Winning Arbitration Battle in the Connecticut Supreme Court Regarding Historic Home Restoration Costs Still Leaves Insurer Defending Legal War in State Trial Court

Concluding that the trial court “improperly substituted its judgment” for that of an appraisal panel, the Connecticut Supreme Court invalidated the trial court’s decision to vacate an arbitration award for property loss caused by a tree falling on the insured’s home. See Kellogg v. Middlesex Mut. Assurance Co., 326 Conn. 638 (2017). Pending the outcome of this appeal, the insured filed a second suit against her insurer, Middlesex Mutual Assurance Company (“Middlesex”), alleging breach of contract under the homeowner’s “Restorationist” insurance policy, as well as various extra-contractual claims based on the allegedly improper and delayed adjustment of the claim. Notwithstanding the overlapping nature of these claims with those addressed by the arbitration panel, the court denied the insurer’s Motion to Dismiss. Thus, the second lawsuit remains pending despite the Supreme Court’s finding in favor of the insurer.

Both cases revolve around Sally Kellogg’s single-family property located in Norwalk, Connecticut, which is listed on the National Registry of Historic Places and sits in Norwalk’s Green Historic District. When Kellogg, an interior designer, purchased the property in 2002, she also purchased the Restorationist policy on the home and its contents. The policy provided for unlimited coverage for repairs, including the replacement or restoration cost of the property without deduction for depreciation.

Eight years later, a four-and-a-half ton tree fell on the house during a severe storm, breaking through the roof and causing extensive structural and other property damage. Following the insured’s submission of her claim, a dispute arose regarding the extent of the damage and the cost of repair. Kellogg invoked the appraisal provision of the policy, which provided for unrestricted arbitration in which a panel of three arbitrators—one appointed by each party, and a referee appointed by the two other arbitrators—had the power to decide issues of law and fact not subject to judicial review. The arbitration proceedings resulted in a combined award of $539,901.84 for both replacement/restoration cost and actual cash value loss to personal property contained within the house.

Kellogg, who had argued for restoration costs exceeding $1.5 million, filed an application in the Connecticut Superior Court to vacate the arbitration award, which Middlesex attempted to dismiss as untimely. Though the trial court stated it would only rule on the motion to dismiss, it went on to hold eight days of trial, which ultimately resulted in a finding that the award violated Connecticut General Statutes Section 52–418(a) because: (1) the trial court disagreed with the amount of the award, and (2) the decision of the appraisal panel “evidenced a manifest disregard of the nature and terms and conditions of the Restorationist insurance policy” in violation of the statute. The trial court vacated the arbitration award and denied Middlesex’s Motion to Dismiss.

In overturning this decision on Middlesex’s appeal, the Connecticut Supreme Court held that the trial court had improperly substituted its own judgment for that of the arbitration panel and failed to follow the proper standard for evaluating a claim of “manifest disregard of the law.” In doing so, the Court recognized the high level of deference paid to arbitrators in unrestricted arbitration proceedings, such that “a court may vacate an unrestricted arbitration award only under certain limited conditions: (1) the award rules on the constitutionality of a statute, (2) the award violates clear public policy, or (3) the award contravenes one or more of the statutory proscriptions of § 52–418.” (Internal citations removed). Further, the award resulting from unrestricted arbitration is not subject to de novo review even for errors of law.

Under this standard, the Supreme Court held, the trial court overstepped the scope of its judicial review, erroneously substituting its judgment for that of the arbitrators by essentially re-trying all of the facts found by the arbitrators regarding an appropriate award to the insured. To permit a party to object to an award simply because the party dislikes the outcome, the Court said, “would completely destroy the deference our law affords to the arbitration process by allowing the trial court to substitute its own judgment on the merits of the question submitted to arbitration.” In the absence of a claim that “the arbitrators refused to postpone a hearing, refused to hear any of the plaintiff’s evidence, or otherwise committed a procedural error,” the trial court should not have vacated the arbitration award, which was “final and binding.” The trial court further erred by construing policy language, when it should not have engaged in de novo review of the policy language at all. However, disagreeing with the trial court’s construction of policy language, the Supreme Court also declined to vacate the arbitration award on the premise that the panel had “manifestly disregard[ed]” the law in violation of Connecticut General Statutes Section 52-418(a)(4) “when it permitted the defendant to withhold depreciation costs until the plaintiff had incurred a debt for the repair or replacement of the property.”

Despite this good news for Middlesex, the company is still saddled with the defense of the second lawsuit. Stemming from the same property loss and claim, this subsequent lawsuit asserts both contractual and extra-contractual claims of bad faith, negligent adjustment of the claim, violations of Connecticut’s Unfair Trade Practices Act and Unfair Insurance Practices Act, negligent infliction of emotional distress, and estoppel. Middlesex moved to dismiss the complaint for lack of ripeness as well as under the “prior pending action” doctrine on the basis that all of the causes of action complained of arose from Middlesex’s allegedly improper conduct in the adjustment and appraisal of the claim.

Nonetheless, the Superior Court sided with Kellogg, categorically denying Middlesex’s motion to dismiss. In doing so, it held that the new action is separate and distinct from the insured’s application to vacate the award, and that her current claims are (or were) not contingent on the outcome of the arbitration appeal. The Court thus allowed the underlying action to proceed, notwithstanding that Kellogg’s claims directly related to the disputed adjustment and appraisal of the loss. For the same reasons, the Superior Court also denied Middlesex’s subsequent motion to stay the proceedings pending the outcome of the appeal.

Insurers should thus take note: a win in connection with issues of coverage and appraisal does not always avoid other potential liabilities arising from the adjustment of claims.

A link to the Connecticut Supreme Court’s decision is available on the judicial branch website: (p. 100).