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First Circuit Finds Preclusive Effect of Prior Arbitration is Arbitrable

Blogs, Insurance Coverage

On February 26, 2014, the United States Court of Appeals for the First Circuit held that a dispute over the preclusive effect of a prior arbitration decision is arbitrable even where that decision has been confirmed by a federal court order. Employers Ins. Co. of Wausau v. OneBeacon American Ins. Co., 744 F.3d 25 (1st Cir. 2014).

The facts in the underlying case were simple and undisputed. Between 1966 and 1986, plaintiffs National Casualty Company (“National Casualty”) and Employers Insurance Company of Wausau (“Wausau”) – together with non-party Swiss Reinsurance America Corporation (“Swiss Re”) – participated as reinsurers in a program run by defendants OneBeacon American Insurance Company and various other OneBeacon entities (collectively, “OneBeacon”). In December 2007, OneBeacon demanded arbitration under its reinsurance contracts with Swiss Re seeking to recover losses arising out of claims by several policyholders. An arbitration panel decided in favor of Swiss Re, and the U.S. District Court for the District of Massachusetts confirmed the award. Thereafter, OneBeacon demanded arbitration with National Casualty and Wausau seeking coverage for a number of claims which the reinsurers contended were “the very same . . . claims OneBeacon arbitrated and lost against Swiss Re.” 

National Casualty and Wausau filed a petition for declaratory relief, arguing that the defendant insurers were barred by the doctrine of collateral estoppel from bringing the disputed claims. The District Court denied the petition, holding that “the preclusive effect of a prior arbitration is a matter for the arbitrator to decide.” Wausau appealed, and the First Circuit affirmed. 

On appeal, the First Circuit considered a single issue: “when an arbitration decision is confirmed by a federal court order, is the preclusive effect of that decision on a subsequent arbitration a matter for the federal court or the arbitrator to decide?” In affirming the District Court’s decision that the matter is for an arbitrator to decide, the Court rejected Wausau’s argument that federal courts have the exclusive authority to determine the preclusive effect of federal court orders confirming arbitration awards. More specifically, the Court found that, because such orders “very rarely consider[] the merits of the arbitrator’s decision” and “generally do[] not address the steps leading to the decision on the merits at all,” “there is no reason why [such orders] should give federal courts exclusive power to determine the preclusive effect of the arbitration.” The Court also found that, by failing to raise it with the District Court, Wausau waived its argument that the parties could not have intended for their arbitration agreement to cover the preclusive effect of prior arbitrations because the case law at the time the parties negotiated the applicable agreement in the early 1970s did not hold that preclusion was an arbitrable issue. 

Click here to read the First Circuit’s decision in its entirety.