Yosemite Insurance Co. (“Yosemite”) lost its challenge to an arbitration award that found Nationwide Mutual Insurance Co. (“Nationwide”) was not required to cover a share of Yosemite’s settlement with the State of California regarding pollution losses from the 1950s. After the arbitral board decided in Nationwide’s favor, Yosemite challenged the impartiality and rationality of the award.

In deciding Yosemite’s challenge, the court emphasized that the bases to vacate an arbitration award under the Federal Arbitration Act (“FAA”) are narrow and impose a steep burden on the challenging party. The dispute was based on whether an exclusion for “contamination and pollution” applied to any claims made or only where the party’s “main operations” related to “contamination and pollution.” The court found that while it believed the operative language was ambiguous, the arbitrators’ decision was “anchored” in the text of the agreement. Because the decision did not stray from an interpretation and application of the agreement, or exhibit a manifest disregard for the law, the court lacked authority under the FAA to second-guess the arbitral panel’s award.

Yosemite also challenged the arbitral panel’s impartiality because one of the three members failed to disclose that he had previously represented a client in a case adverse to Yosemite—a representation Yosemite’s counsel himself did not recall. The court applied a four-factor test borrowed from the Fourth Circuit to determine whether the inadvertent failure to disclose the representation would cause a reasonable person to conclude the arbitrator was biased. The court found there was no non-speculative suggestion of a conflict of interest, no suggestion of antipathy against Yosemite, and that the ten-year old adverse representation failed to impugn the impartiality of the arbitrator.

Despite rejecting Yosemite’s challenges, the court declined to award attorneys’ fees and costs to Nationwide because the claims were not objectively unreasonable. The court did however, “encourage” Yosemite’s counsel to review the strict and demanding showings required when seeking to vacate an arbitral award.

Yosemite Ins. Co. v. Nationwide Mut. Ins. Co., Case No. 16-5290 (USDC S.D.N.Y. Nov. 10, 2016).