Opinion
G053418
09-28-2017
LENNAR CORPORATION, et al., Defendants, Cross-complainants and Respondents; v. GENERAL SECURITY INDEMNITY COMPANY OF ARIZONA, Cross-defendant and Appellant.
Sedgwick, Ralph A. Guirgis, Curtis D. Parvin and Agelo L. Reppas for Cross-defendant and Appellant. Newmeyer & Dillion, Gregory L. Dillion, Alan H. Packer, Bonnie Roadarmel and Brandy L. Worden for Defendants, Cross-complainants and Respondents.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super. Ct. No. 30-2010-00390819) OPINION Appeal from an order of the Superior Court of Orange County, Gail Andrea Andler, Judge. Affirmed. Sedgwick, Ralph A. Guirgis, Curtis D. Parvin and Agelo L. Reppas for Cross-defendant and Appellant. Newmeyer & Dillion, Gregory L. Dillion, Alan H. Packer, Bonnie Roadarmel and Brandy L. Worden for Defendants, Cross-complainants and Respondents.
* * *
INTRODUCTION
Excess insurer General Security Indemnity Company of Arizona (General Security) filed a motion to compel arbitration of claims brought against it by its insureds Lennar Corporation, Lennar Homes of California, and Lennar Sales Corporation (collectively, Lennar). The trial court denied the motion on the grounds that, under Code of Civil Procedure section 1281.2, subdivision (c) (section 1281.2(c)), the existence of other litigation between Lennar and excess insurer Interstate Fire and Casualty Company (Interstate) relating to the same claims created a possibility of inconsistent results. We affirm for the following reasons.
First, General Security failed to prove the existence of a valid arbitration agreement between it and Lennar. Second, section 1281.2(c) was not preempted by the Federal Arbitration Act, and was applicable in this case. Finally, the trial court did not err in finding that under section 1281.2(c), the motion to compel arbitration should be denied.
STATEMENT OF FACTS AND PROCEDURAL HISTORY
Lennar is a national homebuilder and developer. Between 2006 and 2009, Lennar obtained multi-layer liability insurance coverage. Lennar purchased three one-year primary policies from Old Republic, with limits of $10 million each. Next, Lennar obtained from XL Europe Ltd. (XL) a first-layer, multi-year excess policy with a $20 million limit during each period within the policy. Lennar also obtained a second-layer, multi-year excess policy from Interstate with a limit of $10 million per period during the policy. Finally, General Security provided a third-layer, multi-year excess coverage to Lennar with limits of $25 million per policy period.
The XL policy includes an endorsement requiring the arbitration of all disputes in London, England, subject to the applicable English arbitration acts. Neither the Interstate nor the General Security policy contains an arbitration provision. The General Security policy "follows form to" the XL policy language—in other words, the General Security policy incorporates the terms and conditions of the XL policy. "A 'following form' policy incorporates the terms and conditions of another carrier's policy and provides the same scope of coverage as the underlying policy." (Wells Fargo Bank v. California Ins. Guarantee Assn. (1995) 38 Cal.App.4th 936, 940.)
A drywall product manufactured in China and used in Lennar houses began releasing gases, causing bodily injury to occupants, and property damage to wiring, pipes, and other materials in the houses. The claims resulting from the drywall problems exhausted Lennar's primary coverage from Old Republic, as well as a significant portion of its first-layer excess coverage from XL. Lennar then tendered the drywall claims, as well as the pending suits, to Interstate. Interstate responded by filing a claim for declaratory relief against Lennar. Lennar filed a cross-complaint against Interstate. The litigation between these parties continued for five years; they ultimately stipulated to extend the five-year requirement for bringing a case to trial.
After Interstate's declaratory relief action had been initiated, Lennar first advised General Security its policy might be reached, even though Interstate's policy had not then been exhausted. General Security advised Lennar that it believed any controversy concerning the policy would be subject to arbitration.
