Locke Lord QuickStudy: No Thanksgiving Vacation for This Arbitration Award

Locke Lord LLP
November 16, 2016

A New York Federal Court recently rejected a cedant’s request to vacate an arbitration  award on the grounds that it was in manifest disregard of the law or because the umpire failed to disclose his prior representation of the reinsurer.  The court determined that the cedant failed to clear the “high hurdle” necessary to show that the arbitration panel’s award was erroneous.  See,Yosemite Ins. Co. v. Nationwide Mutual Ins. Co., Doc. # 1:16-cv-05290, U.S. Dist. Ct. S.D. New York (Nov. 10, 2016).      

The cedant, Yosemite Insurance Co., asserted a claim against its reinsurer, Nationwide, arising out of a pollution claim in which the state of California was found liable for past and future remediation costs estimated at $700 million at the Stringfellow Site.  The cedant settled with California for $7.5 million and sought to recover a portion of that sum from its reinsurer.  The reinsurer refused payment asserting that the reinsurance treaty excluded  “contamination and pollution.”  The cedant challenged the reinsurer’s position on the grounds that the exclusion applied only if certain specifically listed perils related to the insured’s “main operations,” which was not the case with California.  An arbitration panel, by a 2-1 vote, determined that the cedant’s claim was excluded under the reinsurance treaty and that the limiting language relied on by the cedant did not apply to  the exclusions. 

In the New York court proceedings, the cedant sought to vacate the award while the reinsurer requested its confirmation.  The cedant challenged the award as “irrational” or in “manifest disregard of the law.”  The court stated that its review was “severely limited” based upon the “imposing standard of review” under the Federal Arbitration Act (FAA) noting that a party seeking to vacate an award must clear a “high hurdle.”  The court commented that the panel majority’s reading of the exclusions was “not the only colorable one,” but the Panel’s reasoning was derived from the text of the treaty and therefore was “beyond the scope of judicial review.” 

The cedant’s alternative challenge argued that the award should be vacated due to the evident partiality of the neutral umpire.  The Court rejected this argument as well.  Yosemite asserted that vacatur was required because the umpire failed to disclose that he served as counsel for Nationwide in a separate arbitration against Yosemite in 2004 involving a dispute of a treaty with identical language.  Yosemite argued that the umpire’s service as a lawyer adverse to it in the other proceeding and the failure to disclose it prior to serving in this matter gave rise to a “reasonable impression of partiality.”  The court rejected this challenge noting that the failure to disclose the prior arbitration does not itself sufficiently establish partiality to warrant vacatur.  According to the court, the cedant had the burden to establish evident partiality by showing that the “facts that were not disclosed suggest a material conflict of interest.”  The court ruled that the sparse information presented by the cedant fell short of that standard.  

While the court confirmed the award, the court denied the reinsurer’s request for fees and costs incurred in the court proceedings because the cedant’s petition was not frivolous, not objectively unreasonable or lacking in a “colorable basis” so as to merit sanctions.  The court cautioned that, before bringing any future petition to vacate an arbitral award, counsel should give “more studied attention to the demanding showing necessary to obtain such relief.”  

The Yosemite case serves as a reminder to parties to arbitration proceedings that vacations are not easy to come by.  Reviewing courts will likely give strong deference to arbitral awards and the arbitral process.  In particular, where the dispute involves a question of contract interpretation, the FAA provides limited grounds for vacatur and even if, as here, the court views an alternative construction as “more persuasive” than the panel’s interpretation, it may still not support vacatur of the panel’s award.          

For more information on the matters discussed in this Locke Lord QuickStudy, please contact the authors.