10 Jul 2018
"Peter Rosen is a partner in the Los Angeles office of Latham & Watkins and the former global chair of the firm’s Insurance Coverage Litigation Practice. Most recently, he was the lead lawyer for the retail leaseholder at the World trade Center in the massive insurance coverage litigation arising out of the 9/11 attacks. He is recognized by Chambers usA as a leading lawyer in the insurance area and teaches insurance law and corporate governance at the usC Gould school of Law."
Eight months ago, I joined two of my policyholder counsel colleagues, Mitchell Dolin of Covington and Paul Zevnik of Morgan Lewis, on a panel chaired by Deirdre Johnson, now of Squire Patton Boggs, to discuss ARIAS•U.S.’s potential foray into the arbitration of direct insurance coverage disputes. Perhaps to the surprise of many in our audience, we all said we were cautiously optimistic that ARIAS could develop an attractive arbitration product for direct insurance coverage disputes.
Why were we cautiously optimistic? First, as litigators and trial lawyers, we recognize that there is a greater emphasis on arbitration as a binding forum to resolve controversies. Many of our commercial clients see arbitration as an efficient, speedy, and confidential alternative to litigation to resolve controversies. Moreover, as I describe in more detail below, we are seeing more and more commercial insurance policies with arbitration as a method—sometimes a binding method—to resolve disputes about the policies.
Most of the policies we see, however, are form policies sold to our policyholder clients without much input from our clients or their brokers, especially concerning their alternative dispute resolution (ADR) provisions. As policyholder counsel, it behooves us to ensure that, if the only ADR method made available in our clients’ policies is binding arbitration, the policies include a rules set that works with insurance coverage disputes. We also must be confident that the organization behind the development and implementation of this rules set is training and certifying arbitrators who are knowledgeable about direct insurance coverage disputes. As we discussed during our panel presentation, we see ARIAS (and its non-administered rules set) as a viable organization to provide this support.
Second, each of the arbitration and mediation organizations (e.g., the American Arbitration Association, JAMS, FedArb, the International Institute for Conflict Prevention & Resolution, and the International Chamber of Commerce) is encouraging its corporate members and their law firms to select it as the arbitration administrator (with its rules set) or as the provider of the non-administered rules set in the transactional agreements they sign and their law firms negotiate. For example, CPR, of which each of our firms is a member, has an online arbitration clause tool (available at https://www.cpradr.org/resource-center/model-clauses/clause-drafting/clause-selection-completion-tool) that its member clients and their law firms can use to draft arbitration clauses in their stock purchase agreements, merger agreements, and asset sales agreements. Similarly, JAMS provides that, if a rules set is not provided in an arbitration clause in which JAMS is designated as the arbitration administrator, the parties will default to JAMS’ rules set (see https://www.jamsadr.com/rules-comprehensive-arbitration).
These organizations generally encourage the parties to match the rules set (and the administrator, if the arbitration is not self-administered) in all of the agreements governing a transaction or relationship, including the insurance policies that will be affected by the transactions. However, they don’t yet provide the same level of training for, or the same degree of consistency among, insurance coverage dispute arbitrators and mediators that ARIAS can provide for direct insurance disputes arising out of these transactions (or, for that matter, any insurer-policyholder disputes). Similarly, while both JAMS and CPR have insurance coverage panels, both are largely self-selecting (with some level of scrutiny by the arbitration organization). Importantly, neither organization sponsors training for, or provides for certification of, mediators and arbitrators specializing in insurance disputes to an extent that is remotely similar to what ARIAS currently offers for reinsurance disputes. [add CiArb footnote] In the absence of training and certification, matching the rules set and, as appropriate, the administering arbitration organization set out in the underlying transactional documents may not make sense for the insurance policies that would come into play in the event there is an insurance coverage dispute arising under or out of the underlying transactional documents.
Coverage-in-Place Agreements
Third, aside from the policy-specific arbitration clauses discussed above, there are other areas of focus where ARIAS could provide meaningful arbitration products. Many coverage-in-place agreements provide for binding arbitration (during our panel discussion, we provided some examples). Following are three such agreements, one administered by the AAA, one administered by JAMS, and one utilizing CPR’s non-administered arbitration rules.
Example #1
The Parties agree that they will attempt to resolve any dispute arising from this Settlement Agreement through good faith negotiations for a period of thirty (30) days after written notification regarding such dispute. Thereafter, if the dispute remains unresolved, the Parties agree to submit the dispute to mediation. The Parties will conduct the mediation in such a manner that it shall be completed within ninety (90) days after good faith negotiations have failed to resolve the dispute. Thereafter, if the dispute remains unresolved, the Parties agree to submit the dispute to binding arbitration administered by the American Arbitration Association under its Commercial Arbitration Rules in effect as of the Effective Date. Unless the Parties agree otherwise, mediation and/or arbitration shall take place in New York, New York.
