Texas law is currently silent on the issue of whether insurance companies may sell insurance policies that require policyholders to bring coverage disputes to an arbitrator rather than the courts. Texas has no statute or regulation in force that prohibits or restricts mandatory arbitration.1
There is only one section in the Texas Insurance Code for property insurance policies that even references arbitration. Section 2210.554: “Voluntary Arbitration of Certain Coverage and Claim Disputes” applies only to a Texas windstorm and hail insurance policy that is issued by the Texas Windstorm Insurance Association (“TWIA”). This provision states in part that a “person insured under this chapter may elect to purchase a binding arbitration endorsement in a form prescribed by the commissioner. A person who elects to purchase an endorsement under this section must arbitrate a dispute involving an act, ruling, or decision of the association relating to the payment of, the amount of, or the denial of a claim.”
In 2016, Texas policyholders barely escaped a mandatory, binding, pre-dispute arbitration provisions after Texas Farm Bureau submitted such an endorsement—a modification to the general homeowners’ insurance policy—to the Texas Department of Insurance for approval.2 Fortunately, Texas Farm Bureau withdrew its proposal without commenting for its reason of doing so. It should be noted, however, that the proposal came under significant fire from consumer groups and plaintiff attorneys. Despite this narrow escape, as insurance companies have been forced into costly litigation as a result of the ever increasing number of natural disasters such as hurricanes, hailstorms, and wildfires, there is little doubt that similar proposals will recur in the future.
Accordingly, it is relevant before the next carrier onslaught of submitted mandatory arbitration legislation proposals descend to take a look at how Texas state and federal courts are currently construing arbitration provisions in insurance policies and particularly, whether non-signatories to the policy may enforce an arbitration provision. Three court cases will be reviewed to illustrate the Texas federal and state court views.
In the first case, Bhandara Family Living Trust v. Underwriters at Lloyd’s London f/k/a Certain Underwriters at Lloyd’s et al, No. 19-968, (S.D. Tex Feb. 20, 2020), the federal trial court issued a Memorandum and Order Compelling Arbitration. There, the Plaintiff Trust owned four Houston commercial properties that were damaged by Hurricane Harvey. Plaintiff filed a claim and when it was denied, Plaintiff filed a suit in state court alleging breach of contract, violations of the Texas Insurance Code, and bad faith against the several carriers that insured the property. Plaintiff also alleged that two insurance brokers, (“Broker Defendants”) violated the Texas Insurance Code when they failed to disclose to Plaintiff the Policy’s unconscionable arbitration clause during procurement.
Lloyd’s immediately invoked the policy’s arbitration clause—New York courts and New York law—and removed the suit to federal court on diversity grounds based on the carrier’s foreign citizenship. All the Defendants, including the Broker Defendants who were not parties to the policy, joined Lloyd’s and moved to compel arbitration. Plaintiff argued the arbitration clause was unconscionable because the Broker Defendants were not signatories to the policy, therefore, the clause did not apply to them and they could not compel its application. Plaintiff further argued, contrary to the Defendants, that equitable estoppel did not apply because the claims against the Broker Defendants were distinct from its claims against Lloyd’s. The Fifth Circuit Court of Appeals had previously identified the circumstances in which equitable estoppel allowed a non-signatory to the policy containing an arbitration clause could compel arbitration: (1) when the insured had relied on the terms in the policy in asserting claims against the non-signatory; and (2) when the claims of the non-signatory and insurers were intertwined and there was concerted misconduct by both.
The trial court granted the Defendants’ Motion to Compel Arbitration based on equitable estoppel. The court found that Plaintiff’s claims against the Defendants were all intertwined because Plaintiff had filed all the claims in one suit. Furthermore, the only injury Plaintiff alleged as a result of the Broker Defendants’ egregious act of inserting an onerous arbitration clause undisclosed to them, was that the clause prejudiced Plaintiff’s ability to recover under the policy and in the absence of the arbitration provision and the policy, Plaintiff would have no claims against the Broker Defendants. The court concluded that Plaintiff’s claims against the Broker Defendants relied on and presumed the existence of the policy and the claims were intertwined, therefore, arbitration was mandated under the doctrine of equitable estoppel. The non-signatories prevailed.
In the second case, Jody James Farms JV v. The Altman Group, Inc., 547 S.W.3d 624 (Tex. 2018), the Texas Supreme Court held that a party to an insurance contract that mandates arbitration is not required to enter arbitration in a dispute against another party that is a non-signatory to the policy unless the parties between them have a specific agreement to arbitrate, or they are bound by principles of agency or contract law to do so. The Texas Supreme Court made this determination in a case involving a dispute over a crop insurance policy that was obtained by the insured through an independent insurance agency (“Agency”). The Agency was not a signatory on the policy.
