Masco Corporation v. Zurich American Insurance Company, Near North Insurance Agency, Inc.

382 F.3d 624, 2004 U.S. App. LEXIS 18324, 2004 WL 1925484

Opinions

ROGERS, Circuit Judge.

The district court in this case refused to give effect to a broad arbitration clause in an insurance policy, where the underlying dispute between the parties revolved around policy coverage that neither party intended, but that was imposed on the contract by law as determined by subsequent Ohio Supreme Court opinions. Because the dispute nonetheless falls within the ambit of the arbitration agreement, we reverse.

Zurich American Insurance Company (“Zurich”), through its agent, Near North Insurance Agency, Inc. (“Near North”), sold to Masco Corporation (“Masco”) two commercial automobile insurance policies, one effective June 30, 1997, to June 30, 1998, and a second, renewal policy, effective June 30, 1998, to June 30, 1999. The two policies included a deductible agreement, consisting of a basic agreement and a set of specifications. As part of the deductible agreement, Zurich agreed to pay and handle the claims made under the policies, and Masco agreed to pay Zurich a $500,000 deductible for claims made under the policies. The deductible agreement included an arbitration clause reading, “Any dispute arising out of the interpretation, performance or alleged breach of this agreement, shall be submitted to arbitration....”

In negotiating the purchase of automobile insurance, Masco specifically instructed Near North that it wished to purchase policies that contained no uninsured/under-insured-motorist (“UM7UIM”) coverage. Near North and Zurich provided Masco with forms that all parties thought rejeet- ed UM/UIM coverage. At the time the polices were purchased and the deductible agreement was entered into, both parties to this appeal thought that their contract did not include UM/UIM coverage.

Later events, however, rendered the parties’ rejection of UM/UIM coverage ineffective. The Ohio Supreme Court in Scott-Pontzer v. Liberty Mutual Fire Insurance Co., 85 Ohio St.3d 660, 710 N.E.2d 1116 (1999), and Linko v. Indemnity Insurance Co. of North America, 90 Ohio St.3d 445, 739 N.E.2d 338 (2000), interpreted & sect; 3937.18 of the Ohio Revised Code to extend UM/UIM coverage to almost all corporations buying automobile insurance unless they expressly rejected the coverage in a very precise way. Both Zurich and Masco agree that the manner in which they rejected possible UM/UIM coverage, although arguably valid at the time of contracting, did not satisfy the Linko requirements. It is thus uncontro-verted that a new burden of coverage arose flowing from Zurich to Masco and those affiliated with Masco.¹

Zurich has paid a pair of UM/UIM claims made against the policies. On March 11, 1999, Natalie Ruska, the daughter of an employee of a Masco subsidiary, was killed in an automobile accident. Ms. Ruska’s estate sued Zurich in an Ohio state court claiming entitlement to Scott-Pontzer benefits. Zurich settled the suit, paying Ms. Ruska’s estate approximately $700,000. Zurich then demanded payment of the $500,000 deductible from Masco.

On April 7, 1999, Linda Collins was injured in an automobile accident. At the time of the accident, Ms. Collins was a passenger in a vehicle being driven by her daughter, Rachael Collins, an employee of a Masco subsidiary. Collins sued Zurich demanding Scott-Pontzer benefits. At oral argument, Zurich admitted that it paid Ms. Collins at least $140,000 in Scottr-Pontzer benefits. Masco believes that Zurich will demand payment of a deductible for the Collins claim.

Wishing to clarify its legal position, Mas-co filed a complaint in the Ohio Court of Common Pleas against Zurich and Near North seeking a declaration that: (a) it owed no obligation to pay deductibles for UM/UIM claims brought against Zurich, (b) if it is required to pay Zurich a deductible then Near North should indemnify it, and (c) that the deductible contained in the liability portion of the policies does not apply to UM/UIM coverage imposed by operation of law. Zurich removed the case to the federal district court, and moved to stay and compel arbitration based on the arbitration clause in the deductible agreement. The district court denied the motion to stay, holding that the “the underlying disputes in the complaint are beyond the scope” of the deductible agreement because “Masco could never have agreed to pay a deductible for coverage that would arise by operation of law years later as a result of a deficiency in the policy or waiver drafted by Zurich.” Masco Corp. v. Zurich Am. Ins. Co., No. 4:02 CV 0988, slip op. at 5 (N.D.Ohio Dec. 5, 2002). Zurich timely appealed. The question of ar-bitrability is the sole issue on appeal.

