In the reinsurance world, when a dispute ensues between the same parties regarding one or multiple claims that arise under multiple treaties, a host of contentious issues can develop. An increasingly common fight between cedants and reinsurers is whether to arbitrate claims that arise under numerous treaties “separately on a contract-by-contract basis or collectively in a consolidated arbitration.” Certain Underwriters at Lloyd’s London v. Westchester Fire Ins. Co., No. 06-1457, 2007 WL 1673876, at *3 (3d Cir. June 12, 2007).
Why the Consolidation Fight?
Why do reinsurers and cedants fight over consolidation? Why does the issue of consolidation often escalate between the parties? There are a number of strategic reasons why parties in reinsurance disputes engage in this fight — and most of them only benefit the lawyers.
Reinsurers from whom a payment is sought on a particular claim under a number of treaties sometimes seek multiple separate arbitrations on the same claim (one per treaty) in the hopes that they will prevail in at least some of the arbitrations. Seeking multiple arbitrations on the same claim is also a tactic used from time to time to drive up the cost of arbitration and thus, force a settlement. In turn, cedants occasionally seek to consolidate smaller claims under many different treaties before one arbitration panel in order to achieve efficiencies of scale in the arbitration process, and in the hopes that the weaker claims will be swept along with the stronger ones in the panel’s decision. Cedants also argue that consolidating claims under different treaties before one panel allows for consistency across the implicated treaties.
History of Consolidation Law
Until recently, unless the parties agreed to consolidate, they had no choice but to arbitrate disputes (under more than one treaty) in multiple arbitrations because courts simply refused to consolidate separate contracts, even if the same parties and the same claims were involved. Reinsurers successfully argued that unless the treaties specifically set forth a right to consolidate disputes, the parties were entitled to separate arbitrations under each of the treaties. Case law supported this principle, dictating that courts were not allowed to consolidate arbitrations under separate contracts unless the right to consolidate was stated expressly in the contract itself. [See Government of U.K. v. Boeing Co., 998 F.2d 68, 74 (2d. Cir. 1993).] The courts reasoned that the Federal Arbitration Act (“FAA”) was designed to “enforce private agreements into which the parties had entered . . . even if the result was ‘piecemeal’ litigation.” Under this kind of reasoning, it was virtually impossible to consolidate disputes over separate treaties into one arbitration unless such an option was provided for in the treaties themselves.
The U.S. Supreme Court changed the lay of the land in Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84 (2002), holding that courts have the power to decide “gateway matters,” such as the validity of arbitration clauses, but procedural matters, such as the issue of consolidation, are not the courts’ business — they must be decided upon by the arbitrator or arbitrators. Since the Howsam decision, other courts have consistently held that consolidation is a procedural issue and, thus, an issue to be decided by arbitrators, not courts [See Certain Underwriters at Lloyd’s London v. Westchester Fire Ins. Co., No. 06-1457, 2007 WL 1673876 (3d Cir. June 12, 2007), which held that consolidation of disputes is a procedural issue to be resolved in arbitration; Certain Underwriters at Lloyds, London v. Cravens Dargan & Co., 197 Fed. Appx. 645 (9th Cir. 2006), which held that the district court did not error in deciding “not to establish the terms of the arbitration procedure and leaving that question to the arbitrator.”; Employers Ins. Co. of Wausau v. Century Indem. Co., 443 F.3d 573, 578 (7th Cir. 2006), which found that “consolidation [of arbitrations] is a procedural issue.”; Shaw’s Supermarkets, Inc. v. United Food and Comm. Workers Union, Local 791, AFL-CIO, 321 F.3d 251, 254 (1st Cir. 2003).]
There is nothing in the Federal Arbitration Act that limits arbitrators’ abilities to order consolidation when the contract in question is silent on the subject of consolidation. Thus, arbitrators now hold the power to decide the issue of consolidation. Courts have no authority to consolidate arbitrations other than to refer the parties to the arbitrators.
