The U.S. Court of Appeals for the Seventh Circuit recently issued its opinion in Trustmark Ins. Co. v. John Hancock Life Ins. Co., a case that both the reinsurance and general arbitration communities have been following closely. In a unanimous opinion, the Seventh Circuit reversed the District Court’s decision to hold that a party-appointed arbitrator’s prior involvement in an earlier arbitration between the parties did not disqualify him or render him incapable of serving in a subsequent arbitration involving related issues.

Trustmark Insurance Company reinsured certain risks written by John Hancock Life Insurance Company. A dispute arose between the parties concerning the meaning of a particular provision in the parties’ reinsurance agreements, which was submitted to arbitration. The panel found in favor of Hancock, which ultimately confirmed the arbitration award in the Northern District of Illinois.

Thereafter, another dispute arose between the same parties concerning the same reinsurance agreements. Hancock commenced a new arbitration and named the same arbitrator who had been appointed by Hancock in the earlier arbitration. Trustmark picked an arbitrator who had not participated in the first proceeding, and the two party-appointed arbitrators then chose the umpire.

One of the first issues the panel had to address was what weight should be given to the award issued in the prior arbitration between Hancock and Trustmark. Hancock contended that the award was largely dispositive, while Trustmark argued that it should be ignored. Moreover, because the parties had entered into a confidentiality agreement in the first arbitration, an issue arose as to what evidence from that proceeding could be disclosed to the panel presiding over the second arbitration. After considering the issue, Hancock’s party-appointed arbitrator and the umpire concluded that the arbitrators themselves (and the parties’ lawyers) were entitled to know and consider the evidence presented and results reached in the first arbitration.

Before the hearing on the merits began in the second arbitration, Trustmark brought an action to, among other things, enjoin the proceeding on the grounds that Hancock’s arbitrator was not “disinterested,” as required by the reinsurance agreements, due to his involvement in the first arbitration. Trustmark argued further that the panel lacked authority to rule on the scope of the confidentiality agreement from the first dispute, because that agreement did not contain an arbitration clause.

The District Court agreed with Trustmark, finding that Hancock’s arbitrator was not “disinterested” because he knew what happened during the first proceeding and could thus be called as a fact witness about those proceedings. The court also ruled that the panel could not consider the decision made by the first panel. But the Seventh Circuit reversed, finding that Trustmark failed to satisfy the standard for injunctive relief, both with respect to the harm it purportedly would suffer if the arbitration were allowed to proceed, and the merits of its claim.

The court found first that the harm alleged by Trustmark in support of its motion to enjoin-- having to wait until the panel rendered its award to challenge the arbitrator’s conduct and incurring related legal costs -- did not constitute “irreparable harm.” Rather, the court noted that Trustmark’s remedy for any alleged flaws in the arbitral process was limited to filing an application to challenge the award issued by the panel under the Federal Arbitration Act.

Next, the court held that Hancock’s party-appointed arbitrator was capable of serving in the subsequent arbitration between the parties, because he was “disinterested” under the standard set forth in the reinsurance agreements. The court defined “disinterested” as having a financial or personal stake in the outcome of the proceeding, which was not the case with respect to Hancock’s arbitrator. The court further found that the knowledge gained by the arbitrator from the prior dispute between the parties did not affect his “disinterested” status or otherwise taint the arbitral process. The court noted that judges routinely hear multiple suits arising from the same controversy, without resulting in disqualification, and that an arbitrator’s familiarity with certain issues is often a reason why he or she is appointed to serve on other panels involving overlapping areas.

Last, the court ruled that the panel had the authority to construe the confidentiality agreement from the first arbitration between Trustmark and Hancock. The court noted that although the agreement itself did not contain an arbitration clause, it was “presumptively” within the scope of the reinsurance agreements’ broad arbitration clauses, which covered all disputes arising out of the first arbitration. Further, because arbitrators are empowered to decide procedural questions that arise during the arbitral process, the court found that the panel could interpret both the scope of the confidentiality agreement and impact of the earlier award.

Click here to review a copy of the Seventh Circuit’s decision.