Appeals Court holds insureds should raise public policy issue at arbitration

Congratulations to my friend Marie Cheung-Truslow at Smith & Brink, who just won a nice victory in the Massachusetts Appeals Court. Marie is a fabulous attorney who frequently represents insurers on large loss subrogation matters and in reference proceedings, and who I have often turned to for advice.

Marie's client, Northern Assurance, provided a yacht insurance policy covering a yacht called "Blaze of Glory." The yacht was destroyed in a fire. Fire investigators concluded that the fire was intentionally set and that its point of origin was the Blaze of Glory. (The Appeals Court decision doesn't state whether the yacht's name was a clue in the case.)

The insureds made an insurance claim for the fire loss. They appeared for an examination under oath and provided numerous documents but, according the Northern, not all the documents that were requested. Northern denied coverage on the grounds that the insureds had failed to cooperate. It filed a declaratory judgment complaint. The insureds responded with a demand for arbitration, as they were entitled to do under the policy.

The arbitrator ruled in favor of Northern. The insureds filed a motion to vacate the arbitration award on the ground that the arbitrator had exceeded her authority and contravened public policy by shifting the burden of proof on the cooperation issue from Northern to the insureds. The trial judge agreed with the insureds and vacated the arbitrator's award.

In Northern Assurance Co. of Am. v. Payzant, 80 Mass. App. Ct. 23 (2011), the Massachusetts Appeals Court overturned the decision of the trial court judge. It held that the insureds had waived their burden-shifting argument by not raising it at arbitration and by affirmatively asserting at arbitration that the burden-shifting clause of the insurance policy applied.

The court held that the proper procedure would have been for the insureds to challenge the legality of the burden-shifting clause of the policy before the arbitrator. The arbitrator would have ruled on this issue, and the right to a judicial determination would have been preserved. Alternatively, the insureds could have refrained from demanding arbitration.