After Interstate's coverage was exhausted, Lennar amended its cross-complaint to name General Security. General Security moved to compel Lennar to arbitrate, and to dismiss or stay Lennar's cross-claims against General Security. General Security also demanded arbitration proceedings against Lennar in London, England, the venue specified in the arbitration provision in the XL insurance policy.
The trial court denied the motion to compel arbitration: "The contract at issue is a policy of insurance, issued to a national home builder, to apply to potential claims made across the country. The transactions at issue thus involve interstate commerce. [Citations.] The FAA thus applies here. [¶] However, there is no federal policy favoring arbitration under a certain set of procedural rules. Parties may expressly designate that any arbitration proceeding is to occur under the FAA's procedural provisions rather than under state procedural law, but absent such an express designation, the FAA's procedural provisions do not apply in state court. [Citations.] [¶] Under [Code of Civil Procedure section] 1281.2, a trial court must enforce a written arbitration agreement unless a party waives the right to arbitration, grounds exist for revoking the arbitration agreement, or pending litigation with a third party creates the possibility of conflicting rulings on common factual or legal issues. [Citation.] The latter applies when: (1) a party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party; (2) the third-party action arises out of the same transaction or series of related transactions; and (3) there is a possibility of conflicting rulings on a common issue of law or fact. [Citation.] [¶] Here, all of those conditions exist. Lennar is a party to the arbitration agreement at issue, but is also a party to the instant action commenced by Interstate. [General Security] argues that Interstate also follows form to the XL policy, and thus is also bound to arbitrate thereunder. But Interstate is not a party to the contract at issue. And even if that were so, Interstate has not also moved to compel arbitration here, and after protracted litigation in this Court, could not now reasonably do so. The other elements are met as the instant action concerns the same insurance period and the same insureds, involves the same underlying claims and costs, and there is a real possibility of conflicting rulings on issues of law or fact concerning [General Security]'s and Interstate's respective duties to Lennar. . . . The motion is therefore denied."
General Security timely filed a notice of appeal.
DISCUSSION
"On petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party thereto refuses to arbitrate such controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists, unless it determines that: [¶] . . . [¶] (c) A party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party, arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact. . . . [¶] . . . [¶] If the court determines that a party to the arbitration is also a party to litigation in a pending court action or special proceeding with a third party as set forth under subdivision (c) herein, the court (1) may refuse to enforce the arbitration agreement and may order intervention or joinder of all parties in a single action or special proceeding; (2) may order intervention or joinder as to all or only certain issues; (3) may order arbitration among the parties who have agreed to arbitration and stay the pending court action or special proceeding pending the outcome of the arbitration proceeding; or (4) may stay arbitration pending the outcome of the court action or special proceeding." (Code Civ. Proc., § 1281.2.)
"'"There is no uniform standard of review for evaluating an order denying a motion to compel arbitration. [Citation.] If the court's order is based on a decision of fact, then we adopt a substantial evidence standard. [Citations.] Alternatively, if the court's denial rests solely on a decision of law, then a de novo standard of review is employed. [Citations.]"' [Citations.] '[W]hen ruling on a petition to compel arbitration, the superior court may consider evidence on factual issues such as contract formation bearing on the threshold issue of arbitrability. . . . On appeal we must review the court's factual ruling on arbitrability under the substantial evidence test.'" (Ramos v. Westlake Services LLC (2015) 242 Cal.App.4th 674, 686.)
I.
DID GENERAL SECURITY PROVE THE EXISTENCE OF A VALID AGREEMENT TO ARBITRATE?
It is undisputed that the General Security policy does not contain an arbitration provision. General Security contends that because the XL policy contains an arbitration provision, and the General Security policy follows the form of the XL policy, that provision is included in the General Security policy.
