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CLARENDON NATIONAL INSURANCE v. NCO FINANCIAL SYSTEMS

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 ...

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