The Second Circuit just reminded us that there’s nothing magical about the label “arbitration” and, despite it being a good idea to include it, there’s nothing magical about using – or failing to use – phrases like “final and binding” in an arbitral clause.
In Milligan v. CCC Information Services, Inc., 920 F.3d 146 (2d Cir. 2019), the court was faced with an appraisal process in an auto insurance policy. The underlying dispute involved a payout for a total loss on a current model year vehicle. The plaintiff brought a putative class action alleging that the insurer failed to pay the full value of her vehicle following a total loss in breach of insurance policy and in violation of New York insurance law. The insurer calculated the value of the loss by using the average of three similar dealer vehicles that were available or recently sold in the marketplace at the time of the valuation. The plaintiff argued that the insurer should have calculated the value of her car by using her purchase price less any applicable deductible and depreciation.
In response, the insurer sought to compel the plaintiff to use the policy’s appraisal process. Essentially, the process provided that either the insurer or the insured could, within 60 days after proof of a loss was filed, demand an appraisal of the loss. Each side would select an appraiser and those party-selected appraisers would, in turn, select a neutral third umpire. This process was not called arbitration, and it nowhere provided, at least expressly, that the result of the process would be final and binding.
No matter, the Second Circuit held. The process constituted arbitration. To be arbitration, the process needs only to manifest an intention by the parties to submit a dispute to a specified third party for binding resolution. But this intention doesn’t need to be expressed in any particular language. According to the court,
[t]he appraisal provision identifies a category of disputes (disagreements between the parties over “the amount of loss”), provides for submission of those disputes to specified third parties (namely, two appraisers and the jointly-selected umpire), and makes the resolution by those third parties of the dispute binding (by stating that “[a]n award in writing of any two will determine the amount of the loss”).
As a result, because the lower court didn’t compel the parties to go to the process, the court had jurisdiction to consider the interlocutory appeal under FAA § 16(a)(1)(B).
I’m just finishing an article on procedural customization by contract, so I’m particularly attentive to the ways in which creative contract designers can think about process innovations. Generally, in my view, this sort of creativity is much needed. I’m frankly surprised at just how little procedural customization actually exists out there.
But, the Milligan case reminds me that parties need to be thoughtful about how courts might construe their procedural customizations. Because the appraisal process at issue was deemed to be arbitration, the rules regarding scope of the arbitral clause applied. The court found that the scope of what was to be submitted to this appraisal process was narrow. It only required the parties to submit factual issues regarding proof of loss to this process. Because the plaintiff’s claims were about the legal meaning of “reasonable value,” they were not arbitrable. (And, although the court doesn’t mention this, because there was no delegation clause, it got to decide whether the claims fell within the scope of the clause or not.) I’m guessing that this outcome might not have been what the insurer intended when it drafted this clause.