(Article from Insurance Law Alert, April 2015)
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Because courts use a highly deferential standard in reviewing arbitration awards, petitioners face an uphill battle when they file motions to vacate arbitration awards. However, in a recent decision, the Fifth Circuit ruled that when an arbitrator is appointed in a manner inconsistent with the procedures set forth in the agreement to arbitrate, the award must be vacated. PoolRe Ins. Corp. v. Organizational Strategies, Inc., 2015 WL 1566633 (5th Cir. Apr. 7, 2015).
The dispute at issue involved two separate but related sets of arbitration agreements: (1) service agreements between Capstone and Organizational Strategies, Inc. ("OSI"), which required AAA arbitration; and (2) reinsurance agreements between PoolRe and certain captive insurance companies, which required ICC arbitration. When billing disputes arose between Capstone and OSI, PoolRe cancelled its reinsurance agreements with the captives. Thereafter, Capstone initiated arbitration against OSI. The arbitration demand was forwarded to Dion Ramos of Conflict Resolution Systems in Texas, who appointed himself arbitrator in the Capstone- OSI arbitration (governed by the AAA). PoolRe intervened in the arbitration for the limited purpose of having Ramos appoint an Anguilla-based arbitrator, as required by the PoolRe arbitration agreements. Ramos, applying AAA guidelines, ruled that PoolRe waived its right to arbitration in Anguilla by intervening and that he had jurisdiction to decide PoolRe’s claims. After Ramos issued an arbitration award, the parties filed competing motions in Texas federal district court to confirm and vacate the award and to compel a second phase arbitration. The court found that Ramos was not selected in the manner required by the PoolRe agreement and that he exceeded his authority by exercising jurisdiction over and applying AAA rules to the dispute between PoolRe and the captives. The court vacated the award and the Fifth Circuit affirmed.
The Fifth Circuit ruled that vacatur of the award was justified because the selection of Ramos as arbitrator did not conform with the selection process of the PoolRe-captive reinsurance agreements. The court explained that arbitrator selection is a material contract term and that a non-trivial departure from authorized procedures warrants vacatur. The court further reasoned that Ramos exceeded his authority by applying AAA rather than ICC rules to the dispute in contravention of the PoolRe arbitration clause. The court held that by violating this provision, Ramos exceeded his authority. Finally, the Fifth Circuit held that vacatur of the entire award was appropriate and that the district court was not obligated to "carve out only the objectionable part of the award [relating to PoolRe] and confirm the rest." Although district courts have the discretion to partially vacate an award, they are not required to do so, particularly where, as here, the entire arbitration process was tainted and the award is not easily divisible.