Reinsurance, Arbitrations and the Ever Increasing Authority of the Arbitrator

There has been a literal rush of interesting decisions out of the First Circuit and the Massachusetts District Court in the last few weeks, and I am going to try to catch up and comment on them over the next few days. One that jumped out at me, for various reasons, is a decision on whether an arbitrator or instead a federal court decides the collateral estoppel effect of a preceding reinsurance arbitration between an insurer and its reinsurers. In Employers Ins. Co. of Wausau v. OneBeacon American Insurance, the First Circuit concluded that it was an issue for the arbitrator to decide, and not for the court. There were several things that jumped out at me about this decision that made me want to note it and comment on it.

First off, I tried a reinsurance case in the Massachusetts state court’s business session years ago, which was fascinating, as much as anything, for the fact that it was in court at all. As the Employers Ins. opinion reflects, reinsurance disputes are almost always subject to arbitration. In my case, the dispute concerned money owed under a missing reinsurance contract from the 1960s, and no one could establish either its existence or, if it existed, its relevant terms, including whether it required arbitration. As a result, the case became one of the rare reinsurance cases to be tried, requiring first a ruling over the existence and terms of the reinsurance certificate and then one over the amount owed under it. The opinion in Employers Ins. really is, in some ways, about the vacuum-sealed nature of the reinsurance industry and disputes within it, in the sense of they are always, with extraordinarily rare exceptions, kept locked up tight within a system of arbitrations. It is nearly a purely private dispute resolution mechanism that controls that area of business, and the opinion in Employers Ins. reinforces that point, by the degree to which it emphasizes that the plaintiff could not avoid the arbitration system and move its dispute into court. 

 

Second, the case reflects the simple fact that once a business commits to an arbitration regime, they are not getting out of it. The standards for attacking an arbitration ruling in federal court make it nearly impossible to overturn a ruling and, as the Employers Ins. decision makes clear, even the most creative attempts to get around arbitrating a dispute after a company has agreed to that path are likely to be rejected out of hand by the courts. When it comes to arbitration, companies need to understand that the old rule of in for a dime, in for a dollar governs things: if you agree to an arbitration approach, you are stuck with it and are very unlikely to ever be able to get out from under that approach.