On March 30, 2015, the Appeals Court upheld a Superior Court decision refusing to vacate an arbitration award of $174,507 in additional compensation under a producer agreement between a producer, Mr. Kevin Kay, and the insurance agency formerly known as Association Benefits Insurance Agency, Inc. (“Association Benefits”).
Agency producer agreement provides for sixty-month additional payout
The agency defendant, Association Benefits, from its founding in 2000, specialized in arranging endorsed commercial lines insurance programs for associations, such as the Retailers Association of Massachusetts and the Retailers Association of New Hampshire. The agency sought to have an exclusive endorsement to market workers’ compensation, property and liability, commercial auto, and health and benefits insurance to the members of any affiliated association.
The plaintiff, Kevin Kay, became employed with Association Benefits in 2001, marketing workers’ compensation policies to the member companies of the associations affiliated with the agency. When he established any relationships with insureds through the placement of workers’ compensation insurance he would then attempt to induce insureds to place additional coverages through Association Benefits.
In 2004 Association Benefits and Mr. Kay and other producers employed by Association Benefits were given formal “producer contracts.” Under the contract, Mr. Kay was to receive scheduled commissions on his sales. Both parties could terminate the contract. Mr. Kay could terminate at any time for any reason. Association Benefits had to give a thirty–day notice unless it terminated Mr. Kay for “cause”.
If Association Benefits simply terminated the contract by a thirty-day notice without cause, the contract entitled Mr. Kay to receive additional compensation over a sixty-month period. The total payout of the additional compensation was based on his in-force production at termination and his compliance with a corresponding five-year non-competition agreement.
Association Benefits sold and Mr. Kay disputes additional compensation
In 2011, according to the Appeals Court’s decision, Association Benefits ran into financial difficulties and sold its assets, including its name, on May 1, 2011, to Hub International (“Hub”). The agency’s principals joined Hub and Association Benefits changed its corporate name to F.V.F.M. Insurance Agency, Inc. (“FVFM”).
Following the sale, FVFM operated solely as the pass-through entity for the periodic payments paid by Hub under the asset purchase agreement. FVFM had the obligation to use these payments from HUB to satisfy the additional compensation provisions in the various producer contracts.
FVFM also terminated Mr. Kay’s and various other producers’ contracts. FVFM, offered Mr. Kay a $118,804 buyout of the additional compensation that FVFM owed under his producer agreement. Mr. Kay refused the offer and claimed that FVFM owed him substantially more.
Claims, counterclaims and arbitration
The producer agreement between Mr. Kay and FVFM had an arbitration provision that stated that ‘any dispute[s] or controvers[ies]’ between the parties ‘arising’ under the Agreement or with respect to its ‘interpretation or implementation’ would be resolved by ‘binding arbitration’… and that the arbitrator’s award would be ‘final.’
After Mr. Kay rejected the buyout offer, FVFM filed for arbitration under the producer agreement and asserted that it had no legal obligation to pay Mr. Kay any additional compensation because Mr. Kay had materially breached the producer agreement by, essentially:
- acting as the police chief for a hamlet in New Hampshire; and
- passing along confidential information to a third-party in an effort to sell his book of business to another agency.
Mr. Kay denied FVFM’s allegations and counterclaimed that FVFM owed him $185,000 in additional compensation, as well as claiming the agreement’s noncompetition clause was legally unenforceable.
Arbitration award of $174,507 for producer
The arbitration proceedings resulted in an award against FVFM. The arbitrator essentially found that Mr. Kay did not materially breach any of the provisions of his producer contract and that under the formula provided for in the producer contract, FVFM owed Mr. Kay $174,507 in additional compensation.
The arbitrator also held that while Mr. Kay’s noncompetition agreement could be enforced, its five-year provision was overly broad and would be limited to a three-year period.
Arbitration decision and Superior Court complaints
Mr. Kay filed in Essex Superior Court a complaint to confirm the arbitrator’s award. FVFM filed in Suffolk Superior Court a complaint to vacate the arbitrator’s award. The court consolidated the two cases in Essex County and ruled on both complaints.
The Superior Court judge hearing the combined complaints confirmed so much of the arbitrator’s award as awarded Mr. Kay the $174,507 but vacated so much as reduced the producer agreement’s noncompetition provision to a three-year period.
FVFM appealed to the Appeals Court.
The Appeals Court’s decision
On appeal, FVFM’s main argument was that the transcripts of the hearing and evidence presented showed that the arbitrator made the wrong decision in awarding Mr. Kay any damages. FVFM argued that the record leads to only one reasonable conclusion, which is that Mr. Kay materially breached the producer agreement and, thus, deserved no additional compensation at all under the agreement.
The Appeals Court noted that the Superior Court judge who affirmed the arbitration decision’s monetary award had heard this same argument and ruled that “even if the arbitrator was wrong as to his factual findings and misconstrued the producer contract’s [additional] compensation provisions, there existed no valid basis to set aside the arbitrator’s award of $174,507 to [Mr.] Kay.”
The Appeals Court then ruled that the Superior Court judge had correctly stated the Massachusetts law relating to arbitration and the power of the courts to set aside an arbitrator’s award. The Appeals Court quoted the Superior Court judge in observing that the parties’ contract provided that disputes would be decided by ‘binding arbitration’ and that the arbitrator’s award would be ‘final.’
It then ruled against FVFM’s appeal quoting the Superior Court judge again:
Whether [Mr.] Kay’s actions constituted a material breach of the Agreement and the proper interpretation of Section 6(c) [the deferred compensation provision] clearly fall within this broad grant of authority to decide any disputes between the parties. … [FVFM] cannot now successfully claim [the arbitrator] exceeded his authority in deciding these matters merely because he decided them in favor of [Mr.] Kay.”
Comment on arbitration agreements and waiving appeal rights
The appeal by the agency in this case demonstrates an issue that anyone entering into a serious contract that contains a provision to resolve any disputes under the contract by arbitration should consider.
In this case, the Agency lost in the Superior Court and the Appeals Court because when the agency wrote arbitration into its producer agreement, the agency was agreeing to receive only “the honest judgment of the arbitrator as to a matter referred to him.” In effect, this means that in the absence of fraud, the arbitration decision is binding “even though the arbitrator or arbitrators may have committed gross errors of law or fact in reaching their award.”
Massachusetts courts have strongly stated that they will not vacate an arbitrator’s findings and legal conclusions, “even if they appear erroneous, inconsistent, or unsupported by the record at the arbitration hearing.”
For producers and agencies acting as trusted advisors to insureds, they should be especially vigilant in reviewing insurance contracts that require arbitration as the only method for resolving disputes between the insured and the issuing company. You want to make sure that insureds understand that in agreeing to arbitration they effectively lose their appeal rights.
Decision by the Appeals Court
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