Plaintiffs sued their insurer, Northbrook Indemnity Company, which removed the case to federal court and moved to compel arbitration. A Florida district court granted Northbrook’s motion to compel, and the dispute proceeded to arbitration.

After the panel found in Northbrook’s favor, plaintiffs moved to vacate the arbitration awards on the grounds that Northbrook concealed the fact that it was reinsured 100% by First Colonial Insurance Company, and thus First Colonial was an “indispensable party” to the dispute and the “true party in interest.” Because First Colonial’s presence in the lawsuit would have destroyed diversity jurisdiction, plaintiffs argued that the case was improperly removed and that the district court lacked subject matter jurisdiction when it granted the motion to compel.

The court denied plaintiffs’ motion to vacate on this basis, noting that plaintiffs were well aware of the identity of First Colonial during the arbitration, yet never objected to its absence. Moreover, the court found that First Colonial was not an indispensable simply because it reinsured Northbrook 100%, as First Colonial had no liability to plaintiffs.

Plaintiffs also challenged the panel’s award of attorneys’ fees to Northbrook. The court held that by agreeing to have the panel decide this issue, plaintiffs waived any right they had under Florida law to have a court determine whether either party was entitled to attorneys’ fees (the parties’ agreement provided that it would be “governed by and construed, interpreted and enforced with the laws of the State of Florida.”) Because the panel had the authority to award attorneys’ fees upon its finding that plaintiffs acted in bad faith before and during the proceeding (the so-called “bad faith” exception to the “American Rule”), the court upheld this portion of the awards.

Notably, in a separate part of its decision, the court also stated that the doctrine of manifest disregard of the law was no longer viable in light of the U.S. Supreme Court’s decision in Hall Street Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008). As discussed previously on www.insurereinsure.com, there has been a split among federal courts post-Hall Street concerning whether manifest disregard of the law remains a valid basis to challenge arbitration awards.

Click here to review a copy of the court’s decision, captioned First Automotive Serv. Corp., et al. v. First Colonial Ins. Co., et al., No. 3:07-cv-00682 (2010).