The issue of whether an arbitration award can be vacated based on bias or prejudice because of an alleged non-disclosure by the arbitrator has long plagued commercial arbitration. Many arbitration codes and organizations promote robust and fulsome disclosures by arbitrators, yet there are always occasions where the losing party claims that the arbitrator was biased or prejudiced and that the alleged nondisclosure was at the root of the problem.
The courts, however, have found that to vacate an award, there has to be a showing of actual bias or prejudice that affects the award. The courts have also found that while more forthcoming disclosure should have occurred, the alleged nondisclosure, by itself, is often not close enough to support vacatur of the award.
In a recent case, this scenario played out again in the context of a property appraisal under an insurance policy.
In Milano v. State Farm Fire and Casualty Co., No. 20-cv-179 (RPK) (E.D.N.Y. Apr. 29, 2021), a dispute arose over a property damage claim and the appraisal provision of the policy was invoked. Each side appointed an appraiser, but because they could not agree on an umpire, a neutral appraiser was appointed (by the state court before removal in this case). As an aside, an appraisal provision is essentially a tripartite arbitration provision and is often treated that way by the courts.
The court ended up appointing the neutral suggested by the insurance company and supported by the insurance company’s appraiser. The neutral appraiser’s CV was included as an exhibit to the insurance company appraiser’s affidavit, which showed that from 1999 – 2009, the neutral worked for Woods Restoration, Inc. The insurance company’s appraiser was Timothy Woods.
After the appraisal award was issued in the insurance company’s favor, the policyholder sought to vacate the award based on the failure to disclose that the neutral appraiser worked for 10 years at the company owned, in part, by the insurance company’s appraiser.
In denying the motion to vacate the award, the court cited the many cases that demonstrate how difficult it is to vacate an arbitration award based on bias or prejudice (evident partiality under section 10 of the Federal Arbitration Act). The court noted that the moving party had to demonstrate by clear and convincing evidence that the challenged arbitrator was partial to one party. The court also stated the following:
In addition, when a party attempts to prove evident partiality with evidence discovered after arbitration, vacatur is not appropriate if the party “should have known” the facts contained in that evidence, or “could have learned” the facts contained in that evidence “just as easily before or during the arbitration” as “after it lost its case.”
Here, while more forthcoming disclosure was desirable, the connection to Woods Restoration was disclosed on the umpire’s CV and the information showing that the insurance company’s appraiser was a principal at Woods Restoration was readily available.
The court also set forth the rationale why mere nondisclosure of a professional relationship, without showing actual partiality, is not enough to vacate an arbitration award:
But “the FAA does not proscribe all personal or business relationships between arbitrators and the parties” or their representatives. (citation omitted). On the contrary, because “[t]he best informed, and most capable potential arbitrators are repeat players with deep industry connections,” who are often part of “tightly knit professional communities,” there is some “[j]udicial tolerance of relationships between arbitrators and party representatives,” (citation omitted), and no “per se rule requiring vacatur of an award whenever an undisclosed relationship is discovered,” (citation omitted). Rather, whether an undisclosed past relationship establishes evident partiality depends on the “materiality” of the relationship.
This language applies to relationships among professionals in the insurance and reinsurance industries just as well as appraisers. While it is recommended that these professional relationships be disclosed, the failure to disclose is unlikely to result in vacatur of an arbitration award without the clear and convincing showing of evident partiality and that the professional relationship was a material relationship.
Whether there was adequate disclosure here is in the eye of the beholder. In industry arbitrations, like reinsurance for example, playing close to the vest and failing to disclose notable, but non-material professional or other relationships, might result in the marketplace choosing otherwise. Regardless of cases like this, arbitrators (and parties) are better off with broader disclosures to avoid the frictional cost of collateral proceedings over evident partiality.