Example #2
11.2. In the event the mediation fails to resolve such dispute within ninety (90) days of any Party’s written request to mediate pursuant to Section 11.1, said dispute shall be submitted to and resolved by arbitration held through JAMS in New York, New York.
11.3. The dispute resolution procedures set forth in this Section 11 shall govern all disputes relating to, arising out or involving the construction or application of this Agreement, as well as any contention that a Party has failed to live up to is obligations under this Agreement.
Example #3
Binding Arbitration: If a mediated resolution to the dispute is not achieved within ninety (90) days of the selection of a mediator (or such additional time as the relevant Parties may agree in writing), any party pay serve a written demand for arbitration of the unresolved dispute.
The unresolved dispute shall be submitted to binding arbitration . . . before a single arbitrator selected by the relevant Parties with substantial background in risk management or insurance coverage law. If the relevant Parties cannot agree on the arbitrator within (30) days of a written demand for arbitration, then a panel of three arbitrators shall be selected by the relevant Parties pursuant to the Center for Public Resources’ Rules for Non-Administered Arbitration, subject to the relevant Parties’ agreement that all three arbitrators shall have a substantial background in risk management or insurance coverage law. The costs of the arbitration shall be shared equally . . . Each party to the arbitration shall bear its own costs and fees, including attorneys’ fees, in association with the arbitration.
Other coverage-in-place agreements provide for a multi-phase dispute resolution process—negotiation, mediation and arbitration—requiring the parties to select arbitrators with, as set out in example #3 above, “substantial background in risk management or insurance coverage law.” ARIAS clearly could provide a set of non-administered rules to govern coverage-in-place agreement arbitrations and supply certified arbitrators with the necessary background and experience.
Captive Insurance and Reinsurance
Captive insurance and reinsurance agreements are another opportunity for an ARIAS arbitration program. During our panel presentation, we highlighted the following provision in a captive insurance agreement:
XIX. GOVERNING LAW AND DISPUTE RESOLUTION
Any dispute or claim arising out of or relating to this Agreement, including its formation and validity, shall be referred to arbitration. The arbitration shall be conducted in accordance with the ARIAS U.S. Rules for the Resolution of U.S. Insurance and Reinsurance Disputes.
Arbitration shall be initiated by the delivery, by mail, facsimile, or other reliable means, of a written demand for arbitration by one party to the other . . .
The parties agree to submit to binding arbitration. The arbitration proceedings shall take place before a single arbitrator appointed pursuant to the ARIAS·U.S. Umpire Selection Procedure. Such arbitrator shall be either a present or former executive officer of insurance or reinsurance companies in the United Stated of America and shall be certified by ARIAS·U.S. The arbitrator shall be disinterested, shall not be under the control of either party, and shall have no financial interest in the outcome of the arbitration.
In another example we provided during our panel presentation, we noted that the policy between the insured company and its captive insurer did not have an arbitration clause, but the reinsurance agreement between the captive and its reinsurers contained the following:
1. Any dispute arising out of the interpretation, performance or breach of this Agreement, including the formation or validity thereof, shall be settled by a panel of three arbitrators; [and]
4. The arbitration shall take place in New York City, N.Y., unless the arbitrators select another location. Insofar as the arbitration panel looks to substantive law, it shall consider the laws of New York.
We also pointed out that the provision in the captive reinsurance agreement between the captive insurer and the company’s fronting insurer contained the following language:
Arbitration
a. As a condition precedent to any right of action hereunder, any dispute arising out of the interpretation, performance or breach of this Agreement, including the formation or validity thereof, shall be submitted for decision to a panel of three arbitrators . . .
d. All arbitrators shall have at least ten (10) years of insurance or reinsurance experience and be disinterested with knowledge about the lines of business at issue.
Specialty Insurance
As we note above, many of the specialty policies our clients purchase contain alternative dispute resolution clauses, all of which could benefit from an ARIAS-sponsored arbitration program. For example, AIG’s public entity directors and officers liability insurance policy has contained an ADR clause for many years. Its current form provides as follows:
ADR Options: All disputes or differences which may arise under or in connection with this Coverage Section, whether arising before or after termination of this policy, including any determination of the amount of Loss, shall be submitted to an alternative dispute resolution (ADR) process as provided in this Clause. The Named Entity may elect the type of ADR process discussed below; provided, however, that absent a timely election, the Insurer may elect the type of ADR. In that case, the Named Entity shall have the right to reject the Insurer’s choice of the type of ADR process at any time prior to its commencement, after which, the Insured’s choice of ADR shall control.
