In a recent decision from the United States District Court for the Eastern District of Washington, Olsen v. United States, No. CV-06-5020-FVS (E.D. Wash. Mar. 10, 2008), the court vacated several arbitration awards on the grounds that the reinsurer was not bound by the arbitration agreement in contracts between the ceding company and its insureds, and the arbitrators did not have jurisdiction to preside over the disputes between the parties.

The Federal Crop Insurance Corporation (“FCIC”), a division of the United States Department of Agriculture, is a reinsurer of crop insurance policies issued by private insurance companies, through agreements with insurance companies referred to as Standard Reinsurance Agreements (“SRAs”). The plaintiffs purchased crop insurance policies (the “Policies”) with American Growers Insurance Company (“AGIC”) covering crops grown in 2001 and 2002, and AGIC entered into SRAs effective for those years. The Policies provided that disputes between the insureds and AGIC would be resolved through arbitration. The Policies also stated that the FCIC, as reinsurer, would “assume all obligations or unpaid losses” if AGIC was unable to fulfill its obligations, but that disputes between the insureds and FCIC were to be resolved through the FCIC appeal provision published in the Code of Federal Regulations. The plaintiffs sought reimbursement under the Policies for crop losses in 2001 and 2002 and later filed demands for arbitration when they could not reach agreement with AGIC. In 2005, the state of Nebraska liquidated AGIC, and the FCIC informed the plaintiffs that it would review the claims.

Hereafter, the arbitrators previously appointed proceeded with arbitration against FCIC. FCIC objected to the claims against them being brought in the arbitral forum and refused to participate. Despite FCIC’s absence, the arbitrators held evidentiary hearings and issued awards in favor of the plaintiffs.

The court found that FCIC was not a party to the Policies or the arbitration agreements contained therein, noting that the Policies state that disputes between the insureds and the FCIC must be resolved through the administrative process. Thus, the court vacated the awards, finding that it was improper for the arbitrators to decide the issue of whether the arbitration agreement was effective against the FCIC, since both the Ninth Circuit and the Federal Arbitration Act indicate that a court must decide whether an agreement to arbitrate exists in the first instance. The court also rejected the plaintiffs’ argument that the FCIC agreed to assume direct liability to them.

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