"As a general rule, a party is bound by the provisions of an agreement which he signs, even though he does not read them and signs unaware of their existence." (King v. Larsen Realty, Inc. (1981) 121 Cal.App.3d 349, 358.) Further, "[a] contract may validly include the provisions of a document not physically a part of the basic contract. . . . 'It is, of course, the law that the parties may incorporate by reference into their contract the terms of some other document. [Citations.] But each case must turn on its facts. [Citation.] For the terms of another document to be incorporated into the document executed by the parties the reference must be clear and unequivocal, the reference must be called to the attention of the other party and he must consent thereto, and the terms of the incorporated document must be known or easily available to the contracting parties.'" (Williams Constr. Co. v. Standard-Pacific Corp. (1967) 254 Cal.App.2d 442, 454; accord King v. Larsen Realty, Inc., supra, 121 Cal.App.3d at p. 357.)
In Chan v. Drexel Burnham Lambert, Inc. (1986) 178 Cal.App.3d 632, 635-636, the plaintiff had signed a uniform industry application at the time she was hired as a stockbroker by the defendant. One paragraph of that four-page application stated: "'I agree to abide by the Statute(s), Constitution(s), Rule(s) and By-Laws [of the National Association of Securities Dealers, the American Stock Exchange, and the New York Stock Exchange] as any of the foregoing are amended from time to time of the agency jurisdiction or organization with or to which I am filing or submitting this application; . . .'" (Id. at p. 636.) One of the New York Stock Exchange's rules provided: "'Any controversy between a registered representative and any member or member organization arising out of the employment or termination of employment of such registered representative by and with such member or member organization shall be settled by arbitration, at the instance of any such party, in accordance with the arbitration procedure prescribed elsewhere in these rules.'" (Ibid.) The court held that the plaintiff was not required to arbitrate her claims against the defendants because the arbitration provision neither appeared on the face of the document she signed, nor was it properly incorporated by reference. (Id. at pp. 641-642.) The court noted that while ambiguities in the arbitration clause must be construed in favor of arbitration, ambiguities in the incorporating document must be construed against the drafter. (Id. at p. 644.)
In this case, General Security relies on the Casualty Following Form Endorsement, which appears at page 4 of 9 of the General Security policy, and specifically the following language: "Interests Insured Subject to the applicable limits of insurance, we will pay on behalf of the insured as follows: [¶] (i) Whenever this insurance operates on an excess of loss or umbrella basis: all sums in excess of the amount payable by all the Controlling Primary Policy and/or all the Underlying policies described in the Schedule of Underlying Insurance; [¶] (ii) Whenever this insurance operates on a stand-alone basis: as per the stand-alone terms and conditions. [¶] (iii) Whatever the case above in (i) or (ii) this insurance will follow the terms and conditions of the policy number IE00012802LI05A issued by: [¶] XL INSURANCE COMPANY, [¶] in effect at the inception date of this policy, notwithstanding the provisions of the [General Security] Commercial Excess Liability Policy number: [¶] 25-L42000105-05. [¶] ln no event shall this insurance be construed in any way to provide coverage outside the terms, conditions, agreements, exclusions and definitions as the set-forth in the policy here-above mentioned in (iii): [¶] IE00012802LI05A. [¶] Nothing contained in this endorsement shall obligate [General Security] to provide a duty to defend or investigate any claim or suit before the Controlling Underlying Policy and/or all the underlying policies Limits shown in the Schedule of Underlying Insurance are exhausted by payment of judgments, claims or settlements. [¶] The insurance afforded by this policy shall apply only as set-forth in (i) or (ii) and only after all the underlying policies have been exhausted by payment of the limits of such underlying policies."
The arbitration clause in the XL policy provides, in relevant part: "It is hereby understood and agreed that the following is added to Section VII. Conditions of this Policy: [¶] T. Arbitration [¶] (1) Any dispute, controversy or claim arising out of or relating to this Policy or the breach, termination or invalidity thereof shall be finally and fully determined in London, England under the provisions of the Arbitration Acts of 1950, 1975 and 1979 and/or any statutory modifications or amendments thereto, for the time being in force, by a Board composed of three arbitrators to be selected for each controversy."
