Dow Corning Corp. v. Safety National Cas. Corp.

Decision Date09 July 2003
Docket NumberNo. 02-2048.,02-2048.
Citation335 F.3d 742
PartiesIn re Arbitration Between DOW CORNING CORPORATION, Petitioner-Appellant, v. SAFETY NATIONAL CASUALTY CORPORATION, Respondent-Appellee.
CourtU.S. Court of Appeals — Eighth Circuit

Mitchell F. Dolin, argued, Washington, DC (David E. Finkelson, DC, Paul J. Puricelli, St. Louis, MO, on the brief), for appellant.

Andrew K. Epting, Jr., argued, Charleston, SC (Sean K. Trundy, Charleston, SC, Steven H. Schwartz, John Briggs, St. Louis, MO, one the brief), for appellee.

Before LOKEN,* FAGG, and MORRIS SHEPPARD ARNOLD, Circuit Judges.

LOKEN, Chief Judge.

Safety National Casualty Corporation (Safety) issued three "excess umbrella" liability insurance policies to Dow Corning Corporation (Dow Corning) covering the period December 1, 1983 to December 1, 1984. The policies included a mandatory arbitration provision. Many years later, Safety denied coverage for claims by consumers that silicon breast implants manufactured by Dow Corning caused them to suffer autoimmune disease. In June 1998, Dow Corning commenced arbitration of the coverage dispute. The critical issue was when coverage arose under the policies for autoimmune disease injuries.

Dow Corning and Safety could not amicably select the three-member panel of arbitrators required by the arbitration clause in the policies. Safety moved to compel arbitration under section 4 of the Federal Arbitration Act (FAA), 9 U.S.C. § 4, seeking to resolve Dow Corning's objection to Safety's party-arbitrator. Dow Corning responded with a cross-motion under section 5 of the FAA, asking the district court to appoint the neutral member of the three-member panel. The district court denied both motions. We affirmed, remanding with directions that the parties "select an umpire and get on with the arbitration of their coverage dispute." Dow Corning Corp. v. Safety Nat'l Cas. Corp., 205 F.3d 1345 (8th Cir.2000) (table).

After a hearing in July 2001, the panel issued a 2:1 decision in favor of Safety on the coverage issue, declaring its decision to be binding on the parties. Dow Corning filed a motion to vacate the award under section 10 of the FAA, 9 U.S.C. § 10. The district court denied the motion. Dow Corning appeals, arguing that the award should be vacated under section 10(a)(4) because the arbitrators exceeded their authority when they declared their decision binding and allowed the pre-hearing appointment of a substitute arbitrator; and that the award should be vacated under section § 10(a)(2) because of the neutral umpire's evident partiality. We modify the district court's judgment to reflect our conclusion that the arbitrators' award is non-binding and otherwise affirm.

I. The Binding Arbitration Issue

Arbitration usually results in a final determination that is binding on the parties to the underlying dispute, but the parties may instead agree to non-binding arbitration, in which case the arbitrators' decision is likely to be a precursor to further litigation on the merits of the dispute. The distinction is significant. "Mandatory arbitration prior to resort to a court is a different concept from mandatory arbitration precluding resort to a court." Orlando v. Interstate Container Corp., 100 F.3d 296, 300 (3rd Cir.1996) (concluding that a collective bargaining agreement called for mandatory but not binding arbitration).

If contracting parties agree to binding arbitration, if their agreement is within the reach of the FAA, and if they "have agreed that a judgment of the court shall be entered upon the award made pursuant to the arbitration," then a federal court asked to confirm the award "must grant such an order unless the award is vacated, modified, or corrected as prescribed in sections 10 and 11." 9 U.S.C. § 9. But in this case, Safety did not ask the district court to confirm the award under section 9, so we need not decide whether the arbitration agreement contained the judgment-entering recitation required by section 9. See PVI, Inc. v. Ratiopharm Gmbh, 135 F.3d 1252 (8th Cir.1998). However, Safety did ask the arbitrators to declare their decision binding, and they did so over Dow Corning's objection. Dow Corning moved to vacate the award under section 10(a)(4), arguing the panel exceeded its authority in purporting to render a binding decision. The district court agreed that the decision was binding, and Dow Corning appeals that ruling.

