Arbitrator Factual Error Must Stand

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In Martinique Properties, LLC v. Certain Underwriters at Lloyd’s of London, Subscribing to Policy Number W1551E160301; Beazley Lloyd’s Syndicate 2623; Beazley Lloyd’s Syndicate 623, No. 21-3561, United States Court of Appeals, Eighth Circuit (March 1, 2023) the Eighth Circuit interpreted the Federal Arbitration Act as applied to an insurance appraisal.

FACTS

Martinique Properties, LLC sued the Certain Underwriters at Lloyd’s, London (Underwriters) seeking to vacate an arbitration award. The district court dismissed the complaint for failure to state a claim for vacatur. Martinique Properties appealed.

Martinique Properties owned apartments in Omaha, Nebraska, for which it had property insurance coverage through Underwriters. In May 2016, while the policy was in effect, the apartments sustained hail and wind damage. Martinique Properties submitted an insurance claim for reimbursement of its repair costs and the Underwriters and Martinique disputed the amount owed for the repairs.

The insurance policy included an appraisal provision, which governed the process for resolving disagreements as to the amount of loss or the value of the property. Under the provision, a panel of appraisers was to evaluate the property damage and determine the amount of loss. If the panel came to a decision, its agreed-upon appraisal award would be binding on the parties.

Martinique Properties invoked the appraisal provision. A panel of appraisers agreed on a binding appraisal award in June 2020. The suit against Underwriters sought a declaration that the appraisal process and award were invalid. According to Martinique Properties, the award incorporated incorrect figures and measurements.

The district court granted Underwriters’ motion to dismiss, finding that none of Martinique Properties’ allegations presented appropriate grounds for vacatur.

ANALYSIS

The Arbitration Act is a congressional declaration of a liberal federal policy favoring arbitration agreements. Under the Act a court may only vacate an arbitration award in four limited circumstances, and in the absence of one of these grounds, the award must be confirmed.

Martinique Properties argued that the appraisal award must be vacated because the appraisers used figures and measurements which are contrary to the actual conditions of the Property and failed to consider certain buildings and certain portions of a damaged roof when determining the appraisal award.

Martinique Properties alleged only factual errors that challenge the merits of the appraisal award, and the Eighth Circuit had no authority to reconsider the merits of an arbitration award, even when the parties allege that the award rests on factual errors.

An arbitrator does not exceed his or her powers by making an error of fact. Accordingly, the appraisers’ use of certain figures and measurements in calculating the amount of loss and their alleged failure to consider particular buildings and portions of roof damage, even if incorrect, are not sufficient for vacatur under the act.

Since the parties bargained for the arbitrator’s decision; if the arbitrator got it wrong, then that was part of the bargain.

Appraisal of the extent of loss in a first party property insurance policy is, in the Eighth Circuit, an arbitration. Arbitration is designed to avoid or limit litigation. When insured and insurer agree to appraisal in accordance with the terms of the policy is binding on both parties except in the case of fraud or misconduct. Arguments over fact belong in the appraisal proceedings and neither a state nor a federal court may place its evaluation over that of the appraisers. Martinique chose appraisal and must accept the findings of the appraisers.

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Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com

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