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CLARENDON NATIONAL INSURANCE v. NCO FINANCIAL SYSTEMS

United States District Court, E.D. Pennsylvania


April 8, 2004.

CLARENDON NATIONAL INSURANCE CO. Movant,
v.
NCO FINANCIAL SYSTEMS, INC. Respondent

The opinion of the court was delivered by: LOUIS POLLAK, Senior District Judge

OPINION

On April 16, 2003, Clarendon National Insurance Company ("Clarendon") initiated this case, pursuant to 9 U.S.C. § 9 of the Federal Arbitration Act ("FAA")*fn1 and 9 U.S.C. § 10(a),*fn2 by filing an Application to Confirm in part, and Vacate in part, a March 17, 2003 arbitration award. After hearings on January 7-10, 22, and 27, 2003, Arbitrator Beitch awarded $150,500, plus interest, to respondent NCO Financial Systems, Inc. ("NCO") against Clarendon.*fn3 Clarendon is asking this court to (1) vacate the arbitrator's ruling that Clarendon, an insurance provider, breached its insurance contract with NCO when Clarendon applied a higher deductible than the contract specified to an NCO insurance benefits claim, and (2) confirm the arbitrator's ruling that Clarendon did not act in bad faith. NCO opposes Clarendon's application to vacate the portion of the arbitrator's award finding that Clarendon breached the insurance contract. NCO does not oppose confirmation of the finding that Clarendon did not act in bad faith.

No formal record of the arbitration proceedings or the arbitrator's reasons for his decision exists.*fn4 Thus, there has been some disagreement among the parties as to whether or not this court could review the rationality of the arbitrator's decision based upon affidavits or unofficial piecemeal transcripts. After concluding that this court indeed had jurisdiction and authority to review the arbitration decision, I ordered the parties to submit to the court an appendix containing all pre-hearing, post-hearing, and supplemental memoranda submitted to the arbitrator as well as the demand for arbitration. Additionally, the parties were permitted to submit supplemental memoranda based upon the appendix documents. The parties' Joint Appendix was filed on July 30, 2003,*fn5 and on March 1, 2004 I issued an order in which I concluded that no further documents were needed to conduct a review of the arbitration award. On March 11, 2004, this court heard oral arguments in this case.

  For the reasons stated below, Clarendon's application will be granted in part and denied in part. Clarendon's Application to Confirm the arbitrator's finding that Clarendon did not act in bad faith will be granted, and Clarendon's Application to Vacate the arbitrator's finding that Clarendon breached the terms of the insurance contract will be denied. Accordingly, NCO's Motion to Dismiss Clarendon's Application, as it relates to the arbitrator's breach of contract award, will be granted.

 Scope of Review of Arbitrator's Decision

  A court may vacate an arbitrator's award based on any of the four grounds set forth in the Federal Arbitration Act. These grounds include:

(1) where the award was procured by corruption, fraud, or undue means;
(2) where there was evident partiality or corruption in the arbitrators, or either of them;
(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or
(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.
9 U.S.C. § 10(a).

  A court shall also vacate an award if the arbitrator displayed a "manifest disregard" of the law, First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 942 (1995), or if the arbitral award was "completely irrational," Mutual Fire, Marine & Inland Ins. Co. v. Norad Reinsurance Co., 868 F.2d 52, 56 (3d Cir. 1989). An arbitrator will be found to have demonstrated a "manifest disregard" of the law if the arbitrator recognized the existence of a governing principle of law, but chose to ignore it. Janney Montgomery Scott Inc. v. Oleckna, 2000 WL 623231, at *5 (E.D.Pa. May 15, 2000). For an award to be "completely irrational," "it is not enough that [a court] find that the arbitrators erred, but rather [a court] must find that their decision indeed escaped the bound of rationality." Id at *6; see also Mutual Fire, 868 F.2d at 56 ("We must determine if the form of the arbitrators' award can be rationally derived either from the agreement between the parties or from the parties['] submissions to the arbitrators.").

