Austin, TX (Law Firm Newswire) July 10, 2018 – Arbitration has been in the news in the wake of Epic Systems v. Lewis, a case in which the U.S. Supreme Court upheld mandatory arbitration agreements in a trio of employment law cases and, in the process, underlined the strong federal policy in favor of private arbitration of disputes.
Gregory D. Jordan, a business litigation attorney from Austin, Texas with The Law Offices of Gregory D. Jordan notes, however, that, “No matter how sympathetic courts might be to a business’ desire to arbitrate claims against it, public policy reasons alone generally cannot create a duty to arbitrate in the absence of a validly executed contract specifying which claims must be resolved via arbitration.”
Jordan points to a recent case from the Texas Supreme Court to illustrate his point. In Jody James Farms v. The Altman Group Inc., No. 17–0062 (Texas, 5/11/18), the court ruled that an insurance agency could not compel arbitration of a farmer’s lawsuit against it, based on a mandatory arbitration clause contained in the insurance policy that was issued by the insurance company to the farmer.
Examining the insurance policy, the court failed to find any language that could be reasonably read to encompass disagreements between the farmer and the insurance agency, a non-signatory to the policy. The court considered but rejected several alternative legal theories — among them agency, estoppel and third-party beneficiary — for applying the insurance contract’s arbitration provisions to the dispute between farmer and insurance agency.
Agency Allegedly Responsible for Late Notice to Insurer
The plaintiff, Jody James Farms, purchased crop insurance from Rain & Hail LLC through the defendant, The Altman Group Inc., an insurance agency.
Jody James Farms filed a claim against the policy for a crop loss, which Rain & Hail denied, based on the contention that the plaintiff failed to provide timely notice of the loss. Jody James Farms and Rain & Hail arbitrated the coverage dispute, as required by an arbitration clause contained in the insurance policy.
The arbitrator ruled in favor of Rain & Hail, agreeing that Jody James Farms had not given timely notice of its claim.
Jody James Farms subsequently filed a lawsuit against The Altman Group, alleging that the insurance agency had breached its fiduciary duty to the insured and had engaged in deceptive trade practices by failing to promptly inform Rain & Hail of the crop-loss.
The Altman Group moved to compel arbitration of Jody James Farms’ claims, even though the insurance company was not a signatory on the insurance contract. The trial court approved The Altman Group’s motion, and the case went to arbitration. The court issued “take nothing” award, ruling in Altman Group’s favor.
Jody James Farms disagreed with the ruling, arguing that no binding arbitration agreement existed between it and The Altman Group. The trial court denied Jody James Farms’ motion and affirmed the trial court’s earlier decision.
”Unmistakable Clarity” Lacking Here
On appeal, the state supreme court began its analysis by holding that, in the absence of a clear indication in the contract, the court, not the arbitrator, is the proper entity to decide whether a dispute is subject to arbitration.
The court was guided here by the U.S. Supreme Court’s admonition, in First Options of Chicago Inc. v. Kaplan, 514 U.S. 938, 943 (1995), that “a party can be forced to arbitrate only those issues it specifically has agreed to submit to arbitration.”
In this case, the court said, there is no evidence that Jody James Farms agreed to arbitrate its claims against an insurance agency that was not a party to the agreement.
The court rejected the insurance agency’s argument that the contract’s reference to the rules of the American Arbitration Association — which provide that arbitrators have the authority to rule on their own jurisdiction — called for a different result. The court argued that the rules of the American Arbitration Association do not apply when both parties are signatories to the arbitration agreement. However, the rule is different when one of the parties to the dispute did not sign the arbitration agreement. In this situation, “questions related to the existence of an arbitration agreement with a non-signatory are for the court, not the arbitrator,” the court said.
The court concluded that the arbitration agreement called for arbitration between Jody James Farms and Rain & Hail — but not between Jody James Farms and The Altman Group. ”A valid arbitration agreement exists for disagreements between Jody James and Rain & Hail,” the court ruled, ”but the insurance policy cannot be reasonably read to encompass disagreements between the signatories and other parties.”
The court, considered but ultimately rejected several alternative legal bases for requiring Jody James Farms to arbitrate its claims against The Altman Group.
Agency. While it is true that a party to an arbitration agreement cannot avoid the agreement by suing the other party’s agents, in this case, The Altman Group is not legally an agent of Rain & Hail. There is no evidence that Rain & Hail exercised the necessary control necessary to create an agency relationship with The Altman Group, the court said.
Estoppel. The court turned back Altman Group’s arguments that Jody James Farms was estopped from resisting arbitration of its claims. Estoppel doctrines such as direct-benefits estoppel prevent a party from asserting benefits under one aspect of a contract while denying the validity of other aspects of the same contract. Here, the court said, Jody James Farms’ claims do not arise under the insurance contract but are, instead, non-contract theories involving an alleged breach of fiduciary duty and statutory deceptive trade practices claims.
Third-party beneficiary status. Nothing in the insurance contract evidenced an intent to make The Altman Group a beneficiary of that agreement, the court said, adding that any benefit the insurance agency enjoyed was, at best, indirect and incidental.
For these reasons, the court vacated the arbitrator’s take-nothing award and remanded the case to the trial court.
The case demonstrates that there is work to do before all players in the crop insurance industry can obtain the cost savings and risk mitigation benefits of arbitrating disputes with their insureds. The state supreme court’s opinion demonstrated an unwillingness to bind non-signatories to arbitration agreements; in effect, to create arbitration agreements where none exist. Going forward, insurance agencies should consider risk mitigation strategies such as executing arbitration agreements with their customers, taking care to identify and protect against all possible legal claims that could be raised in the event the insurer denies coverage under policies they have sold.
The case is Jody James Farms v. The Altman Group Inc., No. 17–0062, decided May 11, 2018.
To learn more, visit http://www.theaustintriallawyer.com/
Law Offices of Gregory D. Jordan
5608 Parkcrest Drive, Suite 310
Austin, Texas 78731