Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_07-cv-02542/USCOURTS-caed-2_07-cv-02542-2/pdf.json

Parties Involved:
Anthem Blue Cross Life and Health Insurance Company,
Defendant
BC Life and Health Insurance Company
Defendant
HCC Life Insurance Company
Plaintiff
Managed Benefit Administrators LLC
Defendant

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1

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

HCC LIFE INSURANCE COMPANY, No. 2:07-cv-02542-MCE-DAD

Plaintiff,

v. MEMORANDUM AND ORDER

MANAGED BENEFIT ADMINISTRATORS

LLC; and ANTHEM BLUE CROSS

LIFE AND HEALTH INSURANCE

COMPANY, formerly known as

BC LIFE AND HEALTH INSURANCE

COMPANY,

Defendants.

----oo0oo----

 The Nevada Irrigation District (“NID”) filed a demand for

arbitration against HCC Life Insurance Company (“Plaintiff” or

“HCC Life”), Managed Benefit Administrators, LLC (“MBA”), and

Anthem Blue Cross Life and Health Insurance Company (“BC”)

arising out of a $3,000,000 claim under NID’s insurance policy.

In the arbitration proceeding, Plaintiff filed a cross-demand

against MBA and BC, asserting that, to the extent Plaintiff is

liable to NID, MBA and BC are liable to Plaintiff. 

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 Because oral argument will not be of material assistance,

1

the Court orders this matter submitted on the briefs. E.D. Cal.

Local Rule 78-230(h).

2

After the arbitration panel dismissed the cross-demand, Plaintiff

brought this action against MBA and BC. Presently before the Court

is Plaintiff’s Motion to Compel Arbitration. Because no contract

exists between HCC Life and MBA or between HCC Life and BC, and

because this case does not satisfy the criteria under which a

nonparty to an arbitration agreement is bound by another party’s

consent, Plaintiff’s Motion to Compel Arbitration is denied.1

BACKGROUND

HCC Life provided a stop loss insurance policy to NID.

Under the policy, NID established a self-funded health plan for

its employees, while Plaintiff insured NID for medical expenses

in excess of the policy’s deductibles. To be subject to

reimbursement under the policy, NID’s expenses had to be both

covered by the policy and by NID’s self-funded health plan. The

agreement between Plaintiff and NID required that any controversy

or dispute arising out of or relating to the policy would be

settled by arbitration.

Defendant MBA, formerly known as Acclaim Administrators, and

Defendant BC, formerly known as BC Life & Health Insurance

Company, contracted with NID to review, process, adjudicate, and

pay or deny claims under NID’s self-funded health plan. Both MBA

and BC have individual contracts with NID and each of those

contracts contain arbitration clauses.

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3

Stephen Paulus, a former NID employee covered by NID’s

insurance policy, underwent surgery at Sutter Memorial Hospital

on September 22, 2005 to repair his mitral heart valve. As a

result of alleged complications from the surgery, Mr. Paulus died

on November 5, 2005. Sutter Memorial Hospital submitted

approximately $3,000,000 in charges to NID. NID paid at least

part of this claim and, on October 24, 2006, Plaintiff paid

$423,282.98.

NID filed a demand for arbitration with the American

Arbitration Association against Plaintiff, MBA, and BC seeking

reimbursement of $1,500,000 from Plaintiff under the stop loss

policy. NID also sought exemplary and punitive damages against

Plaintiff. NID alleged that “MBA breached its Administrator

Services Agreement and negligently performed its third party

administrator duties, or BC Life & Health negligently performed

its utilization review function, and as a consequence NID paid,

and has been denied reimbursement for, medical expenses for ...

Stephen H Paulus....” Compl. 2:16-20. The arbitration

proceeding is currently pending.

Plaintiff filed a cross-demand in the arbitration

proceeding, seeking reimbursement from MBA and BC for amounts

already paid to NID and for any future amounts owed to NID. On

October 9, 2007, the arbitration panel granted MBA and BC’s

motion to dismiss the cross-demand, but did not provide an

explanation for the decision.

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4

Plaintiff subsequently brought this action against BC and

MBA. Plaintiff seeks the same relief it sought in its crossdemand that the arbitration panel dismissed: equitable

subrogation, equitable contribution, equitable indemnity, and

declaratory relief. Plaintiff alleges that BC and MBA failed to

perform their duties under their respective contracts with NID

and that their actions resulted in excessive and unnecessary

medical procedures and services, experimental and investigative

medical procedures and services, and charges above reasonable and

customary amounts. Plaintiff now moves to compel arbitration on

those claims.

