United States: Introducing The ARIAS-US Panel Rules For The Resolution Of Insurance And Contract Disputes

Last Updated: October 11 2019
Article by Peter A. Halprin, David Ichel and Peter Rosen

In April 2017, ARIAS-US undertook a project to create arbitration rules for use in non-reinsurance disputes including direct insurance disputes and those involving captives1. Following many meetings, drafts, and revisions, the new ARIAS-US Panel Rules for the Resolution of Insurance and Contract Disputes are here and went into effect as of September 16, 2019 (the "Insurance Rules").

The Neutral Rules

The starting point for the rules was the ARIAS-US Neutral Panel Rules for the Resolution of U.S. Insurance and Reinsurance Disputes (the "Neutral Rules").2

As set forth in Article 1.6 of the Neutral Rules, "The object of these Rules is to obtain the fair resolution of disputes by an independent and impartial arbitration panel free of any bias or predisposition. The arbitration panel selected under these Rules is assigned the mandatory duty to act fairly and impartially as between the Parties."3

To that end, the Neutral Rules require that the arbitration panel consist of three neutral arbitrators who qualify under the ARIAS-US Neutral Arbitration Panel Criteria (the "Neutral Criteria").4 They also require that, "The arbitrators shall be persons who are current or former officers or executives of an insurer or reinsurer."5

The Neutral Criteria covers four potential areas of concern - (a) prior service as party-appointed arbitrator; (b) prior service as an umpire or neutral arbitrator; (c) prior expert or consultant service, and; (d) prior service as counsel for or employment by one of the parties. If, in the five years prior to the date of nomination, an arbitrator candidate has served in excess of the enumerated threshold amount associated with any area of conflict, the arbitrator shall fail to meet the Neutral Criteria.6

Given the neutrality of the arbitrators, the Neutral Rules prohibit ex parte communications between the arbitrators and a party or its representatives.7

Under Article 13.3, the arbitrators are not obligated to follow strict rules of law or evidence.8

The Instructions for Adoption and Application, which begin the Neutral Rules, offer "honorable engagement" language to include in the arbitration clause as follows:

The Panel shall interpret this contract as an honorable engagement, and shall not be obligated to follow the strict rules of law or evidence. In making their Decision, the Panel shall apply the custom and practice of the insurance and reinsurance industry, with a view to effecting the general purpose of this contract.9

Addressing the Concerns of Policyholders

In working on a new rule set, it became apparent that policyholders had concerns about an organization that historically drew its arbitrators from the insurance industry. As set forth in one policyholder law firm blog post:

Insurance carriers are always concerned about the possibility that an arbitrator who they have not vetted properly will be appointed for an insurance coverage arbitration. To protect against this, insurers have formed specific trade associations disguised as arbitration tribunals. The most infamous of these is ARIAS. ARIAS arbitrators have experience working for insurers, and they translate this knowledge into finding for insurers in arbitration. An arbitration before ARIAS is like an arbitration with the insurance company claims adjuster who denied the claim acting as arbitrator. Policyholders should never agree to an arbitration with an ARIAS arbitrator.10

A June 2017 legal brief, echoing this sentiment, noted the following in relation to the eligibility requirements for becoming an ARIAS certified arbitrator:

To be eligible, one must have at least ten years of experience in the insurance/reinsurance industry, and obtain three sponsor recommendations from individual ARIAS members that the candidate has known for at least five years. This, reasonably, leaves a small pool of potential candidates who are likely well-acquainted with one another through business dealings, prior arbitrations, and other contacts, which could lead to a situation where the "neutral" umpire would be tempted to be sympathetic to the insurance company.11

Framework for the New Rules and Key Items of Note

Considering these concerns regarding ARIAS and the goal of making new rules that would attract direct insurance disputes, the new rules were designed to address these changes. This meant addressing concerns about the rules in relation to who could serve as an arbitrator and what law might apply to the dispute as well as the means by which the pool of arbitrators could be expanded. In drafting the new rules, however, it became apparent that other innovations might be layered on to the foundation of the existing neutral rules including the resolution of arbitrator challenges and the use of mediation while an arbitration was pending.

