Granite State Insurance Company et al v. Clearwater Insurance Company

Filing 23

ORDER GRANTING IN PART AND DENYING IN PART PETITION TO APPOINT AN UMPIRE; DENYING CROSS-PETITION 10 (Illston, Susan) (Filed on 8/19/2013)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA

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GRANITE STATE INSURANCE COMPANY
and NEW HAMPSHIRE INSURANCE
COMPANY,

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United States District Court
For the Northern District of California

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No. C 13-2924 SI
ORDER GRANTING IN PART AND
DENYING IN PART PETITION TO
APPOINT AN UMPIRE; DENYING
CROSS-PETITION

Petitioners,
v.
CLEARWATER INSURANCE COMPANY,
Respondent.

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Granite State Insurance Company (“GSIC”) and New Hampshire Insurance Company (“NHIC”)

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(collectively “petitioners”) have filed a petition pursuant to the Federal Arbitration Act (“FAA”), 9

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U.S.C. § 5, requesting that the Court appoint an umpire in the underlying arbitration proceedings.

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Respondent Clearwater Insurance Company has filed a cross-petition, to which petitioners have replied.

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Pursuant to Civil Local Rule 7-1(b), the Court finds that this matter is appropriate for resolution without

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additional argument and VACATES the hearing scheduled for August 30, 2013. Having reviewed the

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parties’ papers and for good cause shown, the Court GRANTS IN PART and DENIES IN PART the

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petition and DENIES the cross-petition for the reasons set forth below.

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BACKGROUND

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Petitioners and respondent are parties to two reinsurance contracts entitled “Excess Third Party

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Liability First Excess of Loss Agreement” and “Excess Third Party Liability Second Excess of Loss

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Reinsurance Agreement.” Pet. ¶ 10. NHIC and Clearwater are parties to a third reinsurance contract

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entitled “Contract of Reinsurance.” Id. ¶ 11. Under all three contracts, Clearwater was the reinsurer

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and petitioners were the reassured. Id. ¶ 12. Petitioners GSIC and NHIC are part of the American

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International Group, Inc., of insurance companies. Id. ¶ 5.

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This case arises out of a dispute over Clearwater’s adherence to its obligation to reimburse

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petitioners for their losses arising out of asbestos litigation. That litigation, in which Kaiser Aluminum

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Chemical Corporation sought insurance coverage from petitioners for thousands of asbestos bodily

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injury claims, concluded with a settlement in 2006, whereby petitioners agreed to cover some part of

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Kaiser’s claims. Id. ¶ 14. Petitioners made payments to Kaiser consistent with the settlement agreement

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and in turn, billed Clearwater for its share of those payments pursuant to the three reinsurance contracts.

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Id. ¶ 15. After paying some of these bills, Clearwater ceased paying. Id. ¶ 16. Thereafter, on

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November 5, 2012, petitioners made a demand for arbitration under the reinsurance contracts.

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Although they differ in other respects disputed by the parties, the parties agree that each of the

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three reinsurance contracts contain an identical arbitrator selection provision. They all provide for a

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panel of three arbitrators, with one chosen by the cedent (i.e., petitioners), one chosen by the reinsurer

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(Clearwater), and the third (known as the umpire) chosen by the two arbitrators. Where the two

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arbitrators cannot agree on an umpire, the parties are to exchange names of two umpire candidates,

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decline one from the other party’s list, and draw lots from the remaining two candidates.

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Petitioners appointed their one arbitrator (Susan Claflin) on December 5, 2012. Clearwater,

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however, refused to appoint just one arbitrator, contending that the November 5, 2012, demand for a

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single arbitration was improper. Instead, Clearwater appointed one arbitrator to cover the first two

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reinsurance contracts at issue (James Sporleder), and a second one to cover the third contract (John

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Allare). Thereafter Ms. Claflin contacted Mr. Sporleder to select an umpire. Sneed Decl. ¶ 7. Mr.

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Sporleder replied that he was not in a position to do so, id., and after a delay of several months, on

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March 11, 2013, the arbitrators exchanged the names of umpire candidates: petitioners’ arbitrator

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nominated Clive Becker-Jones and Elizabeth Thompson; respondent’s arbitrator nominated Dale

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Diamond and Jack Koepke. These nominations remain pending.

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On March 21, 2013, petitioners’ counsel sent counsel for Clearwater a proposed questionnaire

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to be sent to the four umpire candidates. Id. ¶ 9. On April 22, 2013, Clearwater’s counsel raised the

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concern that the first and second reinsurance contracts between petitioners and Clearwater contained

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a different “honorable engagement” clause than the third contract between only NHIC and Clearwater.

