January 31, 2013
Second Circuit Holds that Scope of "Arbitration" Is a Question of Federal Common Law
M.D. Imad John Bakoss (Bakoss) entered into an insurance contract with Lloyds of London (Lloyds), which provided for the paymetn of a benefit to Bakoss should be become "permanently totally disabled." Each party was permitted to have Bakoss examined by a physician of its choice to determine whether or not he was qualified to receive such a payment. In the case of a disagreement between the two party physicians, the two physicians were to name a third physician who would then determine whether or not Bakoss was in fact permanently totally disabled. That decision was, according to the insurance contract, "final and binding."
Bakoss brought a suit on the insurance contract in New York state court. Lloyd's removed the case to a federal district court, characterizing the third-physician clause as an arbitration agreemnt, which gave rise to federal question jurisdiction under the Federal Arbitration Agreement (FAA).
In agreeing with Lloyd's characterization of the agreement as an abritration agreement, the district court relied on other decisions from federal district courts. On appeal in Bakoss v. Certain Underwriters at Llods of London Issuing Certificate No. 0510135, Bakoss argued that the district court erred in using federal common law rather than New York state law in determining whether or not the agreement was one for arbitration. While the Second Circuit acknolwedged a Circuit split on the issue, it sided with those that reasoned that a congressional interest in favor of a uniform national arbitration policy counciled in favor of the application of federal common law. It thus upheld the exercise of subject-matter jurisdiction over the suit.
The Second Circuit also affirmed the district court's grant of summary judgment to Lloyd's on the ground that Bakoss did not provide timely notice of his potential permanent disability.
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