Interim Award for Security Is “Final” Enough to Be Confirmed

On August 8, 2022, an Illinois federal court affirmed an arbitral award of pre-hearing security, over the objection that a pre-hearing security is not a “final award” within the meaning of the FAA, 9 U.S.C. § 10(a)(4). Am. Zurich Ins. Co. v. Sun Holdings, Inc., No. 22 C 2744, 2022 WL 3154213 (N.D. Ill. Aug. 8, 2022).

Facts

American Zurich Insurance Company (Zurich) provided insurance to Sun Holdings, Inc. (Sun). Their agreement included a paid deductible program with an arbitration clause adopting the American Arbitration Association’s (AAA) Commercial Arbitration Rules and limiting any award to compensatory damages. A dispute arose, and Zurich sought damages in excess of $1 million.

Arbitration commenced with the AAA, who appointed a three-member panel. The panel issued orders directing Sun to pay $1,001,945.60 in pre-interest security, which Sun did not do. Zurich filed a petition in the Northern District of Illinois to confirm the award of pre-hearing security; Sun cross-moved to vacate the award.

Legal Analysis

Sun contended that because the agreement limited damages to compensatory damages, and the award of the security was tantamount to specific performance, the award for security was outside the scope of the panel’s powers. 

The trial court held that although the agreement limits damages, it did not limit relief and is silent with respect to equitable relief. Furthermore, the agreement incorporates AAA’s Commercial Arbitration Rules, which permit the award of interim relief. The court also noted that Sun provided no authority for its contention that pre-hearing security is equivalent to “specific performance.” The court went on to state that in contrast to the permanent remedy of specific performance, pre-hearing security “is a temporary equitable order calculated to preserve assets; interim awards like pre-hearing security preserve a party's stake in arbitration and protect the bargain that gave rise to the dispute.” Finally, the court noted that the Seventh Circuit has held that despite its interim nature, an award of pre-hearing security is considered final and “subject to both confirmation and vacation under the FAA.” Yasuda Fire & Marine Ins. Co. of Eur., Ltd. v. Cont'l Cas. Co., 37 F.3d 345, 349 (7th Cir. 1994); Publicis Commc'n v. True N. Commc'ns Inc., 206 F.3d 725, 729 (7th Cir. 2000).

Practice Point

In the Seventh Circuit, an interim award of pre-hearing security may qualify as a final award within the meaning of the Federal Arbitration Act and be subject to confirmation. Moreover, although such relief is equitable in nature, it is different from specific performance and is designed to preserve assets until the arbitration can be decided.