OneBeacon America Ins. Co. v. Turner (S.D. Tex. 2006); AND Int’l Marine Underwriters v. Thomas J. Turner (5th Cir. 2006)

Issue Discussed: Judicial Review/Manifest Disregard

Submitted by John R. Cashin

Date Promulgated: October 30, 2006

Issues Addressed: Whether an arbitration award should be vacated for Manifest Disregard of the law.

In OneBeacon America Insurance Company v. Turner, the Court of Appeals for the Fifth Circuit affirmed the District Court’s judgment that in part denied OneBeacon’s effort to vacate an arbitration award on grounds that the arbitrators acted in manifest disregard of the law in awarding attorney’s fees and had exceeded their powers in awarding administrative fees and expenses.

The dispute arose from an insurance policy covering a yacht owned by Turner that the parties agreed had an insured value of $95,000. The vessel was reported missing and was subsequently discovered with damage from flood and vandalism. An initial insurance estimate determined that the damage was between $55,000 and $65,000. Believing that Turner was partially responsible for the loss, OneBeacon offered $9,000 to settle the claim. Turner rejected the offer and invoked the policy’s arbitration provisions. Such provisions called for each party to appoint an arbitrator and the two arbitrators appoint a third. The policy also provided that each party was responsible for its arbitrator’s fees and half the third arbitrator’s fees and expenses.

The arbitration panel conducted a hearing and both parties waived their right to record the proceedings. The panel issued an award finding the vessel a ‘‘total loss’’ and awarded Turner the full value of the yacht. The panel also awarded Turner for personal property damage and for administrative fees and expenses relating to the arbitration and for attorney’s fees. OneBeacon moved to vacate the award, arguing that the arbitrators had acted in manifest disregard of the law in awarding attorney’s fees and expenses. OneBeacon also challenged the panel’s factual findings relating to personal effects and total loss of the yacht. The District Court vacated the portion of the award allocated to the fees and expenses of the arbitration, finding that the arbitrators has acted ‘‘in a manner inconsistent with the arbitration provision’’. OneBeacon America Insurance Company v Turner, 2006 wl 547959, at *3 (S.D. Tex. 2006). As to attorneys fees, however, the District Court denied the motion to vacate, noting there was ‘‘no evidence in this case that the arbitral panel was aware of the Fifth Circuit law requiring litigants in maritime cases to pay their own attorney’s fees.’’ Tex A&M Research Found v Magna Carta Transp., Inc., 338 F. 3d 394 (5th Cir. 2003). The Court also dismissed OneBeacon’s challenge to factual findings. OneBeacon appealed solely on the issue of the award of attorney’s fees alleging manifest disregard of the law.

In a per curiam opinion the Fifth Circuit affirmed the judgment of the District Court and described the two step analysis necessary to determine manifest disregard of the law. First, ‘‘the error must have been obvious and capable of being readily and instantly perceived by the average person qualified to serve as an arbitrator.’’ Kergosien v. Ocean Energy, Inc., 390 F. 3rd. 356, 355 (5th Cir. 2004) In addition, ‘‘the term ‘disregard’ implies that the arbitrator appreciates the existence of a clearly governing principle but decides to ignore or pay no attention to it.’’ Id. The second step requires ‘‘the Court must find that the award results in significant injustice’’. Id. The Fifth Circuit agreed with One Beacon’s argument that the general rule applicable to maritime disputes requires litigants to pay their own attorney’s fees. It held nevertheless that ‘‘the failure of an arbitrator to apply the law correctly is not a basis for setting aside an arbitrator’s award.’’ Kergosien 390 F. 3rd at 356. Having failed to secure a record of the Panel’s proceeding, OneBeacon failed to show that the arbitration panel was aware of the governing principle and refused to follow it so ‘‘its claim that the award was in manifest disregard of the law fails at the first step’’ of the required analysis.

* John R. Cashin is General Counsel – Group Reinsurance at Zurich Financial Services, Zurich, Switzerland. He is an ARIAS Certified Arbitrator. At Zurich his responsibilities include insurance regulation, reinsurance claims, reinsurance litigation, arbitration and contract wording. He joined Zurich in 2004 from the law firm of Stroock & Stroock & Lavan LLP in New York City. Prior to his law firm practice he served as Deputy Superintendent of the New York State Insurance Department and spent twenty years in the reinsurance brokerage business.