The dispute arose because Plaintiff, Jody James Farms, had suffered a loss to its grain sorghum crop. Plaintiff timely contacted the Agency to report the loss. The Agency, however, dropped the ball and failed to report the claim timely to the insurer. The insurer denied the claim. The policy had a mandatory arbitration clause that the insurer invoked. Plaintiff arbitrated with the insurer but loss the arbitration. Plaintiff then sued the Agency for deceptive trade practices and breach of fiduciary duty alleging that the Agency’s untimely submission of its claim resulted in a denial of coverage and a $68,000 pecuniary loss. Even though the Agency was not a signatory to the policy, it moved to compel arbitration under the insurance policy and the case proceeded to arbitration over Plaintiff’s protests. The arbitrator resolved the suit in favor of the Agency and issued a take-nothing arbitration award.
Plaintiff appealed to the supreme court and the court granted Plaintiff’s petition for review, on the initial ground of whether the arbitrator had authority to determine whether a non-signatory to a policy could compel a signatory to arbitrate. On that issue the supreme court held that questions related to the existence of an arbitration agreement with a non-signatory were for the court to decide not an arbitrator.
The court next discussed six different scenarios in which courts previously have found that arbitration may be required with non-signatories. The six grounds are: (1) incorporation by reference, (2) assumption, (3) agency, (4) alter ego, (5) equitable estoppel and its sub-parts of direct-benefits estoppel and alternative estoppel theory, and (6) third-party beneficiary. This opinion is well-written and discusses each of the six grounds thoroughly with an analysis of each ground as it relates to the facts of that case. Time and space here does not permit a review of each of these theories but one should keep this opinion in mind as a good future reference for this issue of a non-signatory invoking an arbitration provision. The court held that compelled arbitration between the Agency and Plaintiff was wrong because the Agency was not a signatory to the policy which required arbitration in disputes between the insurer and the insured. As stated at the beginning of this section of the note, the court concluded:
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. Jody James and the Agency did not agree to arbitrate any matter—not the question of arbitrability and not the merits of this dispute. Nor may Jody James be compelled to arbitrate under agency, third-party beneficiary, or estoppel theories. We therefore reverse the court of appeals’ judgment, vacate the arbitration award [take nothing], and remand to the trial court for further proceedings.
The Texas Supreme Court held that in this instance an insurance policy’s arbitration clause was not valid in a dispute with a non-signatory party.
The third and the most recent case, Living Steward Properties, Ltd. v. Certain Underwriters at Lloyd’s London, No. 2:20-CV-001 (S.D. Tex. May 18, 2020), addressed two issues. First, whether the arbitration agreement could be enforced in favor of a third-party joinder, a public adjuster assigned to the insured’s claim and a non-signatory to the policy. Second, if enforcement was granted, whether the arbitration agreement could be extended to include a decision on the extra-contractual claims brought against the joinder.
As in the Bhandara Family order, the trial court found for the insurer on grounds of equitable estoppel, which prevents a party from avoiding a contractual arbitration agreement with respect to claims against a non-party to the contract under two scenarios.
First, is when the plaintiff insured relies on the existence of the contract in making its claims against the non-party or non-signatory.
Second, is when the claims against the party to the contract and the non-party or non-signatory involve conduct that is inextricably intertwined.
The court found both reasons applied and ordered the plaintiff/insured and the joinder party to submit the claims between them to arbitration together with the claims against the insurer so they could be decided efficiently in one arbitration.
Conclusion
At present, it appears from these three recent cases and a review of other state and federal case authority that Texas federal courts are more likely than Texas state courts to hold that non-signatories to an insurance policy can enforce an arbitration provision contained in that insurance policy.
For now, at least, Texas policyholders can still obtain insurance policies that do not have mandatory arbitration clauses because there is no statute or regulation requiring same. In this regard, Texas is among a plurality of twenty-four states having no law or regulation regarding mandatory arbitration in insurance policies while sixteen states currently do have statutes that prohibit the use of arbitration agreements in insurance policies.3 Absent a Texas statute prohibiting the use of arbitration provisions in insurance policies or a statute granting it, Texas policyholders will continue to use mediation, appraisal, and the court system to settle their insurance disputes rather than arbitration. Some things just should not be changed.
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1 State Laws Regulating Arbitration in Insurance Contracts, Public Citizen, https://www.citizen.org/article/state-laws-regulating-arbitration-insurance-contracts-0.
2 See Jim Malewitz, Texas Insurer Drops Push to Let Homeowners Forgo Right to Sue, TEX. TRIB. (Nov. 3, 2016, 5:00 PM).
3 See PUB. CITIZEN at n. 1.
