Chapter Seventeen

• Jurisdiction: New York

Chapter Seventeen

Arbitration as a Forum For Resolving Coverage Disputes

Eridania Perez, Esq.*

* The author thanks John M. Nonna, Esq., Michael T. Mullaly, Esq., and Nicholas Zalany, Esq., for their contributions to this chapter.

I. Introduction

A. Arbitration in the Insurance Industry

Arbitration has traditionally not been a principal means for resolving disputes between insureds and insurers or among insurers. A major exception has been the traditional use of arbitration in reinsurance disputes. Reinsurance contracts commonly contain arbitration clauses. Professional liability policies and certain excess insurance policies also contain arbitration clauses. The American Arbitration Association (AAA) has promulgated a dispute resolution program for insurance claims to govern disputes between claimants and insurers, as well as Title Insurance Arbitration Rules to govern title insurance claims. Arbitration is also a statutorily prescribed mechanism for resolving disputes in the area of uninsured motorist coverage and no-fault coverage.²¹⁹⁶ This chapter will not address such legislatively mandated forms of arbitration. Rather, it will discuss the law governing arbitration under the Federal Arbitration Act (FAA) and article 75 of the New York Civil Practice Law and Rules (CPLR), case law applying these statutes, and arbitration practices or procedures not governed by statutes and case law.

B. Advantages and Disadvantages of Arbitration

The advantages and disadvantages of arbitration, as compared to litigation, can be debated at length. In general, the most frequently cited advantages and disadvantages of arbitration are as follows:²¹⁹⁷

Advantages

1. Reduced costs;

2. Takes less time and is more efficient;

3. Parties exercise more control over the process;

4. Informal—strict rules of law and evidence not applied;

5. Private—proceedings are not a matter of public record;

6. Final—no appeals;

7. Decision makers are knowledgeable about industry practice and procedure.

Disadvantages

1. Limited discovery, giving rise to “trial by ambush”;

2. No effective review of arbitrators’ decision;

3. No requirement of reasoned decision—awards are like jury verdicts and not subject to any meaningful review unless agreed otherwise by the parties;

4. Can generate satellite litigation;

5. Cannot join all necessary parties;

6. Results in “industrial” justice or a compromise decision.

Several of the perceived advantages and disadvantages may not pertain to a particular arbitration. For instance, in some arbitrations, discovery is as extensive as it is in litigation, particularly with respect to document production and E-discovery. Depositions may be routinely allowed or agreed to by the parties in arbitrations, although arbitration panels differ in their preference for depositions or live testimony.²¹⁹⁸ As a result, arbitrations can be as costly and lengthy as litigation. Arbitrations limited to a single claim or issue of contract interpretation, however, can be handled in summary fashion at a hearing lasting no more than several hours, after limited discovery. Summary judgment is also available in arbitration, although it is not a very common practice.

There has been some criticism of the reinsurance arbitration process. The following criticisms have been the subject of recent debate in the insurance community:

1. Reinsurance arbitrations are conducted typically by a tripartite arbitration panel with two party-appointed arbitrators. The party-appointed arbitrators are expected to be advocates for the parties who appointed them. Yet, as arbitrators, these party-appointed arbitrators are supposed to be judges. This process-imposed schizophrenia has come under fire. Voices within the industry have called for a panel of three neutrals to assure a higher quality of decision-making process.

2. Although there are exceptions, many reinsurance arbitration awards are not reasoned. Rather, they are more like jury verdicts or responses to jury interrogatories. They may simply state an amount to be paid or summarily state if certain relief is granted or denied. This type of award leaves the parties in the dark as to the reasons behind the award and leads to questions as to whether the panel has adequately considered all of the issues and addressed all of the arguments. Summary awards tend to reinforce the view of some that arbitrators reach compromise decisions without rigorous analysis of the issues.

3. As noted above, the degree of discovery in reinsurance arbitration has equaled, if not in many cases surpassed, the discovery burdens encountered in litigation. There are those who believe that this level of discovery undercuts one of the principal advantages of arbitration, that is, minimal discovery burdens. These discovery burdens result in longer and more costly arbitrations, thus eliminating another perceived advantage of arbitration—cost.

