Arbitration Awards Need Abuse to Be Overturned

Arbitrators have Substantial Discretion to Determine the Scope of Their Contractual Authority to Fashion Remedies

Arbitration is controlled by strong public policies favoring arbitration as a speedy and relatively inexpensive means of dispute resolution. For that reason arbitration awards are almost never overturned unless the aggrieved party can prove the arbitrators exceeded their powers, acted as a result of conflict of interest,  or acted wrongfully.

In QBE Insurance Corporation v. American Claims Management, Inc., D073345, Court of Appeal, Fourth Appellate District Division One State of California (February 4, 2019) Appellant American Claims Management, Inc. (ACM), a third party claims service administrator, entered into a contract to handle insurance claims on behalf of respondent QBE Insurance Corporation (QBE). ACM appeals a judgment entered after the superior court confirmed an arbitration award in QBE’s favor. The arbitration panel (the Panel)1 concluded that ACM violated the parties’ contract in handling a claim by a QBE auto insurance policy holder, Galdino Cortes, who was involved in a vehicular accident that injured three members of the Cardona family. The Panel awarded QBE total damages of $18,450,855.73, which included interest, attorney fees and costs.

ACM contends the Panel exceeded its powers because it:

“ignored California law” as shown by its failing to cite “a single California case or statute in discussing whether ACM breached the contract or must indemnify QBE”;

“created new California law in violation of California statutes and public policy;

held ACM liable for the entire $15 million settlement although, at most, ACM is assertedly only liable to indemnify QBE for the $1,250,000 that QBE paid to Cortes under the settlement agreement, and not the $13,750,00 settlement with the Cardonas

manifestly disregarded the law under the Federal Arbitration Act (FAA); and

“miscalculated amounts owed to QBE.”

ACM specifically contends the Panel improperly included in its award “damages relating to attorneys’ fees in the Cardona[ ] litigation”; “fees and interest, for obligations incurred before the Panel determined the duty to indemnify arose”; and attorney fees in the arbitration.

FACTUAL BACKGROUND

The parties stipulated to the following facts during arbitration: In February 2011, Cortes was involved in a traffic collision with the Cardonas. Cortes’s insurance policy had a $30,000 liability limit per accident. That month, the Cardonas mailed a policy limits demand to ACM, giving it 15 days to respond. After a late attempt to accept the offer, the case went to trial and the Cardonas obtained a judgment against Cortes in the amount of $20,974,903.

ACM did not timely communicate to QBE its receipt of the demand letter. The Panel wrote in its final award:

“In what would become a disturbing pattern, ACM also neglected to inform QBE that [] Cardona had called ACM . . . to follow up on his demand letter, that the demand letter expired . . . , and that [an ACM employee who was subsequently fired] failed to contact Cardona until [after the demand letter’s deadline]. In other words, ACM apparently chose to withhold from QBE evidence of its own negligent performance under the Agreement that . . . had potentially exposed ACM to hundreds of thousands, if not millions of dollars for bad faith.”

ACM and QBE later stipulated that $15 million was a reasonable amount to settle the Cardona lawsuit against QBE, and it was a good faith settlement.  QBE subsequently paid the Cardonas that amount.

QBE sued ACM to recover the $15 million settlement plus more than $1 million in legal fees that QBE incurred in the related action.

Arbitration Ruling

The Panel ruled on QBE’s breach of contract claim that QBE had proven its prima facie case and “ACM was deficient in its performance of its responsibilities to QBE under the [Claims Management Agreement (CMA)].”

The Panel ruled:

“The starting point for the Panel’s analysis of contract damages is with ACM’s failure to timely review the letter demand, timely respond thereto and ultimately pay policy limits on behalf of Cortes. Had it done so, QBE would have only incurred an expenditure of $30,000[ ], [Cortes’s] full policy limits. . . . [¶] QBE ultimately paid $15 [million] to resolve the Cortes and Cardonas claims. All but $30,000[ ] of this payment was required because of ACM’s breach.”

Trial Court Proceedings

ACM is contesting the Panel’s decision and findings because it does not agree with the award. All of ACM’s arguments were unavailing. ACM was trying to re-litigate the merits of the award regarding whether QBE is entitled to indemnity. That is an issue squarely within the CMA for the Panel to decide.

DISCUSSION

Considering the strong public policies favoring arbitration as a speedy and relatively inexpensive means of dispute resolution, the scope of judicial review of private, binding arbitration awards is extremely narrow. Even an error of law apparent on the face of the award that causes substantial injustice does not provide grounds for judicial review. With respect to contractual remedies, arbitrators, unless expressly restricted by the agreement or the submission to arbitration, have substantial discretion to determine the scope of their contractual authority to fashion remedies. Judicial review of their awards must be narrow and deferential.

Although a court may correct an arbitration award when the arbitrators exceeded their powers or may correct an award if the correction can be made without affecting the merits of the decision upon the controversy submitted.

The appellate court must, when asked to review an arbitration award, narrowly and deferentially review the arbitrators’ award. Following the rule dealing with arbitration awards the appellate court concluded that ACM’s contention the Panel’s final award is in excess of its powers failed because the recovery or non-recovery of fees is one of the contested issues of law and fact submitted to the arbitrator for decision and, therefore, the arbitrator’s decision was final and could not be judicially reviewed for error.

In addition, the court concluded that on their face, ACM’s several claims amount to nothing more than assertions of legal error whose conclusion was provided by the agreement to the arbitrators.

When parties contract to resolve their disputes by private arbitration, their agreement ordinarily contemplates that the arbitrator will have the power to decide any question of contract interpretation, historical fact or general law necessary, in the arbitrator’s understanding of the case, to reach a decision. Inherent in that power is the possibility the arbitrator may err in deciding some aspect of the case.

Arbitrators do not ordinarily exceed their contractually created powers simply by reaching an erroneous conclusion on a contested issue of law or fact, and arbitral awards may not ordinarily be vacated because of such error, for the arbitrator’s resolution of these issues is what the parties bargained for in the arbitration agreement.

The judgment was affirmed and QBE Insurance Company was awarded its costs on appeal.[IA]

ZALMA OPINION

The court followed the standard rule with regard to arbitration awards – it affirmed the finding because there was no proof of collusion, undisclosed conflict of interest or evidence that the arbitrators exceeded the powers provided to them by the contract authorizing arbitration. Professional liability claims people understand the hazards of short time limit policy demands and the failure to respond or advise the insurer placed QBE in a situation where it was required to pay $15 million on its $30,000 policy because of the error of the adjusters. The only issue not touched by the appellate court is whether ACM had sufficient errors and omissions insurance to pay the $15 million judgment or if ACM has sufficient assets to pay the judgment.