It is well-established, and well-known, that upon receipt of a properly served Demand for Arbitration or Notice of Intention to Arbitrate, the insurer must promptly determine whether or not, in its view, the claim presented is valid and meritorious. If the insurer answers this question in the affirmative, it will allow the claim to proceed to arbitration in accordance with the arbitration provisions of its applicable endorsement. If, on the other hand, the insurer determines that the claimant presents preliminary issues that should be resolved prior to arbitration, it must move in court to stay the arbitration, either permanently, or temporarily, pending a determination of those preliminary, or threshold, issues. The failure of the insured to make a timely motion to stay arbitration—i.e., within 20 days after receipt of the Demand for Arbitration or Notice of Intention to Arbitrate, pursuant to CPLR 7503(c)—will result in a preclusion of the right to have the arbitration stayed while the court determines the preliminary issues, and a waiver of the right to stay arbitration upon any such issue or ground. (A waiver of the preliminary issues has been held to be the equivalent of a determination that the insured claimant has complied with the policy and that he or she was, in fact, involved in an accident with an uninsured (or underinsured) motorist. Aetna Life & Cas. Co. v. Stekardis, 34 N.Y.2d 182 (1974). See Steck v. State Farm Ins. Co., 89 N.Y.2d 1082 (1996).) Somewhat less familiar to practitioners is the notion that a failure timely to seek a stay of arbitration is not the only way that an insurer may waive that right.

CPLR 7503(b) limits the right to apply for a stay of arbitration to a party "who has not participated in the arbitration and who has not made or been served with an application to compel arbitration." It is well-established: "A party otherwise entitled to a judicial determination of the arbitrability of a dispute may waive that right by actively participating in the arbitration." Arner v. Liberty Mutual Ins. Co., 233 A.D.2d 321 (2d Dept. 1996). See also Matter of the Arbitration between Wiederspiel v. Carstens, 36 A.D.3d 971 (3d Dept. 2007) ("a right to seek a stay of arbitration may be waived when a party actively participates in the arbitration process"); Denobile v. Panetta, 166 A.D.3d 771 (2d Dept. 2018) ("participation in the arbitration process without a reservation of rights manifested a preference inconsistent with the subsequent effort to stay arbitration"); Flintlock Construction Services v. Weiss, 122 A.D.3d 51 (1st Dept. 2014); JJF Associates v. Joyce, 59 A.D.3d 296 (1st Dept. 2009); Mark Ross and Co. v. XE Capital Management, 46 A.D.3d 296 (1st Dept. 2007). Even less commonly understood is the concept of what constitutes "participation in the arbitration" in this context.

What Constitutes 'Participation?

The courts have recognized that "participation in arbitration" occurs when a party engages in discovery demands and proceedings (Hanney v. Taylor, 2001 WL 1691986 (Sup. Ct., New York Co. 2001), or otherwise takes affirmative steps to further the arbitration process. Morfopoulos v. Lundquist, 191 A.D.2d 197 (1st Dept. 1993).

In Home Mutual Ins. Co. v. Springer, 130 A.D.2d 493 (2d Dept. 1987), the court held that "the petitioner acquiesced in the arbitration proceeding by filing a notice of appearance and participating in the selection of an arbitrator and the scheduling of the arbitration hearing. Consequently, its right to stay arbitration and to raise any objection to the service of the notice to arbitrate was waived."

In Carbone /Orrino Agency, 210 A.D.2d 221 (2d Dept. 1994), the court stated as follows: "Where a party does not move for a stay until after the statutory time period of 20 days after service of the demand for arbitration and where the party has participated in or acquiesced in the arbitration proceeding, the party waives its right to raise any objection to service of the demand … . Further, the appellants requested an adjournment of the hearing and the parties acquiesced in the selection of the arbitrators. Therefore, the appellants participated in the arbitration process. Consequently, the appellants are not entitled to a stay of arbitration."

In Allstate Ins. Co. v. Peterson, 226 A.D.2d 528 (2d Dept. 1996), the court held that the insurer's participation in the arbitration process by objecting to one or more of the arbitrators proposed by the American Arbitration Association after its motion for a stay had been denied operated as a forfeiture of its right to apply to the Supreme Court for a pre-arbitration stay.

In Allstate Ins. Co. v. Khait, 227 A.D.2d 551 (2d Dept. 1996), the court held: "By actively participating in the selection of the arbitrators and in adjourning the arbitration hearing without any reservation of rights, the petitioner … participated in the arbitration proceeding. Consequently, its right to the stay of arbitration was waived."

