Many insurance policies have binding arbitration clauses along with other provisions that address whether a lawsuit may be brought against the insurance company.  What happens when the arbitration goes against the policyholder?  Can the policyholder then sue the insurance company over the same coverage dispute even if the arbitrator ruled against the policyholder?

In Capone v. Atlantic Specialty Insurance Co., No. 19-3760 (6th Cir. Jan. 27, 2020) (Not Recommended for Full-Text Publication), the policyholder had his yacht serviced.  The service invoice contained a to-do list written by the mechanic that included updating the oil cooler gasket because it was seeping.  The policyholder did not have the gasket checked or replaced.  The next year, the policyholder took out an insurance policy for his yacht.  Subsequently, the yacht’s engine failed because of the leaking oil gasket and repairing the engine was quite expensive.

The policyholder sought insurance coverage for the engine repair.  The insurance company denied the claim because the policyholder had failed to maintain the engine properly.  The suit was submitted to arbitration and the arbitrator found in favor of the insurance company.

The policy had a binding arbitration clause (“If you make a claim under this policy and we disagree about whether the claim is payable . . . the disagreement must be resolved by binding arbitration”).  It also had a provision concerning legal actions against the insurance company (“you may not bring suit against us unless you have complied with all terms of this policy, including arbitration).

Apparently relying on the Legal Actions provision, the policyholder brought suit in federal court for breach of contract in denying coverage and for a declaration that the insurance company owned him the cost of the engine repair.  The insurance company moved to dismiss the case based on preclusion by the arbitration award.  The district court granted the insurance company’s motion to dismiss and the circuit court affirmed.

In affirming, the court characterized the policyholder’s lawsuit as asking the district court, in substance, to vacate the arbitrator’s award.  The court noted the limited grounds for vacatur set forth in section 10 of the Federal Arbitration Act (“FAA”).  Because the policyholder alleged none of the enumerated grounds for vacatur, the court held that the district court properly dismissed the policyholder’s suit.

The court rejected the policyholder’s argument that the Legal Actions provision allowed him to bring his coverage claims anew, notwithstanding the arbitration award.  The court said that the policyholder was “largely mistaken” as the court could only review the arbitrator’s award as limited by the grounds in section 10 of the FAA.  The court also noted that the arbitration clause in the policy provided that the “arbitrator shall have the same powers as arbitrators under the Federal Arbitration Act,” and those powers included the power to enter final and binding awards.  Because the arbitrator did that in this case, there was no basis to vacate the award and the district court’s judgment dismissing the complaint was affirmed.