Avoiding Problems With Arbitrator Disclosures: Practical Lessons From Karlseng v. Cooke

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For many decades, the reinsurance marketplace has adopted arbitration as the preferred mode of dispute resolution. The expressed goals of arbitration are familiar — timely and efficient resolution of disputes by a panel of experts familiar with the intricacies of the business. One way that the Federal Arbitration Act (FAA) facilitates those goals is by promoting finality. The grounds for vacating an award pursuant to the FAA are highly limited and difficult to sustain. See 9 U.S.C. § 10(a).

Despite those obstacles, over the last several years it has become commonplace for losing parties to reinsurance arbitrations to challenge the award in court. Thus, even after a lengthy arbitration, the parties now often engage in months, or even years, of appellate litigation before learning whether an award will stand.

Because it is extremely difficult to challenge an arbitration award on the merits, many losing parties have based their efforts to overturn an arbitration award on alleged nondisclosures by arbitrators during the arbitrator appointment process. Among the limited grounds for vacating an award contained in the FAA is that an arbitrator displayed "evident partiality" in making the award. As interpreted by the courts over the years, the standard for proving actual partiality is appropriately onerous — akin to a finding of fraud or corruption by the arbitrators. Accordingly, cases where arbitrators were found to be actually biased have been extremely rare.

Going back to the United States Supreme Court's opinion in Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S. 145, 89 S. Ct. 337 (1968), however, courts have been more willing to vacate an award under the "evident partiality" standard based on nondisclosures of an arbitrator's personal monetary interest in the dispute — or with a party — from which partiality might be inferred. Indeed, reinsurance practitioners are eagerly awaiting the Second Circuit Court of Appeals forthcoming decision in Scandinavian Reinsurance Co. v. St. Paul Fire & Marine Insurance Co., 732 F. Supp. 2d 293 (S.D.N.Y. 2010). The opinion in that case should help further define the boundaries of required disclosures by arbitrators regarding their involvement in other potentially related arbitrations.

A recent decision by the Texas Appellate Court provides a new twist in this ongoing saga. Although the case was decided under the applicable Texas arbitration...