In North River Ins. Co. v. Morgan, 291 A.D.2d 230 (1st Dept. 2002), the court held that the insurer participated in the arbitration for more than two years before it commenced an Article 75 proceeding to stay arbitration by, at a minimum, agreeing with the claimant's counsel that New York arbitration rules would be applied; agreeing that the third arbitrator would be selected by the AAA; designating an arbitrator; receiving medical reports and records; and agreeing to reschedule the hearing to a particular date. Thus, the insurer waived any objection that there was no agreement to arbitrate.

In JJF Associates, LLC v. Joyce, 59 A.D.3d 296 (1st Dept. 2009), the court held that the petitioner could not avail itself of CPLR 7503 since it participated in the arbitration to the extent of attending a pre-hearing conference with the selected arbitrator, at which a hearing schedule and ground rules were decided upon, and even moved before the arbitrator to dismiss the proceeding on the ground that it was not properly brought.

And, in Boston Old Colony Ins. Co. v. Martin, 34 A.D.2d 776 (1st Dept. 1970), the court held that even simply "the adjournment of the arbitration hearing at the request of the respondent without any reservation of rights constituted a waiver of any right to a stay of the proceedings and any objection to the proceedings.

On the other hand, it should be noted that in Mix Centre, Ltd. v. Butler, 221 A.D.2d 82 (1st Dept. 1995), the court held that the individual respondent, who was neither a signatory to nor named in the arbitration agreement, did not participate in the arbitration hearing when an attorney appeared on his behalf and "did nothing more than request an adjournment."

And, in Cybex International v. Fuqua Enterprises, 246 A.D.2d 316 (1st Dept. 1998), the court held that the petitioner did not wave its right to seek a stay of arbitration, noting that "its participation in arbitral discovery and in the selection of an arbitrator were done before it had received detailed specification of respondent's claims, and that once it did, it made timely attempts, including a motion before [the] court, to stay the arbitration" (emphasis added).

Recent Case

More recently, the "participation in arbitration" issue was raised, and resolved, in the case of U.S. Specialty Ins. Co. v. Navarro, 169 A.D.3d 415 (1st Dept. 2019), lv. to appeal denied 34 N.Y.3d 903 (2019) (in which this writer represented the respondent/appellant, Navarro, on appeal).

In that case, the injured party/claimant/respondent, Navarro, was a patrol officer employed by the Town of Greenburgh Police Department, who was injured when the parked police vehicle he was occupying was struck head-on by another vehicle, which was insured with only the minimum 25/50 bodily injury liability insurance limits. Insofar as Navarro suffered severe personal injuries as a result of this collision, the value of which clearly exceeded the offending vehicle's coverage limits, he decided to pursue a claim for Supplementary Uninsured/Underinsured Motorist (SUM) benefits under an insurance policy issued by U.S. Specialty Ins. Co. (USSIC) to the Town, which appeared to provide, inter alia, SUM coverage in the amount of $1 million (combined single limit). However, pursuant to governing case law, no such coverage was actually provided for police vehicles, since such vehicles are not considered "motor vehicles" under the UM/SUM statutes. See State Farm Mut. Auto. Ins. Co. v. Fitzgerald, 25 N.Y.3d 799 (2015); State Farm Mut. Auto. Ins. Co. v. Amato, 72 N.Y.2d 288 (1988).

The record indicated that, upon receipt of notice of Navarro's claim, USSIC engaged in the following conduct in acknowledging, entertaining, investigating, administering, handling, and litigating Navarro's SUM claim:

• Acknowledged the claim upon receipt, without asserting any objection thereto;
• Failed to issue a denial or disclaimer within a reasonable period of time following receipt of notice of the claim;
• Failed to issue a denial or disclaimer within a reasonable period of time after receipt of Navarro's request for consent to settle the underlying lawsuit against the tortfeasor;
• Provided Navarro with consent to settle the underlying action, without raising any objection to coverage or advising that any issue as the coverage may, in fact, exist, knowing, of course, that thereafter Navarro would issue a general release;
• Conducted discovery pursuant to the terms of its SUM endorsement—i.e., an EUO and IME of Navarro pertaining to his SUM claim;
• Actively engaged in settlement negotiations with Navarro's counsel over a period of several months in an effort to amicably resolve the SUM claim;
• Agreed to, and participated in, a private mediation of the SUM claim;
• Received and acknowledged Navarro's formal demand for SUM arbitration, without moving to stay arbitration within 20 days thereafter;
• Attempted, albeit somewhat unsuccessfully, to participate in a Pre-Hearing Conference Call with the AAA arbitrator assigned to the hearing of Navarro's claim;
• Participated in numerous telephone conference calls with the arbitrator and Navarro's counsel regarding adjournments of the scheduled AAA arbitration hearing; and
• Retained an expert economist to testify and/or furnish a report for use at the AAA SUM arbitration hearing, and served the report upon Navarro.

