In Storm v. Standard Fire Ins. Co., No. B299277 (Cal. Ct. App. July 24, 2020) (“Storm”), the California Court of Appeal held that policy language providing that each party will pay its expenses in arbitration and bear expenses of the arbitrator equally did not preclude recovery of those costs by a party under California Code of Civil Procedure Section 998 (“Section 998”). Pursuant to Section 998, if (a) a party rejects an offer for settlement prior to trial or arbitration and (b) the rejecting party fails to obtain a more favorable judgment or arbitral award than the rejected offer, then the rejecting party (c) will not recover post-offer costs and (d) shall pay the offering party’s costs from the time of the offer. Cal. Civ. Proc. Code § 998. Storm holds that inclusion of a cost-sharing provision in an arbitration provision will not preclude recovery of costs for failure to accept an offer and later failure to obtain a more favorable arbitral award.
Storm emanates from an underinsured motorist arbitration. During the arbitration, the insured served a Section 998 offer, which the insurer did not accept. Subsequently, the arbitrator awarded the insured damages exceeding her Section 998 offer. In arbitration enforcement proceedings, the insured requested the court award her arbitration and post-arbitration costs as the prevailing party. The insurer argued that the parties’ insurance contract provided for the division of costs incurred during arbitration, although the agreement made no mention of Section 998. The trial court agreed with the insurer that the policy language precluded the recovery of costs. Reversing the trial court’s decision, the California Court of Appeal concluded that the policy language, which stated that “[e]ach party will … [p]ay the expenses it incurs [in arbitration]” and “[b]ear the expenses of the arbitrator equally,” did not preclude recovery under Section 998 of arbitration costs, or the recovery under section 1293.2 of post-arbitration costs. Storm, at *1.
Central to the Court’s analysis was the notion that the specification by policy language as to how costs are to be initially borne does not determine whether such costs may be recouped later under the cost-shifting provisions of Section 998 or section 1293.2. The Court found that “the parties agreed, in the first instance, to pay their own arbitration expenses and to be equally accountable for the arbitrator’s fee . . . [b]ut these terms say nothing about limiting the statutory right to recover those expenses under sections 998’s cost-shifting provisions.” Storm, at *5. In addition, the Court further held that the request for arbitration expenses was properly made before the court (and not the arbitrator), because the arbitration provision was narrow and limited the issues to “[w]hether [the insured] [was] legally entitled to recover damages under this coverage,” and “the amount of damages.” Storm, at *6. As a result, the “arbitrator’s powers were expressly limited,” and there was no authority to “rule on requests for arbitration costs under Section 998.” Id.
This case serves as a reminder to insurers that California encourages productive settlement discussions both in public and private fora and imposes penalties, such as cost-shifting, under its statutes. More important, the holding undermines the intent of arbitration cost-sharing provisions in insurance policies. To ensure that insurers are not responsible for the full cost of arbitration, as well as post-arbitration costs involved in enforcement of an arbitration award, insurers will need to amend their policies to make clear that they preclude an insurer from relying upon cost-shifting statutes to recover arbitration costs. Finally, parties should always be reminded that an arbitration provision in a contract defines the scope of an arbitrator’s authority, and that narrow arbitration clauses may result in courts adjudicating issues beyond their scope.