Consolidation: The Racing Game
While current case law is uniform in holding that arbitrators, not courts, must decide the issue of consolidation, a new game has emerged — a racing game — but the rules of the race are still unclear. Parties that have multiple treaties at issue in a dispute race to be the “first in time” to have a panel that is appointed on a single treaty make a decision about consolidation of other disputes. A recent case clearly illustrates this game.
In Clearwater Ins. Co. v. Granite State Ins. Co., 2006 WL 2827872 (N.D. Cal. 2006), the reinsurer filed five related petitions to compel arbitration, in five separate courts across the country, on five different treaties where the defendants claimed that the plaintiff owed unpaid balances. The parties could not agree on an umpire, but both parties wanted to be the first to have a full panel seated with an umpire of their liking appointed.
Thus, the plaintiff moved in court to compel the appointment of an umpire in four of the related petitions filed in the Northern District of California. At the same time, the cedants filed their own motion to compel arbitration in a Massachusetts state court. Before any of the Northern District of California courts ruled upon the motions to compel, the Massachusetts state court appointed an umpire, and thus, a complete panel was put in place on one of the treaties. Defendants sought to stay the four motions to compel arbitration in the Northern District of California, until the fully appointed Massachusetts panel decided a motion to consolidate. The Northern California District Court in Clearwater denied the stay of proceedings because it reasoned that it was for the panel to decide “[t]he issue of whether, when, and how to consolidate these arbitrations.” Ultimately, the parties settled the issue, largely by going forward with the panel completed by the Massachusetts appointment of an umpire — but not until both sides had paid substantial fees to their attorneys.
Both parties in Clearwater went to great lengths to be the “first in time” to have a complete panel seated and to have the panel rule on the issue of consolidation. This is an emerging trend in reinsurance arbitrations. However, a recent Pennsylvania District Court case has added a new twist to this race, holding that the issue is one for arbitrators to decide. In Argonaut Ins. Co. v. Century Indemnity Co., Case No. 05-5355, 2007 U.S. Dist. LEXIS 65863 (USDC E.D. Pa. Sept. 5, 2007), the parties had partially seated four different arbitration panels, but in only one of the panels had both parties appointed their arbitrator. The parties asked the court to decide which of the four arbitration panels should decide the consolidation question. Both parties wanted a court to rule that the “first-in-time” rule governed the decision, meaning the first panel that was fully constituted would be the panel to decide the issue of consolidation. The problem was that the parties disagreed as to which of the four panels was the first to be formed. The cedant argued that the fourth panel that was formed was really the “first in time” to be formed — not only because the fourth panel was formed pursuant to a demand that revoked the prior demands, but also because it was the only panel in which both parties had actually appointed a party-arbitrator.
The court left the mess in the hands of the parties, holding that the entire problem was “a matter of arbitral procedure for the arbitrator, and not a question of arbitratability for the Court.” The court further held that it lacked “the authority to dismiss (or to stay) an arbitration unless it is for the reason that a dispute is not arbitratable.” While the court noted that “principles of efficiency strongly favor a single arbitration panel’s determination of whether consolidation of reinsurance claims is appropriate,” it held that unless the parties “can sensibly jointly design a procedural roadmap,” all four arbitration panels “will have to agree upon a reasonable solution as to which panel must decide the issues.”
Lack of Clarity in Consolidation
At present, there is a decided lack of clarity in consolidation law. Little is set in stone beyond the fact that consolidation is an issue for the arbitrators, not courts, to decide. The racing game strategy adds many new wrinkles to the consolidation issue that will surely unfold in future disputes, but which currently remain unresolved, even after Clearwater and Argonaut. For example, in Argonaut, if two of the panels grant a motion to consolidate, while the other two deny it, which decisions will be binding? If all four panels were formed at the same time, which panel’s ruling would be upheld? Would it be the panel that ruled first? The courts have not answered these questions.
Because much is still uncertain, the only way for parties to ensure consolidation in future disputes is to include express consolidation language in their contracts. Parties desiring consolidation of disputes should insert a provision that plainly and succinctly provides for consolidation in the event that a dispute involving multiple contracts of reinsurance arises among the same parties. Otherwise, the parties will have no choice but to hope that they win the consolidation race, and that if they win, the decision is binding.