  When determining whether or not to vacate an arbitration award, a court's scope of review is extremely limited. Mutual Fire, 868 F.2d at 56; Agco. Corp. v. Anglin, 216 F.3d 589, 593 (7th Cir. 2000). The presumption is in favor of the award, Oleckna, 2000 WL 623231, *2, and the award should be upheld so long as the arbitrator's conclusions are "barely colorable." Forest Elec. Corp. v. HCB Contractors, 1995 WL 37586, *9 (E.D.Pa. Jan. 30, 1995) (citing Collins & Aikman Floor Coverings v. Froehlich, 736 F. Supp. 480, 486 (S.D.N.Y. 1990). Indeed, the Supreme Court recently reaffirmed the narrow review involved in arbitration appeals:

Courts are not authorized to review the arbitrator's decision on the merits despite allegations that the decision rests on factual errors or misinterprets the parties' agreement. Paperworkers v. Misco, Inc., 484 U.S. 29, 36 (1987). We recently reiterated that if an `arbitrator is even arguably construing or applying the contract and acting within the scope of his authority,' the fact that `a court is convinced he committed serious error does not suffice to overturn his decision.' Eastern Associated Coal Corp. v. Mine Workers, 531 U.S. 57, 62 (2000) (quoting Misco, supra, at 38). It is only when the arbitrator strays from interpretation and application of the agreement and effectively "dispense[s] his own brand of industrial justice" that his decision may be unenforceable. Steelworkers v. Enterprise Wheel & Car Corp., 363 U.S. 593, 597 (1960).
Major League Baseball Player's Ass'n v. Garvey, 532 U.S. 504, 509 (2001); see also Sun Ship, Inc. v. Matson Navigation Co., 785 F.2d 59, 62 (3d Cir. 1986) ("[9 U.S.C. § 10] limits the court's role to determining whether the parties received a fair and honest hearing on a matter within the arbitrators' authority . . . The court may not take issue with the arbitrators' interpretation of the contract . . . Nor can it consider whether the arbitrators committed an error of law."); Laborers Local 135 v. Utility Line Servs, Inc. 1999 WL 124459, *2 (E.D.Pa. Feb. 24, 1999) (A court cannot "overrule an arbitrator simply because it disagrees with the arbitrator's construction of the contract . . . or because it believes its interpretation of the contract is better than that of the arbitrator."); Total Warehouse Servs. Corp. v. Int'l Bhd. of Teamsters, Local 830, 1995 WL 521710, *3 (E.D.Pa. Sept. 1, 1995) ("In fact, an arbitrator's award may not be overturned by the reviewing court even where the court is convinced that the arbitrator committed serious error, as long as the arbitrator is even arguably construing or applying the contract and acting within the scope of his authority." (internal citations and emphasis omitted)); Recyclers Ins. Group, Ltd. v. Insurance Co. of North America, 1992 WL 150662 (E.D.Pa. June 15, 1992) ("Courts must not decide the rightness or wrongness of the arbitrators' contract interpretation, only whether the panel's decision `draws its essence' from the contract." (internal citations omitted)).

  This limited scope of review applies even when a court is faced with the difficult task of reviewing an arbitrator's decision without the benefit of a record of the arbitration hearing or a statement of the arbitrator's reasons for his or her decision. See, e.g., Oleckna, 2000 WL 623231, *5 (concluding that under its "highly deferential standards of review," the arbitration award was "not so flawed" to warrant vacating the arbitration panel's decision, even though the lack of transcript and statement of reasons for the award "impede[d]" the court's analysis in certain ways.); Mack Transp. Co. v. Local 773, Int'l Bhd. of Teamsters, 476 F. Supp. 165, 170 (E.D.Pa. 1979) (finding a "rational interpretation" supporting the labor arbitration award and, therefore, confirming the award, even though the court's interpretation of the award was "at best, conjectural," because there was no written explanation of the arbitrators' reasoning or finding of facts).