The Federal Arbitration Act (the “FAA”) manifests “a liberal federal policy favoring arbitration agreements.” Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983). “To enforce this dictate, [the FAA] provides for a stay of proceedings when an issue is referable to arbitration and for orders compelling arbitration when one party has failed or re fused to comply with an arbitration agreement.” Javitch v. First Union Sec., Inc., 315 F.3d 619, 624 (6th Cir.2003) (citing 9 U.S.C. §§ 3 & 4). This court reviews de novo a district court’s decision whether to compel arbitration pursuant to the FAA. Burden v. Check Into Cash of Kentucky, LLC, 267 F.3d 483, 487 (6th Cir.2001).

Case law amply supports arbitra-bility of Masco’s claims against Zurich in this case. “Before compelling an unwilling party to arbitrate, the court must engage in a limited review to determine whether the dispute is arbitrable; meaning that a valid agreement to arbitrate exists between the parties and that the specific dispute falls within the substantive scope of that agreement.” Javitch, 315 F.3d at 624. “[A]s a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration.” Moses H. Cone, 460 U.S. at 24-25, 103 S.Ct. 927 (1983). “[T]here is a general presumption of arbitrability, and any doubts are to be resolved in favor of arbitration ‘unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute.’” Highlands Wellmont Health Network, Inc. v. John Deere Health Plan, Inc., 350 F.3d 568, 576-77 (6th Cir.2003) (quoting AT & T Techs., Inc. v. Communications Workers of Am., 475 U.S. 643, 650, 106 S.Ct. 1415, 89 L.Ed.2d 648 (1986)). Where, as here, the arbitration clause is broad, “only an express provision excluding a specific dispute, or ‘the most forceful evidence of a purpose to exclude the claim from arbitration,’ will remove the dispute from consideration by the arbitrators.” Id. at 577 (quoting AT & T Techs., 475 U.S. at 650, 106 S.Ct. 1415). Of course, “[w]hile ambiguities in the language of the agreement should be resolved in favor of arbitration, we do not override the clear intent of the parties, or reach a result inconsistent with the plain text of the contract, simply because the policy favoring arbitration is implicated.” EEOC v. Waffle House, Inc., 534 U.S. 279, 294, 122 S.Ct. 754, 151 L.Ed.2d 755 (2002) (internal citations omitted).

Here, notwithstanding Masco’s argument to the contrary, the arbitration clause in the deductible agreement was patently broad enough to cover the dispute as to whether Zurich can recover deductibles for the UWUIM payments made under the policies. The arbitration clause encompasses “[a]ny dispute arising out of the interpretation, performance or alleged breach of [the deductible agreement].” J.A. at 66. Masco’s claims against Zurich, which pray for a declaration that Masco has no obligation under the deductible agreement to pay deductibles for UM/UIM coverage, plainly fall within these spacious terms. The dispute “arises out of’ the parties’ conflicting “interpretation” of Mas-co’s obligations under the deductible agreement and Masco’s “alleged breach” of the deductible agreement by failing to pay deductibles for UM/UIM coverage.

Masco argues that, because the parties did not contemplate UM/UIM coverage, they could not possibly have contracted to submit disputes arising out of this coverage to arbitration. But, by its plain terms, the arbitration clause embraces any dispute arising out of the deductible agreement whether or not the parties anticipated the dispute at the time of contracting. Our task, of course, is limited to enforcing the parties’ agreement as written, and we have no license to write a “foreseeability” limitation into the arbitration agreement. As the Seventh Circuit held in Deputy v. Lehman Bros., Inc., 345 F.3d 494, 513 (7th Cir.2003), “[w]hether a claim is subject to arbitration depends on the contractual language, and in this case the arbitration clause did not limit its scope to reasonably foreseeable claims.” See also Fazio v. Lehman Bros., Inc., 340 F.3d 386, 395-96 (6th Cir.2003).

