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Second Circuit Reverses District Court Holding on Evident Partiality, Confirms Arbitration Award

Reinsurance Alert | February 8, 2012
By: Michael Olsan and Brendan McQuiggan

In a decision with important implications for reinsurance arbitrators and reinsurance professionals alike, the United States Court of Appeals for the Second Circuit last week reversed a decision from the Southern District of New York, which had vacated an arbitration award based on the “evident partiality” of the arbitrators. The Second Circuit, in Scandinavian Reinsurance Company Ltd. v. Saint Paul Fire and Marine Ins. Co., No. 10-0910 (2d Cir. Feb. 3, 2012), found error in the district court’s conclusion that “evident partiality” was established by the failure of two panel members on the three-member arbitration panel to disclose that they were simultaneously serving as panel members in another, arguably similar arbitration that overlapped in time. The court held that, despite the similarities between the proceedings and the lack of disclosure, Scandinavian Re had not met its burden of establishing facts so suggestive of a bias that a reasonable person, considering all of the circumstances, would have to conclude that the arbitrators were partial to one side.

The St. Paul Arbitration

The underlying arbitration concerned a dispute between Scandinavian Re and St. Paul over the interpretation of a stop-loss retrocessional agreement, signed in 1999. After both parties entered run-off in 2002, a dispute arose over the ultimate liability that Scandinavian Re could face under the agreement and the number of “experience accounts” that the contract contemplated would be created for the premium (which was held by St. Paul). In 2007 the dispute was submitted to arbitration before a three-member panel, as required by the arbitration clause in the contract. St. Paul appointed Peter Gentile as its arbitrator. Paul Dassenko was selected as the umpire. Prior to the panel’s formal installation at a February 2008 organizational meeting, both Gentile and Dassenko made a variety of formal disclosures about their past employment in the insurance and reinsurance industries, their prior contacts with the parties and their employees, and their lack of prior involvement with the subject matter of the dispute. The panel acknowledged an ongoing responsibility to make additional disclosures. In August 2009, following an evidentiary hearing, Gentile and Dassenko returned a majority award in favor of St. Paul, finding that the contract carried an aggregate limit of approximately $290 million in liability.

The Platinum Arbitration

While proceedings in the St. Paul arbitration were ongoing, another arbitration involving a dispute over a reinsurance contract began between reinsurer Platinum Underwriters Bermuda, Ltd. and its ceding company PMA Capital Insurance Company. In the Platinum arbitration, Gentile was appointed as Platinum’s arbitrator, and Dassenko was appointed as the umpire. The reinsurance contract issue before the panel involved the method of calculating the balance of an “experience account” called for by the contract and Platinum’s business was related in several ways to the business of St. Paul. A past employee of both Scandinavian Re and Platinum testified in both proceedings. Neither Dassenko nor Gentile ever disclosed the fact of their concurrent service in the Platinum Arbitration to the parties in the St. Paul Arbitration.

Prior History and Appeal

In November 2009, Scandinavian Re filed a petition to vacate the award in the St. Paul Arbitration in the United States District Court for the Southern District of New York. Scandinavian Re asserted that Gentile and Dassenko’s failure to disclose their concurrent service in the Platinum Arbitration reflected bias by those arbitrators in St. Paul’s favor. St. Paul filed a cross-petition to confirm the award.[1] In February 2010, the district court concluded that the award was the result of “evident partiality,” one of the enumerated grounds for vacating an arbitration award under the Federal Arbitration Act (FAA), 9 U.S.C. §10(a)(2), and granted Scandinavian Re’s petition.  St. Paul appealed.      

The Second Circuit reversed, holding that Scandinavian Re did not successfully carry the heavy burden on the party seeking vacatur under the FAA for evident partiality. Short of proof of actual bias, “ an arbitrator is disqualified only when a reasonable person, considering all the circumstances, would have to conclude that an arbitrator was partial to one side.” Scandinavian Reins. Co., No.10-0910at *8 (internal citation omitted, emphasis in original). While failure to disclose a relationship with another party to an arbitration can, by itself, demonstrate evident partiality, the relationship must be known to the arbitrator and be “material” (meaning self-evidently suggestive of potential bias, such as a family connection or an ongoing business arrangement). Id. at *10.      

After analyzing the two proceedings along multiple lines of inquiry, the Court of Appeals disagreed with the district court’s conclusion that the similarities between the two proceedings could only lead a neutral observer to conclude that the arbitrators were biased towards St. Paul. For instance, the court said the simple fact of the overlap in participants  (which it noted was common in reinsurance matters) and the failure to disclose were not, by themselves, indicative of bias. Id. at *10. Nor were the substantive similarities between the contracts, the overlap in witnesses, or the past relationship between Platinum and St. Paul suggestive of a predisposition on the part of Gentile or Dassenko: “the fact that one arbitration resembles another in some respects does not suggest to us that an arbitrator presiding in both is somehow therefore likely to be biased in favor of or against any party.” Id. at *11.

The Second Circuit rejected Scandinavian Re’s argument that the non-disclosure, despite an acknowledged, continuing duty to disclose, was itself conclusive as to bias. The court refused to adopt perfect observance of a disclosure policy, even one’s own policy, as the standard for evaluating evident partiality: “[W]e do not think it appropriate to vacate an award solely because an arbitrator fails to consistently live up to his or her announced standards for disclosure, or to conform in every instance to the parties’ respective expectations regarding disclosure.” Id. at *12. 

Finally, the Court of Appeals rejected the argument, adopted by the district court, that knowledge acquired by Gentile or Dassenko in the Platinum Arbitration could have influenced their consideration of the evidence in the St. Paul Arbitration. Citing with approval to the Seventh Circuit’s decision in Trustmark Ins. Co. v. Jon Hancock Life Ins. Co., 631 F.3d 869, 873 (7th Cir. 2011), the court confirmed that arbitrators, like judges, are not disqualified merely because they acquired relevant knowledge in a previous proceeding. Id. at *13. While ultimately holding the lack of disclosure did not warrant vacatur, the court ended its opinion with an endorsement of full disclosure, which “not only enhances the actual and apparent fairness of the arbitral process, but . . . helps to ensure that the process will be final, rather than extended” by court proceedings. Scandinavian Re at *13.

For more information regarding this alert, please contact Michael Olsan (215.864.6278/ or Brendan McQuiggan.

[1] Scandinavian Re learned of the Platinum Arbitration after PMA filed a petition to vacate the Platinum arbitration award in the Eastern District of Pennsylvania. Ultimately, that award was vacated, and the district court’s decision to vacate the award was upheld on appeal. See PMA Capital Ins. Co. v. Platinum Underwriters Bermuda, Ltd., 659 F. Supp. 2d 631 (E.D. Pa. 2009); PMA Capital Ins. Co. v. Platinum Underwriters Bermuda, Ltd., 400 F. App’x 654 (3d Cir. 2010).  [Full Disclosure: White and Williams LLP represented PMA in the Petition to Vacate Arbitration Award and Platinum’s subsequent appeal]      

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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