C. Arbitration Compared to Litigation

There are two critical differences between litigation and arbitration proceedings; one is the relative flexibility of arbitration. While court systems are beginning to experiment with different “tracks” for certain types of complex commercial cases, generally the litigation system is oriented toward rigid procedural rules of discovery, pleadings and motion practice, which can be costly and time-consuming. Discovery disputes or requests for interim relief in arbitration generally can be handled more expeditiously by arbitration panels. Moreover, motion practice in arbitration tends to be more limited.

The second critical difference is that, as explained below, overturning an arbitration award is far more difficult than obtaining a reversal of a judgment or order of a court.

D. Mediation as an Alternative to Arbitration

One method of dispute resolution often linked to arbitration is mediation. However, mediation differs from arbitration in that, in mediation, a decision is not rendered for the parties. Rather, a decision is made by the parties to resolve a dispute, and that decision may be facilitated by a mediator. Mediation has not yet gained widespread use in the industry as a means of resolving insurance and reinsurance coverage disputes, given that these disputes are rarely resolved in mediation, resulting in an extra hurdle for the parties before litigation or arbitration. Mediation, however, can become a valuable adjunct to arbitration and litigation if the parties are willing to reach a resolution of their dispute and express optimism that a settlement can be reached.

II. Substantive Law of Arbitration

A. Federal and New York Law

Substantive law governing arbitration is codified. The FAA is applicable to arbitrations falling within its purview, essentially those involving interstate commerce or maritime transaction disputes.²¹⁹⁹ Otherwise, the arbitration statute of a particular state will govern. All states, except Alabama, have enacted statutes enforcing agreements to arbitrate existing controversies and those arising in the future.²²⁰⁰ The FAA and state arbitration statutes mandate the enforcement of arbitration agreements and make judicial assistance available to obtain specific performance of such agreements.

For instance, Section 2 of the FAA provides the following:

A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. ²²⁰¹

While federal law may apply to an arbitration agreement, a federal district court does not have jurisdiction to grant relief permitted under the FAA absent diversity of citizenship,²²⁰² unless the arbitration agreement or award falls within chapter 2 or 3 of the FAA dealing with international arbitration conventions. In the latter case, federal question jurisdiction is available. The FAA preempts conflicting state law, and state courts are bound to apply the FAA if a dispute falls under its purview.²²⁰³

Section 7501 of the CPLR also provides for the enforcement of agreements to arbitrate:

A written agreement to submit any controversy thereafter arising or any existing controversy to arbitration is enforceable without regard to the justiciable character of the controversy and confers jurisdiction on the courts of the state to enforce it and to enter judgment on an award. ²²⁰⁴

B. Agreement to Arbitrate

The availability of arbitration depends on the parties’ agreement to arbitrate their dispute. This agreement may be in the original contract, insurance policy or reinsurance contract. On the other hand, if the parties did not agree to arbitrate in their original contract, they may agree to arbitrate a dispute once it has arisen. This is referred to as a submission agreement.

Agreements to arbitrate need not encompass all disputes between the parties but may be limited to disputes regarding the “interpretation” or “performance” of an agreement. On the other hand, the parties may agree on a broad arbitration clause. A typical broad arbitration clause reads as follows:

Any controversy or claim arising out of or relating to this contract or the breach thereof shall be settled by arbitration and judgment on the award rendered by the arbitrators may be entered in a court having jurisdiction.

Courts have generally held clauses other than the above to be broad.²²⁰⁵

The scope and intent of the agreement to arbitrate has given rise to considerable litigation. The decision as to whether an arbitration agreement encompasses a particular dispute is for the court rather than the arbitration panel.²²⁰⁶ The parties, however, can agree to have the panel decide the issue of arbitrability and rules incorporated in the arbitration agreement may refer the issue of arbitrability to the panel.²²⁰⁷

The judicial trend...