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United States Life Insurance Co. v. Superior National Insurance Co.

January 4, 2010


Appeal from the United States District Court for the Central District of California. Valerie Baker Fairbank, District Judge, Presiding. D.C. No. CV-07-00850-VBF (JTL).

The opinion of the court was delivered by: E. Shea, District Judge


Argued and Submitted November 19, 2008 -- Pasadena, California

Before: Susan P. Graber and Richard R. Clifton, Circuit Judges, and Edward F. Shea,*fn1 District Judge.


We are asked to determine whether an arbitration panel violated the Federal Arbitration Act (FAA), 9 U.S.C. §§ 2-16. The process employed by the arbitration panel, which included an ex parte meeting with panel-retained workers' compensation experts, was unusual; however, after deferentially reviewing the panel's award, we determine that the arbitration process provided the parties with a fundamentally fair arbitration and that the arbitration award rested on a plausible interpretation of the governing arbitration documents. Accordingly, we affirm the arbitration award in favor of Superior National Insurance Companies in Liquidation (SNICIL).


U.S. Life contractually agreed to reinsure the workers' compensation risks insured by five California insurers between May 1, 1998, and January 1, 2003. This reinsurance contract contained an arbitration provision. These California insurers later declared bankruptcy and will be referred to as SNICIL. The California Insurance Commissioner became SNICIL's statutory liquidator.

Ten years ago, on November 29, 1999, U.S. Life requested arbitration, seeking: 1) rescission or reformation of the rein-surance contract because SNICIL misrepresented the reserves during the underwriting process and 2) damages for SNICIL's bad-faith performance. SNICIL agreed to arbitrate, seeking a declaration that the reinsurance contract was valid, a ruling that U.S. Life was to perform its contractual obligations, and damages. 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.*fn2

Phase I addressed rescission and reformation claims. After holding extensive hearings, the panel entered a Final Interim Award that found no basis for rescission. The panel, however, reformed the reinsurance contract so that U.S. Life became liable for only 90% of the risks insured by SNICIL's underlying policies because of SNICIL's failure to be forthright during the contract formation period. The panel awarded SNICIL interest on this 90% amount "at a rate equal to the average of the 2 and 5 Year Treasury Notes as posted in the Wall Street Journal."

U.S. Life sought vacatur of the Final Interim Award. The district court denied U.S. Life's petition; this court affirmed the district court's decision. U.S. Life Ins. Co. v. Ins. Comm'r, 160 Fed. App'x 559 (9th Cir. 2005).

Phase II proceeded to determine whether SNICIL engaged in improper claims handling that resulted in bills to U.S. Life in excess of the amounts due under the reinsurance agreement. A Phase II organizational meeting was held on April 14, 2005. Rather than review each of the 98,901 June 30, 2004 claims, U.S. Life's expert selected 500 of the 12,604 contested claims files for an audit. SNICIL's expert used this same sample to conduct its audit.

Prior to Phase II's evidentiary hearings, SNICIL's party arbitrator advised the parties that he had terminal cancer, but that he wished to continue as an arbitrator. The parties elected to continue with the arbitration proceeding with SNICIL appointing an alternate arbitrator to observe and potentially replace SNICIL's party arbitrator. The parties agreed that Phase II would be governed by Protocols Governing the Presentation of Evidence ("the protocols"). The panel approved the protocols.

In March 2005, the panel listened to the parties' Phase II evidence and arguments for approximately thirteen days.*fn3

After the hearings, the panel advised the parties that it was unable to reach a decision regarding the quality of SNICIL's claims handling and, more pointedly, U.S. Life's reinsurance contract obligations given the parties' divergent expert opinions. To rectify this "stalemate," the panel advised that it would retain two workers' compensation claims-handling experts ("the reviewers") to review the submitted bills.

The panel and the parties exchanged correspondence dis- cussing what review process to use. Ultimately, the panel*fn4 determined that the following review process would be used:

1) the reviewers would review 162 of the 500-claim sample of the June 30, 2004 claims; 2) the reviewers would meet with the panel for three days (hereinafter, "the ex parte meeting") and no transcript would be prepared of the ex parte meeting; 3) the reviewers would provide their conclusions in writing to the panel and the parties; 4) the parties could submit briefs responding to the reviewers' conclusions; 5) a two-day hearing would be held during which the parties could question the reviewers, under oath, for five hours each as to their qualifications and the reasons for their conclusions, but not as to the ex parte meeting; and 6) the parties could submit post-hearing briefs to the panel. This procedure was used.

On December 6, 2006, the panel issued its Phase II Interim Award, finding that all amounts billed prior to June 30, 2004, were properly due.*fn5 The panel determined, in addition to the Phase I Final Interim Award interest requirement, that U.S. Life was to disgorge its actual investment earnings on all monies due under the reinsurance agreement as of June 30, 2004. The panel also required U.S. Life to pay post-June 30, 2004 bills within thirty days of billing.

On February 1, 2007, the panel issued its Phase II Interim Final Award, which clarified that the panel's December 6, 2006 ruling [did] not change the interest awarded in its Final Interim Award of December 30, 2004, as amended and clarified. Any and all monetary awards for [SNICIL] of the excess investment earnings as set forth in this PHASE II INTERIM FINAL AWARD and in the Phase II Interim Award shall be deemed to be interest or other monetary remedy for US Life's disgorgement of unjust enrichment.

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 Phase I interest and Phase II disgorgement. Furthermore, U.S. Life was required to pay all post-December 6, 2006 bills within thirty days of receipt.

U.S. Life filed an action in district court to vacate this award. SNICIL answered and also filed a separate action to confirm the award. After consolidating the two actions, the district court upheld the arbitration award. U.S. Life now seeks review.


A. Standard of Review

When reviewing the district court's confirmation of an arbitration award, the appellate court must accept the district court's findings of fact unless clearly erroneous but decide questions of law de novo. First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 947-48 (1995); Schoenduve Corp. v. Lucent Techs., Inc., 442 F.3d 727, 730 (9th Cir. 2006); Employers Ins. of Wausau v. Nat'l Union Fire Ins. Co. of Pittsburgh, 933 F.2d 1481, 1485 (9th Cir. 1991). The issues before us involve questions of law.

During this de novo review, we were cognizant that arbitration is an encouraged method of dispute resolution and that our review of the arbitration panel's decision is greatly limited. See United Paperworkers Int'l Union v. Misco, Inc., 4 ...

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