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Federal law trumps state law in definition of 'arbitration': Court

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Federal law trumps state law in definition of 'arbitration': Court

A federal appellate court has ruled that federal common law trumps state law regarding the definition of “arbitration” in insurance policies, affirming a lower court's ruling.

The case of Imad John Bakoss v. Certain Underwriters at Lloyd's of London Issuing Certificate No. 0510135 was appealed to the United States Court of Appeals for the Second Circuit in New York after a lower court determined that the interpretation of “arbitration” is governed by the Federal Arbitration Act.

The case centers on Mr. Bakoss, a medical doctor specializing in pulmonary and internal medicine, who claims to have retired due to permanent coronary artery disease.

Mr. Bakoss sought $550,000 in disability benefits from a policy issued by Lloyd's of London. The claim was denied by the insurer as Mr. Bakoss' condition allegedly did not satisfy the definition of “permanently totally disabled,” according to court documents filed in U.S. District Court for the Eastern District in New York.

As part of the policy, each party is provided the right to have Mr. Bakoss examined by a physician of its choice for the purpose of determining if he was “totally disabled.” In the event of a disagreement between each party's physician, the policy states that those two physicians “shall jointly name a third physician to make a decision on the matter which shall be final and binding,” according to court documents.

The third-physician provision in the policy is an arbitration clause and as such is governed by federal common law, not state law, the panel of three appeals court judges unanimously affirmed on Wednesday.

“We hold that Congress intended national uniformity regarding the interpretation of the term 'arbitration,' and therefore federal common law governs,” the judges wrote in their opinion. “Applying state law would create a patchwork in which the FAA will mean one thing in one state and something else in another, and there is no indication that Congress intended that result.”

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