By: Noah Gradofsky, Law Offices of Jan Meyer and Associates, P.C.
This article appeared in the Fall/Winter 2018 Issue of Subrogator Magazine, page 62.
There are many important advantages to arbitration. Arbitration is often quicker, easier, and less expensive than court litigation. In the subrogation industry, where each carrier handles a high volume of disputes, the economic efficiency is well worth it. Furthermore, even if, for argument’s sake, the vagaries of the arbitration process mean that there may be more “unfair” results than there might be in a trial by judge and jury (I don’t assume this to be true), the likelihood is that any such unfairness will balance out over time. As the old adage goes, “you win some, you lose some.”
This said, while it is highly efficient to use arbitration to decide the facts of a case – who was at fault, amount of damages, etc. – the same is not true when it comes to decisions of law. The insurance industry generally uses Arbitration Forums for most of its arbitration needs. The arbitrators are typically experienced adjusters who, if anything, are more capable than the average jury of evaluating who is at fault in an accident and determining a reasonable measure of the insurance company’s damages. At the same time, although the arbitrators are often capable legal thinkers, they may not be as well versed in a specific state’s laws and are not trained in interpreting complex legal issues.
Arbitration is an efficient choice for determinations of facts because the facts of each case are unique and therefore there is limited value to precedent. The fact that a jury found Driver A 100% liable for running a stop sign in Case A does not necessarily mean that another jury should find the same way in Case B, where perhaps Driver B ran a stop sign but Driver C had the last chance to avoid the accident. On the hand, if there is a question of law, for instance whether an insurance company must indemnify its insured for damages caused by running a stop sign, it would be ill-advised to require parties to ask arbitrators to decide that question in each and every arbitration. It is best to let someone wearing a black robe decide that question once and for all.
A number of courts have recognized the inadvisability of having to refer legal questions to arbitration. For instance, the Minnesota Supreme Court subjects legal findings of arbitrators in no-fault cases to plenary review by the courts, explaining in Johnson v. Am. Family Mut. Ins. Co., 426 N.W.2d 419, 421 (Minn. 1988):
We think that consistency mandates that the courts interpret the no-fault statutes, not various panels of arbitrators. Therefore, we hold that in the area of automobile reparation, arbitrators are limited to deciding issues of fact, leaving the interpretation of the law to the courts.
Similarly, in New Jersey, where no-fault (PIP) reimbursement claims are subject to mandatory arbitration pursuant to N.J.S.A. 39:6A-9.1, the Appellate Division refused to cede to arbitrators the authority to decide threshold legal questions related to recoverability, stating:
[W]e reject Allstate's argument that this dispute, which involves a recurrent issue of statutory interpretation, should have been subject to the vagaries of separate and endlessly-initiated arbitration proceedings under authority granted by the arbitration provisions of N.J.S.A. 39:6A-9.1. The issue presented, a purely legal one, is 'much more within the expertise of the court' than of arbitrators.
Coach USA, Inc. v. Allstate New Jersey Ins. Co., 354 N.J.Super. 277, 285 (App.Div.), certif. den., 175 N.J. 170 (2002)(Citations omitted).
In general, and particularly in larger claims, the insurance industry will be best served by allowing courts to review legal issues raised in cases even when arbitration may be the most efficient way to come to factual conclusions. Depending on the case, it may be wise to ask a court to settle legal issues prior to a case being referred to arbitration. This might be true, for instance, where the response to a certain legal question will certainly affect the case and perhaps will point the exploration of the facts of the case in a different direction. This might also be true when a certain legal decision may demonstrate that there is no right of recovery and therefore seeking a finding of facts would be futile. In such cases, the parties may want to consider agreeing to proceed with a declaratory judgment action prior to arbitration. They may care to do so even if they are signatories to an arbitration agreement or a relevant statute or regulation requires arbitration of a dispute (if the parties agree to take a certain issue of law to the court, judges are likely to accommodate their interest in judicial clarification of the law). In other cases, it may be best for the parties to ask an arbitrator to review a case and to reserve the right to go to court if the arbitrator’s decision turns on a legal finding with which they disagree. This will often be the most efficient course of action when a determination of the facts may indicate precisely what legal questions must be answered.
