Opinion ID: 2576197
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Heading: The Arbitration and Service of Suit Clauses

Text: The lower courts, as mentioned, concluded the policy's arbitration and service of suit clauses conflicted, thereby creating an ambiguity that had to be resolved in favor of the insured. We conclude the lower courts erred. Our goal in construing insurance contracts, as with contracts generally, is to give effect to the parties' mutual intentions. ( Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1264, 10 Cal.Rptr.2d 538, 833 P.2d 545; see Civ.Code, § 1636.) If contractual language is clear and explicit, it governs. ( Bank of the West, at p. 1264, 10 Cal.Rptr.2d 538, 833 P.2d 545; see Civ.Code, § 1638.) If the terms are ambiguous, we interpret them to protect `the objectively reasonable expectations of the insured.' ( Bank of the West, at p. 1265, 10 Cal.Rptr.2d 538, 833 P.2d 545, quoting AIU Ins. Co. v. Superior Court (1990) 51 Cal.3d 807, 822, 274 Cal.Rptr. 820, 799 P.2d 1253.) Only if these rules do not resolve a claimed ambiguity do we resort to the rule that ambiguities are to be resolved against the insurer. ( Bank of the West, at p. 1264, 10 Cal.Rptr.2d 538, 833 P.2d 545.) When a party to an arbitration agreement challenges the agreement as unenforceable, we decide the issue based on the same state law standards that apply to contracts generally. ( Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 971-972, 64 Cal.Rptr.2d 843, 938 P.2d 903.) The United States Arbitration Act (9 U.S.C. § 1 et seq.), commonly known as the Federal Arbitration Act (hereafter FAA), creates a presumption in favor of arbitrability ( Engalla v. Permanente Medical Group, Inc., supra, at p. 971, 64 Cal.Rptr.2d 843, 938 P.2d 903; see 9 U.S.C. § 2) and permits courts to refuse to enforce agreements to arbitrate only upon such grounds as exist at law or in equity for the revocation of any contract (9 U.S.C. § 2). Similarly, title 9 of the Code of Civil Procedure (§ 1280 et seq.) expresses a strong public policy favoring the enforcement of valid agreements to arbitrate. ( Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 9, 10 Cal.Rptr.2d 183, 832 P.2d 899.) In a typical service of suit clause, one or more parties agree to submit to the jurisdiction of courts for designated purposes related to the contract in which the clause appears. Here, the Underwriters have agreed, [i]n the event of [their] failure ... to pay any amount claimed to be due under the [policy], and at the request of Assured, to submit to the jurisdiction of a court of competent jurisdiction within the United States. Courts in other jurisdictions have generally enforced arbitration clauses in contracts, including insurance contracts, that have also included service of suit clauses, rejecting the argument that consent to service creates an ambiguity or waives the right to compel arbitration. These courts have reasoned that the two clauses do not conflict because the service of suit clause should be interpreted, in view of the presumption favoring arbitration, as intended to facilitate enforcement of the arbitration clause. [3] The only California case on point is consistent with the general rule. In Appalachian Insurance Co. v. Rivcom Corp. (1982) 130 Cal.App.3d 818, 182 Cal.Rptr. 11, the Court of Appeals held that a service of suit clause did not supersede, or create an ambiguity in light of, a clause requiring that the value of any loss be determined by appraisal, a form of arbitration expressly subject by statute to California arbitration law. ( Id., at pp. 824, 827-828, 182 Cal.Rptr. 11; see Code Civ. Proc., § 1280, subd. (a).) The court reasoned that both clauses could operate because the service of suit clause allowed the insured to sue in court if the insurer refused to pay the appraised value. ( Appalachian Insurance Co. v. Rivcom Corp., supra, at pp. 827-828, 182 Cal.Rptr. 11.) This case is easier to resolve than the cases just mentioned. In none of those cases did the court note that the contract at issue included language establishing priority as between the arbitration (or appraisal) clause and the service of suit clause. Here, in contrast, the contract does include such language. The first sentence of the arbitration clause expressly declares that,  Notwithstanding any other item set forth herein, the parties hereby agree that any dispute which arises shall be settled in Binding Arbitration. (Italics added.) The phrase [n]otwithstanding any other item clearly indicates the parties intended the arbitration clause to apply according to its terms and for all disputes to be settled in binding arbitration, even if other provisions, read in isolation, might seem to require a different result. No ambiguity exists. Boghos advances several arguments against this conclusion. None is persuasive. First, Boghos argues that, given the service of suit clause, the arbitration clause cannot be enforced without rendering the former surplusage. Boghos thus invokes the general rule of contract interpretation that [t]he whole of a contract is to be taken together, so as to give effect to every part, if reasonably practicable, each clause helping to interpret the other. (Civ.Code, § 1641.) The rule's effect, among other things, is to disfavor constructions of contractual provisions that would render other provisions surplusage. ( Berg v. MTC Electronics Technologies Co. (1998) 61 Cal.App.4th 349, 361-362, 71 Cal.Rptr.2d 523.) To enforce the policy's arbitration clause according to its terms does not render the service of suit clause surplusage. The service of suit clause continues to have real effect because it requires the Underwriters to submit to the jurisdiction of United States courts in actions to compel arbitration or to enforce arbitral awards, thus