Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_10-cv-01873/USCOURTS-casd-3_10-cv-01873-0/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:1332 Diversity-Insurance Contract

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- 1 - 10cv1873

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

AG LA MESA LLC dba Country Villa La

Mesa HealthCare Center, a limited liability

company, 

Plaintiff,

CASE NO. 10cv1873 - IEG (BGS)

ORDER:

(1) GRANTING DEFENDANT’S

MOTION TO COMPEL BINDING

ARBITRATION; and

(2) STAYING THE LITIGATION

[Doc. No. 8]

vs.

LEXINGTON INSURANCE COMPANY,

and DOES 1 through 10, inclusive,

Defendants.

This diversity action stems from Defendant Lexington Insurance Company’s denial of

Plaintiff AG La Mesa’s insurance claim. Presently before the Court is a Motion to Compel

Binding Arbitration and to Dismiss or, in the Alternative, Stay the Litigation brought by

Defendant. In consideration of the parties’ briefs, oral argument, and for the reasons discussed

herein, the Court GRANTS Defendant’s motion and stays the litigation.

BACKGROUND

Defendant issued an employment practices liability insurance policy to Plaintiff with a period

of October 1, 2009 to October 1, 2010. (See Def.’s Mot. at 3; Pl.’s Opp. at 2.) The Policy contains

an arbitration clause that requires arbitration of “a disagreement as to the interpretation of this policy.”

(Def.’s Mot. at 3; Pl.’s Opp. at 8.)

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On January 25, 2010, a former employee of Plaintiff, Linda Maire, sued Plaintiff for various

employment-related violations and practices on behalf of herself and other putative class members.

(Def.’s Mot. at 4; Pl.’s Opp. at 2.) Three days later, on January 28, 2010, Plainitff’s broker notified

Defendant of the Maire lawsuit and asked it to provide a defense. Defendant denied the claim on

February 3, 2010. (Def.’s Mot. at 5; Pl.’s Opp. at 2.) Plaintiff asked Defendant to reconsider its denial

twice, and in both instances, Defendant affirmed its denial of coverage. (Def.’s Mot. at 5; Pl.’s Opp.

at 3.) In both instances, Defendant affirmed its denial without mentioning arbitration and instructed

Plaintiff to contact the California Department of Insurance (“DOI”) if it disagreed with the denial.

(See Def.’s Mot. at 5; Pl.’s Opp. at 3.)

On August 3, 2010, Plaintiff filed a complaint in Superior Court against Defendant for breach

of the implied covenant of good faith and fair dealing and breach of contract. (See Doc. No. 1.)

Defendant removed the case to this Court on September 8, 2010. (Id.) Prior to removal, on August

26, 2010, Defendant invoked the policy’s arbitration clause and demanded that Plaintiff agree to

arbitrate in Massachusetts. (See Def.’s Mot. at 6; Pl.’s Opp. at 3.) Plaintiff denied Defendant’s

demand on September 2, 2010. (Def.’s Mot. at 6; Pl.’s Opp. at 3.) After Plaintiff rejected arbitration

in Massachusetts, Defendant demanded arbitration in California pursuant to a letter dated September

21, 2010. (Def.’s Mot. at 6; Pl.’s Opp. at 3.) Plaintiff denied Defendant’s second demand on

September 27, 2010. (Def.’s Mot. at 6.)

Defendant filed the present motion on October 14, 2010. (Doc. No. 8.) Plaintiff filed an

opposition and Defendant filed a reply. (Doc. Nos. 10, 11.)

DISCUSSION

I. Scope of the Insurance Policy’s Arbitration Clause

“The Arbitration Act establishes that, as a matter of federal law, any doubts concerning the

scope of arbitrable issues should be resolved in favor of arbitration . . .” Moses H. Cone Memorial

Hospital v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983). At the same time, arbitration “is a

matter of contract and a party cannot be required to submit to arbitration any dispute which he has not

agreed so to submit.” AT&T Tech., Inc. v. Communications Workers of America, 475 U.S. 643, 648

(1986) (quoting Steelworkers v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582 (1960). In this

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 In its complaint, Plaintiff has asserted two causes of action: breach of the implied covenant 1

of good faith (first cause of action) and fair dealing and breach of contract (second cause of action).