Key Items of Note in the Insurance Rules

There are some key differences between the Neutral Rules and the Insurance Rules.12 These differences are addressed in the order they appear in the Insurance Rules:

  1. Although the Insurance Rules do not expressly label party-appointed arbitrators as "non-neutral" or "partisans," they do accept the notion that such arbitrators need not be considered neutral by background or general viewpoint.13 In undertaking this approach, and consistent with the challenge provisions in the Insurance Rules, the intent was to limit challenges to those involving the umpire rather than to waste the parties' time and resources as to whether the party-appointed arbitrators have a truly neutral background.14
  2. Relatedly, a challenge procedure – modeled on Article 13 of the UNCITRAL Arbitration Rules (as revised in 2013) with modifications – was adopted to address umpire challenges.15 Key aspects of this procedure are discussed in more detail below.
  3. The presumption regarding arbitrator authority is changed so that now, "The Panel is obligated to follow strict rules of law, unless otherwise agreed."16
  4. An optional mediation procedure was introduced which would temporarily stay the arbitration upon a joint application by the parties to mediate the dispute.17

As far as expanding the pool of arbitrators was concerned, there was also an intent to revise the qualification procedures to make it possible for those without experience as an insurance executive to qualify. Under the proposed changes, brokers, insurance counsel, and risk managers would all have qualifying insurance experience.

The Umpire Challenge Procedure

ARIAS largely adopted, in pertinent part, the following challenge procedures (item 2 above):

  1. Challenges are not permitted 90 days after the Organizational Meeting18;
  2. The arbitration shall not be stayed pending a challenge unless agreed to by the parties or ordered by the Sub-Committee19;
  3. Limited grounds are provided for challenges to be pursued.20 The grounds are as follows:

    1. Failure of the umpire to meet the criteria set forth in the relevant contracts;
    2. Failure of the umpire to meet the Neutral Criteria;
    3. Violation of the standards set forth in Comment 3 to Canon 1 of the ARIAS-US Code of Conduct21; or
    4. The alleged failure to make adequate disclosures as required by Canon IV of the ARIAS-US Code of Conduct.22
  4. A Sub-Committee chosen from the members of the ARIAS Ethics Committee and the Board of Directors will hear challenges.23
  5. A fee structure will be utilized whereby a flat fee of $5,000 will be charged for a hearing on the papers while, for an in-person hearing, a daily rate of $2,400 plus reasonable costs and fees will be applied.24
  6. The Sub-Committee will render a decision on the challenge within thirty (30) days of receiving the papers or completing a hearing on the merits.25
  7. The prevailing party receives an award of fees and costs.26
  8. If the umpire withdraws or the challenge results in the replacement of the umpire, the second-highest ranked candidate will be the replacement umpire.27

Impartial Decision Making Remains Mandatory

The Insurance Rules recognize that arbitrators with insurance expertise may have a background that involves work primarily on behalf of either policyholders or insurers. As noted above, the choice was made to avoid disputes as to the neutrality of party-appointed arbitrator backgrounds and instead allow each side to a dispute to appoint an arbitrator they deem qualified.

Even if an arbitrator has primarily worked for one side or another historically, the arbitrator is required to act neutrally in handling the case, deliberating, and reaching a decision. This is grounded in Section 1.5 of the Insurance Rules which, as carried over from the Neutral Rules, provides as follows:

The object of these Rules is to obtain the fair resolution of disputes by a disinterested and arbitration panel free of any bias. The arbitration panel selected under these Rules is assigned the mandatory duty to act fairly and impartially as between the Parties.

Going Forward

The Insurance Rules addressed the most pressing of concerns of policyholders by removing neutral background requirements for party-appointed arbitrators, removing the requirement that arbitrators be former or current executives of insurance companies28, and requiring arbitrators to apply strict rules of law. In addition, a challenge regime was put in to place which provides due process at minimal cost while deterring frivolous challenges and a mediation procedure was added to permit parties to resolve disputes outside of arbitration while avoiding attempts to delay proceedings.