Masco further argues that (1) the deductible, which applies to “Masco Policies for Automobile Liability” (J.A. at 75), does not apply to UM/UIM claims, and (2) Ohio law forbids the imposition of a deductible on UM/UIM coverage created by operation of law. These arguments address the substance of the parties’ dispute, not whether the dispute falls with the terms of the arbitration clause, and hence the arguments lie within the province of the arbitrator.

In essence, Masco attempts to recast its challenge to the underlying contractual liability as a challenge to the arbitrability of the dispute. While Masco denies that it is obligated by the deductible agreement to reimburse Zurich for deductible amounts that Zurich paid as a result of the imposition of UM/UIM coverage, it has no argument for making a particular challenge to the arbitration agreement. Instead, Mas-co’s challenge is based squarely on the absence of an underlying contractual obligation. Masco argues that it never purchased UM/UIM coverage, that the deduc-tibility obligation accordingly did not apply to such coverage, and that, in turn, it cannot be compelled to arbitrate a nonexistent obligation to pay UM/UIM deductibles.

Where challenges to an arbitration clause, like those in this case, are based on disagreement regarding an underlying contractual dispute, the Supreme Court’s holding in Prima Paint Corporation v. Flood & Conklin Manufacturing Company, 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967), makes clear that arbitration is required. Under Prima Paint, a general arbitration clause is enforceable even if it is contained in a contract that is generally asserted to be voidable, unless the basis for rescission applies specifically to the arbitration clause.

It is true that a party opposing a motion to stay and compel arbitration may argue that the arbitration clause is itself invalid. “An arbitration agreement may be invalidated for the same reasons for which any contract may be invalidated, including forgery, unconscionability, and lack of consideration.” Fazio, 340 F.3d at 393. In this case, Masco argues that the arbitration clause fails because it cannot apply to a contractual provision that Masco did not agree to. But, by virtue of Ohio law, the extension of UM/UIM coverage was legally deemed to be an obligation arising from the contract, and it is an issue of contract interpretation whether the deductible reimbursement requirement applied to the UM/UIM obligation. One seeking to challenge an arbitration clause must make an argument that is specific to the arbitration clause, however, and that does not simply challenge the contractual obligation to which the arbitration clause applies. See Burden, 267 F.3d at 491.

The dissent concludes that Masco’s obligation to reimburse Zurich for the UM7 UIM deductibles arose from a mutual mistake, and that the arbitration agreement with respect to that dispute was infected by the same mutual mistake. Masco’s complaint contains a claim for contract reformation based on mutual mistake, but the theory was not otherwise argued by the parties, and normally this court treats an issue not raised by a party as waived. Rybarczyk v. TRW, Inc., 235 F.3d 975, 984 (6th Cir.2000). In particular, the parties have not addressed whether, under the relevant law, a party can base a mutual mistake claim on a change in the law subsequent to the formation of the contract, given the requirement that the mistake exist at the time the contract was made. The answer appears to be no. See In the Matter of the Liquidation of the New York Agency and Other Assets of Bank of Credit & Commerce Int’l, S.A., 90 N.Y.2d 410, 660 N.Y.S.2d 850, 683 N.E.2d 756, 764 (1997) (“The doctrine of mutual mistake requires that the mistake exist at the time the contract is negotiated.”); cf. Wheelabrator Envtl. Sys., Inc. v. Galante, 136 F.Supp.2d 21, 33 (D.Conn.2001) (holding that the defendant could not base a defense of mutual mistake on a court decision rendered a year after the contract was formed); Sheet Metal Workers Local 137 v. Vic Constr. Corp., 825 F.Supp. 463, 467 (E.D.N.Y.1993) (stating that a failure to determine or predict a controlling interpretation of a statute does not constitute a mistake); Krantz v. Univ. of Kansas, 271 Kan. 234, 21 P.3d 561, 567 (2001) (“A subsequent change in the law will not justify rescission of a settlement agreement or contract on the basis of ‘mistake of the law.’ ”).

