In the reinsurance world, when a dispute ensues between the sameparties regarding one or multiple claims that arise under multipletreaties, a host of contentious issues can develop. An increasinglycommon fight between cedants and reinsurers is whether to arbitrateclaims that arise under numerous treaties "separately on acontract-by-contract basis or collectively in a consolidatedarbitration." Certain Underwriters at Lloyd's London v.Westchester Fire Ins. Co., No. 06-1457, 2007 WL 1673876, at *3(3d Cir. June 12, 2007).

Why the Consolidation Fight?

Why do reinsurers and cedants fight over consolidation? Why doesthe issue of consolidation often escalate between the parties?There are a number of strategic reasons why parties in reinsurancedisputes engage in this fight -- and most of them only benefit thelawyers.

Reinsurers from whom a payment is sought on a particular claimunder a number of treaties sometimes seek multiple separatearbitrations on the same claim (one per treaty) in the hopes thatthey will prevail in at least some of the arbitrations. Seekingmultiple arbitrations on the same claim is also a tactic used fromtime to time to drive up the cost of arbitration and thus, force asettlement. In turn, cedants occasionally seek to consolidatesmaller claims under many different treaties before one arbitrationpanel in order to achieve efficiencies of scale in the arbitrationprocess, and in the hopes that the weaker claims will be sweptalong with the stronger ones in the panel's decision. Cedants alsoargue that consolidating claims under different treaties before onepanel allows for consistency across the implicated treaties.

History of Consolidation Law

Until recently, unless the parties agreed to consolidate, theyhad no choice but to arbitrate disputes (under more than onetreaty) in multiple arbitrations because courts simply refused toconsolidate separate contracts, even if the same parties and thesame claims were involved. Reinsurers successfully argued thatunless the treaties specifically set forth a right to consolidatedisputes, the parties were entitled to separate arbitrations undereach of the treaties. Case law supported this principle, dictatingthat courts were not allowed to consolidate arbitrations underseparate contracts unless the right to consolidate was statedexpressly in the contract itself. [See Government of U.K. v.Boeing Co., 998 F.2d 68, 74 (2d. Cir. 1993).] The courtsreasoned that the Federal Arbitration Act ("FAA") was designed to"enforce private agreements into which the parties had entered . .. even if the result was 'piecemeal' litigation." Under this kindof reasoning, it was virtually impossible to consolidate disputesover separate treaties into one arbitration unless such an optionwas provided for in the treaties themselves.

The U.S. Supreme Court changed the lay of the land inHowsam v.Dean Witter Reynolds, Inc., 537 U.S. 79, 84 (2002),holding that courts have the power to decide "gateway matters,"such as the validity of arbitration clauses, but proceduralmatters, such as the issue of consolidation, are not the courts'business -- they must be decided upon by the arbitrator orarbitrators. Since the Howsam decision, other courts haveconsistently held that consolidation is a procedural issue and,thus, an issue to be decided by arbitrators, not courts [SeeCertain Underwriters at Lloyd's London v. Westchester Fire Ins.Co., No. 06-1457, 2007 WL 1673876 (3d Cir. June 12, 2007),which held that consolidation of disputes is a procedural issue tobe resolved in arbitration; Certain Underwriters at Lloyds,London v. Cravens Dargan & Co., 197 Fed. Appx. 645 (9thCir. 2006), which held that the district court did not error indeciding "not to establish the terms of the arbitration procedureand leaving that question to the arbitrator."; Employers Ins.Co. of Wausau v. Century Indem. Co., 443 F.3d 573, 578 (7thCir. 2006), which found that "consolidation [of arbitrations] is aprocedural issue."; Shaw's Supermarkets, Inc. v. United Foodand Comm. Workers Union, Local 791, AFL-CIO, 321 F.3d 251, 254(1st Cir. 2003).]

There is nothing in the Federal Arbitration Act that limitsarbitrators' abilities to order consolidation when the contract inquestion is silent on the subject of consolidation. Thus,arbitrators now hold the power to decide the issue ofconsolidation. Courts have no authority to consolidate arbitrationsother than to refer the parties to the arbitrators.

