August 21, 2020 Articles

The Southern District of New York Denies Request to Vacate AAA Insurance Coverage Award

The petitioners claimed, in part, that arbitrators were biased because they accepted appointments to other arbitrations involving the respondents.

By Erin Gleason Alvarez

In a recent ruling, the U.S. District Court for the Southern District of New York refused to vacate an arbitration award where the petitioners claimed, in part, that arbitrators were biased because they accepted appointments to other arbitrations involving the respondents. Two arbitrators were offered additional appointments on separate arbitration panels involving the respondents. The district court determined there was no evidence of partiality because the two arbitrators were mutually selected by the parties in accordance with the “strike and rank” method of selection under the rules of the American Arbitration Association (AAA).

In Galilea, LLC v. AGCS Marine Insurance Co., Liberty Mutual Insurance Co., and Starstone National Insurance Co., 427 F. Supp. 3d 518 (S.D.N.Y. 2019), the petitioners alleged that the arbitration award should be voided because (1) the arbitrators exceeded their power by proceeding in New York rather than in Montana, by conducting the arbitration under the rules of the International Centre for Dispute Resolution (ICDR), and by exercising jurisdiction over the petitioners’ counterclaims; (2) the arbitrators exhibited manifest disregard for the law by admitting the insurance application into the proceeding; and (3) there was evident partiality on the part of two of the arbitrators.

Underlying Facts

In 2014, a yacht was purchased. The following year, said yacht and its owners set sail on a voyage that started off the Florida coast, bound for San Diego, with plans for traversing the Panama Canal. Unfortunately, technical difficulties ensued, causing the vessel to run aground near Colon, Panama. While the passengers were safely rescued by the Coast Guard, the ship was heavily damaged—ultimately requiring $1.6 million in repairs.

On the day of the incident, the owners contacted their insurance carriers to request coverage, a request that was promptly denied as the accident purportedly occurred outside the navigational limits outlined in the policy.

The Arbitration

Shortly thereafter, the insurance carriers initiated arbitration in New York before the AAA, seeking a declaration that the yacht was not covered under the owners’ policy. In response, the owners filed an objection and 12 counterclaims in the arbitration proceedings, while simultaneously initiating a lawsuit in Montana federal court.

Arbitration was ultimately compelled, in lieu of the Montana proceedings, following an appeal to the Ninth Circuit. After soliciting input from the parties through the “strike and rank” method, the AAA appointed a panel of three arbitrators. Thereafter, three days of hearings were held before the tripartite panel in New York, under the ICDR’s International Arbitration Rules. The award was delivered to the parties on March 20, 2019.

After the award was issued, the parties returned to court—this time in New York. The owners sought to vacate the award, while carriers made a cross-petition to confirm the award.

Why the Award Was Confirmed

The district court refused to vacate the award, finding that (1) the arbitrators did not exceed their power, (2) the arbitrators did not exhibit manifest disregard for the law, and (3) there was no showing of evident partiality on the part of two of the arbitrators. 

The petitioners asserted three grounds for the court to vacate the award based on arbitrators exceeding their authority. First, the petitioners claimed that the arbitration should not have been held in New York, but in Montana—where they previously attempted to litigate their claims. The court held that the arbitrators did not exceed their power by proceeding in New York because the underlying clause provided, in pertinent part, that arbitration “proceedings will take place within New York County.” Galilea, 427 F. Supp. 3d at 524.

The petitioners claimed, as their second ground, that the panel exceeded its powers in conducting the arbitration under ICDR rules. The petitioners complained that the arbitration was wrongly conducted under ICDR—the AAA’s international division. However, the court ruled that the proceedings were conducted in “accordance with AAA rules, and the arbitration award expressly state[d] that the proceeding was initiated and governed by the AAA Commercial Arbitration Rules.” Id.

For the third ground, the petitioners claimed that the arbitrators exceeded their powers by exercising jurisdiction over the petitioners’ counterclaims. The petitioners had alleged that some of their counterclaims were outside the scope of the arbitration agreement. However, the court pointed out that the arbitration agreement provided that “any and all disputes arising under [the] policy” will be “resolved exclusively by binding arbitration.” Id. Because all of the petitioners’ counterclaims raised issues related to the contract’s formation, interpretation, or implementation, the court ruled that all counterclaims “constitute disputes arising under [the] policy and fall squarely within the scope of the arbitration clause.” Id.

The petitioners’ manifest disregard for the law claim also failed. The petitioners claimed that the arbitrators violated the law by admitting the insurance application into evidence during the proceeding. However, the court noted that the arbitration award indicates that the panel relied on the insurance policy, not the application, in reaching its substantive conclusion, and the court goes on to state that “the panel’s admission of the application is insufficient to constitute manifest disregard of the law because Petitioners fail to show that the arbitrators knew that the New York Insurance Law provision applied to the proceeding and that they ‘willfully flouted the governing law by refusing to apply it.’” Id. at 526.

Finally, the petitioners did not demonstrate evident partiality on the part of two of the arbitrators, who had accepted appointments in other arbitrations involving the respondents. Interestingly, the court ruled that because the arbitrators accepted appointments by the AAA’s “strike and rank” method, there was no evidence of partiality on the part of these two members of the panel. The court reasoned that this “procedure ensures that no party can ‘appoint’ an arbitrator, as the final list is comprised of only mutually-agreed upon arbitrators. . . . Thus, Petitioners’ allegation that the arbitrators were biased due to a desire to be appointed by Respondents in other arbitration proceedings is overstated and misguided.” Id. at 527. The court went on to reason that the AAA rules note that “upon any objection to the continued service of an arbitrator . . . the AAA shall determine whether the arbitrator should be disqualified . . . and shall inform the parties of its decision, which [] shall be conclusive.” But here, the AAA found no issue with either arbitrator continuing on the panel, and the court “[did] not disagree with the conclusion of the AAA.” Id.

For those reasons, the petitioners’ motion to vacate was denied and the Respondents’ cross-petition to confirm was granted.

Erin Gleason Alvarez is a full-time arbitrator and mediator at Gleason Alvarez ADR, LLC, in New York City, New York. 


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