestic reinsurers. This should include whether the

jurisdiction prioritizes examination scheduling and

resource allocation commensurate with the financial

strength and position of each reinsurer and a description

of the educational and experience requirements for

staff responsible for financial examinations.


b. Communication of Relevant Information

to/from Examination Staff

The process under which relevant information

and data received by the supervisory authority are

provided to the examination staff and the process

under which the findings of the examination staff

are communicated to the appropriate person(s).

c. Use of Specialists

Whether the supervisory authority’s examination staff

includes specialists with appropriate training and/or

experience, or whether the supervisory authority otherwise

has available qualified specialists that will permit the

supervisory authority to effectively examine any reinsurer.

d. Supervisory Review

Whether the supervisory authority’s procedures for

examinations provide for supervisory review.

e. Examination Guidelines and Procedures

Description of the policies and procedures the supervisory

authority employs for the conduct of examinations, including

whether variations in methods and scope are commensurate

with the financial strength and position of the reinsurer.

f. Risk-Focused Examinations

Does the supervisory authority perform and document

risk-focused examinations and, if so, what guidance

is utilized in conducting the examinations? Are

variations in method and scope commensurate with

the financial strength and position of the reinsurer?

g. Scheduling of Examinations

Whether the supervisory authority’s procedures

provide for the periodic examination of all domestic

reinsurers, including how the system prioritizes

reinsurers that exhibit adverse financial trends or

otherwise demonstrate a need for examination.

h. Examination Reports

Description of the format in which the supervisory

authority’s reports of examinations are prepared, and

how the reports are shared with other jurisdictions

under information-sharing agreements.

i. Action on Material Adverse Findings

What are the jurisdiction’s procedures regarding

supervisory action in response to the reporting

of any material adverse findings?


3. Information Sharing

Does the jurisdiction have a process for the sharing of

otherwise confidential documents, materials, information,

administrative or judicial orders, or other actions with U.S.

state regulatory officials, provided that the recipients are

required, under their law, to maintain its confidentiality?

4. Procedures for Troubled Reinsurers

What procedures does the jurisdiction follow

with respect to troubled reinsurers?

5. Organization, Licensing and Change of Control of Reinsurers

What processes does the supervisory authority use

to identify unlicensed or fraudulent activities? The

description should address the following:

a. Licensing Procedure

Whether the supervisory authority has documented

licensing procedures that include a review and/

or analysis of key pieces of information included

in a primary licensure application.

b. Staff and Resources

The educational and experience requirements for

staff responsible for evaluating company licensing.

c. Change in Control of a Domestic Reinsurer

Procedures for the review of key pieces of

information included in filings with respect to a

change in control of a domestic reinsurer.



RECENT DEVELOPMENTS IN PRE-JUDGMENT CHALLENGES TO ARBITRATOR BIAS

By Daniel Thies

Federal courts have long had power under the Federal Arbitration Act (“FAA”)

to vacate an arbitral award because of arbitrator bias. See 9 U.S.C. § 10(a)(2).

The FAA does not, however, address the power of a court to remove an arbitra-

tor before or during an arbitration hearing. As a result, courts have historically

been all over the map on the question of whether they have power to interfere

with an ongoing arbitration because of alleged arbitrator bias or doubts about

an arbitrator’s qualifications. See Steven C. Schwartz, Reinsurance Law: An

Analytic Approach § 13.04[3] (rev. 2013) (“[T]he cases are inconsistent as to

whether the FAA permits a pre-hearing challenge to an arbitrator who does not

meet the requirements of the arbitration agreement.”). Several recent decisions

on arbitrator disqualification serve to muddy the water further, potentially

obscuring the legal rules applicable to the question and posing practical chal-

lenges to parties seeking to police arbitrator bias.

