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July 20, 2017 Practice Points

Non-Signatory Bound to Arbitrate Insurance Claim

By Karl Bayer

An appellate court in Beaumont, Texas has ordered ExxonMobil to arbitrate a dispute with an insurance company even though ExxonMobil did not obtain or sign the insurance policy that contained the arbitration clause.

Lexington Insurance Co. v. ExxonMobil Corp., et al., No. 09-16-00357-CV, (Tex. App.––Beaumont, Apr. 27, 2017), concerned a fire at an ExxonMobil oil refinery in 2013. The fire killed two workers and hurt several others. Three of the injured workers were third-party contractors who were employed by Brock Services, a company ExxonMobil hired to provide painting and other services at the plant. As part of its agreement, Brock was required to obtain a liability-insurance policy and to name ExxonMobil as an additional insured. Brock obtained an umbrella policy from Lexington Insurance Company.

After the fire, ExxonMobil demanded payment under the policy and, when Lexington did not respond to ExxonMobil’s claim, ExxonMobil filed a lawsuit against Lexington in the Texas state courts. Lexington responded by filing a motion to compel the dispute to arbitration based on an arbitration clause in the policy. The trial court denied Lexington’s motion and Lexington filed an interlocutory appeal. On appeal, ExxonMobil asserted that it was not bound by the arbitration agreement in the policy because Brock acquired the policy, ExxonMobil did not negotiate to have a policy that contained an arbitration clause, and ExxonMobil is an additional insured under the policy. The Beaumont court disagreed and stated:

Exxon cannot seek to recover under the terms of Lexington's policy and at the same time avoid the provisions in the policy that it disfavors. Under the doctrine of direct benefits estoppel, non-signatories to arbitration agreements may be bound to the arbitration clause of a contract when [they are] . . . seeking to enforce all of the other terms of [that] agreement. See In re Kellogg Brown & Root, Inc., 166 S.W.3d 732, 739–40 (Tex. 2005) (orig. proceeding) (explaining that under the doctrine of direct benefits estoppel, a non-signatory plaintiff seeking to benefit under a contract cannot avoid the contract's arbitration clause). Given that Exxon is suing Lexington on Lexington's policy, we conclude that Exxon cannot avoid the umbrella policy's arbitration clause. Id.; In re FirstMerit Bank, N.A., 52 S.W.3d 749, 755–56 (Tex. 2001) (holding that a non-signatory subjected itself to the contract's terms by suing on the contract, including the contract's arbitration agreement).

The appellate court also dismissed ExxonMobil’s claim that enforcing the arbitration provision in the policy would be unconscionable. According to the court:

When considered in relation to the terms of Exxon's written agreement with Brock . . . , the evidence before the trial court failed to demonstrate that the arbitration clause . . . is either substantively or procedurally unconscionable. We conclude that Lexington has the right to enforce the umbrella policy's arbitration agreement given that Exxon's claims against Lexington are based on the policy.

With regard to the parties’ duty to arbitrate, the appellate court stated:

We express no opinion about whether the trial court properly construed Lexington's umbrella policy in resolving the parties' dispute. We also express no opinion regarding the merits of the parties' arguments about the appropriate method for resolving the coverage dispute. Once Lexington and Exxon disagreed about whether the policy covered the casualty, and Lexington established that the umbrella policy contained a valid arbitration agreement that required disputes over coverage to be arbitrated, the trial court was required to submit the matter to arbitration regardless of the merits of the respective parties' arguments. Id. We hold that the trial court erred by considering the merits of the coverage dispute before sending the matter to arbitration.

The Texas Court of Appeals then rejected ExxonMobil’s asserted defenses to arbitration before holding that a “litigant who sues based on a contract subjects him or herself to the contract's terms.”

Karl Bayer is the founder of Karl Bayer Dispute Resolution in Austin, Texas.

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