Sturgeon v. Allied Professionals Ins. Co., ED 94605.

• Decision Date: 08 March 2011
• Docket Number: No. ED 94605.,ED 94605.
• Parties: Mary STURGEON, Plaintiff/Respondent,v.ALLIED PROFESSIONALS INSURANCE CO., A Risk Retention Group, Inc., Defendant/Appellant.
• Court: Missouri Court of Appeals

344 S.W.3d 205

Mary STURGEON, Plaintiff/Respondent,

v.ALLIED PROFESSIONALS INSURANCE CO., A Risk Retention Group, Inc., Defendant/Appellant.

No. ED 94605.

Missouri Court of Appeals, Eastern District, Division Three.

March 8, 2011.Motion for Rehearing and/or Transfer to

Supreme Court Denied May 10, 2011.

Application for Transfer

Denied Aug. 30, 2011.

Thomas E. Schwartz, Justin D. Guerra, St. Louis, MO, For Plaintiff/Respondent.Gerald F. McGonagle, Rick A. Cigel, Kansas City, MO, For Defendant/Appellant.Before SHERRI B. SULLIVAN, P.J., CLIFFORD H. AHRENS, J., and LAWRENCE E. MOONEY, J.SHERRI B. SULLIVAN, P.J.

Introduction

Allied Professionals Insurance Co., A Risk Retention Group, Inc. (Appellant) appeals from the trial court's judgment denying its motion to compel arbitration. We affirm.

Factual and Procedural Background

On May 21, 2007, Mary Sturgeon (Respondent), a resident of Missouri and a licensed massage therapist, was covered by a professional liability insurance policy issued to her by Appellant when the massage table on which she was massaging a client in her Missouri employer's business collapsed, causing the client to fall and incur injuries. The client sued Respondent for her personal injuries. Respondent contacted Appellant and asked Appellant to provide her with a legal defense pursuant to her insurance policy. Appellant denied coverage and refused to defend Respondent in the personal injury suit, so Respondent hired her own legal counsel. The lawsuit against Respondent was ultimately dismissed.

On December 21, 2009, in the Circuit Court of the City of St. Louis, Respondent filed a breach of contract action against Appellant, alleging that Appellant's failure to defend her constituted a breach of the insurance contract, and seeking damages in the amount of the attorney's fees she incurred as a result of Appellant's failure to defend her.

On March 3, 2010, Appellant filed a motion to compel arbitration, pursuant to the mandatory arbitration clause in the insurance contract, to-wit:

V. GENERAL CONDITIONS

C. Arbitration. If a dispute or claim shall arise with respect to any of the terms or provisions of this Policy, or with respect to the performance by any of the parties to the Policy, then any party or that party's authorized representative may, by notice as herein provided, require that the dispute be submitted within fifteen (15) days to an arbitrator in good standing with the American Arbitration Association under the Commercial Arbitration Rules of the American Arbitration Association then in effect. Any arbitration undertaken pursuant to the terms of this section shall be governed by the Federal Arbitration Act and shall occur in Orange County, California.

The motion was briefed and argued before the trial court, and on March 17, 2010, the trial court denied the motion, finding that Respondent cannot be compelled to arbitrate pursuant to the agreement because Missouri law prohibits mandatory arbitration clauses in insurance contracts and, although an arbitration clause in a contract is generally enforceable under the Federal Arbitration Act (FAA), the McCarran–Ferguson Act created an exception to this general preemption by ensuring that the states can regulate the business of insurance free from the inadvertent preemption by federal statutes of general applicability.

This appeal follows.

Points on Appeal

In its first point, Appellant claims the trial court erred in denying its motion to compel arbitration pursuant to the FAA, in that the FAA requires Respondent to arbitrate this dispute, and Appellant was entitled to seek the trial court's intervention to order arbitration and stay or dismiss this case; Appellant has proven all of the elements necessary to obtain arbitration under the FAA, in that Appellant established the existence of a written arbitration agreement whose scope covers the instant dispute; Respondent's insurance policy explicitly provides that the FAA governs this matter; and the FAA governs this matter because Respondent's purchase of the policy involved interstate commerce.

In its second point, Appellant maintains the trial court erred in finding that Missouri law applies to this case and not California law, because Respondent's insurance policy had a California Choice of Law provision and the operation of Appellant's insurance program requires that California law applies to this case.

In its third point, Appellant asserts the trial court erred in holding that the Liability Risk Retention Act (LRRA) does not exempt Appellant, a risk retention group, from Missouri's restriction against arbitration provisions in insurance policies because the LRRA exempts risk retention groups from state laws that directly or indirectly regulate their operation, and Missouri's statute prohibiting arbitration provisions in insurance policies regulates the business of insurance.

