Wednesday, September 16, 2015

U.S. District Court holds arbitration clause allowing arbitrator to rule on claim based on equitable theory allows her to rule on equitable grounds

Ace American Insurance Company insured a boat owned by John Puccio.  The boat sank in severe weather.  Ace American denied coverage. 

The dispute was submitted to arbitration as required by the terms of the policy.  The arbitrator awarded Puccio damages under the policy, plus attorney's fees and costs as 93A damages.

Ace American filed a complaint in court seeking to vacate or modify the arbitration award.  It argued that the arbitrator exceeded her authority by failing to apply a wear and tear provision of the insurance policy.  The provision excluded "any loss or resulting damage from . . . wear and tear, gradual deterioration, weathering, neglect, lack of reasonable care or due diligence in the maintenance of the insured Vessel." 

The arbitrator concluded that even if wear and tear contributed to the boat's sinking, the insurer "could not possibly have assumed that a 1998 boat was in new condition when it insured the [boat] . . . for 2012."  She reasoned that if the provision were enforceable in this case, the insurer could "comfortably insure boats beyond a certain age without any expectation of ever having to pay."  She concluded that this would "border on fraud," and that therefore the provision could not exclude coverage for Puccio's claim.  She found that Ace American's reliance on the provision was an unfair and deceptive practice under ch. 93A. 

Ace American argued in the United States District Court for the District of Massachusetts that the arbitrator exceeded her authority by resolving the dispute on equitable grounds never submitted to her.

In Ace Am. Ins. Co. v. Puccio, 2015 WL 3540838 (D. Mass.), the court disagreed.  The arbitration clause of the policy gave the arbitrator the authority to resolve "any controversy or claim . . . based in [any] . . . legal or equitable theory . . . arising out of or related to this policy, the interpretation, enforcement, or breach thereof, or the handling of any claim involving this policy."  It did not limit the arbitrator's power to consider equitable grounds in interpreting the policy. 

The court also noted that the arbitrator's decision not to apply the wear-and-tear provision was, at least arguably, an act of interpreting the contract. 

I take no position on whether the arbitrator's decision was good law.  But I do note that this decision highlights why I dislike arbitration generally.  Decisions of arbitrators can be overturned by a court only in very limited circumstances.  If an arbitrator has a bad day and issues a bad decision, you generally can't appeal it.  If a judge has a bad day and issues a bad decision, you can appeal it. 

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