Now that the Insurance Rules are in place, the next steps will involve promoting the rules so that they are incorporated into future dispute resolution provisions and used after disputes arise. In conjunction with these efforts, ARIAS arbitrator certification will be promoted to expand the pool of qualified arbitrators.

With rules perceived as fair and arbitrators perceived as neutral, the Insurance Rules should become a valuable tool for the resolution of with direct insurance and insurance-related contract disputes.

Footnotes

1 Some other examples of disputes which might be resolved under the new rules include cover-in-place agreements, those involving MGAs or brokers, and those involving specialty policies such as representations and warranties insurance. See, e.g., Peter K. Rosen, "Does ARIAS Have a Role to Play in Direct Insurance Arbitrations?", ARIAS-U.S. Quarterly Q2 (2018).

2 Available online here: https://www.arias-us.org/wp-content/uploads/2018/10/ARIASU.S.-Neutral-Panel-Rules-Tracked-Changes-Accepted-1.pdf

3 Neutral Rules, Art. 1.6.

4 Id., Art. 6.1.

5 Id., Art. 6.2. Parties may contract out of this requirement. See, e.g., id., Instructions at 1-2 (offering alternative language to modify the standard arbitration clause to permit the selection of any ARIAS certified arbitrator).

6 Id., Art. 6.3.

7 Id., Art. 6.14.

8 Id., Art. 13.3.

9 Id., Instructions for Adoption and Application.

10 Miller Friel PLLC Insurance Recovery Blog, "Why Insurance Carriers Prefer Insurance Coverage Arbitration Over Litigation" available online at: https://millerfriel.com/blog/insurance-carriers-love-insurance-coverage-arbitration/ (August 2, 2018).

11 Respondents' Memorandum in Opposition to Petitioner's Petition for the Appointment of an Umpire in the Matter of the Arbitration between National Union Fire Insurance Company of Pittsburgh, PA v. Beelman Truck Company, et al., Civil Action No. 1:17-cv-02946-VEC (S.D.N.Y.) (ECF No. 39, Filed June 16, 2019) at 14-15.

12 Although not included as a "key" difference, the Insurance Rules do require payment of a $1,000 administrative fee to be split by the parties. See Insurance Rules, Instructions for Adoption and Application, available online at: https://www.arias-us.org/wp-content/uploads/2019/09/FINAL-ARIASU.S.-PANEL-RULES-FOR-THE-RESOLUTION-OF-INSURANCE-AND-CONTRACT-DISPUTES-9-16-19.pdf.

13 See id., Rule 6.1 and 6.13 (permitting ex parte communications until the Organizational Meeting).

14 That said, the Insurance Rules carryover the existing Neutral Rules requirement that arbitrators make their decision fairly, impartially, and free from bias or predisposition. Id., Rule 1.5. This is addressed in more detail below.

15 Id., Rule 6.19.

16 Id., Rule 13.3.

17 Id., Rule 15.1.

18 Id., Rule 6.19(a).

19 Id., Rule 6.19(b).

20 Id., Rule 6.19(d).

21 "The parties' confidence in the arbitrator's ability to render a just decision is influenced by many factors, which arbitrators must consider prior to their service. There are certain circumstances where a candidate for appointment as an arbitrator must refuse to serve..." https://www.arias-us.org/wp-content/uploads/2019/07/ARIAS-Code-of-Conduct-Canon-I-2019-Update.pdf

22 "Candidates for appointment as arbitrators should disclose any interest or relationship likely to affect their judgment. Any doubt should be resolved in favor of disclosure." https://www.arias-us.org/wp-content/uploads/2019/03/ARIAS-Code-of-Conduct-Canon-IV-2019.pdf

23 Id., Rule 16.9(e).

24 Id., Rule 16.9(f).

25 Id., Rule 16.9(i).

26 Id.

27 Id., Rule 16.9(j).

28 Policyholders wanted to ensure that the selection procedures did not result in only insurance industry experienced arbitrators being selected.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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