Ninth Circuit Reinstates $6 Million Arbitration Award Against Lloyd’s

In Lagstein v. Certain Underwriters at Lloyd’s, London, __ F.3d __ (9th Cir. June 10, 2010), the Ninth Circuit ruled that a district court had erred when it vacated a $6 million arbitration award against Lloyd’s under a disability policy.  In doing so, the Ninth Circuit reaffirmed the extreme deference to be shown arbitration awards and the difficulties that parties face in seeking to vacate such awards.  In light of the lack of viable judicial review, insureds must be careful to take all the steps necessary to protect their interests throughout the actual arbitration process.  This is especially true given the prevalence of arbitration provisions in insurance policies today.  Insureds must be aggressive in defending their interests in such policy disputes because there likely will be little recourse once an arbitration award is handed down by an arbitration panel.

In Lagstein, a doctor had been awarded (1) $900,000 in damages for breach of contract, bad faith and repudiation of the insurance contract, (2) $1,500,000 in bad faith compensatory/emotional distress damages, (3) $350,000 in attorneys’ fees, and (4) interest thereon.  Following issuance of these awards, Lloyd’s filed a motion to vacate the awards under section 10 of the Federal Arbitration Act (“FAA”) in the United States District Court.  Agreeing with Lloyd’s characterization of the evidentiary record, the District Court found that “the size of the awards shock the Court’s conscious and contravene public policy.”  More specifically, the District Court agreed with Lloyd’s assertion that the evidentiary record did not support the size of the breach of contract and compensatory/emotional distress awards and, therefore, found those awards to be “in manifest disregard of the law.”  The District Court also found that the arbitration panel had “exceeded its authority” with regard to the punitive damages award because it lacked the jurisdiction to make that award given the time that had lapsed since the conclusion of the initial merits hearing. 

On appeal, the Ninth Circuit reversed, finding that an arbitration award may be vacated under the FAA under only very narrow circumstances:  (1) the award was procured by corruption, fraud, or undue means; (2) evident arbitrator impartiality or corruption; (3) arbitrator misconduct; or (4) arbitrators exceeded their powers.  Accordingly, the Ninth Circuit held that the FAA does not permit judicial review of the merits of an arbitration award.  Specifically, the Ninth Circuit found that “[a] district court may not vacate an award simply because the court disagrees with its size,” and that “it was error for the district court to vacate the arbitration awards simply because it found the total size either shocking or unsupported by the record.”  In other words, “it is not enough . . . to show that the panel committed an error – or even a serious error.”  Whether or not the panel’s findings are supported by the record is beyond the scope of a court’s review.  And, here, the Ninth Circuit concluded that the arbitrators had not exceeded their powers as Lloyd’s had argued.  First, in order to have exceeded their powers under a “manifest disregard of the law” theory, the arbitration panel must have recognized the applicable law and expressly elected to ignore it.  Such was not the case here.  Second, the Ninth Circuit found that the arbitration panel had the authority to issue the punitive damages award because the timing of the punitive award was a procedural matter properly placed within the panel’s discretion.

Finally, affirming the importance of the arbitrator selection process, the Ninth Circuit rejected Lloyd’s post-award challenge to the two arbitrators that had issued the divided damages awards against Lloyd’s.  Lloyd’s had argued that the awards should be vacated because these two arbitrators had failed to disclose an earlier ethics controversy in which they were both involved.  The Ninth Circuit disagreed, finding that the non-disclosure was insufficient to justify vacating the arbitration awards.  Moreover, the Court concluded that had Lloyd’s conducted even minimal due diligence on the arbitrators’ backgrounds during the arbitration proceeding it would have discovered this publicly available information.  Therefore, the importance of conducting adequate due diligence on proposed arbitrators, and moving to strike them at the outset when appropriate, should not be ignored.