Blue Cross Blue Shield of Tennessee v. Bcs Ins.

• Decision Date: 20 September 2007
• Docket Number: No. 07 C 2163.,No. 06 C 7060.,06 C 7060.,07 C 2163.
• Citation: 517 F.Supp.2d 1050
• Parties: BLUE CROSS BLUE SHIELD OF TENNESSEE, Plaintiff, v. BCS INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — Northern District of Illinois

517 F.Supp.2d 1050

BLUE CROSS BLUE SHIELD OF TENNESSEE, Plaintiff, v. BCS INSURANCE COMPANY, Defendant.

No. 06 C 7060.

No. 07 C 2163.

United States District Court, N.D. Illinois, Eastern Division.

September 20, 2007.

Michael A. Pope, Bryan Matthew Webster, Marie Ann Halpin, McDermott, Will & Emery LLP, Chicago, IL, Earle J. Schwarz, John I. Houseal, Jr., Glankler Brown, PLLC, Memphis, TN, for Plaintiff.

Marc J. Pearlman, Scott Andrew Hanfling, Terry Michael Hackett, Kerns, Pitrof, Frost & Pearlman, Chicago, IL, for Defendant.

MEMORANDUM OPINION AND ORDER

REBECCA R. PALLMEYER, District Judge.

Defendant BCS Insurance Company ("BCS") issued to Plaintiff Blue Cross Blue Shield of Tennessee ("BCBST") Directors and Officers Liability Insurance Policy No. D/O 991-390 (the "Policy"). In the Policy, the parties agreed to binding arbitration of "[a]ny controversy arising out of or relating to this Policy." BCBST filed a demand for arbitration under the Policy in October 2004. Although the parties began conducting discovery, two arbitrators withdrew from the panel in 2006. With the arbitration still pending, BCBST filed a Complaint in the Western District of Tennessee. BCS then filed a Petition to Compel Arbitration in this court (06 C 7060). BCBST's Complaint was transferred to this court (07 C 2163), which now considers BCBST's Motion for Summary Judgment of the Petition to Compel Arbitration and BCS's Motion to Compel Arbitration, Stay and Dismiss BCBST's Complaint. For the reasons set forth here, the court concludes that the Policy's arbitration clause is valid. BCBST's motion for summary judgment is therefore denied, and BCS's motion to compel arbitration is granted. The court stays proceedings on those counts of BCBST's Complaint alleging breach of contract and bad faith refusal to pay, and dismisses BCBST's claim for declaratory relief.

BACKGROUND¹

A. The Coverage Dispute Between BCS and BCBST

BCBST is a Tennessee insurance corporation with its principal place of business in Chattanooga, Tennessee. (BCS's 56.1 Resp. 1.) BCS is an Ohio stock insurance company with its principal place of business in Oakbrook, Illinois. (Id. ¶ 2.) In 1999, BCS issued to BCBST the Policy, which has a coverage period from August 1, 1999 to August 1, 2002. (Policy, at BCS 008179, Ex. 1 to Compl.) The Policy includes an Insurance Company Errors and Omissions Endorsement, (id. at BCS 008206-09), which, according to BCBST, requires BCS to provide a defense and indemnity BCBST in litigation between BCBST and Guardsmark, Inc. ("Guardsmark"). That underlying litigation arose from BCBST's role as a third-party administrator for a medical plan issued by Guardsmark for a period of time prior to November 1, 1999, when Guardsmark terminated the relationship. (BCS's 56.1 Resp. ¶ 8.) In February 2001, Guardsmark filed a Complaint against BCBST, Guardsmark, Inc. v. BlueCross BlueShield of Tennessee, No. 01-2117 M/A (W.D.Tenn.), alleging that BCBST negligently administered Guardsmark's medical plan. (Id. 119-10; BCBST's 56.1 ¶ 9.) A trial commenced on March 22, 2004, and the dispute was ultimately settled on May 12, 2004. (BCS's 56.1 Resp. ¶ 11.)

By letters dated February 20, 2004; June 18, 2004; and July 22, 2004, BCBST submitted a claim to BCS under the Policy, demanding reimbursements for the combined cost of its defense against Guardsmark and the settlement amount, less a $250,000 deductible. (BCS's 56.1 Resp. ¶ 15.) BCS denied liability under the Policy for any portion of this claim. (Id. ¶ 16.) Because BCS has refused to reimburse BCBST for the costs of its defense against and settlement with Guardsmark, BCBST seeks to recover as damages $3,363,018.60 for BCS's alleged breach of contract, plus prejudgment interest; statutory damages under Tennessee Code § 56-7-105 for BCS's alleged bad faith refusal to pay; and certain attorneys' fees. (Compl.¶ 41.)

B. The Arbitration Proceedings

In this action, BCS seeks to compel arbitration of the parties' coverage dispute based on the terms of the Policy. The Policy contains an arbitration clause providing for arbitration of "[a]ny controversy arising out of or related to this Policy," which is to be conducted by a three-person panel. (Policy, at BCS 008204-05, Ex. 1 to Compl.) That arbitration is to be self-administered: the parties agree to follow the rules of the American Arbitration Association ("AAA") but decline to submit to the AAA's authority or jurisdiction. (Id.) Each arbitrator must be a current or former executive of a Blue Cross or Blue Shield Plan, and none may be a current or former officer or employee of either BCBST or BCS. (Id.) To create the arbitration panel, each party appoints one arbitrator. (Id. at 008204-05) The two party-appointed arbitrators then select a third arbitrator, who chairs the arbitration panel. (Id.) If the two arbitrators cannot agree on a chairperson for the panel, the Chief Judge of the local federal district court appoints the third arbitrator. (Id.) Arbitration takes place in Chicago, Illinois, unless the parties agree otherwise. (Id.)

