Arbiters and Conflicts of Interest

An interesting story at Professional Liability Matters regarding an arbitration settlement that was voided because the arbitrator, in this case as judge, did not disclose an affiliation he had with one of the parties.  You can read the article here.  The interesting part comes in the legal theory to determine conflict; from the California Court of Appeals (emphasis added): 

On appeal, the California Court of Appeals noted that the standard for disclosure is not whether the judge was actually biased, but whether a reasonable person “could entertain a doubt that he could be impartial.”  Because the judge included one of the firm’s partners as a reference on his resume, the court determined that this standard was met.  Accordingly, the Court held that the judge had erred in failing to make the disclosure and vacated the arbitration award. 

This touches on a topic that insurance coverage lawyers have been dealing with for years. Namely, that an insured can state that a particular lawyer or firm, in a case where a determination of coverage impacts that insured, has a potential conflict of interest simply because they are panel counsel of the insurance carrier and thus the carrier has sway over their economic likelihood. I.e., it’s theorized a particular law could have an incentive to perform in the insurance carrier’s favor rather than in the insured’s favor.

An example would be a situation where an insured is brought up on potential fraud charges. The theory goes – and mind this is simplified and subject to jurisdictional law – that a carrier’s panel counsel has incentive to steer the decision toward a finding of fraud rather than negligence so that the insurance carrier will not have to pay an award. This would then encourage the carrier to use that particular counsel in the future. c.f. San Diego Navy Federal Credit Union, et al. v. Cumis Insurance Society, Inc.

States handle this matter differently – some state that a conflict doesn’t really exist or, if it does, the professional ethics and requirements put upon lawyers is sufficient to preclude “steering” cases in this manner. While an insured can still hire their own counsel in cases they believe they have conflict, many locales state it’s at their own cost.  However, other jurisdictions do require the carrier to pay for an insured’s independently chosen counsel if there’s a significant conflict.

In jurisdictions where “independent counsel” is mandated (California being one) an interesting question arises when an insurance contract has an arbitration clause. I’ll be honest in saying that I’m not familiar with California policies, but if their arbitration clauses read like others I’ve seen then an insurance contract can require insureds to submit to binding arbitration in matters of dispute. These clauses often specifically define the firm to be used. 

If such is in your contract, it seems like a potential “steering” problem, similar to that exists with lawyers, is created. After all if a state assumes that legal counsel will be influenced by volume of business, why wouldn’t an arbitration firm? I’ll admit it’s probably a harder argument to make, but certain jurisdictions consider a legal counsel conflict to be per se, so if the conflict is automatically presumed, it’s not that big of a stretch to apply it to other scenarios. 

And remember the article above – in the situation of this particular arbiter, all that was needed was for a “reasonable person” to “entertain doubt” of their impartiality. So while perhaps a difficult argument, the obstacles are still pretty low. And it would only take one court case to, essentially, invalidate any arbitration agreement in a particular jurisdiction when the insurance carrier was solely responsible for appointing the arbiter.

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