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January 2010

United States Life Insurance Co. v. Superior National Insurance Co. - Arbitration Panel's Ex Parte Meeting with Neutral Experts Not Unfair

Arbitration Panel which Included an Ex Parte Meeting with Panel-Retained Experts is Unusual but Still Provided the Parties with a Fair Arbitration and Did Not Violate the Federal Arbitration Act

__F.3d__, 09 C.D.O.S. 47 (9th Cir. 2010)

The Ninth Circuit Court of Appeals held U.S. Life Insurance Co. received a fair arbitration despite the fact that the arbitration panel conducted an ex parte meeting with panel-retained experts.  The Ninth Circuit found while the ex parte meeting was unusual, the panel had the authority to adopt the procedure. The arbitration was fair and did not violate the Federal Arbitration Act (FAA), 9 U.S.C. §§ 2-16.

Plaintiff U.S. Life contractually agreed to reinsure the workers' compensation risks insured by five California insurers.  These insurers ("SNICIL") later declared bankruptcy and the Insurance Commissioner became SNICIL's statutory liquidator.  The reinsurance contract between U.S. Life and SNICIL contained an arbitration provision.  In November 1999, U.S. Life requested an arbitration seeking: 1) rescission or reformation of the contract because SNICIL misrepresented reserves during underwriting; and 2) damages for SNICIL's bad-faith performance.  SNICIL agreed to arbitrate and sought a ruling that U.S. Life was to perform its contractual obligations. 

The panel, which consisted of an arbitrator appointed by each party and a neutral arbitrator selected by the parties' arbitrators, bifurcated the arbitration proceeding into two phases.  Phase I addressed rescission and reformation. The panel found no basis for rescission but did reform the reinsurance contract so that U.S. Life became liable for only 90% of the risks insured by SNICIL's policies because SNICIL was not forthright during contract formation.  U.S. Life sought vacatur of this decision which was denied by the district court. The Ninth Circuit affirmed the district court's decision in U.S. Life Ins. Co. v. Ins. Comm'r, 160 Fed. App'x 559 (9th Cir. 2005).

Phase II determined whether SNICIL engaged in improper claims handling that resulted in bills to U.S. Life in excess of the amounts due under the contract. After hearing the parties' Phase II evidence and arguments, the panel advised it was unable to reach a decision given the parties' divergent expert opinions.  The panel advised it would retain two workers' compensation claims-handling experts to review the submitted bills.  The panel and the parties exchanged correspondence discussing what review process to use. Ultimately, the panel adopted the following process: 1) the experts would review 162 of the sample claims; 2) the experts would meet with the panel in an ex parte meeting; 3) the experts would provide their conclusions in writing; 4) the parties could submit briefs responding to the experts' conclusions; 5) the parties could question the experts on their qualifications and conclusions, but not on the ex parte meeting; and 6) the parties could submit post-hearing briefs. 

On February 18, 2007, the panel issued its Final Arbitration Award, requiring U.S. Life to pay all bills submitted before December 6, 2006, along with interest and disgorgement.  U.S. Life filed an action in district court to vacate the award.  SNICIL answered and filed a separate action to confirm the award.  The district court consolidated the two actions and upheld the arbitration award. U.S. Life sought review.

The Ninth Circuit reviewed the district court's findings of law de novo.  The Ninth Circuit noted Section 10 of the FAA sets forth grounds to vacate an arbitration award (1) where the award was procured by corruption, fraud, or undue means; (2) where there was evident partiality or corruption in the arbitrators; (3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, to hear evidence pertinent and material to the controversy, or any other misbehavior which prejudices the rights of a party; or (4) where the arbitrators exceeded their powers. 9 U.S.C. § 10(a). 

U.S. Life argued in conducting the ex parte meeting, the panel refused to hear pertinent and material evidence.  The Ninth Circuit disagreed, finding while the ex parte meeting was unusual, the panel had authority to adopt its own rules of procedure, which it did.  The Ninth Circuit also explained that in order to show a panel's decision warranted reversal because of an arbitrator's mistake in the conduct of the hearing, the party must show prejudicial impact. U.S. Life failed to establish prejudicial impact by the panel's ex parte meeting or that the refusal to allow the parties participate in or question the experts about the ex parte meeting constituted a refusal to hear pertinent and material evidence.  The Ninth Circuit noted the panel advised the parties of its dilemma of being unable to reach a decision and determined what process to use only after receiving input from the counsel.  The process employed ensured due process by allowing the parties to present their respective arguments on the experts' conclusions by reviewing and submitting briefing and questioning the experts.  Although the parties were not privy to the ex parte meeting, the panel gave the parties ample opportunity to discover and critique the experts' conclusions.  The Ninth Circuit also found since the panel's ex parte contact was with neutral experts, there was no panel misconduct prejudicing U.S. Life.  The Ninth Circuit further found the award of disgorgement of investment income was an appropriate remedy for U.S. Life's delay in payment.  Thus, there was no panel misconduct and the Ninth Circuit affirmed the district court's decision confirming of the panel's Phase II award.

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This opinion is not final. Though it has been certified for publication, it may be modified on rehearing, or granted review by the Supreme Court of the State of California. Should any of these events occur, the opinion would be unavailable for use as authority in other cases.

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