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SDNY Vacates Arbitration Award for Party-Arbitrator’s Nondisclosures

Reinsurance Alert | April 6, 2017
By: Justin K. Fortescue and Ciaran B. Way

The US District Court for the Southern District of New York recently vacated an arbitration award finding that a party-appointed arbitrator’s undisclosed relationship with the party appointing him was significant enough to demonstrate evident partiality. Certain Underwriting Members at Lloyd’s of London, et. al. v. Ins. Companies of America, Inc., Nos. 16-cv-232 and 16-cv-374 (S.D.N.Y. March 31, 2017).

In the arbitration, the panel was asked to determine whether the reinsurance contracts, covering workers’ compensation policies, only applied when multiple claimants were injured as the result of the same loss occurrence. After a three-day hearing, the arbitration panel issued an award in favor of the ceding company, Insurance Companies of America (ICA). After the award was issued, Lloyd’s discovered that ICA’s arbitrator had significant undisclosed relationships with principals at ICA and moved to vacate the award in federal court.

The reinsurance contracts called for a panel of three “disinterested” arbitrators, one appointed by each party and an umpire. ICA appointed Alex Campos as its arbitrator. When questioned about his relationship with ICA at the organizational meeting, Campos' sole disclosure was that ten years earlier he discussed some potential business dealings with ICA’s chairman Gary Hirst that never materialized, and that he had no involvement with ICA since then. Campos did not disclose that his company, Vensure Employee Services, Inc. (Vensure), was operated out of the same office suite as ICA or that he had known Ricardo Rios, Treasurer, Secretary and Director of ICA, since 2008. Campos also failed to disclose that he had hired Rios as the CFO of Vensure even though he had done so in the time between the organizational meeting and the hearing. In addition, although Rios attended all three days of the arbitration and provided testimony as a witness, neither Rios nor Campos acknowledged that they knew each other. The court found this “apparent willful avoidance” “troubling” and evidence that they were intentionally concealing their relationship.

The court rejected ICA’s argument that a reduced partiality standard, or none at all, should apply to a party-appointed arbitrator. The court found that the Second Circuit’s “traditional evident partiality standard applies” and the question was “whether the facts that were not disclosed suggest a material conflict of interest,” such that “a reasonable person would have to conclude that an arbitrator was partial to one party of the arbitration.” See Scandinavian Reinsurance Co. v. Saint Paul Fire & Marine Ins. Co., 668 F.3d 60 (2d Cir. 2012).

The court noted that although the Second Circuit has not adopted a specific test to determine evident partiality, it has relied on the Fourth Circuit’s four-prong test, which considers: (1) the extent and character of the personal interest, pecuniary or otherwise, of the arbitrator in the proceedings; (2) the directness of the relationship between the arbitrator and the party he is alleged to favor; (3) the connection of that relationship to the arbitrator, and (4) the proximity in time between the relationship and the arbitration proceedings. See Three S. Del, Inc. v. DataQuick Info. Sys., Inc., 492 F.3d 520, 530 (4th Cir. 2007). Applying these factors, the court held that Campos’ failure to disclose his close, on-going and longstanding relationships with principals of ICA required the arbitration award to be vacated.

This case is significant as it makes clear that the evident partiality standard applied to an umpire may also apply to party-appointed arbitrators. Given this ruling, parties should use their best efforts to ensure their arbitrator’s disclosures are accurate and complete and should be cognizant of the potential consequences of an arbitrator’s failure to make sufficient disclosures.

If you have questions or would like further information, please contact Justin Fortescue (215.864.6823; fortescuej@whiteandwilliams.com) or Ciaran Way (215.864.6815;wayc@whiteandwilliams.com).

This correspondence should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult a lawyer concerning your own situation and legal questions.
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