For example, in a decision from the Eastern District of Michigan, Star Insurance

Co. v. National Union Fire Insurance Co., No. 13-13807, 2013 U.S. Dist. LEXIS

130379 (E.D. Mich. Sept. 12, 2013), the court entertained a pre-hearing chal-

lenge based on alleged arbitrator conduct. Two other recent cases, however,

appear to have taken a different approach, indicating that alleged arbitrator

bias cannot be challenged in court before a final arbitral award is issued. See

Allstate Ins. Co. v. OneBeacon Am. Ins. Co., No. 13-12368, 2013 U.S. Dist. LEXIS

146826 (D. Mass. Oct. 8, 2013); IRB-Brasil Resseguros S.A. v. Nat’l Indem. Co.,

No. 11 Civ. 1965, 2011 U.S. Dist. LEXIS 136640 (S.D.N.Y. Nov. 29, 2011).

Another line of cases poses challenges to litigants trying to determine how and

when to pursue concerns about alleged arbitrator bias. One case addresses

ethical concerns with the use of panel e-mails in an attempt to show bias.

Northwestern Nat’l Ins. Co. v. Insco, Ltd., No. 11 Civ. 1124, 2011 U.S. Dist. LEXIS

50789 (S.D.N.Y. Oct. 3, 2011). Another case, by contrast, addresses the extent

to which arbitrators must make disclosures themselves of potential conflicts of

interest. Scandinavian Reins. Co. Ltd. v. St. Paul Fire & Marine Ins. Co., 668 F.3d

60 (2d Cir. 2012).

In light of these recent cases, parties to arbitration proceedings must care-

fully navigate the fraught issue of whether, when, and how to assert bias. With

careful planning and attention to detail, however, parties to an arbitration can

heed the lessons of these cases in their efforts to try to answer these questions.

I. Star Insurance Co. v. National Union Fire Insurance Co.

In Star Insurance v. National Union, the Eastern District of Michigan granted

a preliminary injunction enjoining an arbitration proceeding. Star Ins., 2013

U.S. Dist. LEXIS 130379, at *19. After an interim final award had been issued

against it on liability, one party alleged unauthorized communication between

opposing counsel and the opposing party-appointed arbitrator and alleged

[…] courts have historically been all over the map on the question of whether they have power to interfere with an ongoing arbitration because of alleged arbitrator bias or doubts about an arbitrator’s qualifications.

[…] parties to arbitration proceedings must carefully navigate the fraught issue of whether, when, and how to assert bias.

RECENT DEVELOPMENTS IN PRE-JUDGMENT CHALLENGES TO ARBITRATOR BIAS26

that these communications took place during a time period when ex parte

communications were not permitted. Id. at *13-17. The party against whom the

interim final award had been issued also alleged that the umpire and opposing

party-appointed arbitrator supposedly issued panel orders without the input of

the third arbitrator who was copied on the communications, but contended he

was on vacation. Id. at *17-18. According to the court, these acts were grounds

for enjoining the arbitration proceeding before addressing damages and before

issuance of the final arbitral award.

According to the court, four factors are considered in determining whether to

grant a preliminary injunction: (i) likelihood the moving party will prevail on

the merits, (ii) irreparable harm to the moving party if a preliminary injunction

is not issued, (iii) possibility of substantial harm to others, and (iv) impact on

the public. In its decision, the court stated that each factor favored the moving

party (i.e., the party against whom the interim final award on liability had been

issued by the arbitrators). The court accepted the moving party’s argument that

it would suffer injury to its “reputation, goodwill, and standing in the insurance

industry” if the anticipated $25 million arbitral award was issued against it. Id.

at *12. The court also determined that an exception to the general rule against

courts intervening in pre-final award arbitration proceedings was applicable,

and thus the moving party was likely to succeed on the merits because, in the

court’s view, the moving party “need only prove the fact of ex parte communi-

cations to prevail on the merits of a request to remove a panel member” (and

the court said the non-moving party “seems not to dispute the fact of the com-

munications”). Id. at *14, *17. The court found that there could be substantial

harm to others because, according to the court, the moving party “persuasively

argue[d] that no award, even if issued could be confirmed and reduced to judg-

ment until these issues are resolved.” Id. at *18. The court also found that the

“public interest favors the issuance of an injunction of the arbitration proceed-

