Two insurance companies, National Travelers and ReliaStar, disagreed about whether Coinsurance Agreements between them had terminated. The arbitration that the Coinsurance Agreements mandated generated a finding of non-termination and a $21 million damages award to ReliaStar. The three arbitrators also ordered National Travelers to pay ReliaStar $3.8 million in attorneys’ fees and expenses for conducting the arbitation in “bad faith”.
National Travelers moved in district court (S.D.N.Y.) to vacate the “bad faith” part of the award on the ground that the arbitration panel lacked authority to make it. NT pointed to section 10.3 of the Coinsurance Agreements, noting that it obligated each party to “bear the expense of its own arbitrator . . and related outside attorneys’ fees.” The district court granted NT’s motion.
The Second Circuit split 2-1 in favor of upholding the “bad faith” award. The majority “clarif[ied] that a broad arbitration clause, such as the one in this case, see Coinsurance Agreements § 10.1, confers inherent authority on arbitrators to sanction a party that participates in the arbitration in bad faith and that such a sanction may include an award of attorney’s or arbitrator’s fees.” ReliaStar Life Ins. Co. of New York v. EMC Nat’l Life Co., No. 07-0828-cv, slip op. at 8 (2d Cir. Apr. 9, 2009). The majority also concluded that section 10.3 did not override the arbitrators’ power to impose compensatory sanctions. “[S]ection 10.3 is fairly understood to reflect the parties’ agreement as to how fees are to be borne, regardless of the arbitration’s outcome, in the expected context of good faith dealings.” Id. at 11 (emphasis in original).
The dissenting judge believed that section 10.3 “divested the arbitral panel of authority to make an award of attorney’s fees.” Id. at 16 (emphasis in original).
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