 Defendant correctly notes that Plaintiff’s first cause of action is completely dependant on its second

cause of action. See Waller v. Truck Ins. Exchange, Inc., 900 P.2d 619, 639 (Cal. 1995) (“if there is

no potential for coverage and, hence, no duty to defend under the terms of the policy, there can be no

action for breach of the implied covenant of good faith and fair dealing”). Nevertheless, because

Plaintiff’s first cause of action involves obligations that are, by definition, separate from the express

obligations of the insurance contract, see AXA Versicherung AG v. New Hampshire Ins. Co., 708 F.

Supp.2d 423, 431 (S.D.N.Y. 2010), the Court concludes Plaintiff’s first cause of action is not covered

by the parties arbitration clause. Part I evaluates the applicability of the arbitration clause to Plaintiff’s

second cause of action only.

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case, the Maire lawsuit has generated a dispute over coverage, and the parties disagree as to whether

the arbitration clause in the Policy requires the parties to resolve the dispute through binding

arbitration. For purposes of the present motion, the question is whether a coverage dispute constitutes

a “disagreement as to the interpretation of this policy.”1

Defendant maintains that “all of Plaintiff’s claims derive from the interpretation and

application of the policy provisions, including amendments, endorsements, and exclusions thereto.

Specifically, the parties’ coverage positions differ with respect to the application of the Insuring

Agreement, Endorsement #012, ‘Revised Workplace Torts,’ and Exclusion H, Wage claims.” Def.’s

Reply at 7. Defendant argues further that “resolution of the disagreement over interpretation of the

policy would involve an analysis of the Maire lawsuit pursuant to the terms of the policy in its

entirety.” Id.

Plaintiff responds that the arbitration clause is narrow and does not encompass any and all

disputes arising out of the policy. Pl.’s Opp. at 8-9. According to Plaintiff, policy interpretation

consists only in ascertaining the meaning of the parties’ expression, and that under California law, an

arbitrator tasked with ascertaining the meaning of the parties’ expression would only look to the four

corners of the policy (unless extrinsic evidence were necessary to explain an ambiguity). Id. at 9. It

follows, Plaintiff argues, that an arbitrator would not be permitted to analyze the Maire complaint to

see if it was covered by the policy. Id. Plaintiff relies principally on Certain Underwriters at Lloyd’s

of London v. Celebrity, Inc., 950 S.W.2d 375 (Tex. Ct. App. 1996) for the proposition that policy

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 In Celebrity, Inc., 950 S.W.2d 375 (Tex. Ct. App. 1996), plaintiff Celebrity obtained 2

insurance coverage from defendant Underwriters on certain types of claims that might be filed by

plaintiff’s employees. When one of Celebrity’s employees filed a claim, Underwriters denied

coverage, maintaining that it was for an “occupational illness,” a stated exclusion under the policy.

In contrast with an “occupational illness,” an “occupational injury” would have been covered under

the policy. Celebrity filed suit, and Underwriters moved to compel arbitration. The parties’ contract

contained an arbitration clause that required the parties to “arbitrate conflicts concerning interpretation

of the policy as that policy pertains to the performance of the parties’ respective obligations

thereunder.” The trial court denied Underwriters’ request for arbitration. Upholding the trial court’s

decision, the Court of Appeals observed:

[T]he arbitration clause before us requires arbitration of the interpretation of the policy

. . . Here, the underlying dispute is not one of policy interpretation. Instead, it appears

to be a factual dispute . . . Accordingly, we conclude that the underlying dispute was

not encompassed by the arbitration clause in the [insurance policies].

Id. at 378-79.

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interpretation is distinct from weighing the evidence and determining whether particular conduct

amounts to a breach.2

The starting point for evaluating the scope of an arbitration clause is the language of the clause

itself, with any doubts resolved in favor of arbitration. Moses H. Cone Memorial Hospital v. Mercury

Constr. Corp., 460 U.S. 1, 24-25 (1983). A controversy falls within a valid arbitration clause “unless

it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation

that covers the asserted dispute.” Marchese v. Shearson Hayden Stone, Inc., 734 F.2d 414, 419 (9th

Cir. 1984) (internal quotation marks omitted).

In this case, the question is whether “interpretation” is susceptible of a meaning that

encompasses the resolution of a concrete dispute over the scope of coverage. Among other things,

“interpret” means “to conceive in the light of individual belief, judgment, or circumstance.” See

Merriam-Webster’s Collegiate Dictionary 654 (11th ed. 2003). To conceive of the parties’ dispute in

light of individual circumstance may entail resolving the parties’ coverage dispute; “interpret” is thus

“susceptible of an interpretation covers the asserted dispute.” Marchese, 734 F.2d at 419.