ADR Rules: In considering the construction or interpretation of the provisions of this policy, the mediator or arbitrator(s) must give due consideration to the general principles of the law of the State of Formation of the Named Entity. Each party shall share equally the expenses of the process elected. At the election of the Named Entity, either choice of ADR process shall be commenced in New York, New York; Atlanta, Georgia; Chicago, Illinois; Denver, Colorado; or in the state reflected in the Named Entity Address. The Named Entity shall act on behalf of each and every Insured under this Alternative Dispute Resolution Clause. In all other respects, the Insurer and the Named Entity shall mutually agree to the procedural rules for the mediation or arbitration. In the absence of such an agreement, after reasonable diligence, the arbitrator(s) or mediator shall specify commercially reasonable rules.
Specialty policies sold by other insurers also provide that any arbitration shall be conducted under ARIAS (UK) or ARIAS·U.S. rules.
E7 Jurisdiction and Governing Law / Arbitration
This policy shall be governed by a construed in accordance with the laws of England and Wales. All matters in difference between the parties arising under, out of or in connection with this policy, including formation and validity, and whether arising during or after the period of this policy, shall be referred to an arbitration tribunal. The seat and place of arbitration shall be in London.
The arbitration shall be conducted in accordance with the latest UK ARIAS Rules published at the time that the arbitration is commenced by the claimant (the party requesting arbitration), unless the rules conflict with this clause, in which case this clause will prevail . . .
Some even provide that ARIAS shall appoint the second and third arbitrators in the event the counterparty fails to timely appoint the second arbitrator or the parties cannot agree on the third arbitrator (this is from a product recall policy):
Arbitration
Seat: New York
Appointer: ARIAS (US)
Further, many of the transactional liability policies (representations and warranties and tax liability policies) insurers are placing in the United States contain ADR clauses:
(a) ADR Options. All disputes or differences which may arise under or in connection with this Policy, whether arising before or after termination of this Policy, including any dispute regarding the determination of the amount of Loss, shall be submitted to an alternative dispute resolution ("ADR") process as provided in this Section 9(a). The Named Insured may elect the type of ADR process discussed below; provided, however, that absent a timely election, the Insurer may elect the type of ADR process. In that case, the Named Insured shall have the right to reject the Insurer’s choice of the type of ADR process at any time prior to its commencement, after which, the Named Insured’s choice of ADR process shall control. The parties shall only be entitled to pursue judicial proceedings in connection with this Policy (which judicial proceedings shall be in accordance with Section 11(a) hereof) (i) in connection with a dispute, if the parties have first elected and complied with the mediation ADR process provided below with respect to such dispute, or (ii) to enforce any arbitral award.
The arbitrator will interpret this Agreement as an honorable engagement and will not be obligated to follow the strict rules of law or evidence. In making the award, the arbitrator shall apply the custom and practice of the property and casualty insurance and reinsurance industry in the United States of American with a view to affecting the general purpose of the Agreement. To the extent that the arbitrator looks to any state or federal law, the arbitration tribunal will apply the laws of State of Delaware.
There certainly are many other insurance companies that sell commercial liability and first-party insurance policies to policyholders that contain binding arbitration provisions, all of which could benefit from ARIAS-certified and -trained arbitrators.
The Path Forward
What, then, are the next steps? As my colleagues and I noted during our presentation, policyholders and their counsel have generally viewed ARIAS with suspicion because it handles only insurance industry disputes. Our concern is that, as largely an industry group, ARIAS is not well suited to handle direct disputes.
This can change (as we discussed during our presentation) with the identification and selection of arbitrators whom both insurers and policyholders will embrace. This will require a revamping of ARIAS’ certification process. Among the changes that likely will need to be made are the following:
modify the “Industry Experience” to include 10 years of specialization in representing policyholders in insurance-related matters;
add an Option D that permits a member to satisfy the eligibility requirements to be a certified arbitrator by participating as an arbitrator or umpire or as lead trial counsel in a certain number of direct dispute arbitrations; and
update the ARIAS·U.S. Rules, Code of Conduct, Practical Guide, and Panel Selection Procedures and Forms to account for the addition of direct insurance disputes arbitrators and mediators.
Peter Rosen’s article was first published in the ARIAS Quarterly (2018 Q2)