Galilea, LLC v. AGS Marine Insurance Company

Background

Galilea, LLC and Christopher Kittler, a member of Galilea, sought to vacate, or set aside, an arbitration award entered for AGCS Marine Insurance Company, Liberty Mutual Insurance Company, and Starstone National Insurance Company. The respondents cross-petitioned to confirm, or make enforceable, the award and sought reimbursement of arbitration fees and expenses.

Galilea purchased a 60-foot yacht in April 2014. The yacht was insured through May 7, 2015, under Seawave Yacht Insurance. On May 12, 2015, the petitioners signed the Pantaenius Insurance Policy, which insured the yacht through May 12, 2016; the respondents were the policy’s named underwriters. On June 24, 2015, during a voyage from Florida to San Diego, the yacht experienced mechanical problems and grounded near Colon, Panama. The passengers were rescued, but the yacht sustained heavy damage requiring $1.6 million in repairs. The respondents denied coverage, stating that the incident occurred outside the policy’s navigation limits.

The respondents began arbitration in New York in August 2015. The petitioners filed objections and twelve counterclaims and also brought a federal lawsuit in Montana. After litigation over whether arbitration was required, the Ninth Circuit held in an earlier related proceeding that the policy showed a clear and unmistakable intent to have arbitrators decide questions about the scope and enforceability of the arbitration agreement.

A three-day arbitration took place in New York City in December 2018. The three-arbitrator panel heard six witnesses and received post-hearing briefs. In its March 20, 2019 final award, the panel denied with prejudice the petitioners’ counterclaims seeking payment under the policy, denied the remaining counterclaims, found that the policy was void from the beginning because the petitioners had not disclosed prior water damage and because there had been a five-day lapse in coverage, and found that the petitioners had not shown that they notified the respondents of their specific insurance requirements. The panel also awarded the respondents $59,340 for fees and expenses.

Petitioners’ Challenges

The petitioners argued that the arbitrators exceeded their authority by conducting the arbitration in New York rather than Montana, using the American Arbitration Association’s International Centre for Dispute Resolution, and deciding all twelve counterclaims. They also argued that the panel showed a serious disregard for the law by admitting the insurance application into evidence. Finally, they claimed that arbitrators Barak and Bulow were evidently partial because they were offered additional appointments in separate arbitrations involving respondents.

Court’s Analysis

Under the Federal Arbitration Act, a court may vacate an arbitration award for specified reasons, including corruption, evident partiality, serious procedural misconduct, or an arbitrator’s exceeding the arbitrator’s powers. The party seeking vacatur bears the burden of proof, and courts give arbitration awards substantial deference.

Authority and forum. The court held that New York was the proper arbitration location because the policy stated that proceedings would take place within New York County and follow American Arbitration Association rules. The court also rejected the challenge based on use of the International Centre for Dispute Resolution because the proceeding was conducted under the association’s commercial arbitration rules.

The court further held that the panel had authority to decide all twelve counterclaims. The policy required arbitration of “any and all disputes arising under” the policy, and the counterclaims concerned the policy’s formation, interpretation, implementation, or performance. The court also relied on the Ninth Circuit’s earlier ruling that the policy clearly assigned questions about the arbitration agreement’s scope and validity to the arbitrators. The court therefore deferred to the panel’s determination that all of the counterclaims were properly before it.

Alleged disregard of law. The court rejected the argument that admitting the insurance application required vacatur. The award showed that the panel relied on the insurance policy, rather than the application, for its substantive conclusion. The petitioners also had not shown that the arbitrators knew a New York insurance-law provision applied and deliberately refused to follow it. The court noted that the petitioners had not objected to admission of the application during the arbitration and had relied on it themselves.

Alleged partiality. The court held that the petitioners had not presented direct, objective evidence that either arbitrator was biased. The American Arbitration Association’s “strike and rank” selection process meant that respondents did not simply appoint the arbitrators. The petitioners also agreed to continue after one disclosure and delayed objecting to another arbitrator. The court concluded that no reasonable person would be compelled to find that the arbitrators were partial. It also noted that the association had rejected the petitioners’ objections to the arbitrators.

Disposition

Judge Valerie Caproni denied the Petition to Vacate the Arbitration Award. She granted the respondents’ Cross-Petition to Confirm the Arbitration Award, directed the petitioners to pay $59,340 in fees and expenses as provided in the award, directed the Clerk of Court to enter judgment for the respondents, and ordered the case closed.