Voluntary inter-company arbitration

Voluntary inter-company arbitration serves as an alternative dispute resolution mechanism that insurance companies frequently use to resolve subrogation and reimbursement claims without resorting to litigation. Unlike mandatory arbitration provisions, voluntary arbitration requires both parties to affirmatively agree to submit their dispute to an arbitrator. This consensual nature creates both opportunities and risks for insurers, particularly when policy limits become relevant to the dispute.

The case of Nationwide Mutual Insurance Co. v. GEICO Casualty demonstrates a critical tactical consideration: when an insurance policy provides the option to reject arbitration if the claim may exceed policy limits, exercising that option becomes essential. Failure to invoke this protective provision can result in an insurer being bound by an arbitration award that exceeds its contractual obligations, with limited grounds for challenging the award under New York’s strict arbitration review standards.

Case Background

This dispute arose from a property damage claim involving three vehicles damaged in an accident. Nationwide sought reimbursement from GEICO for property damage it paid on behalf of its insured. The total damages to all three vehicles exceeded the $25,000 property damage limit in the relevant insurance policy. GEICO informed Nationwide of this policy limit and indicated it was preparing to issue pro rata payments to all parties involved.

Despite GEICO’s clear communication about the policy limits, both parties proceeded to voluntary inter-company arbitration. GEICO participated in the arbitration proceedings but failed to exercise its contractual right to reject arbitration based on potential policy limit issues. The arbitrator ultimately awarded Nationwide $22,337.28, and when GEICO contested the award as exceeding policy limits, the Appellate Term sided with Nationwide, enforcing the full arbitration award.

Jason Tenenbaum’s Analysis

Nationwide Mut. Ins. Co. v Geico Cas., 2016 NY Slip Op 51700(U)(App. Term 2d Dept. 2016)

(1) “Geico further stated, among its contentions, that Nationwide was aware of the policy’s $25,000 property damage limit, that the amount of damage to the three vehicles involved in the accident exceeded the property damage limit in the policy, and “is pending signed releases to issue all parties a pro rata amount for reimbursement.”

(2) “In its petition to confirm, Nationwide conceded that it had received $17,399.95 from Geico, but stated that it was still owed the remaining unpaid balance of $4,437.33.”

(3) The arbitrator, in a decision published on September 10, 2013, noted that Geico had not submitted a declarations page from the policy to confirm the policy limits, and awarded Nationwide the total sum of $22,337.28 ($21,837.28 plus a $500 deductible).

(4) Nationwide sought the remainder, which was granted. Geico objected but lost.

(5) “Furthermore, where the arbitration agreement provides that the arbitrator may not make an award in an amount beyond the policy’s limits, an award in excess of those limits is subject to vacatur, pursuant to CPLR 7511 (b) (1) (iii), as an award in excess of the arbitrator’s power (see Matter of Brijmohan v State Farm Ins. Co., 92 NY2d 821 ).”

(6) “The provision upon which Geico relies, however, is not a specific limitation on the power and authority of the arbitrator to make an award in excess of the policy’s limits. Instead, the provision affords Geico the option to reject arbitration, but Geico did not exercise that option.”

(7) Geico loses.

The lesson – reject voluntary arbitration when you sense the policy limits are going to be exceeded.

Legal Significance

The decision in Nationwide v. GEICO highlights an important distinction in arbitration law between limitations on arbitrator authority and procedural options available to parties. Under New York law, arbitration awards can be vacated when an arbitrator exceeds their power, as established in CPLR 7511(b)(1)(iii). However, courts construe this provision narrowly, focusing on whether the arbitration agreement itself prohibits certain actions by the arbitrator.

Here, the insurance policy did not prohibit the arbitrator from making awards exceeding policy limits. Instead, it gave GEICO the option to decline arbitration when such a scenario seemed likely. This distinction proved critical: GEICO’s failure to exercise its opt-out right meant the arbitrator acted within the scope of authority granted by the parties’ agreement to arbitrate, even though the resulting award exceeded policy limits.

The court’s ruling reinforces that parties must actively protect their interests by invoking available procedural safeguards before arbitration begins. Once parties submit to arbitration, New York’s strong public policy favoring arbitration finality means courts will enforce awards even when the outcome seems inequitable, provided the arbitrator acted within the scope of authority conferred by the arbitration agreement.

Practical Implications

For insurance companies and their counsel, this case underscores the importance of carefully reviewing arbitration provisions and evaluating whether to participate in voluntary arbitration when policy limits are at issue. Several practical lessons emerge:

First, when an insurer becomes aware that total claims may exceed policy limits, counsel should immediately review whether the arbitration agreement contains opt-out provisions triggered by this circumstance. These provisions exist precisely to protect insurers from awards exceeding their contractual obligations, but they provide no protection unless affirmatively invoked.

Second, insurers should establish internal procedures for evaluating whether to proceed with voluntary arbitration. This evaluation should consider not just the merits of the underlying claim, but also whether policy limits create risks that outweigh arbitration’s benefits. In cases involving multiple claimants or complex property damage, the prudent course may be to decline arbitration and resolve claims through litigation or direct negotiation.

Third, when an insurer decides to participate in arbitration despite policy limit concerns, it must ensure the arbitrator receives clear evidence of those limits. GEICO’s failure to provide the policy declarations page to the arbitrator likely contributed to the unfavorable award, as the arbitrator noted this evidentiary gap in the decision.

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