The consolidation of reinsurance disputes has become a hot topic lately. For example, it can arise when the same parties are involved in a dispute over a loss that pierces several layers of the same reinsurance program if each layer is governed by a separate reinsurance contract. In the absence of a contractual consolidation clause or the consent of the parties, such disputes generally must be decided by separate panels, raising significant cost and efficiency concerns. Attempts to force consolidation in federal court when the contract is silent on the issue have failed in two important federal circuits, the Second and Ninth Circuits. Also, resolution of the consolidation issue has generally been left to the courts, not the arbitrators, to decide in the first instance.
A July 9th Massachusetts federal district court decision may signal that the law in the First Circuit may be heading in a different direction. In this important case, Employers Insurance of Wausau (“Employers”) and Nationwide Mutual Insurance Co. (“Nationwide”), respectively, had four and five separate reinsurance contracts with First State Insurance Group (“First State”). In both cases, First State sought to compel arbitration and consolidation of each series of related disputes so that one panel would hear the Employers case and another the Nationwide dispute rather than nine separate panels. Consistent with the law in the Second and Ninth Circuits, the district court ruled, albeit “reluctantly,” to deny First State’s motion to consolidate in the absence of contract language despite what the court viewed as potential “economies of effort and expense” single arbitrations offered given the similarities of the underlying disputes.
Subsequent to the district court’s initial order, the First Circuit decided Shaw’s Supermarkets, Inc. v. UFCW, Local 791, 321 F.3d 251 (1st Cir. 2003), on March 6, 2003. The appellate court held that the consolidation issue was to be decided in the first instance by the arbitrator, not the federal court. This divergence from the rule in other federal circuits arose in the context of a labor dispute arbitration over the same union grievance about a store-wide policy affecting three separate regional collective bargaining agreements. The Shaw’s trial court relied on cases permitting the consolidation of labor arbitrations arising from multiple grievances under one contract. However, that distinction, according to the First State court, did not appear to have had any bearing on the Court of Appeals’ ultimate holding.
Rather than seek reconsideration of the district court’s earlier consolidation denial ruling in light of this subsequent development in the law, First State advised the various arbitration panels, which had been appointed in the interim, that the court’s prior ruling was a “nullity” and that each panel possessed the power to correct this “judicial error.” When this was brought to the district court’s attention by Employers’ and Nationwide’s emergency motions, the court ruled that private arbitrators may not unilaterally take it upon themselves to overturn a district court’s ruling on a matter of law – only the federal appellate court may correct such errors under Article III of the U.S. Constitution. As the “law of the case,” the allegedly erroneous consolidation decision may be reexamined only by the court, not arbitration panels, when there are subsequent legal developments. The court ruled that First State must withdraw its pending consolidation motions before all of the arbitration panels.
In an interesting footnote, the district court commented on the “potential for chaos sown” by First State’s actions. In considering the binding nature of the court’s earlier denial of consolidation in the Employers arbitrations, one panel ruled that it was bound by the ruling, and two “expressed doubt.” In the Nationwide proceedings, two panels abided by the court’s ruling, and three ordered briefing on the issue.The court did not address the question of what would happen if one or more of these multiple arbitration panels ordered all of the related disputes arising under different contracts to be consolidated or if more than one panel issued such a ruling. Which panel's consolidation order would take precedence? These thorny problems were left for future panels and courts to resolve.
Employers Insurance of Wausau v. First State Insurance Group, Civ. Action Nos. 02-12252-RGS & 02-12012-RGS, 2004 U.S. Dist. LEXIS 12712 (D. Mass. July 9, 2004).