Insurer’s lack of candor to arbitration panel results in complete loss of attorney’s fees awarded by arbitrators

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Virginia Surety Company, Inc. v. Certain Underwriters at Lloyd’s, London, Case No. 1-10-1753 (App. Ct. Ill. Apr. 20, 2011)


Virginia Surety (“VS”) demanded arbitration against Lloyd’s relating to payments allegedly due from Lloyd’s under two insurance treaties, a 1996 and a 1998 Treaty, in which Lloyd’s agreed to reinsurer VS’s risk on certain automobile extended warranty contracts. The parties’ arbitration agreement did not require a reasoned award, but the parties agreed that they would prefer such an award if the panel was willing to provide one. An arbitration hearing was conducted and, on the last day of the hearing, the parties settled their dispute with respect to the 1996 Treaty, leaving only the dispute over the 1998 Treaty to be resolved by the arbitrators. The parties agreed to pay their own attorney’s fees with respect to the 1996 Treaty only.

The panel later issued its award in which it found that Lloyd’s relied on a material misrepresentation in VS’s insurance application, entitling it to rescission and relieving it of any obligation under the 1998 Treaty. Lloyd’s was ordered to repay $2 million in principal, plus interest, minus the amount of attorney’s fees and costs, to be determined by an in camera review of Lloyd’s billing statements. After such review, the panel issued its decision, awarding VS a total of $759,000 after deducting $2 million in attorney’s fees and expenses.

VS then filed a petition to vacate the adverse cost award of $2 million, arguing that the arbitration panel exceeded its powers and because the adverse cost award was not permitted by law, appeared to be punitive, appeared to include costs relating to the 1996 Treaty and because the panel failed to issue a reasoned award. VS also argued that Lloyd’s committed a fraud on the panel by submitting billings for expenses relating to the 1996 Treaty. Lloyd’s cross-moved for confirmation of the award.

The trial court granted VS’s petition, vacating a portion of the arbitrators’ award relating to adverse costs because it appeared Lloyd’s committed a fraud on the panel by submitting expenses relating to the 1996 Treaty in spite of the agreement that each party would bear its own costs as to the 1996 Treaty. The trial court also found the arbitration was fundamentally unfair because VS never had an opportunity to review the expense evidence submitted by Lloyd’s to the panel. The trial court refused to remand back to the arbitration panel for clarification of the expense issue.

The appellate court agreed with the trial court’s finding that Lloyd’s had acted with an intent to deceive because Lloyd’s admitted that it submitted billing statements relating to both the 1996 and 1998 Treaties when only the 1998 Treaty was at issue and when the panel expressly directed Lloyd’s to submit billings only for the 1998 Treaty matter. The appellate court affirmed the trial court’s refusal to remand to the panel for clarification of the expense award, instead explaining that such remand would give similarly situated parties an incentive to engage in fraud in the future.

As a result, Lloyd’s was ordered to refund the $2 million in premiums, plus interest, from the 1998 Treaty. Further, the award of attorney’s fees to Lloyd’s was stricken altogether, with no further award of fees granted. Consequently, by improperly submitting billing statements for both the 1996 and 1998 Treaties, Lloyd’s ultimately was awarded zero dollars in attorney’s fees and expenses.

For a copy of the decision click here 

Patrick Omilian and Joanna Roberto