STANDARD

“An order to arbitrate ... should not be denied unless it

may be said with positive assurance that the arbitration clause

is not susceptible of an interpretation that covers the asserted

dispute.” United Steelworkers of Am. v. Warrior & Gulf

Navigation Co., 363 U.S. 574, 582-83 (1960). Any doubts should

be resolved in favor of arbitration. Id. at 583. In making this

determination, a court looks only at whether the parties agreed

to arbitrate the claim, not to the merits of the of the claim

itself. AT & T Techs. Inc., 475 U.S. at 649-50. In determining

the existence of an agreement to arbitrate, the district court

looks to “general state-law principles of contract

interpretation, while giving due regard to the federal policy in

favor of arbitration.” Wagner v. Stratton Oakmont, Inc., 83 F.3d

1046, 1049 (9th Cir. 1996).

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5

“On petition of a party to an arbitration agreement ... the

court shall order the [parties] to arbitrate the controversy if

it determines that an agreement to arbitrate the controversy

exists.” Cal. Civ. Proc. Code § 1281.2. The right to

arbitration depends on the existence of an agreement to

arbitrate, and a party cannot be forced to arbitrate in the

absence of such an agreement. Frederick v. First Union Secs.,

Inc., 100 Cal. App. 4th 694, 697 (Ct. App. 2002). “The strong

public policy in favor of arbitration does not extend to those

who are not parties to an arbitration agreement, and a party

cannot be compelled to arbitrate a dispute that he has not agreed

to resolve by arbitration.” Lee v. S. Cal. Univ. for Prof’l

Studies, 148 Cal. App. 4th 782, 786 (Ct. App. 2007). “Very

limited circumstances exist under which a nonparty to an

arbitration agreement can be bound by someone else’s consent....” 

Id. 

Because the existence of an arbitration agreement is a

statutory prerequisite to granting a petition to compel

arbitration, the petitioner bears the burden of proving the

agreement exists by a preponderance of the evidence. Rosenthal

v. Great W. Fin. Secs. Corp., 14 Cal. 4th 394, 413 (Cal. 1996).

ANALYSIS

Under the Federal Arbitration Act (FAA), arbitration

agreements “shall be valid, irrevocable, and enforceable, save

upon such grounds as exist at law or in equity for the revocation

of any contract.” 9 U.S.C. § 2. 

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6

While the FAA and the California Arbitration Act (CAA) express a

strong public policy in favor of enforcing arbitration

agreements, this policy does not arise until an enforceable

agreement is established. Baker v. Osborne Dev. Corp., 159 Cal.

App. 4th 884, 892 (Ct. App. 2008). “[A]lthough the FAA governs

the interpretation of arbitration clauses, California law governs

whether an arbitration agreement has been formed in the first

instance, and whether an arbitration agreement exists is an issue

for judicial determination.” Id. at 893.

The right to arbitration depends upon contract. Romo v. Y-3

Holdings, Inc., 87 Cal. App. 4th 1153, 1158 (Ct. App. 2001).

When presented with a petition to compel arbitration, a trial

court’s first task is to determine whether the parties have in

fact agreed to arbitrate the dispute. Id. Generally, one must

be a party to an arbitration agreement to be bound by it.

Buckner v. Tamarin, 98 Cal. App. 4th 140, 142 (Ct. App. 2002). 

One of the narrow exceptions in which a court may enforce an

arbitration agreement is where a nonsignatory and one of the

parties to the agreement have a preexisting agency relationship

that makes it equitable to impose the duty to arbitrate on either

of them. Nguyen v. Tran, 157 Cal. App. 4th 1032, 1036-37 (Ct.

App. 2007).

Separate contracts exist between Plaintiff and NID, MBA and

NID, and BC and NID; and all three include arbitration clauses.

No contract exists, however, between Plaintiff and MBA or between

Plaintiff and BC. To grant Plaintiff’s Motion, this Court would

have to find an agency relationship between BC and NID, and

between MBA and NID. 

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7

Such a relationship would render Plaintiff’s claims against BC

and MBA subject to arbitration under Plaintiff’s contract with

NID.

As their respective contracts with NID reveal, BC and MBA

were independent contractors and not agents of NID. The

Administrative Services Agreement between NID, MBA, and BC states

that “[BC] is an independent contractor. Nothing in this

Agreement shall create, or be construed to create, the

relationship of employer and employee between [NID] and [BC] or

as principal and agent....” (Newman Decl. Ex. G at 73.) The

Administrative Services Agreement between NID and MBA similarly

states that “MBA is an independent contractor. Nothing in this

Agreement shall create, or be construed to create, the

relationship of employer and employee between [NID] and MBA, or

as principal and agent other than as provided in this

agreement....” (Newman Decl. Ex. H at 102.) While “[a]gency and

independent contractorship are not necessarily mutually exclusive

legal categories,” Mottola v. R. L. Kautz & Co., 199 Cal. App. 3d

98, 108 (Ct. App. 1988), this Court finds particularly compelling

BC and MBA’s own explicit characterization of their relationship

with NID as independent contractors and not agents.