Since the courts generally defer to decisions made in binding arbitration, as long as the decision is rational and there is no evidence of an arbitrator’s partiality or corruption, parties who are interested in having a court review an arbitrator’s legal findings will want to have an arbitration agreement that provides for that judicial review. As it happens, the Arbitration Forums Agreements accomplish precisely that. Article Third of the Agreements (other than in International Reciprocal Forum) states that the arbitrators’ decisions “shall be based on local jurisdictional law.” Hence, an Arbitration Forums arbitrator must apply the law (the provision cannot simply mean that laws regarding jurisdiction have to be applied … Arbitration Forums is a voluntary forum).
In most, if not all, states an arbitrator’s ruling can be vacated by the court if the arbitrator somehow exceeded his or her power. For instance, the Uniform Arbitration Act, which has been adopted in 19 states (see http://www.uniformlaws.org/Act.aspx?title=Arbitration%20Act%20(2000)) provides in Section 23 that a court “shall vacate an award” if “an arbitrator exceeded the arbitrator’s powers.” When the parties have agreed that an arbitrator is to follow the law, the arbitrator’s failure to do so is grounds to vacate the arbitrator’s decision. For instance, in Faherty v. Faherty, 97 N.J. 99, 112-113 (N.J. 1984) the New Jersey Supreme Court reversed such part of an arbitrator’s award that was contrary to New Jersey law, particularly because “the parties agreed that the arbitrator would decide legal issues in accordance with the law of New Jersey.” In Tretina v. Fitzpatrick & Assocs., 135 N.J. 349, 365 (N.J. 1994), in which the New Jersey Supreme Court announced a narrower scope of review for arbitration, the Supreme Court confirmed that the Flaherty standard remained in effect:
Additionally, in Faherty, supra, we concluded that a combination of public-policy reasons and a mistake of law warranted judicial vacation of the arbitration award. We vacated a portion of the arbitration award because it granted one spouse alimony after she had remarried, and because, unlike the contract in this case, the parties in Faherty had agreed that the arbitrator would decide legal issues in accordance with New Jersey law. 97 N.J. at 112, 477 A.2d 1257.
Since an Arbitration Forums arbitrator is only empowered to make decisions based on local law, it follows that an arbitrator’s failure to follow the law is grounds to vacate an arbitration. In GEICO v. Erie, BER-L-9751-14 (N.J. Sup. Ct. Law. Div. January 5, 2015)(available from our office’s website, http://www.janmeyerlaw.com/njpip/geico_erie.html), Judge Susan J. Steele of the New Jersey Superior Court Law Division agreed. In that case, GEICO filed a claim in Arbitration Forums within the statute of limitations for PIP reimbursement claims, but an affirmative defense was upheld due to adverse policy limits. GEICO (full disclosure, from the second arbitration and onward GEICO was represented by our office) filed a second arbitration (agreeing to accept Respondent’s policy limits) after the statute of limitations would otherwise have expired, and argued that under New Jersey law, the first arbitration had satisfied the statute of limitations. Arbitration Forums disagreed and found GEICO’s second arbitration proceeding to be barred by the statute of limitations. GEICO asked the court to vacate Arbitration Forums’s ruling because it was contrary to New Jersey law. Judge Steele agreed with GEICO’s argument regarding the statute of limitations and vacated the arbitrator’s decision, writing that, “The court ?nds the arbitrator exceeded his powers by incorrectly applying the New Jersey law concerning the statute of limitations.”