While the foregoing facts created an issue—which the First Department also resolved—concerning whether USSIC could be equitably estopped from denying SUM coverage that would not otherwise have existed—an important issue and an interesting topic, to be discussed in a future article—for present purposes the pertinent question before the court was whether USSIC's involvement in the arbitration process was sufficient to constitute a waiver of its right to seek a judicial determination of the arbitrability of the SUM coverage dispute involving Navarro's claim in view of its no coverage defense.

Navarro's counsel argued that USSIC waived the right to object to arbitration by actively participating in the arbitration process since (at least) the date it provided written consent to Navarro to settle with the underinsured adverse vehicle for its full policy limits, thus freeing Navarro to proceed with his SUM claim. As detailed by counsel: "'Petitioner demanded an EUO, IME and other pre-arbitration involvement; participated in a private Mediation; numerous conference calls; and coordinated multiple dates and adjourn dates for the SUM arbitration with AAA'" (citation omitted). Thus, counsel concluded: "Petitioner's participation in the pre-arbitration process waived any objection that there was no agreement to arbitrate" (citing, inter alia, Matter of JJF Associates v. Joyce, 59 A.D.3d 296, 297 (1st Dept. 2009), and North River Ins. Co. v. Morgan, 291 A.D.2d 230 (1st Dept. 2002).

In arguing that it did not actively participate in the arbitration process, USSIC asserted that "the relevant time frame from which to assess whether a party has participated in the arbitration begins to run from the time that a demand for arbitration or a notice of intent to arbitrate is served." Counsel for Navarro noted that this contention (made without the citation of any supporting case law) allowed USSIC to remove the focus from its numerous activities (or non-action) during the pertinent period, which acknowledged the existence of a valid SUM claim under its policy, and, thus, by logical extension, the existence of an arbitration agreement between the parties, including pre-arbitration discovery, and to fail to give proper attention or weight to the numerous and substantial activities in which USSIC engaged after the Demand for Arbitration was served. These included USSIC's notification to the AAA of its appearance in the arbitration proceeding; agreeing to, or acquiescing in, the AAA's selection of the arbitrator assigned to hear the arbitration between Navarro and USSIC; agreeing to participate in a Pre-Hearing Conference Call; consenting as well as to adjournments and selecting hearing dates; and exchanging expert discovery for use at the hearing—all without any reservation or objection to the AAA's jurisdiction over it, and without seeking to stay the arbitration until 14 months after the demand was received, and after all of those indicia of acceptance of arbitration as the means to resolve Navarro's claim had been given. As Navarro's counsel noted: "Such post-demand conduct as was engaged in by USSIC was found to constitute sufficient participation in the arbitration process as to warrant a finding of waiver in Morfopoulos v. Lundquist, 191 A.D.2d 197 (1st Dept. 1993) and Hanney v. Taylor, 2001 WL 1691986 (Sup. Ct. N.Y. Co. 2001); see also Boston Old Colony Ins. Co. v. Martin, 34 A.D.2d 776 (1st Dept. 1970). The same result should have obtained herein."

Although the Supreme Court, which decided the Petition to Stay Arbitration in favor of USSIC on other grounds, did not address the "waiver by participation" ground at all, the First Department did specifically address that issue. Apparently accepting USSIC's contention that the relevant activity by the insurer for purposes of "participation in arbitration" was that which followed (and not preceded) service of the Demand for Arbitration, the court held that USSIC's conduct in this case constituted "minimal involvement in the arbitration process" and, thus, was "insufficient" to constitute a waiver of its right to seek a stay of arbitration of the SUM coverage dispute (emphasis added).

Conclusion

Practitioners must carefully compare the facts of their cases with the cases cited here and perform a case-by-case analysis in order to try to determine whether the insurer's involvement in the arbitration process following the service of the Demand for Arbitration was sufficient to result in a waiver of the right to seek a stay of arbitration on the basis that no coverage existed in the first place.

Jonathan A. Dachs is an attorney practicing in New York City. A frequent lecturer and writer on Insurance Law issues, he is the author of New York Uninsured and Underinsured Motorist Law & Practice (LexisNexis/Matthew Bender 2016, 2017, 2018 and 2019).