The General Security policy does not explicitly reference the arbitration provision in the XL policy. There is no reason anyone would expect an insurance company based in Arizona that issued an insurance policy from offices in New York to multiple corporations based in Delaware and California to incorporate a provision from an Irish-based insurance company requiring arbitration in London, England, pursuant to English arbitration rules. While the General Security policy refers to "terms and conditions," these are referenced under the heading "Interests Insured," and the focus is on the terms of payment and coverage, rather than terms such as arbitration. Indeed, the General Security policy includes language indicating that the parties anticipated disputes about the policy would be resolved through litigation. Under the heading "Legal Action Against Us," the General Security policy reads, in part: "No person or organization has a right under this policy: [¶] . . . [¶] b. To sue us on this policy unless all of its terms have been fully complied with."
Under the totality of the circumstances, we conclude the arbitration provision in the XL policy was not effectively incorporated into the General Security policy, and therefore General Security did not prove the existence of a valid agreement to arbitrate its dispute with Lennar.
II.
FAA VS. CAA
General Security argues that the trial court erred by relying on section 1281.2(c), a part of the California Arbitration Act (Code Civ. Proc., § 1280 et seq.) (CAA), to deny its motion to compel arbitration, contending that statute is inconsistent with the Federal Arbitration Act (9 U.S.C. § 1 et seq.) (FAA). The FAA governs arbitration agreements involving interstate commerce, and contains both procedural and substantive provisions. (It is undisputed that the claims at issue in the underlying product liability cases, as well as the acquisition of the insurance policies, involve interstate commerce.) The arbitration provision in the XL insurance policy does not specify that either the FAA or the CAA applies, and does not contain a choice of law provision.
The procedural aspects of the FAA do not apply in state courts unless the parties have specified to the contrary. (See Sanchez v. Valencia Holding Co., LLC (2015) 61 Cal.4th 899, 922 [even where arbitration agreement specifies FAA governs any disputes, CAA governs arbitration procedures]; Cronus Investments, Inc. v. Concierge Services (2005) 35 Cal.4th 376, 388-390 (Cronus); see Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior University (1989) 489 U.S. 468, 476-477, fn. 6 [United States Supreme Court has never held FAA's procedural provisions apply in state court; "by their terms [they] appear to apply only to proceedings in federal court"]; Southland Corp. v. Keating (1984) 465 U.S. 1, 16, fn. 10; Los Angeles Unified School Dist. v. Safety National Casualty Corp. (2017) 13 Cal.App.5th 471, 479-480.)
In Rosenthal v. Great Western Fin. Securities Corp. (1996) 14 Cal.4th 394, 405, the parties' contract involved interstate commerce, and the FAA's substantive provisions were implicated. The California Supreme Court held, however, "[i]t is a 'general and unassailable proposition . . . that States may establish the rules of procedure governing litigation in their own courts,' even when the controversy is governed by substantive federal law." (Id. at p. 409.)
In Cable Connection, Inc. v. DIRECTV, Inc. (2008) 44 Cal.4th 1334, 1342, footnote 3, the choice-of-law provision of the agreement provided that "'any arbitration conducted hereunder shall be governed by the [FAA].'" This language did not make the FAA's procedural provisions applicable in a matter pending in a California appellate court. (Id. at pp. 1350-1351, fn. 12.)
In Valencia v. Smyth (2010) 185 Cal.App.4th 153, 177, the court held, "the question is not whether the parties adopted the CAA's procedural provisions: The state's procedural statutes (§§ 1281.2, 1290.2) apply by default because Congress intended the comparable FAA sections (9 U.S.C. §§ 3, 4, 10, 11) to apply in federal court. The question, therefore, is whether the parties expressly incorporated the FAA's procedural provisions into their agreements."
The XL policy's arbitration clause reads, in relevant part, as follows: "Any dispute, controversy or claim arising out of or relating to this Policy or the breach, termination or invalidity thereof shall be finally and fully determined in London, England under the provisions of the Arbitration Acts of 1950, 1975 and 1979 and/or any statutory modifications or amendments thereto, for the time being in force, by a Board composed of three arbitrators to be selected for each controversy . . . ." There is no mention of the FAA, much less a specific incorporation of its procedural provisions in the arbitration provision.
