The Connecticut Supreme Court recently handed down an important decision reiterating the high bar to overturning arbitration awards while, at the same time, clarifying a portion of the applicable statute providing for vacating an arbitration award as well as a prior ruling concerning the timing of payment of heldback depreciation.
In Kellogg v. Middlesex Mutual Assurance Company, the plaintiff insured her historic property under the defendant’s restorationist policy. Unlike traditional homeowners policies, the restorationist policy had no policy limit; rather, if repairs were completed, it provided for the full replacement or restoration cost of the property without deduction for depreciation. The insured property was damaged when a large tree fell on the roof and chimney during a storm. When the parties could not agree as to the amount of the loss, the insured submitted the dispute to appraisal. Following seven site visits, the submission of voluminous materials, and hearings with multiple witnesses concerning the correct amount of the claim ($1.6 million v. $476,000), the umpire and the insurer’s appraisal awarded the insured nearly $580,000 on a replacement cost basis. The insured filed an application with the Connecticut Superior Court to vacate the arbitration award under Conn. Gen. Stat. § 52-418. Following an eight day trial that covered the entirety of the claim and appraisal process, the court vacated the award and ordered a new arbitration hearing.
On appeal, the Connecticut Supreme Court reversed, noting that “the courts will not review the evidence considered by the arbitrators nor will they review the award for errors of law or fact…Furthermore, every reasonable presumption and intendment will be made in favor of the award and of the arbitrator’s acts and proceedings.” The court first noted that the trial court incorrectly substituted its own judgment and vacated the award based on the trial court’s belief that the panel improperly refused to award money, or awarded too little money, for certain categories of claimed damage. In holding that the trial court overstepped its authority, the court held that Conn. Gen. Stat. § 52-418 does not “empower a court simply to disagree with the arbiter’s ultimate conclusions on the questions submitted to arbitration” because “to do so would completely destroy the deference our law affords to the arbitration process…” Mere disagreement with an arbitration panel’s decision does not, by itself, constitute the deprivation of a full and fair hearing that justifies the reversal of a panel’s award.
In rejecting the lower court’s finding that the arbitration panel’s award was too low, the Supreme Court provided useful guidance with respect to Conn. Gen. Stat. § 52-418(a)(3), which permits the vacatur of an award if, among other things, the arbitrators committed “any other action by which the rights of any part have been prejudiced…” The court concluded that merely awarding an arguably low award did not constitute a prejudicial “other action” because that portion of the statute speaks only to procedural irregularities that deprived a party of a full and fair hearing. In the instant case, the umpire conducted numerous cite visits, considered a host of material, and full participated in the process. There was no evidence of the type of procedural deprivation that would justify the overturning of the award.
The court next addressed the trial court’s conclusion that the arbitration panel manifestly disregarded the law because its award included two components – an actual cash value award to be paid to the insured immediately and an award for withheld depreciation that would be paid once repairs were completed. The trial court found that such a two-step process requiring repairs before the insured could receive the full amount of the replacement cost award violated the Supreme Court’s ruling in Northrop v. Allstate Ins. Co., 247 Conn. 242 (1998). The Supreme Court disagreed, finding that Northrop “held only that an insurer could not withhold depreciation from a replacement cost award after a homeowner had incurred a valid debt for repairs.” Here, the insured had only submitted estimates which, the court noted “impose no obligation or debt on the homeowners and, unlike the incurrence of a valid debt, do nothing to address concerns that the insured will forgo repairs and receive a windfall.” For that reason, Northrop did not apply, and the trial court erred in reversing the award on that ground.
The court’s holding in Kellogg provides a helpful reminder of the high hurdles a challenging party must clear in contesting an arbitration award, as well as a useful clarification of Conn. Gen. Stat. § 52-418(a)(3) and its holding in Northrop concerning when withheld depreciation may be paid.