Reinsurance Update

This edition highlights a recent decision from the United States Court of Appeals for the Ninth Circuit affirming an arbitration award against a reinsurer who contended that the arbitrators violated the FAA by engaging in ex parte communications with expert witnesses.  We also include a brief legislative update regarding a recently-enacted federal law restricting arbitration clauses.

Ninth Circuit Upholds Arbitration Award Requiring Reinsurer to Pay More Than $400 Million
United States Life Ins. Co. v. Superior Nat’l Ins. Co., No. 07-55938, 10 Cal. Daily Op. Serv. 47, 2010 Daily Journal D.A.R. 103, 2010 WL 6384, 2010 U.S. App. LEXIS 41 (9th Cir. Jan. 4, 2010 )

After more than a decade of litigation regarding the reinsurance of certain workers’ compensation policies, the United States Court of Appeals for the Ninth Circuit recently affirmed an arbitration award against the reinsurer, U.S. Life Insurance Company (“U.S. Life”), for more than $400 million, plus interest.  At issue before the Ninth Circuit was whether the arbitrators violated the Federal Arbitration Act by holding an ex parte meeting with Panel-retained expert witnesses to assess whether the insurers engaged in improper claim handling.  The court held:  “The process employed by the arbitration panel, which included an ex parte meeting with panel-retained workers’ compensation experts was unusual; however, after deferentially reviewing the panel’s award, we determine that the arbitration process provided the parties with a fundamentally fair arbitration and that the arbitration award rested on a plausible interpretation of the governing arbitration documents.” 

Legislative Update – New Federal Law Restricts Arbitration Clauses

In December 2009, President Obama signed into law a Department of Defense appropriations bill that prohibited military contractors from enforcing mandatory arbitration clauses in their employment contracts.  See Department of Defense Appropriations Act, 2010, Pub. L. No. 111-118, 123 Stat. 3409 (2009).  More particularly, under section 8116 of the law, a defense contractor may not be awarded a contract in excess of $1 million by the Department of Defense if it “enter[s] into any agreement with any of its employees or independent contractors that requires, as a condition of employment, that the employee or independent contractors agree to resolve through arbitration any claim under title VII of the Civil Rights Act of 1964 or any tort related to or arising out of sexual assault or harassment . . . .”  This law, as well as other bills currently pending, represents a departure from the “national policy favoring [arbitration] and placing arbitration agreements on equal footing with all other contracts.”   United States Life Ins. Co., 2010 U.S. App. LEXIS 41, at *8 (internal citations and quotation marks omitted).  Although bills limiting arbitration agreements currently focus on consumer and employment disputes, any challenge to the validity of arbitration as a dispute resolution mechanism warrants observation by reinsurers given the critical role arbitration plays in resolving reinsurance disputes.  We will watch this trend carefully and report forward as necessary. 

If you have any questions regarding this or any other reinsurance matter, please contact:

John Jacobus, 202.429.6276 or jjacobus@steptoe.com
Jon Neumann, 602.257.5220 or jneumann@steptoe.com

For information regarding Steptoe's Government Affairs & Public Policy Group, please contact:

Scott Sinder, 202.429.6289 or ssinder@steptoe.com