Ninth Circuit Upholds Arbitration Award Under Reinsurance Contract Despite Ex Parte Communications Between Arbitration Panel and Neutral Experts

U.S. Life Insurance Co. v. Superior National Insurance Co.

(9th Cir. [CA] January 4, 2010)


The Ninth Circuit Federal Court of Appeals has recently upheld a California District Court ruling affirming an arbitration award in favor of a group of insurers against a reinsurer.  The group of insurers entered into a reinsurance contract with U.S. Life to reinsure the insurers’ workers compensation risks for a five year period.  After entering into the agreement, the insurers declared bankruptcy and entered into liquidation.  Approximately one and a half years following the effective date of the reinsurance agreement, U.S. Life requested an arbitration, seeking to rescind or reform the agreement due to the insurers’ misrepresentation of the reserves during the underwriting process and the award of damages for bad faith performance in the quality of the insurers’ claims handling procedures. 

The panel of arbitrators advised the parties after hearing evidence and arguments for approximately thirteen days that it was unable to reach a decision regarding the quality of the insurers’ claims handling procedures due to a stalemate.  To rectify the stalemate, the panel advised that it would retain two workers compensation handling experts to review the submitted bills .  Following the review, the experts met with the panel for three days without the presence of counsel and no transcript was produced of the ex parte meeting.  The experts provided their conclusions in writing to the panel and parties and the parties were given the opportunity to submit briefs responding to the experts’ conclusions.
After an arbitration award in favor of the insurers, U.S. Life filed an action to vacate the award.  The reinsurer argued that, by closing the meeting of the panel with the expert reviewers, the panel violated the Federal Arbitration Act by refusing to hear pertinent and material evidence and prejudicing the parties since they were unable to respond to evidence presented by the experts or cross-examine them during the three day ex parte meeting.

Upholding the arbitration award to the insurers, the Ninth Circuit held that although an ex parte meting between an arbitrator and a neutral expert is not a routine arbitration practice, the panel had authority to adopt its own rules of procedure.  The court held that panel’s procedures did not violate the Federal Arbitration Act since U.S. Life received a fair hearing and failed to establish that it was denied the opportunity to present its case or to contest the insurers’ evidence.


For a copy of the decision click here


Bryan Richmond and Jeffrey Kingsley

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