Another New Jersey case, NJM v. Travelers Ins. Co., 198 N.J. Super. 9 (Super. Ct. App. Div. 1984) offers some support for, and some caution regarding, reading the Arbitration Forums Agreements this way. In that case, the court refused to overturn an arbitration award that it clearly viewed as mistaken under New Jersey law. However, there are a number of distinguishing factors in that case. First, the arbitrator’s decision refused to order reimbursement from one PIP carrier to another pursuant to N.J.S.A. 39:6A-11, which calls for “equitable” sharing of a PIP claim among concurrent PIP insurers. Further, the Arbitration Forums Agreement at the time was significantly different, stating that “[t]he decision of the arbitrators shall be based on law and equitable considerations consistent with accepted claim practices.” Id. at 12. The reference to “equitable considerations” may have implied an intent to provide arbitrators with more latitude than under the current Agreement. Finally, the phrase “consistent with accepted claim practices” suggested to the court further latitude for the arbitrator in ways that are unique to concurrency claims. The court wrote that:
The words "consistent with accepted claim practices" follow the reference to "law and equitable considerations", thus broadening the base upon which the arbitrators may act. Here the arbitrators may well have recognized accepted claim practices to avoid a cumbersome and uneconomic shifting of dollars from one insurance company to another, as in the case of subrogation.
Id. at 13 (citations omitted). Thus, the NJM case suggest that mistakes of law can be reversed by the court unless they may be justified by an interpretation of “accepted claims practices.” Nonetheless, when filing and/or responding in Arbitration Forums, it may be wise to make a statement reserving the right to appeal mistakes of law to a court. In addition, if both parties are interested in maintaining the possibility of going to court over interpretations of law, they may want to memorialize that interest prior to filing in Arbitration Forums. Along these lines, when a nonsignatory company agrees to participate in Arbitration Forums, the written consent should include a provision that decisions of law may be appealed to a court, both to avoid any issue of ambiguity as to the Arbitration Forums Agreement and in order to avoid any argument that only the Arbitration Forums’s Rules, and not the Arbitration Forums Agreement, apply to arbitration via consent.
Where it is anticipated that a significant issue of law will be decided in an arbitration proceeding and subsequently reviewed by a court, the insurers should strongly consider referring the case to counsel rather than having an adjuster file the arbitration. It is important that the legal issues be carefully presented in arbitration for two reasons. First, this will maximize the arbitrator’s opportunity to write a decision that clearly indicates the arbitrator’s factual and legal determinations. Second, since courts tend to be conservative toward review of arbitration decisions, some judges may decide to uphold a questionable arbitration decision by saying the decision was result not of the arbitrator exceeding her or his power by failing to follow the state law but of a party’s failure to adequately explain and argue the law in its contentions.
Maximizing the opportunity to challenge an arbitrator’s legal findings could lead to unnecessary court battles and thus detract from the efficiency of the arbitration system. This is not a reason to “throw the baby out with the bath water,” however, but rather a reason to consider what steps can be taken to reduce abuses of the system. Importantly, Arbitration Forums Rule 5-2 specifies that after following certain procedures, a prevailing party whose award is not paid can recover “statutory interests and all legal fees and costs incurred in pursuing collection until the award is paid.” This should be a significant deterrent for respondents to raise legal challenges to arbitration results. In order to level the playing field and to deter petitioners from needlessly challenging arbitration results, Arbitration Forums should consider adding a provision that anyone unsuccessfully seeking to vacate an arbitration award is liable to pay the other party’s legal fees and costs. If this standard is too harsh, a provision could be added stating that a party is only liable for the costs of the other party if the party failed to raise a good-faith argument why the arbitration should be vacated. Similar provisions could be added to arbitration agreements outside of Arbitration Forums. In addition, Arbitration Forums may wish to consider a system where certain legal questions could be sent to court for determination while the arbitration remains pending.
The Arbitration Forums Agreements and other arbitration agreements reserving the possibility of judicial review of legal decisions offer the insurance industry the best of both worlds in dispute resolution – efficiency and finality in terms of factual findings and the opportunity to seek judicial clarification of legal issues. Finally, as discussed above, parties are wise to consider whether there are legal issues that might be best addressed by a court, via a declaratory judgment action or the like, prior to initiating arbitration proceedings.