Standard of Review

An appellate court's review of a trial court's denial of a motion to compel arbitration is de novo. Lawrence v. Beverly Manor, 273 S.W.3d 525, 527 (Mo.banc 2009).

Discussion

We address Appellant's second point first, as it involves the issue of which state's law should be applied to this case.

Point II—Choice of Law

Appellant maintains the choice of law provision in Respondent's insurance policy prescribing the application of California law is valid and should be enforced by this Court. The choice of law provision provides:

Section V. GENERAL CONDITIONS Q. Choice of Law. This Policy and the rights of the parties hereunder shall be governed by and construed in accordance with the laws of the State of California, including all matters of construction, validity, performance, and enforcement without giving effect to the principles of conflict of laws. Notwithstanding this provision, arbitration shall be governed by the Federal Arbitration Act.

In support of its argument that this Court should enforce the California choice of law provision, Appellant relies on California law. However, such reliance is putting the cart before the horse.

We recognize that generally parties may choose the state whose law will govern the interpretation of their contractual rights and duties. Tri–County Retreading, Inc. v. Bandag Inc., 851 S.W.2d 780, 784 (Mo.App. E.D.1993). As long as the application of this law is not contrary to a fundamental policy of Missouri, we will honor the parties' choice of law provision. Id. Here, the application of California law would allow the arbitration clause in an insurance policy to be enforced. Such a result would be contrary to Missouri public policy, because Section 435.350 ¹ of the Missouri Arbitration Act prohibits mandatory arbitration provisions in insurance contracts. Section 435.350, entitled “Validity of arbitration agreement,” provides that such provisions are invalid, unenforceable and revocable:

A written agreement to submit any existing controversy to arbitration or a provision in a written contract, except contracts of insurance and contracts of adhesion, to submit to arbitration any controversy thereafter arising between the parties is valid, enforceable and irrevocable, save upon such grounds as exist at law or in equity for the revocation of any contract. Contracts which warrant new homes against defects in construction and reinsurance contracts are not ‘contracts of insurance or contracts of adhesion’ for purposes of the arbitration provisions of this section.[Emphasis added.] This section makes clear that Missouri law deems arbitration agreements in insurance contracts to be invalid. In accord, Standard Security Life Ins. Co. of New York v. West, 267 F.3d 821, 824 (8th Cir.2001); Datacor, Inc. v. Heritage Warranty Ins. Risk Retention Group, Inc., No. 4:09–CV–1123 (CEJ), 2009 WL 5062137 at *2, 3 (E.D.Mo. December 16, 2009); Tamko Building Products, Inc. v. Factory Mutual Ins. Co., No. 4:09–CV–1401 (CDP), 2009 WL 5216999 at *2 (E.D.Mo. December 30, 2009). “The laws and judicial decisions of our state, as well as the applicable principles of common law are essential in determining whether an arbitration provision in an insurance policy is contrary to our public policy.” Allen Foods, Inc. v. Lawlor, 94 S.W.3d 436, 438 (Mo.App. E.D.2003), citing Fidelity & Deposit Co. of Maryland v. Grand Nat. Bank of St. Louis, 69 F.2d 177, 180 (8th Cir.1934). Public policy is declared in a statute. Northland Ins. Co. v. Bess, 869 S.W.2d 157, 159 (Mo.App. E.D.1993). Our legislature has expressed Missouri's public policy in the enactment of Section 435.350. See Allen Foods, 94 S.W.3d at 438.

Accordingly, we conclude that applying California law to Respondent's claim would be against Missouri public policy, because it would allow the enforcement of an arbitration clause in an insurance contract. Therefore, the California choice of law provision in Respondent's insurance policy is void and unenforceable. Missouri law applies to this case.

Although the foregoing analysis is dispositive of this point, we also note that California law is not applicable under a conflict of laws analysis. Missouri courts apply the most significant relationship test as set forth in Restatement (Second) of Conflict of Laws Section 188 when resolving choice of law issues. Sheehan v. Northwestern Mut. Life Ins. Co., 44 S.W.3d 389, 396 (Mo.App. E.D.2000); Emerson Elec. Co. v. Crawford & Co., 963 S.W.2d 268, 273–74 (Mo.App. E.D.1997). Section 188 of the Restatement employs the most significant relationship test. Dillard v. Shaughnessy, Fickel & Scott Architects, Inc., 943 S.W.2d 711, 715 (Mo.App. W.D.1997). Section 188(2) identifies five potentially significant contacts to be considered in a contract case when determining which state has the most significant relationship to the transaction and parties: (a) the place of contracting, (b) the place of negotiation of the contract, (c) the place of performance, (d) the location of the subject matter of the contract, and (e) the domicile, residence,...