In Northwestern National Insurance Co. v Insco Ltd., (S.D.N.Y. May 12, 2011), Northwestern National Insurance Company (NNIC) petitioned the district court to replace Insco's party-appointed arbitrator after Insco's first party-appointed arbitrator resigned, even though Insco was willing to and had appointed an acceptable replacement.

NNIC and Insco entered into a reinsurance agreement with an arbitration clause providing that disputes "shall be submitted to three arbitrators, one to be chosen by each party, and the third to be chosen by the two so chosen." After a dispute arose over reimbursement for litigation-related expenses, NNIC initiated arbitration against Insco. Both parties appointed an arbitrator and the two arbitrators appointed a third. After all arbitrators disclosed their potential conflicts of interest, the parties agreed that the panel was properly constituted.

Later in the proceedings, both party-appointed arbitrators disclosed potential conflicts. Incso then demanded that the entire panel resign because of evident partiality and stated that it would file action in court if a new panel was not constituted. Before Insco could go to court, Insco's party-appointed arbitrator resigned because NNIC would challenge any award against it based on evident partiality. Insco then appointed an ARIAS-US certified arbitrator as a replacement.

NNIC objected to the replacement and filed a petition in the district court for judicial appointment of an ARIAS-US certified arbitrator. It argued that because Insco acted in bad faith, by demanding replacement of the panel only because it was losing, and the arbitration agreement was silent as to replacement, the court should appoint the replacement. The court rejected this argument, explaining that NNIC cited no case law that supported its position.

The court instead relied on the Federal Arbitration Act, which requires that an arbitration agreement's procedure for appointing arbitrators be followed. Courts can only replace a party-appointed arbitrator when the agreement "does not specifically provide a method" for replacement. The court further explained that allowing a party to appoint a replacement arbitrator is consistent with the purpose of arbitration, "amicable determination of disputes with results which both parties are willing to accept." If a court replaces a party-appointed arbitrator, the parties' clear intent that each be allowed to appoint one arbitrator would be frustrated. Thus, the court should allow Insco to appoint the replacement and preserve the balance of arbitrators the parties intended.

This decision illustrates the willingness of courts to enforce arbitration agreements to give effect to the parties' intent and avoid unnecessary court interference in arbitrations.