 Discussion:

  In its application to this court, Clarendon maintains that "[i]n ruling for NCO on its breach of contract claim, the arbitrator exceeded his powers by entering an award that was contrary to the express terms of the contract."*fn6 Clarendon's Appl. at 1. "The arbitrator was required to abide strictly by the terms of the written contract," Clarendon argues, because of a provision in the final insurance certificate it issued on July 28, 2000,*fn7 which stated:

  Any controversy or claim arising out of or relating to the Contract, or the breach thereof, shall be settled by Arbitration in accordance with the rules of the American Arbitration Association, with the express stipulation that the arbitrator[s] shall strictly abide by the terms of this Policy and shall strictly apply rules of law applicable thereto.

 Clarendon's Appl. at 2 (quoting policy language at R.90).*fn8

  Clarendon contends that "[s]pecifically, the arbitrator ignored, or refused to apply, a contractual provision referred to by the parties as the `Entire Contract' clause." Clarendon's Appl. at 1. The "Entire Contract" clause states:

Entire Contract: This insurance as issued to the Insured, and together with the Insured's Application/Schedule, Policy Addenda (if any) constitute the entire Contract. The Company has relied upon the underwriting information provided by the Insured or the Insured's Agent, in the issuance of this Contract. Should subsequent information become known which, if known prior to the issuance of this Contract, would affect the rates, deductibles, terms or conditions for coverage hereunder, the Company will have the right to revise the rates, deductibles, terms or conditions as of the Effective Date of Issuance, by providing written notice to the Insured.
R.88.

  NCO counters that "[t]he arbitrator had ample basis to find, on the facts presented at the hearing, that the Entire Contract provision was not part of the parties' agreement, since the parties' agreement preceded, by at least several months, Clarendon's issuance of the written agreement with the `Entire Contract' provision;" and as such, the "Entire Contract" clause was a material addition to which NCO had not agreed. NCO Motion to Dismiss at 3, ¶ 8, NCO Reply Memo at 3.*fn9 Furthermore, NCO contends that the July 28 certificate was never accepted or signed by a representative of NCO. Id.

  Even assuming that the arbitrator accepted the "Entire Contract" clause as part of the parties' agreement, Clarendon contends that he improperly failed to abide by the express terms of the clause, the relevant part of which provides:

Should subsequent information become known which, if known prior to the issuance of this Contract, would affect the rates, deductibles, terms or conditions for coverage hereunder, the Company will have the right to revise the rates, deductibles, terms or conditions as of the Effective Date of Issuance, by providing written notice to the Insured.
  Based on this provision, Clarendon maintains that it was authorized to attach the Special Endorsement with the $350,000 deductible for E.R. to the July 28 certificate.

  NCO maintains that, assuming arguendo the applicability of the "Entire Contract" clause, Clarendon could not, with respect to E.R.'s claim, change the $200,000 deductible that had previously been agreed upon, because NCO did not know of the facts surrounding E.R.'s birth prior to its February 21, 2000 application for the 2000/2001 policy and, therefore, could not have disclosed these facts to Clarendon.*fn10 Moreover, NCO contends that as a corporation with more than "5,000 participants from coast-to-coast in the health benefits plan," it could not investigate the medical condition and claims of its employees and their families without disregarding their statutory and common law privacy rights. NCO Reply Memo. at 4, ¶ 2.

  Clarendon disagrees:

[U]nder the Entire Contract clause, it does not matter whether or not NCO knew about the premature birth of E.R. prior to the issuance of the 2000/2001 policy. Rather, the contract permits Clarendon to revise the rates, deductibles, terms, or conditions of the contract if subsequent information becomes known, which if known prior to the issuance of the contract, would have affected those contract terms in the first instance. The 2000/2001 policy allocated the risk of undisclosed facts (whether known or unknown) to NCO and put NCO (the party best suited to do so) to the task of investigating the facts and then disclosing the risks.
Clarendon Appl. at 10-11. Clarendon, in its Pre-Hearing Memorandum to the arbitrator, briefly argued this point, stating that where "an insurer relies upon a policy provision to limit (but not rescind) coverage because of an undisclosed preexisting condition (which is this case here), the insured's knowledge of the preexisting condition is irrelevant."*fn11 R. 117.