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See O’Sullivan Decl., Ex. H. Accordingly, Clearwater’s counsel informed petitioners’ counsel that it

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was willing to voluntarily proceed with one arbitration, rather than the three it had been demanding, if

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petitioners were willing to resolve the issue of which “honorable engagement” clause would govern that

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single arbitration. Id. The parties continued to dispute whether there was any material difference

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between the various “honorable engagement” clauses and whether the parties or an arbitration panel

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should decide which clause governed the proceeding.

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On June 25, 2013, GSIC and NHIC filed this petition to appoint an umpire in a single arbitration

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proceeding from among the two candidates their arbitrator has nominated. Petitioners contend that they

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are at an impasse and that the Court should appoint an umpire so that a panel may be convened. On July

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15, 2013, Clearwater filed a cross-petition to compel arbitration pursuant to 9 U.S.C. § 4, seeking a

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Court order requiring petitioners to participate in three separate arbitrations. Clearwater contends that

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three separate arbitrations are required because the individual contracts at issue contemplate the

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existence of separate arbitrations. Whether they may be consolidated into one arbitration, Clearwater

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insists, is a issue that can be addressed later, after three separate panels are convened.

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STANDARD OF REVIEW

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The Federal Arbitration Act creates a policy favoring enforcement of agreements to arbitrate.

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See 9 U.S.C. § 2. Section 4 of that Act permits the district court to order parties to an arbitration

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agreement to proceed in the manner provided for in that agreement, where one party has refused the

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other party’s demand for arbitration. Where, however, the parties have agreed to arbitrate and there is

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“a lapse in the naming of an arbitrator or arbitrators or umpire,” Section 5 provides that the district

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“shall designate and appoint an arbitrator or arbitrators or umpire.” See 9 U.S.C. § 5; Pac. Reinsurance

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Mgmt. Corp. v. Ohio Reinsurance Corp., 814 F.2d 1324, 1329 (9th Cir. 1987). The district court may

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appoint an umpire in an underlying arbitration proceeding where “(1) there is a written arbitration

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agreement; (2) diversity provides an independent basis for federal jurisdiction; and (3) the underlying

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transaction involves interstate commerce.” Acequip Ltd. v. Am. Engineering Corp., 315 F.3d 151, 154

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(2d Cir. 2003).

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DISCUSSION

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Petitioners request that the Court appoint one arbitrator in one arbitration. Clearwater requests

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that the Court order the parties to select three different umpires in three separate arbitrations. The Court

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declines to do either. To do as either party requests, the Court would necessarily decide the parties’ core

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dispute – whether petitioners’ November 5, 2012, demand for a single arbitration was improper. Doing

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so would require this Court to overstep its authority to review arbitration agreements under the FAA.

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Whereas the validity or enforceability of a contract containing an arbitration provision is an

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issue for a court to decide, it is settled law in this Circuit that disputes as to the scope of the parties’

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agreement to arbitrate is for the arbitrator, not the Court. See Cox v. Ocean View Hotel Corp., 533 F.3d

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1114, 1119-20 (9th Cir. 2008). The U.S. Supreme Court has made clear that procedural issues regarding

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an arbitration clause’s scope are for the arbitrators to decide. Howsam v. Dean Witter Reynolds, Inc.,

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537 U.S. 79, 84 (2002). Numerous courts since have held that the question of whether arbitration

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should proceed in one proceeding or multiple proceedings is an issue for the arbitrators to decide. See,

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e.g., Certain Underwriters at Lloyd’s v. Westchester Fire Ins. Co., 489 F.3d 580, 587 (3d Cir. 2007);

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Employers Ins. Co. v. Century Indem. Co., 443 F.3d 573, 581 (7th Cir. 2006) (“consolidation is a

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procedural issue” and “procedural issues are presumptively for the arbitrator to decide”); Shaw’s

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Supermarkets, Inc. v. United Food & Commercial Workers Union, Local 791, 321 F.3d 251, 254 (1st

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Cir. 2003) (consolidation is “a procedural matter for the arbitrator”); Clearwater Ins. Co. v. Granite

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State Ins. Co., 2006 WL 2827872, at *1 (N.D. Cal. Oct. 2, 2006) (Illston, J.) (“the issue of consolidation

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is one for arbitration panels, not the courts, to decide”).

