Court Opinion

ID: 9394310
Source: CourtListenerOpinion
Date Created: 2023-05-13 10:09:54.076969+00
Date Added: 2024-06-11T17:18:58.822071
License: Public Domain

NO. 12-22-00311-CV

                           IN THE COURT OF APPEALS

               TWELFTH COURT OF APPEALS DISTRICT

                                       TYLER, TEXAS

THE   TRAVELERS               INDEMNITY             §      APPEAL FROM THE 349TH
COMPANY,
APPELLANT                                           §      DISTRICT COURT

V.                                                  §      HOUSTON COUNTY, TEXAS

GRAPELAND        INDEPENDENT
SCHOOL DISTRICT,
APPELLEE

                                   MEMORANDUM OPINION

       The Travelers Indemnity Company (“Travelers”) appeals the trial court’s denial of its
motion to dismiss Grapeland Independent School District’s (“Grapeland”) claims against it or
stay the litigation in favor of arbitration. We affirm.

                                             BACKGROUND
       Grapeland obtained property insurance coverage from Texas Rural Education
Association Risk Management Cooperative (“TREA”) for the period of September 1, 2018
through September 1, 2019. The coverage declarations document (“Policy”) contains no
arbitration clause. TREA subsequently formed a contract (“Reinsurance Contract”) with
Travelers to reinsure part of TREA’s liability to Grapeland. The Reinsurance Contract provides a
reinsurance limit of $200,000,000.00 and a company retention of $500,000.00 per occurrence. It
contains the following arbitration clause:

         As a condition precedent to any right of action hereunder, any dispute between the
         COMPANY and the REINSURER arising out of, or relating to the formation, interpretation,
         performance or breach of this CERTIFICATE, whether such dispute arises before or after
         termination of this CERTIFICATE, shall be submitted to arbitration.
In the Reinsurance Contract, “company” means TREA, and “reinsurer” means Travelers.
       Grapeland sued Travelers, TREA, and Abercrombie, Simmons, & Gillette (“ASG”)1
based on a dispute over the settlement of its claim for damage sustained from hail and
windstorms on April 6, 2019. In its fourth amended petition, the live petition, Grapeland asserts
claims against only TREA for breach of contract, breach of the common law duty of good faith
and fair dealing, and violation of the Texas Prompt Payment of Claims Act. Against only
Travelers, Grapeland asserts a negligence claim. Against TREA and Travelers, Grapeland asserts
claims for common law fraud, and conspiracy to commit fraud. Against TREA, Travelers, and
ASG, it asserts claims for misrepresentation, violation of the Texas Unfair Compensation and
Unfair Practices Act, and violation of the Texas Deceptive Trade Practices Act (DTPA).
       Travelers moved the trial court to dismiss the claims against it or stay the litigation in
favor of arbitration based on the Reinsurance Contract’s arbitration clause. The court denied the
motion. This appeal followed.

                                 DENIAL OF MOTION TO DISMISS OR STAY
       In Travelers’s sole issue, it contends that the trial court erred by denying its motion to
dismiss or stay the litigation in favor of arbitration. Specifically, Travelers argues that
Grapeland’s claims against it are subject to the Reinsurance Contract’s arbitration clause because
direct benefits estoppel applies and the claims “arise out of or relate to the Reinsurance
Contract.”
Standard of Review and Applicable Law
       We review a trial court’s order denying a motion to compel arbitration for abuse of
discretion. Henry v. Cash Biz, LP, 551 S.W.3d 111, 115 (Tex. 2018). We defer to the trial
court’s factual determinations if they are supported by evidence but review its legal
determinations de novo. Id. Determining whether a claim involving a nonsignatory must be
arbitrated is a gateway matter for the trial court, which means the determination is reviewed de
novo. Jody James Farms, JV v. Altman Group, Inc., 547 S.W.3d 624, 629 (Tex. 2018).
       No party may be compelled to arbitrate unless they have agreed to arbitrate or are bound
by principles of agency or contract law to do so. Id. at 640. Whether a party is bound by an
arbitration agreement is normally a function of the parties’ intent as expressed in the agreement’s

       1
           Only Travelers and Grapeland are parties to this appeal.
terms. Id. at 633. Additionally, courts have articulated six scenarios in which arbitration with
nonsignatories may be required: (1) incorporation by reference, (2) assumption, (3), agency, (4)
alter ego, (5) equitable estoppel, and (6) third-party beneficiary. Id. When relying on a contract
to compel arbitration, the moving party must first establish the existence of a valid and
enforceable arbitration agreement. Id. Within this element is the question of whether the
arbitration agreement is valid and enforceable against a nonsignatory. See id. Second, the claims
at issue must fall within the arbitration agreement’s scope. Id.
       The Texas Supreme Court has recognized direct benefits estoppel as a type of equitable
estoppel that may be used to compel arbitration. Id. at 636. Direct benefits estoppel applies to
parties who seek to derive a direct benefit from a contract with an arbitration agreement. Id. at
637. A nonsignatory may be compelled to arbitrate if it (1) seeks to derive a direct benefit from
the contract through the lawsuit or (2) deliberately seeks and obtains substantial direct benefits
from the contract itself. In re Weekley Homes, L.P., 180 S.W.3d 127, 131-32 (Tex. 2005). When
a claim depends on the contract’s existence and cannot stand independently—that is, the alleged
liability arises solely from the contract or must be determined by reference to it—equity prevents
a person from avoiding the arbitration clause that was part of that agreement. Jody James
Farms, 547 S.W.3d at 637. However, when the substance of the claim arises from general
obligations imposed by state law, including statutes, torts, and other common law duties, or
federal law, direct benefits estoppel is not implicated even if the claim refers to or relates to the
contract or would not have arisen but for the contract’s existence. Id.
Analysis
       In its brief, Travelers asserts that “a non-signatory to a contract that provides disputes
arising out of or relating to the performance or breach of the contract can be bound by the
arbitration provision when (1) it directly seeks benefits under the contract or (2) brings claims
that arise out of or relate to the contract.” Based on this purported statement of the law, Travelers
argues that the trial court erred by denying its motion because “[t]hrough this suit, Grapeland
both directly seek[s] benefits (insurance payments) under the Reinsurance Contract and asserts
causes of action that arise out of and relate to the Reinsurance Contract.” We recently addressed
these arguments and decided against Travelers in an almost identical case. See Travelers
Indemnity Company v. Alto ISD, No. 12-21-00143-CV, 2022 WL 1668859 (Tex. App.—Tyler
May 25, 2022, pet. denied) (mem. op., not designated for publication). Nonetheless, Travelers
urges us to disavow our analysis in Alto. We decline to do so.
        In Alto, we rejected Travelers’s assertion that a nonsignatory can be bound by an
arbitration provision merely because its claim “relates” to the contract. See id. at *6; see also
Jody James Farms, 547 S.W.3d at 637. We also rejected Travelers’s argument that direct
benefits estoppel applied because “Alto’s live petition [was] replete with allegations seeking
additional insurance funds from Travelers, which, if owed, would necessarily arise from a
payment obligation under the Reinsurance Contract.” See Alto, 2022 WL 1668859, at *4.
Travelers’s repeats this argument here and lists the following examples from Grapeland’s
petition:

            [1] “The damage to Plaintiff’s property for which it made claims to Defendants for insurance
            proceeds was incurred in Houston County, Texas as a result of a [sic] hail and windstorms that
            traveled through Houston County, Texas.” [record citations omitted]

            [2] “To date, Grapeland ISD has received . . . approximately $900,000 from Defendant
            Travelers . . .” []

            [3] “To date, Grapeland ISD has received $0 from Defendant TREA RMC . . .” []

            [4] “Grapeland ISD has not received additional funds from TREA RMC or Travelers.” []

            [5] “Defendant Travelers[’s] adjusters represented to [Grapeland] and [Grapeland’s] adjuster
            LRG that certain items would be covered and payments would be made, but the payments
            were never made.” []

            [6] “Defendants TREA RMC, ASG and Travelers wrongfully denied and limited [Grapeland’s]
            claims for repairs even though the Policy provided coverage for losses such as those suffered
            by [Grapeland].” []

            [7] “Defendants TREA RMC, ASG and Travelers . . . refused to pay the claim without a
            reasonable investigation . . .” []

            [8] “[Grapeland] has been damaged as a result of Defendants TREA RMC[’s] and
            Travelers[’s] deceptive trade practices in an amount equal to the costs of repairs . . .” []

            [9] “[Grapeland] is entitled to actual damages, which includes the loss of the benefits that
            should have been paid pursuant to the policy . . .” []

        Here, as in Alto, we disagree that the petition excerpts constitute “allegations seeking
additional insurance funds from Travelers, which, if owed, would necessarily arise from a
payment obligation under the Reinsurance Contract.” Instead, the excerpts, especially when
considered in context of the petition as a whole, show that Grapeland alleges it was damaged by
receiving an inappropriate settlement for its claims under the Policy—not the Reinsurance
Contract, and that Travelers’s liability, if any, is premised on insurance code, tort, and DTPA
duties that are general, noncontract obligations arising from its role as the adjuster of the claims
under the Policy—not the reinsurer of TREA’s liability under the Reinsurance Contract.
Accordingly, we conclude Travelers has not carried its burden of establishing that direct benefits
estoppel applies in this case. See Jody James Farms, 547 S.W.3d at 633; see also 5556 Gasmer
Management LLC v. Underwriters at Lloyd’s, London, 463 F.Supp.3d 785, 793-94 (S.D. Tex.
2020) (direct benefits estoppel did not apply when nonsignatory sought to hold insurance broker
defendants liable in tort pursuant to Texas Insurance Code theories rather than duties imposed by
the insurance policy).
         Because Travelers has not shown that the arbitration provision is valid and enforceable
against Grapeland under either of its theories, we conclude that the trial court did not abuse its
discretion by denying Travelers’s motion to dismiss or stay the litigation. See Jody James
Farms, 547 S.W.3d at 633. Accordingly, we overrule Travelers’s sole issue.

                                                  DISPOSITION
         Having overruled Travelers’s sole issue, we affirm the trial court’s judgment. We lift our
stay of January 4, 2023.

                                                                 BRIAN HOYLE
                                                                    Justice

Opinion delivered May 10, 2023.
Panel consisted of Worthen, C.J., Hoyle, J., and Neeley, J.
                                  COURT OF APPEALS

      TWELFTH COURT OF APPEALS DISTRICT OF TEXAS

                                          JUDGMENT

                                             MAY 10, 2023

                                        NO. 12-22-00311-CV

                     THE TRAVELERS INDEMNITY COMPANY,
                                  Appellant
                                     V.
                   GRAPELAND INDEPENDENT SCHOOL DISTRICT,
                                   Appellee

                               Appeal from the 349th District Court
                         of Houston County, Texas (Tr.Ct.No. 20-0060)

               THIS CAUSE came to be heard on the appellate record and briefs filed herein,
and the same being considered, it is the opinion of this court that there was no error in the
judgment.
               It is therefore ORDERED, ADJUDGED and DECREED that the judgment of the
court below be in all things affirmed, all costs of this appeal are assessed against the Appellant,
TRAVELERS INDEMNITY COMPANY, and that this decision be certified to the court
below for observance.

                   Brian Hoyle, Justice.
                   Panel consisted of Worthen, C.J., Hoyle, J., and Neeley, J.