Even assuming that the mutual mistake theory might apply in this case, the argument still amounts to an attack on the underlying liability, and only derivatively on the obligation to arbitrate. Therefore, under Prima Paint, the general arbitration provision still applies. The existence of a mutual mistake leads at most to the conclusion that the underlying contract obligation was voidable, or subject to rescission. Chastain v. The Robinsan-Humphrey Co., Inc., 957 F.2d 851, 855 (11th Cir.1992); Gould v. Bd. of Educ. of Sewanhaka Cent. High Sch. Dist., 81 N.Y.2d 446, 599 N.Y.S.2d 787, 616 N.E.2d 142, 145 (1993); Restatement (Second) of Contracts § 152 (1981). In a similar situation, where the party objecting to arbitration claimed that the entire contract was fraudulently induced, the Supreme Court in Prima Paint nonetheless required arbitration where the fraudulent inducement did not relate specifically to the arbitration clause. The Court reasoned that a court may consider only claims concerning the validity of the arbitration clause itself, as opposed to challenges to the validity of the contract as a whole, in determining whether a valid agreement to arbitrate exists. Prima Paint, 388 U.S. at 402-06, 87 S.Ct. 1801; see also Great Earth Cos., Inc. v. Simons, 288 F.3d 878, 889-90 (6th Cir.2002). The reasoning clearly extends beyond the fraudulent inducement context to cases involving other bases for rescinding a contract in toto. As the First Circuit reasoned:

Contrary to Beneficial’s assertion, the fact that its attempt to rescind the entire agreement is based on the grounds of frustration of purpose rather than on fraud in the inducement does not change applicability of the severability doctrine. The teaching of Prima Paint is that a federal court must not remove from the arbitrators consideration of a substantive challenge to a contract unless there has been an independent challenge to the making of the arbitration clause itself. The basis of the underlying challenge to the contract does not alter the severability principle. Thus, the Seventh Circuit, applying Prima Paint to a case similar to the one before us, held that a party could not avoid arbitration through rescission of an entire agreement when it had made no independent challenge to the arbitration clause. See, Wilson Wear, Inc. v. United Merchants & Manufacturers, Inc., 713 F.2d 324, 327-28 (7th Cir.1983).

Unionmutual Stock Life Ins. Co. of Am. v. Beneficial Life Ins. Co., 774 F.2d 524, 528-29 (1st Cir.1985). The reasoning applies a fortiori to a claim of mutual mistake.² In the instant case, Masco’s claims, including its mutual mistake claim, are entirely unrelated to the arbitration clause. As Mas-co’s complaint makes clear, its allegation of mutual mistake concerns the coverage of the automobile liability policies, not the arbitration clause itself. Prima Paint accordingly requires reversal.

The judgment of the district court is REVERSED and REMANDED for proceedings consistent with this opinion.

Footnotes

1

. The Ohio Supreme Court has since drastically reduced the scope of Scott-Pontzer coverage. See Westfield Ins. Co. v. Galatis, 100 Ohio St.3d 216, 797 N.E.2d 1256 (2003).

2

. This is not like a case where, for instance, a contract is void for lack of a valid signature. In such cases, courts have indicated that an arbitration clause contained in the contract would not be binding. See, e.g., Chastain v. The Robinson-Humphrey Co., Inc., 957 F.2d 851, 855 (11th Cir.1992). Such cases involve the asserted total absence of any expressed intent to arbitrate contractual issues. There is clearly no such absence in this case, where at most the contract is voidable rather than void ab initio. (We do not mean to suggest that Prima Paint cannot apply in at least some cases of contracts that are allegedly void, only that Prima Paint does apply where the contract is said to be voidable rather than void.)