In insurance contracts, as in all contracts, “interpretation” entails the use of abstract guidelines

to resolve concrete disputes. Waller v. Truck Ins. Exchange, Inc., 900 P.2d 619, 627 (Cal. 1995)

(reciting interpretation principles and concluding that “[t]hese well-established precepts of insurance

coverage guide us in our determination of whether a particular policy requires a liability insurer to

defend a lawsuit . . .”). In the first instance, the decision-maker must compare “the allegations of the

complaint with the terms of the policy.” Id. While it is conceivable that a disagreement over

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Inc. There, the Texas Court of Appeals drew a hard line between a policy interpretation dispute and

a factual dispute but it did not providing a rationale for doing so.

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interpretation of an insurance policy could arise in the absence of a concrete coverage dispute, it is

unlikely the parties intended that the arbitration clause cover such a minor subset of disagreements.

3

Accordingly, pursuant to its duty to resolve “any doubts concerning the scope of arbitrable

issues” in favor of arbitration, the Court concludes the parties’ coverage dispute is a disagreement as

to the interpretation of the Policy subject to binding arbitration. As a result, the Court must compel

binding arbitration and stay the litigation unless, as Plaintiff maintains, Defendant is precluded from

demanding arbitration due to forfeiture or estoppel.

II. Forfeiture

Plaintiff argues that Defendant has forfeited its right to arbitration. See Pl.’s Opp. at 4-6. In

doing so, Plaintiff relies on a trio of cases in which the California Supreme Court and California Court

of Appeals outlined circumstances in which insurers must apprise its insureds of the right to arbitration

and circumstances in which an insurer forfeits the right to demand arbitration. Id. According to

Defendant, each of those cases is either distinguishable or, in fact, supports its position. See Def.’s

Mot. at 2-5.

In Davis v. Blue Cross of Northern California, 25 Cal.3d 418, 421 (Cal. 1979), the California

Supreme Court upheld the trial court’s finding that Blue Cross could not compel arbitration because

its “failure timely or meaningfully to apprise its insureds of their rights to arbitration . . .” The trial

court’s finding was guided by several factors. The trial court found that the arbitration clause was

ambiguously worded and obscurely placed within the policy. Id. at 426. As a consequence, the trial

court found that Blue Cross should have known its insureds would not be aware of their right to

arbitration and the procedures for initiating it. Id. But, when learning insureds disagreed with claim

resolution, Blue Cross failed to inform them of the arbitration procedures. Id. As a result, the trial

court found that Blue Cross’ failure to inform its insureds of the arbitration clause amounted to an

implied misrepresentation that its insureds had no choice but to accept Blue Cross’ determination. Id.

In addition, the trial court determined that Blue Cross had adopted its course of conduct for the

purpose of inducing insureds to give up their rights under the insurance contracts. Id. On the basis

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of these findings, the trial court concluded that BlueCross had breached the duty of good faith and fair

dealing owed to its insureds, and, in doing so, it forfeited its right to demand arbitration. Id. at 427.

Eight years later, in Sarchett v. Blue Shield of California, 43 Cal.3d 1, 15 (Cal. 1987), the

California Supreme Court expanded on the principles it outlined in Davis. There, in a plurality

opinion, the Court noted that “once it becomes clear to the insurer that its insured disputes its denial

of coverage . . . the duty of good faith does not permit the insurer passively to assume that its insured

is aware of his rights under the policy. The insurer must instead take steps to make sure that the

insured is informed of his remedial rights.” Id. at 15. In a footnote immediately following, the Court

observed: “In some cases, it will be clear that the insured knows his rights under the policy; for

example, the insured’s claim may refer to such remedies. When in doubt, however, the insurer should

advise the insured of his rights under the policy.” Id. at 15 n.15. In contrast with the arbitration

provision at issue in Davis, the arbitration provision in Sarchett was adequately set out in the policy

with a bold-face heading. Id. at 15. However, Blue Shield had reason to know the insured was

uninformed of his rights because he repeatedly protested the denial of coverage without demanding

review by an impartial panel of physicians. Id. Blue Shield nonetheless denied the insured’s claim

several times without mentioning his right to review. Id. Accordingly, the Court held that Blue

Shield’s “course of conduct appears designed to mislead subscribers into forfeiting their contractual

right to impartial review and arbitration of disputed claims.” Id.