ings, to probe further and to preserve the status quo.” Id. at *19.1

II. Allstate v. OneBeacon and IRB-Brasil v. National Indemnity

Two other cases represent a different approach. One case, Allstate v. OneBeacon,

involved an umpire who supposedly inadvertently discovered that one of the

parties had nominated him for service, contrary to the customary practice that

umpire candidates remain unaware of who nominated them and how they were

selected. Allstate Ins. Co., 2013 U.S. Dist. LEXIS 146826, at *3-4. As a result, the

other party sought to enjoin the arbitration proceeding on the ground that the

arbitrator’s knowledge would bias him in favor of the party who nominated

him.

The court rejected the moving party’s argument, noting first that pre-hearing

challenges to arbitrator bias are generally not allowed, except for narrow excep-

tions. Id. at *7. The court then rejected the moving party’s contention that the

arbitrator’s alleged knowledge fell into those exceptions because it violated the

1 The district court’s opinion was reversed by the Sixth Circuit on April 9, 2014. Savers Prop. & Cas. Ins. Co. v. Nat'l Union Fire Ins. Co., 748 F.3d 708, 712 (6th Cir. 2014).


contract’s requirement that the arbitrators be “disinterested.” Id. at *8. Thus,

the court indicated that it would not interpret such a clause as a contractual

prohibition on alleged potential arbitrator bias. Id. at *8.

Second, the court also applied a heightened standard for showing the irrepa-

rable harm necessary for obtaining a preliminary injunction. According to the

court, even if the moving party suffers an adverse judgment from a biased arbi-

trator, a sufficient legal remedy exists “in the form of a post-award challenge

to the arbitration proceeding.” Id. at *13. Because post-award challenges are

usually available, showing irreparable harm will be difficult under the standard

articulated in Allstate v. OneBeacon.

The court in IRB-Brasil v. National Indemnity reached a similar result. In that

case, a party-appointed arbitrator had supposedly communicated with several

candidates for umpire seeking to confirm their “interest, ability, and willing-

ness” to serve. Id. at *15. As a result, the moving party challenged the umpire’s

partiality, citing numerous industry authorities it said supported its position

that such ex parte communication is improper. The court did not accept the

moving party’s argument, stating that “parties are precluded from attacking

the partiality of an arbitration panel until after an award has been issued.” Id. at

*17. The court, therefore, and unlike in Star Insurance, did not issue a prelimi-

nary injunction to enjoin the arbitration proceedings.

III. Northwestern National Insurance Co. v. Insco, Ltd.

In another recent case, Northwestern Nat’l Ins. Co. v. Insco, the court addressed

ethical rules that supposedly limit the extent to which parties may rely on a

party-appointed arbitrator to investigate potential arbitrator misconduct by

other panel members. In that case, one party-appointed arbitrator allegedly

had concerns that the other party-appointed arbitrator had failed to make nec-

essary disclosures. Northwestern Nat’l Ins. Co., 2011 U.S. Dist. LEXIS 50789,

at *3-5. The party arbitrator who apparently had those concerns eventually

informed counsel of those concerns and apparently revealed panel communi-

cations with counsel, who then attached certain communications to a motion to

the entire panel. Id. at *5-7.

After receiving the motion attaching panel communications, the other party

brought a motion in federal court to disqualify the attorney who attached the

panel communications to the motion, alleging violation of ethical obligations

and arbitral guidelines. The court granted the motion after rejecting the argu-

ment that concerns about arbitrator bias justified acquisition of the panel

communications. Id. at *27-30. The court stated that “a party is never allowed to

probe the decision-making process of an arbitration panel to prove bias, except

in the most egregious of cases.” Id. at *27. Alleged concerns about an arbitra-

tor’s “failures to disclose appointments in other arbitrations” and “personal

conflicts of interest” did not amount to the necessary “negligence” or “mal-

feasance.” Id. at *28. Accordingly, the court entered an order disqualifying the

attorneys who obtained the panel communications.