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Clearwater’s core concerns here are twofold – that (1) petitioners’ initial demand for a single

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arbitration was invalid, and that (2) if a single arbitration does proceed, Clearwater’s preferred

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“honorable engagement” clause should govern. Neither of these issues is appropriate for resolution by

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the district court. The two sections of the FAA urged by the parties, 9 U.S.C. §§ 4 and 5, limit the

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district court’s authority to either require the parties to arbitrate as agreed, under Section 4; or to appoint

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arbitrators under certain impasse conditions, under Section 5. Neither of these provisions empowers

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the Court to decide the two scope-of-the-arbitration-agreement questions Clearwater poses. To do as

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Clearwater requests, i.e., to require the parties to appointment three sets of arbitrators, the Court would

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necessarily have to find that petitioner’s demand for a single arbitration was invalid. In effect,

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Clearwater would require the Court to interpret the relevant contracts and decide whether they require

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one or more arbitrations – a consolidation issue decidedly outside the Court’s purview.

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Moreover, Clearwater’s proposal would require the Court to order three separate arbitral panel

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appointments, under circumstances where three separate arbitration demands have not been issued. As

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Clearwater concedes, petitioners have actually made only one demand for arbitration. In responding

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to that single demand, Clearwater has repeatedly objected to its scope, but Clearwater has not made any

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separate demands for arbitration. Thus, Section 4, which empowers the Court to enforce arbitration

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agreements where there has been a proper demand, cannot apply to the two additional arbitrations

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Clearwater seeks. The Court simply cannot order the parties to proceed under Section 4 to arbitrate

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disputes about which no demand for arbitration has been made.

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The Court is similarly constrained in granting the relief petitioners have requested. Petitioners

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argue that the delay in the umpire appointment process is sufficient to warrant the Court’s use of its

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Section 5 power to appoint an umpire. The Ninth Circuit has cautioned, however, that district courts

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“respect” the umpire selection mechanism in the parties’ arbitration clauses “by requiring compliance

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with those agreements when possible.” Pacific Reinsurance Mgmt. Corp. v. Ohio Reinsurance Corp.,

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814 F.2d 1324, 1328-29 (9th Cir. 1987). There the Ninth Circuit affirmed the district court’s

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appointment of an umpire in the underlying arbitration based on a finding that it was “impossible” for

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the court “to follow the agreement of the parties regarding the selection of the umpire.” Id.

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In the instant case, compliance with the parties’ chosen mechanism for appointing an umpire is

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not impossible. Instead, it is already underway in the single arbitration demanded. While Clearwater

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disputes the scope of petitioners’ initial demand, this is not a case where Clearwater has completely

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frustrated petitioners’ efforts. Rather, Clearwater has participated in the contractual appointment

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process. Much of the delay has been to resolve the legal issues Clearwater has raised in its refusals to

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proceed. Because the Court now effectively resolves those issues, by confirming that they must be

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resolved by the arbitration panel, there should be no need for further delay. As described above, the

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parties have each selected an arbitrator, and those arbitrators have each already submitted the names of

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their two umpire candidates.

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Given the facts as they exist at this juncture, the Court is limited to its Section 4 authority – to

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require the parties to proceed with their contractually agreed upon appointment mechanism. The parties

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agree there is no substantive difference between the umpire selection procedures in each of the three

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agreements. Thus, pursuant to its Section 4 powers, the Court now requires the parties to arbitrate as

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agreed. Once selected, the single arbitration panel can resolve the issues of whether petitioners’ demand

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for arbitration was an improper consolidation, which of the three “honorable engagement” provisions

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should govern, and any other similar issues the parties raise.

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CONCLUSION
For the reasons discussed above, respondent’s cross-petition is DENIED. Petitioners’ request
is DENIED IN PART and GRANTED IN PART as follows:

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Pursuant to 9 U.S.C. § 4, the Court hereby Orders the parties to arbitrate as agreed. Having

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nominated four umpire candidates in the single arbitration demanded, and being unable to decide among

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them, the parties shall each strike one candidate and draw lots from among the remaining two, as

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described in the underlying contracts. This process shall be completed within seven (7) days of this

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Order. Upon selection, the parties shall immediately notify the Court and this case will be dismissed.

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The denial in part of petitioners’ request to appoint an umpire pursuant to 9 U.S.C. § 5 is without

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prejudice to re-filing should the parties reach an impasse in implementing this Order.

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IT IS SO ORDERED.
Dated: August 19, 2013
SUSAN ILLSTON
United States District Judge

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