Reinsurance disputes, particularly collateral disputes over the technicalities of arbitration, are often caused by the words selected in the drafting of the reinsurance contract. Because there is no “right” arbitration clause perfect for every reinsurance agreement, arbitration clauses differ from company to company and from broker to broker. Every company and every broker has their preferred arbitration clause wording. And that’s fine as long as what they are drafting comports with reality and common sense.

The hidden minefields are many when drafting a reinsurance contract. The dispute resolution clause, often an arbitration clause, is often given short shrift when the reinsurance contract is being drafted. When treated as an afterthought, the arbitration clause may become a point of controversy should a dispute arise.

Here’s an example that we have seen more than a few times. Some contract drafters like to invoke the rules of a particular organization as the controlling authority for the arbitration panel. But what happens if the rules referenced are superseded or are no longer valid? Obviously, the parties can always agree post-dispute to resolve ministerial issues like which rules (if any) to follow, but what if they don’t agree? Now you have a collateral dispute. To avoid this problem the better practice is to not refer to a particular edition of a set of rules, but to indicate that the rules will be those in effect at the time the arbitration demand is filed.

A similar problem may happen when an arbitration clause names a particular organization or person to select the arbitrators or the umpire if the parties should not agree on a candidate. We have seen a number of arbitration clauses that name the American Arbitration Association, a specific judge, a particular officer of a named organization or some other named person or organization as the person/entity designated to appoint the arbitrator. Should the person or the organization no longer exist or lack power to do what is directed under the arbitration clause more problems and controversy may arise.

In a recent case, the arbitration clause in a series of reinsurance agreements required that the arbitrator be selected by the Anguilla, B.W.I. Director of Insurance. Poolre Ins. Corp. v. Organizational Strategies, Inc., No. 14-20433, 2015 U.S. App. LEXIS 5601 (5th Cir. Apr. 7, 2015). The problem was that no such official existed. Because the arbitrator eventually appointed was not appointed by the Director of Insurance, the award was vacated (for other reasons that existed as well). This was because the arbitrator exceeded his authority in deciding issues where the arbitrator was not appointed properly under the terms of the arbitration clause.

In affirming the district court, the 5th Circuit noted that obviously no arbitrator could have been appointed as required under the arbitration clause in the reinsurance agreements because no Director of Insurance existed. So what was the court’s solution? The court pointed to the Federal Arbitration Act and specifically to section 5, which allows a party to move the district court to appoint an arbitrator if for any reason there is a lapse in the naming of an arbitrator. As the court stated, a lapse under section 5 means a lapse in time in the naming of the arbitrator or the filing of a vacancy on a panel of arbitrators or some other mechanical breakdown in the arbitrator selection process. Here, the mechanical breakdown was that the appointing authority did not exist.

The better practice, of course, is to draft arbitration clauses where references to organizations, rules or selection mechanisms have no chance of breaking down or disappearing. Where there is a problem selecting an arbitrator because the mechanism for selection does not exist or failed or the designated party has no authority or desire to cooperate with the parties’ previously unknown designation, the courts, under section 5 of the FAA, are authorized to complete the selection process so that the parties can get on with the arbitration. But where the issue is not the mechanism for selecting the arbitrator and some other designation in the arbitration clause fails, the parties may be on there own to craft a solution. If cooler heads prevail, collateral litigation may be avoided. If not, the purpose of an efficient and cost-effective mechanism for resolving business disputes will be lost.