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June 2010

Lagstein v. Certain Underwriters at Lloyd's, London - Ninth Circuit Upholds Arbitration Award Against Disability Insurer

Ninth Circuit Reinstates Large Arbitration Award, Concludes District Court Erred Vacating The Award Simply Because It Found The Total Size "Shocking," Unsupported By The Record

__ F.3d __ (9th Cir. June 10, 2010); 10 C.D.O.S. 7237

Certain Underwriters at Lloyd's, London ("Lloyd's") issued a disability policy to Dr. Zev Lagstein.  Lagstein developed heart disease and other ailments and filed a claim for disability benefits. After nearly two years passed without a decision on the claim, Lagstein sued Lloyd's in federal court in Nevada.  At Lloyd's request, the matter was stayed pending binding arbitration pursuant to an arbitration provision in the policy.

The arbitration was heard by a three member panel.  The panel unanimously concluded Lloyd's breached the terms of the policy and acted unreasonably in denying Lagstein's claim.  The panel majority awarded Lagstein full policy benefits of $900,000 and an additional $1,500,000 for emotional distress.  They also concluded punitive damages were warranted, but ordered the amount to be determined at a later hearing.  The dissenting arbitrator would have awarded Lagstein only $11,000 in policy benefits and no emotional distress damages.

Lloyd's objected at the subsequent punitive damages hearing, arguing the panel's jurisdiction ended when it issued its initial award.  The same majority rejected Lloyd's contention, concluded the panel had continued jurisdiction, and awarded $4,000,000 in punitive damages.  The same dissenting arbitrator concluded the panel lacked jurisdiction to make the award and, even if it had jurisdiction, the award should have been $50,000.

Lloyd's discovered the two arbitrators comprising the panel majority, Whitehead and Springer, had been involved in a controversy that occurred over a decade previous.  Specifically, ethics charges were brought against Whitehead while he was a presiding Nevada trial judge.  The charges were ultimately settled, with Whitehead agreeing to retire from the bench and not serve again in "any state judicial capacity."  Several procedural and jurisdictional matters related to the controversy were litigated and resolved by the Nevada Supreme Court.  Springer was a member of that court and consistently sided on his rulings with Whitehead .

Lloyd's filed a motion in district court to vacate the arbitration award on several grounds, including Springer and Whitehead's failure to disclose the prior ethics controversy and the majority's decision to hold a punitive damages hearing after issuing its initial award.  The district court rejected Lloyd's arguments based on the non-disclosure. But, it concluded the amount of the awards "'shock[ed] the Court's conscience,' suggested bias, was unsupported by the record, manifestly disregarded the law, and contravened public policy."  The district court also found the punitive damages award contravened public policy and exceeded the panel's jurisdiction.  It therefore vacated the arbitration award.

Lagstein appealed to the United States Court of Appeals for the Ninth Circuit.  He argued none of the district court's reasons justified vacating the arbitration award.  The Ninth Circuit agreed, reversed the district court's ruling, and remanded the case for confirmation of the award. 

The Federal Arbitration Act ("FAA") governs district courts' review of arbitration awards.  The FAA permits the reviewing court to vacate an arbitration award under only four circumstances:  (1) the award was procured by corruption, fraud, or undue means; (2) arbitrator partiality or corruption; (3) arbitrator misconduct; or (4) the arbitrators exceeded their powers.  If none of these circumstances exist, the award must be confirmed "even in the face of erroneous findings of fact or misinterpretations of law."  The FAA does not sanction judicial review of the merits.  Thus, a reviewing court may not vacate an arbitration award simply because it disagrees with its size or finds it unsupported by the evidence. 

Lloyd's argued the arbitrators exceeded their powers because the arbitration awards "manifestly disregarded the law" and were "completely irrational."  The Ninth Circuit disagreed. It noted manifest disregard of the law requires more than mere error; it must be shown that the panel recognized the applicable law and then ignored it.  Neither the district court nor Lloyd's pointed to a single Nevada statute or decision that the panel purportedly ignored.  Thus there was no basis to conclude the panel manifestly disregarded the law.

The Ninth Circuit also rejected Lloyd's argument that the damage awards were "completely irrational" in light of the facts.  An arbitration award is "completely irrational" only where it fails to draw its essence from the parties' arbitration agreement. Whether the panel's factual findings are supported by the evidence is beyond the scope of this review.

The Ninth Circuit also reversed the vacatur of the punitive damages award.  Lloyd's argued the panel exceeded its jurisdiction because one of the American Arbitration Rules governing the arbitration requires an award "be made promptly by an arbitrator and, unless otherwise agreed by the parties or specified by law, no later than [thirty] days from the date of the closing of the hearing."  Lloyd's argued the initial damages award was within this time period but the punitive damage award was not.

The Ninth Circuit held the question of whether the panel had issued its award within the required time frame was a procedural matter.  Because nothing in the parties' agreement removed the arbitrators' authority to resolve procedural matters, the panel's interpretation need only be "plausible."  The Ninth Circuit found the panel's conclusion, that it retained jurisdiction to award punitive damages, was a plausible interpretation of the arbitration agreement and the AAA rules.  The panel thus did not exceed its jurisdiction.

Finally, the Ninth Circuit rejected Lloyd's challenge in connection with Whitehead and Springer's failure to disclose the earlier ethics controversy.  The Court concluded Lloyd's proved neither "an inappropriate relationship or contact between the judges, nor a failure to disclose information that would warrant vacating the award."

Click here for opinion.

This opinion may be cited as precedent now.  The result in this case could change, however, if a subsequent petition for rehearing or a petition for certiorari to the United States Supreme Court is granted.

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Matthew G. Kleiner

Life, Health & Disability