Insurance: Fifth Circuit Upholds an Award Providing Attorneys' Fees (Web)

In an unpublished per curiam opinion, OneBeacon America Ins. Co.; International Marine Underwriters v. Thomas J. Turner, No. 06-20302, 2006 WL 3102578 (Oct. 30, 2006)(available at http://www.ca5.uscourts.gov/opinions/unpub/06/06-20302.1.wpd.pdf), a Fifth U.S. Circuit Court of Appeals panel affirms a trial court's order allowing attorneys’ fees, counter to the insurance contract at issue in the case.

Appellant OneBeacon American Insurance already had succeeded in getting a U.S. District Court to vacate the portion of the arbitration award allocated to administrative fees and expenses,

finding that the arbitrators had acted “in a manner inconsistent with the arbitration provision.”

But in an appeal solely covering the attorneys’ fees accompanying the award, the Fifth Circuit backed the arbitrators and the trial court, and upheld the fees.

OneBeacon insured Thomas Turner's yacht for $95,000. The yacht went missing, but was discovered with flood and vandalism damages; the initial insurance damages estimate was between $55,000 and $65,000.

But OneBeacon believed that Turner was partially responsible for the loss, according to the opinion. The insurer offered only $9,000. Turner invoked the insurance contract’s arbitration clause. The clause provided for the appointment of one arbitrator or, if they couldn’t agree on a single arbitrator, a three-arbitrator panel, with each party selecting an arbitrator, the two of whom would choose the third.

The contract also specified that each party was responsible for its arbitrator's fees and half the third arbitrator's fees and costs. The three arbitrators, under American Arbitration Association rules, found that the yacht was a total loss. The panel awarded Turner the yacht’s full value, and compensation for personal property damage, administrative fees, attorneys’ fees and expenses relating to arbitration.

OneBeacon sought to vacate the award before the district court, alleging the arbitrators had acted in manifest disregard of the law in awarding attorneys’ fees and had exceeded their powers in awarding administrative fees and expenses.

The opinion notes that the district court struck the administrative fees and expenses, finding that the arbitrators had acted “in a manner inconsistent with the arbitration provision.”

OneBeacon appealed to the Fifth Circuit Court, arguing that the attorneys’ fees award was contrary to public policy and was in manifest disregard of the law, because it was inconsistent with maritime law.

The appellate panel relies on the manifest disregard standard laid in the circuit’s decision in Kergosien v. Ocean Energy Inc., 390 F.3d 346, 355 (5th Cir.2004). The opinion notes that the “failure of an arbitrator to apply the law correctly ‘is not a basis for setting aside an arbitrator's award,’” Kergosien, 390 F.3d 356. It said that “OneBeacon must show that the arbitrator was aware of the governing principle and did not follow it.”

The appeals panel observes that OneBeacon failed to meet its burden in proving the arbitrators demonstrated manifest disregard for the law, even though it holds that a matter of law, Turner is not entitled to attorneys’ fees.

On OneBeacon's public policy argument, the Fifth Circuit notes that it was “no more than a complaint that the Panel failed to interpret the law correctly,” and was not directly against public policy.

The judgment was affirmed with no error.

--Ongmu Tshering, CPR Intern