Even if an argument could be made that the FAA has some applicability here, General Security's argument that it preempts section 1281.2(c) is unavailing. In Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior University, supra, 489 U.S. at page 470, the United States Supreme Court found that section 1281.2(c) "is not pre-empted by the Federal Arbitration Act . . . in a case where the parties have agreed that their arbitration agreement will be governed by the law of California." In Cronus, supra, 35 Cal.4th at page 380, the California Supreme Court extended that rule, concluding that the FAA does not preempt section 1281.2(c), even where the arbitration provision does not include a California choice-of law provision.
The arbitration agreement in the Cronus case provided: "'Any controversy, dispute or claim arising out of, in connection with, or in relation to the interpretation, performance or breach of this Agreement, including any claim based on contract, tort or statute, shall be settled, at the request of either party, by arbitration conducted in Los Angeles, California in accordance with the then existing Rules for Commercial Arbitration of the American Arbitration Association ('AAA'), and judgment upon any award rendered by the arbitrator may be entered by any State or Federal court having jurisdiction thereof. Any controversy concerning whether a dispute is an arbitrable dispute shall be determined by the arbitrator. The parties intend that this agreement to arbitrate be valid, specifically enforceable and irrevocable. The designation of a situs or specifically a governing law for this agreement or the arbitration shall not be deemed an election to preclude application of the [FAA], if it would be applicable.'" (Cronus, supra, 35 Cal.4th at p. 381, fn. 3.) --------
III.
IS A PARTY TO THE ARBITRATION AGREEMENT ALSO A PARTY TO A PENDING COURT ACTION OR
SPECIAL PROCEEDING WITH A THIRD PARTY, ARISING OUT OF THE SAME TRANSACTION OR
SERIES OF RELATED TRANSACTIONS AND IS THERE A POSSIBILITY OF CONFLICTING RULINGS ON
A COMMON ISSUE OF LAW OR FACT?
The trial court denied the motion to compel arbitration because it found there was a possibility of conflicting rulings on common factual or legal issues due to pending litigation between Lennar and Interstate. The trial court's determination whether section 1281.2(c) applies is reviewed under either the substantial evidence or the de novo standard of review, depending on whether the court based its decision on a factual or a legal determination. (Acquire II, Ltd. v. Colton Real Estate Group (2013) 213 Cal.App.4th 959, 972 (Acquire).) When section 1281.2(c) applies, the trial court's denial of a motion to compel arbitration is reviewed for abuse of discretion. (Acquire, supra, 213 Cal.App.4th at p. 971.)
All three of the factors under section 1281.2(c)—"A party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party, arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact"—must be satisfied before that statute may be used to deny a motion to compel arbitration. (Acquire, supra, 213 Cal.App.4th at p. 968.)
In this case, all three factors were satisfied. First, Lennar was also a party to a pending court action with third party Interstate. While General Security notes that Interstate also had a following form term in its policy, even if that was sufficient to incorporate the XL arbitration provision in the Lennar/Interstate policy (see discussion, ante), Lennar and Interstate waived the right to arbitrate by litigating the action for more than five years. Interstate's second amended and supplemental complaint for declaratory relief alleges that as an excess policy, the Interstate insurance policy follows form as to "certain terms and conditions of the XL Policy, which in turn 'follows form' to the underlying Old Republic Policies with respect to some, but not all, claims." None of the language from either the Old Republic or Interstate policies quoted in the complaint addresses arbitration.
Second, the claims in the Lennar/General Security litigation arise out of the same transactions as those in the Lennar/Interstate litigation—namely, the coverage for the underlying claims involving the Chinese drywall installed in Lennar-built houses.
Third, and finally, there was a possibility of conflicting rulings on common issues of law and fact relating to the coverage of the underlying claims.
The trial court did not err in concluding the section 1281.2(c) factors applied in this case and in denying the motion to compel arbitration.
DISPOSITION
The order is affirmed. Respondents to recover costs on appeal.
FYBEL, J. WE CONCUR: ARONSON, ACTING P. J. IKOLA, J.