ARBITRATION

INTRODUCTION

Arbitration is a process by which parties submit their disputes for resolution by impartial third persons instead of by a judicial tribunal. A few statutes and some contracts require that disputes be resolved by arbitration.1 Arbitration may be binding or non-binding. An arbitration award may be confirmed as a court judgment and has the same res judicata and collateral estoppel effect. Arbitration is similar to a general reference. Civil Code §2860(c) compels arbitration of attorney fees disputes with insurers that concede that they have a duty to defend and that a disqualifying conflict of interest exists.

ARBITRATION

Arbitration may be described as a form of alternative dispute resolution that features a third party decision maker chosen by the parties, a mechanism for ensuring neutrality in the rendering of the decision, an opportunity for both parties to be heard, and a binding decision.2 An arbitration award is not appealable.3 An arbitration agreement must be in writing,4 but signatures not required.5 Generally, an arbitrator cannot be called to testify in a subsequent civil proceeding as to matters occurring "at or in conjunction with" the arbitration proceedings.6

1.	Statutory Authorization

Arbitration is authorized by statute. "A written agreement7 to submit to arbitration an existing controversy is valid, enforceable and irrevocable."8 "If a court has ordered arbitration of [an] issue involved in an action pending, the court shall, upon motion stay the action until an arbitration is had."9 "Any party to an arbitration in which an award has been made may petition the court to confirm the award."10 The court retains jurisdiction "to determine any subsequent petition involving the same agreement to arbitrate and the same controversy."11

2.	Fundamental Fairness

An arbitration must include some mechanism for ensuring impartiality.12 Arbitrators must provide a fundamentally fair hearing including adequate notice, hearing on evidence, and impartial decision by the arbitrator.13 If the parties agree that evidence may be received, the arbitrator is required to respect and follow their agreement.14

3.	Privacy

Arbitration hearings may be conducted privately and nonparties may be excluded from attending the hearing. Arbitration may be required to keep communications, documents and testimony confidential, but no such obligation is imposed on counsel or parties.15 Unless barred by a protective order, the parties may freely use evidence proffered in an arbitration and the arbitration award in other proceedings and for other purposes.16 It is not necessary to have a formal record of the arbitration, but frequently parties have the hearing reported to challenge an award17 or to assure a non-participating insurer of the bona fides of the process.

4.	Expenses

Unless the arbitration agreement or rules adopted by the parties provide otherwise, the parties must share all expenses and fees of the arbitration, subject to reallocation by the arbitrator in the award.18 Unlike judicial proceedings, neither party can recover costs from the other.19

5.	Res Judicata

An arbitration award is normally entitled to strict res judicata effect20 whether or not judicially confirmed.21 Similarly, issues actually determined in arbitration proceedings that were necessary to such determination are entitled to collateral estoppel effect in later litigation between the same parties. But the arbitrator's findings do not bind the losing party in later litigation with a nonparty. A nonparty cannot invoke collateral estoppel even if the arbitration award was judicially confirmed.22 In one case, an insurer was not allowed to use findings from an arbitration in subsequent coverage litigation.23

Judicial arbitration may be required where the amount in controversy is $50,000 or less.24

GENERAL REFERENCE

Upon the motion of a party to a written contract that provides that any controversy shall be heard by a referee, a court may appoint a referee "(a) To hear and determine any or all of the issues in an action, whether of fact or of law, and to report a statement of decision. (b) To ascertain a fact necessary to enable the court to determine an action."25 "In a consensual general reference, the decision of the referee upon the whole issue must stand as the decision of the court, and judgment may be entered thereon in the same manner as if the action had been tried by the court. In the case of all other references, the decision of the referee is only advisory.26 A judgment following a general reference is appealable.27

CIVIL CODE §2860 FEE ARBITRATION

1.	The Statute

"Civil Code, section 2860 codifies (with clarifications and limitations) the holding in [Cumis28], which concluded that an insurer is responsible to pay the reasonable cost for hiring independent counsel for the insured when the insured and insurer have divergent interests due to the insurer's reservation of its right to deny coverage."29 "Any dispute concerning attorney's fees not resolved by [agreement] shall be resolved by final and binding arbitration by a single neutral arbitrator selected by the parties to the dispute."30 Section 2860 arbitration is mandatory and binding.31 It applies even though the insurer does not retain its own dependent counsel.32 The insurer does not waive its challenges to coverage by participating in a 2860 arbitration.33 The parties may not waive arbitration since courts are without jurisdiction to adjudicate 2860 fee disputes.34 One case holds that disputes regarding costs (as opposed to fees) may not be arbitrated.35 However, costs may be arbitrated by agreement of the parties.

2.	Applicability of the Stautute

Civil Code §2860 confers upon qualifying insurers a number of protections to qualifying insurers.36 However, it has limited application that the insurer must earn.37 None of the statute's protections are available unless the insurer qualifies, including its hourly rate limitation.38 The statute specifies a simple A + B = C formula for its application.39 Thus, "in the absence of a stipulation or unconditional agreement between the insurer and insured, unless and until there has been a judicial determination of an insurer's duty to defend and the existence of a conflict of interest, the provisions of Civil Code section 2860 are inapplicable."40 These questions "may not be decided in an arbitration ordered pursuant to Civil Code section 2860 but must be resolved by the trial court in the first instance."41 Some insurers will agree to defend without conceding that they have a duty to defend and some will agree to pay for independent counsel without conceding that a disqualifying conflict of interest42 exists. An insurer that fails to fulfill its duty to defend may not invoke the protections of §2860, including arbitration.43 One case holds that parties who agree to arbitration of a fee dispute prior to any determination that a duty to defend and a disqualifying conflict of interest exist will nonetheless be bound by the arbitration award if these two prerequisites are later determined.44

PRACTICE POINTER

When an insurer agrees to defend and agrees to pay independent counsel under a reservation of rights, the policyholder and independent counsel should ask the insurer whether or not it agrees unconditionally. If the answer is "no", §2860 does not apply and any fee dispute may not be resolved by §2860 mandatory arbitration but the rate limitation provision of §2860(c) does not apply and the policyholder may be able to recover the full rates charged by independent counsel.45

If an insurer is not faithfully providing a defense to its policyholder, the policyholder may be able to resolve the liability dispute despite the "actual trial" provision of many liability policies.46