An agent is one who represents the principal in dealings

with third persons. Cal. Civ. Code § 2295. Some of BC and MBA’s

responsibilities, as described in their respective contracts with

NID (Newman Decl. Exs. G & H), are akin to those of an agent

acting on behalf of a principal. 

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8

For purposes of an arbitration agreement, however, California law

does not permit such tenuous relationships as those existing

between BC and NID and between MBA and NID to bind nonsignatories

to the arbitration agreements of another. Indeed, all cases

Plaintiff cites demonstrate a much closer relationship between

principal and agent. See, e.g., Letizia v. Prudential Bache

Secs., Inc., 802 F.2d 1185 (9th Cir. 1986) (nonsignatory account

executives bound by arbitration provision in employer

Prudential’s brokerage agreement with plaintiff); Thomas v.

Perry, 200 Cal. App. 3d 510 (2nd Dist. 1988) (former employee

bound by arbitration provision in employment contract in suit for

breach of oral contract against former employer and two of its

employees); Dryer v. Los Angeles Rams, 40 Cal. 3d 406, 418 (1985)

(nonsignatory owners, operators, and managing agents bound by

arbitration provision in employment contract between plaintiff

and employer). Because MBA and BC were independent contractors

and not agents of NIC, they do not fall within the agency

exception to the general rule that only parties to an arbitration

agreement are bound by it.

Plaintiff also contends that, as an equitable subrogee of

NID, its claims against BC and MBA are subject to arbitration

under their contracts with NID. The purpose of equitable

subrogation is “to place the burden for a loss on the party

ultimately liable or responsible for it and by whom it should

have been discharged, and to relieve entirely the insurer or

surety who indemnified the loss and who in equity was not

primarily liable therefor....” Morgan Creek Residential v. Kemp,

153 Cal. App. 4th 675, 695 (3d Dist. 2007). 

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9

“The subrogated insurer is said to ‘stand in the shoes’ of its

insured, because it has no greater rights than the insured and is

subject to the same defenses assertable against the insured.” 

Fireman’s Fund Ins. Co. v. Md. Cas. Co., 65 Cal. App. 4th 1279,

1292 (1st Dist. 1998). Under the general rule, however, an

insurer is not entitled to subrogation for a debt until that debt

has been fully discharged. Sapiano v. Williamsburg Nat. Ins.

Co., 28 Cal. App. 4th 533, 536 (2nd Dist. 1994). “In other

words, the entire debt must be paid. Until the creditor has been

made whole for its loss, the subrogee may not enforce its claim

based on its rights of subrogation.” Id.

Plaintiff is not entitled to equitable subrogation of any

potential NID claims because Plaintiff has not yet paid the

entire amount due on Mr. Paulus’s claim. In its Complaint,

Plaintiff concedes as much: “HCC Life asserts that it is

entitled, through subrogation, to reimbursement from MBA and BC

for any amounts that it pays for the Stephen Paulus claim....” 

Compl. 10:14-16 (emphasis added). The contrast with a later

statement in the same paragraph, that “HCC Life further asserts

that MBA and/or BC ... are obligated to pay and hold HCC Life

harmless for amounts that HCC Life has already paid to NID....”

Compl. 10:18-20, clarifies that Plaintiff has not yet paid the

entire Paulus claim. Plaintiff is therefore not entitled to

equitable subrogation, and cannot compel arbitration under the

arbitration provisions of BC and MBA’s contracts with NID.

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CONCLUSION

No contract exists between Plaintiff and Defendant BC or

between Plaintiff and Defendant MBA, and neither Defendant ever

agreed to arbitrate disputes with Plaintiff. Because Defendants

are independent contractors and not NIC’s agents, they do not

fall under the narrow exception to the general rule that only

parties to an arbitration agreement are bound by it. Plaintiff

similarly cannot compel arbitration under the theory it is an

equitable subrogee because Plaintiff has not yet fully paid the

debt resulting from the Paulus claim. For these reasons,

Plaintiff’s Motion to Compel Arbitration is DENIED.

IT IS SO ORDERED.

Dated: June 11, 2008

_____________________________

MORRISON C. ENGLAND, JR.

UNITED STATES DISTRICT JUDGE

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