easing burdens the insured might encounter in obtaining jurisdiction over the Underwriters in London. ( Hart v. Orion Insurance Company, supra, 453 F.2d 1358, 1361.) Boghos argues that to read the service of suit clause in this manner would cause it to duplicate a right guaranteed by statute, once again rendering it surplusage. The Code of Civil Procedure, Boghos correctly points out, gives California courts personal and subject matter jurisdiction to compel arbitration and to enforce arbitral awards when a contract to arbitrate is made in this state. (See Code Civ. Proc., § 1293.) [4] Nevertheless, the service of suit clause confers rights the relevant statutes do not. For example, through the service of suit clause the Underwriters consent to suit not just in California but in any court of competent jurisdiction within the United States, apparently at Boghos's choice. This is more than California law provides. A contract term, in any event, is not surplusage merely because it confers a right already guaranteed by statute. (See Berg v. MTC Electronics Technologies Co., supra, 61 Cal.App.4th 349, 361-362, 71 Cal.Rptr.2d 523.) Moreover, policies issued by underwriters at Lloyd's containing the same service of suit clause are sold not just in California, but throughout the United States. That a contractual provision intended to bind insurers to submit to service under a variety of statutory schemes will duplicate certain statutory rights seems both unavoidable and unobjectionable. Boghos also argues that the service of suit clause, if read as intended to facilitate arbitration, narrows the circumstances under which the insurers must submit to the jurisdiction of a court. For purposes of this argument, Boghos interprets the language by which the Underwriters submit to jurisdiction ([i]n the event of [their] failure ... to pay) as an assertion that they do not submit to the court's jurisdiction to compel arbitration of claims not involving a failure to pay, even though the arbitration clause is broad enough to cover such claims. The relevance of this additional argument to the issue before us, namely the enforceability of the arbitration clause, is not evident. The argument lacks merit, in any event. Regardless of the policy language, Code of Civil Procedure section 1293, as Boghos acknowledges, gives California courts personal and subject matter jurisdiction to enforce arbitration agreements formed in California. The service of suit clause, even if limited to claims based on the Underwriters' failure to pay benefits, still gives Boghos the additional, nonstatutory right to require the Underwriters to appear not just in California courts but in any court of competent jurisdiction within the United States. Boghos next argues the service of suit clause must take priority over the arbitration clause under the rule that more specific contractual provisions control over more general ones. (See Code Civ. Proc., § 1859; [5] National Ins. Underwriters v. Carter (1976) 17 Cal.3d 380, 386, 131 Cal.Rptr. 42, 551 P.2d 362.) But this rule applies only when the provisions in question are truly inconsistent. (Code Civ. Proc., § 1859; National Ins. Underwriters v. Carter, supra, 17 Cal.3d at p. 386, 131 Cal.Rptr. 42, 551 P.2d 362.) The arbitration clause here is neither inconsistent with, nor ambiguous in light of, the service of suit clause because the first sentence of the arbitration clause ([n]otwithstanding any other item set forth herein) explicitly requires that clause to be enforced even if other provisions, read in isolation, might seem to dictate a different result. Finally, Boghos argues that to enforce the arbitration clause would in effect allow the Underwriters to disavow a promise to submit to suit in court and give them a license to deceive policyholders. To the contrary, given the unambiguous language of the arbitration clause, no such promise exists. Nor is the policy deceptive. To be sure, insurers must draft policy language with an eye to how insureds will likely understand it. An insurer must, for example, make conspicuous, plain and clear any provision that creates an exception to or limitation on coverage reasonably expected by the insured. ( Haynes v. Farmers Ins. Exchange (2004) 32 Cal.4th 1198, 1204, 13 Cal.Rptr.3d 68, 89 P.3d 381.) We have not held that an arbitration clause constitutes an exception to or limitation of coverage for purposes of this requirement. Yet even if we were to apply this prophylactic rule against deception, the arbitration clause here would easily pass muster as conspicuous, plain, and clear. A coverage limitation is conspicuous when it is positioned and printed in a manner that will attract the reader's attention. ( Id., at pp. 1207-1208, 13 Cal.Rptr.3d 68, 89 P.3d 381.) A limitation is plain and clear when, from the perspective of an average layperson, it is communicated in clear and unmistakable language. ( Id., at p. 1212, 13 Cal.Rptr.3d 68, 89 P.3d 381; State Farm Mut. Auto. Ins. Co. v. Jacober (1973) 10 Cal.3d 193, 201-202, 110 Cal.Rptr. 1, 514 P.2d 953.) While the arbitration clause here is printed in text the same size as the other provisions in the policy, it is the only provision printed entirely in bold. Moreover, the arbitration clause's first sentence clearly and unmistakably requires arbitration of any dispute arising under the policy, [n]otwithstanding any other item in the policy. Finally, both pages of the application for insurance informed Boghos in bold print, immediately above the signature line, that by signing he underst[oo]d and agree[d] that any dispute concerning this insurance must be submitted to binding arbitration.... A reasonable person reading the application and policy would understand that he would be required to arbitrate all disputes arising under the policy.