Because post-award challenges are usually available, showing irreparable harm will be difficult under the standard articulated in Allstate v. OneBeacon.


IV. Scandinavian Reinsurance Co. v. St. Paul Fire & Marine Insurance Co.

Finally, yet another recent case reemphasizes the role of potential judicial

review regarding arbitrator disclosures. In Scandinavian Reinsurance Co. v.

St. Paul Fire & Marine Ins. Co, 668 F.3d 60, the moving party discovered two

months after the final arbitration award was issued that two of the three panel

arbitrators had apparently been involved in another arbitration involving

similar issues. Id. at 68. Although the panelists had all made a variety of other

disclosures, the moving party contended that two conflicted arbitrators had

failed to disclose the contemporaneous arbitration. Id.

The court stated that the arbitrators’ service in a contemporaneous, similar

proceeding was not, “without more, evidence that they were predisposed

to favor one party over another in either arbitration.” Id. at 74. The court

did not place any weight on the arbitrators’ alleged failure to disclose that

service, despite their disclosure of other potential conflicts. Id. at 76-77. The

court stated that arbitrators “need not live up to [their] announced standards

for disclosure” and do not need to “conform in every instance to the parties’

respective expectations regarding disclosure.” Id.

Nonetheless, the court stated that courts will continue to be concerned with

alleged nondisclosure of potential conflicts that are “material.” Id. at 77.

According to the court, the nondisclosure in Scandinavian Re—service in an

unrelated arbitration involving similar issues—was so minor that it will not

likely encourage arbitrators to leave more meaningful conflicts undisclosed.

The court, therefore, did not disturb the award.

V. Potential Significance of These Decisions

These decisions demonstrate the broad range of standards courts may apply to

questions of alleged arbitrator bias. For example, courts may give the term “dis-

interested” a unique interpretation depending on the facts and circumstances

of the dispute before them. In addition, even while acknowledging that alleged

misconduct had not been proven, a court could enjoin arbitration proceedings

to allow further investigation. Such cases, however, are few and far between,

and convincing a court to intervene in arbitration proceedings prior to a final

award will likely still require proof of actual arbitrator misconduct that explic-

itly violates a provision of the arbitration agreement.

Courts have also outlined a regime that requires arbitrators to disclose all

potential material conflicts themselves, while not encouraging arbitrators to

police the impartiality of others. Decisions in these areas give the parties them-

selves a relatively minor role to play prior to final judgment. The parties need

only remain vigilant to overt signs of bias and follow-up on disclosed conflicts

that present potential issues.

[…] the nondisclosure in Scandinavian Re—service in an unrelated

arbitration involving similar issues—was so minor that it will not likely

encourage arbitrators to leave more meaningful conflicts undisclosed.

[…] convincing a court to intervene in arbitration proceedings prior to a final award will likely still require

proof of actual arbitrator misconduct that explicitly violates a provision

of the arbitration agreement.

[…] convincing a court to intervene in arbitration proceedings prior to a final award will likely still require

proof of actual arbitrator misconduct that explicitly violates a provision

of the arbitration agreement.


Parties should be careful to raise potential indications of bias and to follow up

on them through inquiries to the panel. Parties should also document their

inquiries to avoid later accusations of waiver. Parties should not involve their

party-appointed arbitrator in the investigation of others.

VI. Conclusion

Judicial treatment of pre-hearing intervention in arbitration hearings because

of arbitrator bias continues to evolve. The conflicting messages that courts have

sent in this area require careful attention to the factual detail of the case and to

the subtleties of the applicable law. Litigants must continue to be sensitive to

potential bias claims early in the case and must pursue them vigorously. At the

same time, they must proceed with their eyes open to the significant potential

ethical and practical challenges that may stand in their way.

The conflicting messages that courts have sent in this area require careful attention to the factual detail of the case and to the subtleties of the applicable law.



