Emp’rs Ins. Co. of Wausau v. OneBeacon Am. Ins. Co., No. 13-1913 (1st Cir. Feb. 26, 2014) [click for opinion]

Between 1966 and 1986, OneBeacon American Insurance Company entered into reinsurance contracts with various reinsurers, including Employers Insurance Company of Wausau and Swiss Reinsurance America Corporation.  The reinsurance contracts were identical in all relevant respects and contained a broad arbitration clause covering “any irreconcilable dispute” between the parties.  In 2007, OneBeacon demanded arbitration with Swiss Re, seeking reinsurance recovery for losses arising out of claims against OneBeacon by several policyholders. The arbitration panel decided in favor of Swiss Re and the district court confirmed the award.

In 2012, OneBeacon demanded arbitration with Wausau, seeking recovery for the same claims that it had arbitrated and lost against Swiss Re. Wausau petitioned the court for declaratory relief and argued that the prior arbitration award between OneBeacon and Swiss Re should have preclusive effect.  Wausau based its argument on Section 13 of the Federal Arbitration Act (“FAA”), which provides that a court order confirming an arbitration award “shall have the same force and effect, in all respects, as . . . a judgment in an action.”  Wausau asserted that only the federal court could determine the preclusive effect of its own judgment.

The First Circuit disagreed with Wausau and held that the preclusive effect of a prior arbitration award is itself an arbitrable issue.  The court explained that a prior judgment only has preclusive effect when it is rendered on the merits of the dispute, but federal courts rarely examine the underlying details of an arbitration award when they issue a confirmation order.  If a federal judgment confirming an award does not address the steps leading to the decision on the merits, the judgment does not have preclusive effect.

The court noted that its holding does not harm the federal courts’ ability to protect their judgments within the proper bounds.  For example, if a federal court held that an arbitration was not fraudulent and therefore was enforceable, a subsequent arbitrator would not have the power to disturb that ruling.  But, if a federal court has nothing to say about the merits of the arbitration decision that it confirms, then a subsequent arbitrator can decide the preclusive effect of the prior decision without infringing on the court’s power.