Sit On Your Rights – Lose

Sit On Your Rights – Lose

Arbitration Award Affirmed

Plaintiff, Excelsior Insurance Company (“Excelsior”), appealed from a trial court order confirming an arbitration award issued in favor of defendant, One Beacon Insurance Company (“Beacon”). Both Excelsior and Beacon are members of Arbitration Forum, Inc. (“AFI”), and signatories to its arbitration process. Special arbitration under AFI resolves disputes between multiple insurers to the extent, if any, of apportioning liability between the multiple insurers, each of whom has acknowledged a coverage obligation. Where, however, an insurer has denied coverage, AFI lacks jurisdiction to entertain the matter, and the denial of coverage is an affirmative defense under AFI provisions. In Excelsior Insurance Co. v. One Beacon Insurance Co., A-1439-12T1 (N.J.Super.App.Div. 09/03/2013) the New Jersey appellate court resolved the dispute based upon the wording of the arbitration agreement.

Excelsior and Beacon provided coverage to Hovson’s, Inc., a developer who built homes in a development known as Holiday City in Monroe Township, New Jersey. The homes were built between 1996 and 2002. Beacon provided liability coverage to Hovson’s from March 1999 through March 2001, while Excelsior provided similar coverage from March 2001 through March 2005. Homeowners sustained property damage resulting from water infiltration and sued Hovson’s. Excelsior denied coverage on the basis that New Jersey law applied to any interpretation of the claims and that under New Jersey law, coverage is determined by a “manifestation trigger, ” meaning that the water filtration did not manifest during the period of coverage by Excelsior. Beacon, however, agreed to defend Hovson’s under a reservation of rights and, once judgment was entered against Hovson’s, instituted a special arbitration against Excelsior. After Excelsior failed to answer the arbitration pleading and after the arbitrator denied Excelsior’s last-minute adjournment request, the matter proceeded to arbitration where an award was entered in favor of Beacon.

Excelsior filed a verified complaint and order to show cause seeking to vacate the arbitration award. The trial judge noted it was undisputed that Excelsior, inexplicably, never responded to the demand for arbitration with an answer or a contention sheet and that under AFI, the failure to do so operates as a waiver of defenses, including any jurisdictional defense. The judge found that Excelsior had “every opportunity to proceed and participate in the arbitration proceeding, but for reasons not articulated, failed to do so. [Excelsior] did not attempt to assert an affirmative defense of jurisdiction until a day before the arbitration hearing and several days after the materials were due.” Based upon Excelsior’s conduct, the trial court:

“[T]he Arbitration Panel in this matter clearly acted within the scope of the powers afforded them in the Agreement between the parties. The Arbitrator found that [Excelsior] did not provide a sufficient cause for adjourning the arbitration hearing . . . . The Court finds that the Arbitrators acted within their scope of authority in denying [Excelsior’s] lastminute request for an adjournment. Affirmative defenses not raised in the contention sheet are waived.[] Adjournment requests may be granted provided the request is made a least three (3) days before the hearing date and the party requesting the adjournment has filed its “contention sheet” in a timely manner.[]”

Trial Court Decision

The trial judge additionally found that Excelsior’s denial of coverage was based upon its conclusion that the damage sustained by the homeowners manifested itself two years before the inception date of its coverage and, as such, under New Jersey law, its duty to provide coverage had not been triggered. The judge concluded reason “does not constitute ‘denial of coverage’ as defined in the Arbitration Agreement because it admitted coverage was in force but not for the claim. As a result AFI had jurisdiction to hear the dispute. Recognizing the narrow grounds upon which an arbitration award may be vacated, the court concluded Excelsior failed to meet any of those grounds.

Beacon filed a motion to confirm the arbitration award. The trial court granted the motion. Excelsior’s counsel agreed that Excelsior’s primary argument against confirmation of the arbitration award was AFI’s lack of jurisdiction. Having previously rejected this argument, the judge granted the motion.

ANALYSIS

The circumstances under which a court may vacate an arbitration award are limited. The scope of an arbitrator’s authority depends on the terms of the contract between the parties. Thus, an arbitrator may not disregard the terms of the parties’ agreement, nor may he rewrite the contract for the parties.

Excelsior and Beacon, as signatories under AFI, were both bound by its terms and provisions set forth in the AFI Special Arbitration Forum Reference Guide (“Guide”). A company accepts and binds itself to all of the Articles by signing the Special Arbitration Agreement. In signing the Agreement, the company also agrees to comply with the Special Arbitration Rules and Regulations. Thus, the parties were bound by these Articles within the Guide as well as the Rules and Regulations.

At no point does Excelsior explain the reasons for the delay or why it did not file in a timely manner in accordance with Arbitration Forum’s requirement. As a signatory to the Special Arbitration Agreement and Arbitration Forum’s, Inc., Excelsior is required to follow their rules and procedures.

The Guide makes clear that an assertion of a “denial of coverage” should be based upon “the fact that the company’s policy does not cover the individual or entity seeking coverage for the claim or suit or that there was not a policy in effect at the time of the incident at issue.” The denial of coverage here addressed neither of these circumstances. Rather, the denial addressed Excelsior’s determination that there was no coverage because of its interpretation of New Jersey law determining when the duty to provide coverage was triggered.

ZALMA OPINION

An arbitration agreement binds the parties to the agreement just like the terms of an insurance contract bind the parties to the policy. When one party demands arbitration it bears the same weight as a suit in a court. Failure to respond to the demand, as failure to respond to a suit, allows the court or the arbitrators to enter an award as if the defendant had admitted everything in the charge against it.

Excelsior agreed to the terms of the Arbitration Agreement. It also admitted that it had coverage in effect, although it did not believe that it owed the insured a defense or indemnity. One Beacon disagreed and submitted the dispute to arbitration. Excelsior refused to participate in the arbitration and as a result defaulted.