1. As this is a question of the contracting parties' intent, we begin with the terms of the arbitration clause in the insurance policies. Parties intending binding arbitration should say so explicitly in the agreement to arbitrate, either by providing that the arbitration award will be "final and binding," or words to that effect, or by incorporating by reference the rules of the American Arbitration Association or a similar arbitral body that expressly provide for binding arbitration. See, e.g., Rainwater v. Nat'l Home Ins. Co., 944 F.2d 190, 192-94 (4th Cir.1991) (incorporating AAA rules providing for entry of judgment upon the arbitration award makes the arbitration binding); Daniel Constr. Co. v. Int'l Union of Operating Eng'rs, Local 513, 738 F.2d 296, 298-300 (8th Cir.1984) (collective bargaining agreement provided for "final and binding" arbitration). However, the agreement to arbitrate in the Safety insurance policies contained no such provision. It merely provided:

As a condition precedent to any right of action under this Policy, any dispute arising out of this Policy shall be submitted to the decision of a board of arbitration.. . . The members of the board of arbitration shall be active or retired, disinterested officials of insurance or reinsurance companies. . . . The board shall make its decision with regard to the custom and usage of the insurance and reinsurance business.

Dow Corning argues that the "condition precedent" clause confirms the parties intended non-binding arbitration. Though the clause suggests that arbitration of a policy dispute will be followed by litigation, and thus is non-binding, like the district court we do not find this textual clue conclusive. It can also be read as simply recognizing that even binding arbitration is often followed by litigation, as the Fourth Circuit construed a similar provision in Rainwater, 944 F.2d at 194:

[The court] read[s] "condition precedent" to some extent as an artifact left over from the days of hostility toward arbitration. To the extent that the phrase has meaning, we find that it does not undermine the binding nature of arbitration, but instead applies to the confirmation process permitted by [the FAA] or to other litigation in which the arbitration award would be final but just a sub-text in some larger litigation context.

With the arbitration clause ambiguously silent on this issue, we must determine whether the parties to these 1983 excess liability insurance policies intended to contract for binding arbitration. Though evidence of custom and usage among parties to this type of insurance would be relevant, neither party submitted any such evidence. Looking more closely at the text of the agreement, we note the policies require that all three arbitrators be "active or retired, disinterested officials of insurance or reinsurance companies" and that their decisions be made "with regard to the custom and usage of the insurance and reinsurance business." This sounds very much like a provision designed for the resolution of technical disputes between an insurance company and its reinsurer. Here, on the other hand, the provision was inserted into an excess liability policy, where it applies to coverage disputes between an insurer and its insured and provides a decidedly pro-insurer "tilt" to the proceedings. An insured (other than another insurance company) is unlikely to agree that the results of such a proceeding will be binding, that is, judicially unreviewable on the merits under the FAA.

Though federal policy favors arbitration, and that normally means binding arbitration, we know of no federal policy favoring binding arbitration of insurance coverage disputes. Safety — which drafted the policies and presumably had greater knowledge of the custom and practices of excess liability insurers and reinsurers — presented no extrinsic evidence that binding arbitration was intended and cited no federal case in which an arbitration agreement entirely silent on this question was construed as providing for binding arbitration. On this record, we conclude the excess liability policies provided for mandatory but non-binding arbitration.

2. The district court acknowledged that the "condition precedent" language in the policies, though ambiguous, suggests that non-binding arbitration was initially intended. But the court concluded that Dow Corning subsequently agreed to binding arbitration of this coverage dispute, first in a 1994 settlement agreement dismissing Safety from a pending multi-insurer coverage suit, and then again in a July 1999 consent order entered in Dow Corning's Chapter 11 bankruptcy proceeding. In the settlement agreement, Dow Corning and Safety agreed "to arbitrate all coverage issues under [the policies]" if negotiations failed to resolve the dispute. The bankruptcy consent order, entered with the arbitration in process, provided that Safety's liability under the policies:

will be fully and finally adjudicated (i) in the existing arbitration action ... and/or (ii) in subsequent actions in the appropriate forum addressing matters of such insurance coverage and liability not resolved in such Arbitration and/or addressing enforcement thereof....

We cannot agree that the settlement agreement was "an agreement to engage in binding arbitration." It was an agreement to arbitrate under the policies if the dispute could not be informally resolved. This added nothing to the initial...

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