In Chase v. Blue Cross of California, 42 Cal. App. 4th 1142, 1157 (Cal. Ct. App. 1996), the

California Court of Appeal sought to balance the “enhanced duty of the insurer as a contracting party

against the strong public policy in favor of arbitration.” The Court held that in order to find that an

insurer has forfeited its right to arbitration, “we understand Davis and Sarchett to require conduct

designed to mislead policyholders” and instructed that the “the court’s focus when evaluating an

allegation of forfeiture should be on the subjective intent of the insurer.” Id. Under Chase, the burden

of proof is on the party asserting forfeiture and must be demonstrated by clear and convincing

evidence. Id.

To the extent this case is governed by the relatively strict standard articulated in Chase,

Plaintiff cannot satisfy its burden of showing by clear and convincing evidence that Defendant

exercised bad faith. There is no question Defendant initially demanded arbitration in Massachusetts.

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 Defendant contends, and Plaintiff does not dispute, that in September 2009, Plaintiff’s broker 4

requested the arbitration clause be modified in two ways. See Def.’s Mot. at 4.

- 7 - 10cv1873

See Def.’s Mot. at 6; Pl.’s Opp. at 3. However, Defendant’s initial demand appears to have been the

result of a mistake, not bad faith. The original version of the parties’ arbitration clause provided for

arbitration in Massachusetts, and the parties later agreed on a provision for arbitration in California.

Defendant acknowledged its mistake within approximately three weeks. See Def.’s Mot. at 6; Pl.’s

Opp. at 3. Aside from the initial arbitration demand, the only potential evidence of bad faith is

Defendant’s failure to advise Plaintiff of the right to arbitration when it denied (and affirmed denial

of) coverage. The foregoing facts do not establish “clear and convincing evidence” of bad faith.

Chase, 42 Cal. App. 4th at 1157.

Defendant’s failure to advise Plaintiff ofthe right to arbitrate is consistent with its position that

such an advisement was unnecessary here, where the parties had specifically negotiated the terms of

the arbitration clause. Such negotiations suggest that, under Sarchett, this is an instance in which it 4

is “clear that the insured knows hisrights under the policy . . .” 43 Cal.3d at 15 n.15. And unlike both

Sarchett and Davis, which arose in the context of insurer-insured relationships characterized by

unequal bargaining power, the parties in this case are both business entities capable of protecting their

own interests. Accordingly, the Court concludes Defendant has not forfeited its right to demand

arbitration.

III. Estoppel

The elements of equitable estoppel are: “(1) the party to be estopped has engaged in

blameworthy or inequitable conduct; (2) that conduct caused or induced the other party to suffer some

disadvantage; and (3) equitable considerations warrant the conclusion that the first party should not

be permitted to exploit the disadvantage he has thus inflicted upon the second party.” City of Hollister

v. Monterey Ins. Co., 165 Cal. App. 4th 455, 488 (2008). Equitable estoppel does not require

affirmative conduct or fraudulent intent by the insurer; rather, it is predicated on the insurer’s failure

to speak when in law or equity it is bound to do so.” Id.; see also Spray, Gould & Bowers v.

Associated Int’l Ins. Co., 71 Cal. App. 4th 1260, 1268 (Cal. Ct. App. 1999) (“An estoppel may arise

from silence where there is a duty to speak”). Here, Plaintiff contends Defendant engaged in

inequitable conduct in repeatedly denying its claim over a period of six months without mentioning

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arbitration, burdening Plaintiff with the cost of litigation and enabling Defendant to use arbitration to

its unilateral advantage. Pl.’s Opp. at 7.

Defendant’s failure to advise Plaintiff of the right to arbitrate was not blameworthy or

inequitable. As stated above, such an advisement was unnecessary here, where the parties had

specifically negotiated the terms of the arbitration clause. Plaintiff does not contend it lacked actual

knowledge of the arbitration clause. See generally Pl.’s Opp. Accordingly, Defendant is not estopped

from enforcing the arbitration clause.

CONCLUSION

Forthe foregoing reasons, the CourtGRANTS Defendant’s motion and ORDERS as follows:

– The parties are to forthwith submit to binding arbitration as to Plaintiff’s second cause of

action for breach of contract.

– Plaintiff’s first cause of action for breach of the implied covenant of good faith and fair

dealing is not subject to binding arbitration. Accordingly, the Court stays the litigation pending

arbitration. The parties shall inform the Court by letter the status of the case, on or before 90 days

from the date of this order.

IT IS SO ORDERED.

DATED: January 3, 2011

IRMA E. GONZALEZ, Chief Judge

United States District Court

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