Insurer’s Enforcement of Arbitration Clause in Underinsurance Coverage – Is It Possible?
S.C. Code §38-77-160, which provides the statutory authority and requirements for underinsured coverage (UIM), provides, in relevant part, the insurer providing the UIM coverage has the right to appear and defend in the name of the underinsured motorist, any action that may affect its liability. What the statute does not address, however, is how the UIM carrier may enforce certain provisions of its policy when it is limited to standing in the shoes of the underinsured motorist – who is not a party to the insurance contract. This significant limitation recently came to light in a decision by the United States District Court for South Carolina. Jennifer Weber v. Delilah Lewis, 2018 WL 5885511 (November 9, 2018).
In Weber, Plaintiff, an Illinois citizen, was involved in an accident with Defendant, a South Carolina resident. At the time of the accident, Plaintiff’s parents maintained a policy through Safeco Insurance Company that provided UIM coverage and included an arbitration clause stating either the insured or insurer may make a written demand for arbitration if they are unable to reach an agreement as to the amount of damages at issue. Following the accident, Defendant’s insurer tendered its policy limits of $25,000 in exchange for a covenant not to execute. Thereafter, Plaintiff submitted her claim for UIM benefits to Safeco. Being unable to reach agreement as to the amount of damages, Plaintiff filed this action against Defendant, serving the action on Safeco, following which Safeco timely filed a notice of appearance.
Appearing and defending this matter in the name of Defendant, Safeco filed a Motion to Dismiss and Compel Arbitration, or, Alternatively, Stay Litigation Pending Arbitration, upon which the case came before the court. Safeco’s motion sought to enforce the arbitration clause of the policy and compel arbitration pursuant to the Federal Arbitration Act. Plaintiff opposed Safeco’s motion for several reasons, the most compelling of which is the argument that Lewis, the only named defendant in the action, not a party to the subject insurance policy, lacked standing to compel arbitration. The court agreed, yet explored whether the doctrine of equitable estoppel allowed Safeco, acting as Defendant, to compel arbitration.
Numerous courts have found that because arbitration is derivative of contract rights, one who is not a party to the contract cannot compel arbitration. In some instances, however, a nonsignatory, through equitable estoppel, may bind a signatory to an arbitration agreement. Equitable estoppel is found to compel arbitration in two circumstances: when a signatory to the contract including the arbitration clause 1) must rely on the contract in making its claims against the nonsignatory or 2) alleges substantially interdependent and concerted misconduct by the signatory and the nonsignatory. Because the determination of whether equitable estoppel applies to compel arbitration requires analysis of the underlying claims against the nonsignatory, the court should examine the allegations of the underlying action. Generally, estoppel is appropriate if the signatory’s complaint is substantively based on the nonsignatory’s breach of duties assigned to it in the arbitration agreement. Here, Plaintiff’s claims of negligence against Defendant were in no manner reliant upon the Safeco policy. Additionally, Plaintiff made no allegations of collusion or misconduct by Defendant, a nonsignatory and Safeco, a signatory. Thus, the court found the arbitration clause was not enforceable.
This opinion provides the opportunity for academic debate. The courts’ favor of arbitration as a means of dispute resolution is and has been increasingly obvious. This preference has been demonstrated through various means, not the least of which is expansion of the scope and breadth of the applicability of the Federal Arbitration Act. Why, then, are insurers seemingly hamstrung by the statutory means by which they must defend in the name of the underinsured motorist, who is not going to be a signatory to the UIM policy, and thus generally unable to enforce an arbitration provision? While the court addresses an exception available through equitable estoppel, the circumstances under which estoppel may be established are likely extraordinarily rare. This naturally leads to the question of whether legislative action is necessary. Insurance policies are subject to the law of contract construction. If a policy includes an agreement between the insured and the insurer that a claim for UIM damages is subject to arbitration if the parties are unable to agree, it stands to reason such should be an enforceable provision of the contract. Requiring the insurer to stand in the shoes of the underinsured motorist, with seemingly no right to independently assert its position, appears to allow an insured to escape the contractual obligations to which he or she agreed.
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Cheryl D. Shoun is a trial attorney and certified mediator whose experience includes construction law, insurance defense, personal injury defense, employment litigation and medical malpractice. As a frequent writer, she serves as editor for Nexsen Pruet's TIPS: Torts, Insurance and Products Blog.
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