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PROFILES OF THE AUTHORS

THOMAS D. CUNNINGHAM, a partner in Sidley’s Chicago office, has extensive experience arbitrating and litigating domestic and international reinsurance disputes on behalf of ceding companies, reinsurers and receivers. His practice encompasses the property and casualty and life and health fields. Tom has arbitrated or litigated numerous reinsurance disputes, addressing such issues as aggregation of claims, allocation of loss payments, ECO/XPL, late notice, lost contracts, follow the fortunes, pre-hearing security, cessions of declaratory judgment expenses and finite reinsurance issues. He also counsels companies on privacy, escheat and unclaimed property issues. Tom is a member of the firm’s Professional Responsibility Committee. Tom can be reached at +1.312.853.7594 or [email protected].

ERIC S. MATTSON is co-head of Sidley’s Insurance/Reinsurance Disputes practice and a partner in the Chicago office. The focus of his practice is the defense of consumer fraud, RICO, ERISA and Telephone Consumer Protection Act (“TCPA”) class actions. Much of his practice is dedicated to defending the insurance and financial services industry against the expanding array of class actions that challenge the industry’s products, methodologies and procedures. Eric can be reached at +1.312.853.4716 or [email protected].

CHARLENE C. MCHUGH is counsel in the firm’s New York office. Her practice focuses on the regulatory aspects of insurance and reinsurance transactions, including mergers and acquisitions, and representing clients in obtaining regulatory approvals of such transactions from state insurance departments. Charlene assists clients in forming and licensing insurance companies, captives, reinsurance companies, insurance producers and intermediaries; advises banks, investment banks, hedge funds and other financial institutions on the potential insurance regulatory aspects of structured financial products; and advises clients on credit enhancement and financial guaranty insurance products. Charlene is a regular participant at meetings of the National Association of Insurance Commissioners and has co-authored several insurance-related publications related to federal and state insurance legislative and regulatory proposals. Charlene can be reached at +1.212.839.5957 or [email protected].

DANIEL J. NEPPL, editor of the 2014 Insurance and Reinsurance Law Report, is a partner in the Insurance and Financial Services group in the firm’s Chicago office. Before entering private practice, Dan clerked for the Honorable C. Thomas White, Chief Justice of the Nebraska Supreme Court, and worked as Legal Counsel at National Indemnity Company in Omaha, Nebraska. His practice currently focuses on litigation and arbitration of commercial disputes, including insurance and reinsurance disputes. In the reinsurance area, he has represented cedents and reinsurers in matters involving all risk types, including annuity, casualty, financial guaranty, finite, life, and property risks. He has successfully arbitrated numerous disputes to final award, tried numerous cases to verdict, and briefed and argued appeals on reinsurance issues in the Third, Sixth, Seventh, and Ninth Circuits. Dan is licensed to practice in Illinois and New York. He can be reached at +1.312.853.7334 or [email protected].

DANIEL R. THIES is a litigation associate in Sidley’s Insurance and Financial Services Group in the firm’s Chicago office. His practice focuses on insurance and financial services class action defense, reinsurance litigation, and complex commercial litigation. Daniel has served as an Adjunct Professor of Law at the John Marshall Law School, teaching Intellectual Property Trial Advocacy. He currently serves as the ABA Young Lawyers Division Liaison to the Council of the ABA Section of Legal Education and Admissions to the Bar, and also is on the Section’s Publications Committee. Daniel is a member of the ISBA’s Federal Civil Practice Section Council, Standing Committee on Legal Education, Admission, & Competence, and the Young Lawyers Division Council. Daniel can be reached at +1.312.853.7571 or [email protected].

JEN C. WON is a litigation associate in Sidley’s Insurance and Financial Services group. Her practice focuses on insurance and financial services class action defense and reinsurance dispute litigation. Jen has a J.D. from Northwestern University School of Law, where she was Executive Articles Editor of the Journal of Criminal Law and Criminology. Prior to law school, she worked as a financial policy analyst in Washington, D.C. Jen can be reached at +1.312.853.0499 or [email protected].

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2014 INSURANCE & REINSURANCE LAW REPORT...The Insurance and Reinsurance Law Report is published by the Global Insurance & Financial Services Practice Group of Sidley Austin LLP. This