Consolidation: The Racing Game

While current case law is uniform in holding that arbitrators,not courts, must decide the issue of consolidation, a new game hasemerged -- a racing game -- but the rules of the race are stillunclear. Parties that have multiple treaties at issue in a disputerace to be the "first in time" to have a panel that is appointed ona single treaty make a decision about consolidation of otherdisputes. A recent case clearly illustrates this game.

In Clearwater Ins. Co. v. Granite State Ins. Co., 2006WL 2827872 (N.D. Cal. 2006), the reinsurer filed five relatedpetitions to compel arbitration, in five separate courts across thecountry, on five different treaties where the defendants claimedthat the plaintiff owed unpaid balances. The parties could notagree on an umpire, but both parties wanted to be the first to havea full panel seated with an umpire of their liking appointed.

Thus, the plaintiff moved in court to compel the appointment ofan umpire in four of the related petitions filed in the NorthernDistrict of California. At the same time, the cedants filed theirown motion to compel arbitration in a Massachusetts state court.Before any of the Northern District of California courts ruled uponthe motions to compel, the Massachusetts state court appointed anumpire, and thus, a complete panel was put in place on one of thetreaties. Defendants sought to stay the four motions to compelarbitration in the Northern District of California, until the fullyappointed Massachusetts panel decided a motion to consolidate. TheNorthern California District Court in Clearwater deniedthe stay of proceedings because it reasoned that it was for thepanel to decide "[t]he issue of whether, when, and how toconsolidate these arbitrations." Ultimately, the parties settledthe issue, largely by going forward with the panel completed by theMassachusetts appointment of an umpire -- but not until both sideshad paid substantial fees to their attorneys.

Both parties in Clearwater went to great lengths to bethe "first in time" to have a complete panel seated and to have thepanel rule on the issue of consolidation. This is an emerging trendin reinsurance arbitrations. However, a recent PennsylvaniaDistrict Court case has added a new twist to this race, holdingthat the issue is one for arbitrators to decide. In ArgonautIns. Co. v. Century Indemnity Co., Case No. 05-5355, 2007 U.S.Dist. LEXIS 65863 (USDC E.D. Pa. Sept. 5, 2007), the parties hadpartially seated four different arbitration panels, but in only oneof the panels had both parties appointed their arbitrator. Theparties asked the court to decide which of the four arbitrationpanels should decide the consolidation question. Both partieswanted a court to rule that the "first-in-time" rule governed thedecision, meaning the first panel that was fully constituted wouldbe the panel to decide the issue of consolidation. The problem wasthat the parties disagreed as to which of the four panels was thefirst to be formed. The cedant argued that the fourth panel thatwas formed was really the "first in time" to be formed -- not onlybecause the fourth panel was formed pursuant to a demand thatrevoked the prior demands, but also because it was the only panelin which both parties had actually appointed aparty-arbitrator.

The court left the mess in the hands of the parties, holdingthat the entire problem was "a matter of arbitral procedure for thearbitrator, and not a question of arbitratability for the Court."The court further held that it lacked "the authority to dismiss (orto stay) an arbitration unless it is for the reason that a disputeis not arbitratable." While the court noted that "principles ofefficiency strongly favor a single arbitration panel'sdetermination of whether consolidation of reinsurance claims isappropriate," it held that unless the parties "can sensibly jointlydesign a procedural roadmap," all four arbitration panels "willhave to agree upon a reasonable solution as to which panel mustdecide the issues."

Lack of Clarity in Consolidation

At present, there is a decided lack of clarity in consolidationlaw. Little is set in stone beyond the fact that consolidation isan issue for the arbitrators, not courts, to decide. The racinggame strategy adds many new wrinkles to the consolidation issuethat will surely unfold in future disputes, but which currentlyremain unresolved, even after Clearwater andArgonaut. For example, in Argonaut, if two of thepanels grant a motion to consolidate, while the other two deny it,which decisions will be binding? If all four panels were formed atthe same time, which panel's ruling would be upheld? Would it bethe panel that ruled first? The courts have not answered thesequestions.

Because much is still uncertain, the only way for parties toensure consolidation in future disputes is to include expressconsolidation language in their contracts. Parties desiringconsolidation of disputes should insert a provision that plainlyand succinctly provides for consolidation in the event that adispute involving multiple contracts of reinsurance arises amongthe same parties. Otherwise, the parties will have no choice but tohope that they win the consolidation race, and that if they win,the decision is binding.