  Clarendon, however, spent considerably more time in its submissions to the arbitrator arguing that NCO did, indeed, know about E.R.'s medical expenses, and, therefore, that Clarendon properly raised the deductible amount. See R. 102 ("The fact of the premature birth was well known to NCO when it applied for renewal coverage."); R. 106 ("Despite having learned about [E.R.'s] premature birth nearly one month [prior to requesting quotes on a renewal policy], neither [Brokerage Concepts, Inc., NCO's agent and third party administrator] nor NCO disclosed in their quote request that one of the persons for whom they sought coverage . . . had been born prematurely.); R.111 ("NCO's knowledge of and failure to disclose [E.R.'s] premature birth precludes NCO from recovering further from Clarendon."); R.I 12 ("NCO knew about [E.R.'s] premature birth at the time it applied for renewal coverage.").

  NCO contends that Clarendon, in arguing to this court that whether NCO knew about E.R.'s premature birth is irrelevant, has shifted its focus away from its submissions to the arbitrator that NCO did know of E.R.'s premature birth because "it is so apparent that the issues concerning knowledge by NCO are factually intensive and could therefore have been decided against Clarendon." NCO Memo Pursuant to Court Order at 3. NCO further contends that Clarendon's present interpretation of the "Entire Contract" clause is not only "illogical," it "would render the insurance contract illusory, since it would give Clarendon the right to change the terms of coverage at any time based upon newly discovered information, regardless of whether there was any obligation on the part of the insured to make the information available during the application process." NCO Motion to Dismiss at 4-5, ¶ 16 (same argument made at R.7). Furthermore, NCO maintains, the "Entire Contract" clause is ambiguous. "On the one hand, it recites that Clarendon relies on the `underwriting information', and on the other hand it possibly suggests (as Clarendon argues) that Clarendon can retroactively and unilaterally change the terms of insurance based upon newly discovered information, regardless of whether the information could or should have been submitted in the underwriting process." Id. at ¶ 18. Lastly, NCO argues that, by its own terms, the "Entire Contract" clauses requires "written notice to the Insured," and such notice was not given prior to the receipt of E.R.'s claim and the issuance of the written certificate on July 28.

  NCO presented each of these arguments to the arbitrator in its briefs; and, therefore, NCO contends, the arbitrator could have relied on any one of the arguments in making his decision. Accordingly, NCO argues, "[t]he Arbitrator's interpretation of the `Entire Contract' provision in favor of NCO was not just `barely colorable' but also was the most reasonable." NCO Memo, at 3. NCO adds that "there were critical issues of fact which were determined by the arbitrator and that the arbitrator's award was reasonable, and by no means irrational." NCO Reply Memo, at 2-3.

  NCO is correct. Under this court's very limited scope of review, I conclude that the arbitrator, in issuing his award, did not exceed his powers. NCO presented to the arbitrator several theories, any one of which could not unreasonably have been accepted by the arbitrator as a basis for finding that Clarendon breached the terms of the insurance contract. We do not know what in fact was the basis for the arbitral award because Clarendon did not join NCO in requesting Arbitrator Beitch to memorialize the reasons for his award in an explanatory opinion. But since the very limited record before this court does not lend support for Clarendon's submission that the arbitrator, without authority to do so, departed from the insurance contract, and/or that his construction of the contract was irrational, Clarendon's challenge to the arbitral award fails.

  An order consistent with this opinion follows.

  ORDER

  It is hereby ORDERED that Clarendon's Application (#20) is granted in part and denied in part. Clarendon's Application to Confirm the arbitrator's finding that Clarendon did not act in bad faith is GRANTED, and Clarendon's Application to Vacate the arbitrator's finding that Clarendon had breached the terms of the insurance contract is DENIED. NCO's Motion to Dismiss Clarendon's Application (#21), as it relates to the arbitrator's breach of contract award, is GRANTED.


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