On October 18, 2004, BCBST invoked the Policy's arbitration clause and filed a Demand for Arbitration with the AAA. (Letter from Houseal to BCS Ins. Co. of Oct. 18, 2004, Ex. 1 to Petition to Compel Arb. ("BCS Petition").) By a letter dated October 18, 2004, BCBST designated Joseph DuBray as its party-appointed arbitrator. (Id.) Mr. DuBray is General Counsel of Wellmark, Inc. ("Wellmark"), the Blue Cross Blue Shield licensed plan for the State of Iowa. (BCBST's 56.1 Reply ¶ 10.) According to BCS, at the time, Wellmark and BCS were opponents in a legal proceeding. (BCS's 56.1 ¶ 11.) BCS challenged Mr. DuBray as non-neutral, and BCBST appointed a new arbitrator — Michele Calandro, the General Counsel for Blue Cross Blue Shield of Louisiana ("BCBSLA") — in December 2004. (BCS's 56.1 Resp. ¶¶ 18-19; BCBST's 56.1 Reply ¶ 13.) BCS designated Elia Germani, a former executive of Blue Cross Blue Shield of Rhode Island, as its party-appointed arbitrator. (BCS's 56.1 Resp. ¶ 20; BCBST's 56.1 Reply ¶ 25.) In January 2005, Ms. Calandro and Mr. Germani appointed Edward Kane as the third arbitrator and chairperson of the panel. (Id. ¶ 21.)

With the arbitrators empaneled, the parties proceeded with the arbitration process. On May 23, 2005, the parties agreed to a scheduling order, which was submitted to the arbitration panel for approval. (Id. ¶ 22.) In April 2006, the parties agreed to an amended scheduling order, which was also submitted to the arbitration panel for approval. (Id. ¶ 25.) For reasons not apparent in the record, the panel never acted on either proposed scheduling order. (Id. ¶¶ 23, 26.) Nevertheless, BCBST submitted its Statement of Claim on June 20, 2005, and BCS filed its response on July 15, 2005. (BCS's 56.1 Resp. ¶ 24.) BCBST issued information requests, and BCS responded to those requests. (BCBST's 56.1 Reply ¶ 3.) BCS served BCBST with requests to produce, and BCBST produced documents in response. (Id. ¶ 4.) During the week of May 2, 2006, BCBST deposed five BCS witnesses, including BCS President and CEO Daniel Ryan. (Id. ¶ 5.) BCS also attempted to schedule depositions of BCBST witnesses, but BCBST objected to BCS's request. (Id. ¶ 6.) Before depositions of any BCBST witnesses could occur, on June 4, 2006, BCBST proposed a thirty-day moratorium on the arbitration proceedings so that BCS and BCBST could engage in a settlement conference. (Id. ¶ 7.) This settlement conference failed. (Id. ¶ 8.) On August 8, 2006, BCBST sent BCS a proposed Third Amended Scheduling Order, which contemplated a final hearing in July 2007. (Id.)

C. Complications with the Arbitration Panel Prompt this Litigation

After this point, problems arose with the composition of the arbitration panel. In a letter dated October 12, 2006, BCS notified BCBST that "there has been a change in circumstances that we believe requires the withdrawal of Michele Calandro as an arbitrator in this matter." (Letter from Hackett to Schwartz of Oct. 12, 2006, Ex. 3 to BCS Petition.) Specifically, BCS noted that Ms. Calandro was General Counsel for BCBSLA, which had retained joint counsel with BCBST in lawsuits referred to by the parties as the Solomon and Thomas matters. (ld.)² In the Solomon and Thomas matters, BCBSLA and BCBST seek coverage from BCS. (Westermeyer Aff. ¶ 15, Ex. 1 to Reply in Supp. of BCS Ins. Co.'s Mot. To Compel Arb., Stay and Dismiss ("BCS Reply").) Through this joint counsel, BCBSLA and BCBST have also threatened to bring allegations of bad faith against BCS. (Letter from Hackett to Schwartz of Oct. 12, 2006, Ex. 3 to BCS Petition.) BCS therefore objected that "BCBSLA's adversity to [BCS] and its simultaneous alliance with [BCBST] in a coverage dispute claiming that [BCS] is acting in bad faith means that Ms. Calandro is no longer impartial and independent under ... the AAA's Commercial Arbitration Rules and Mediation Procedures ...." (Id.)

BCS never received a response to the October 12 letter. (Letter from Pearlman to Calandro of Dec. 11, 2006, Ex. 4 to BCS Petition.) BCS sent an email dated December 11, 2006, directly to Ms. Calandro, requesting that she withdraw as an arbitrator.³ (Id.) Ms. Calandro voluntarily withdrew as an arbitrator four days later. (Letter from Calandro to Pearlman of Dec. 15, 2006, Ex. 6 to BCS Petition.) BCBST has not replaced Ms. Calandro with another arbitrator. (BCBST's 56.1 Reply ¶ 18.) In the interim, by an email dated October 18, 2006, Mr. Kane withdrew as an arbitrator and chairperson of the arbitrator panel. (Email from Kane to Calandro et al. of Oct. 18, 2006, Ex. 2 to BCS Petition.) Neither party has offered any reason for Mr. Kane's withdrawal. Thus, Mr. Germani is currently the only arbitrator on the panel.

On November 20, 2006, BCBST filed claims against BCS in the Western District of Tennessee for breach of contract, bad faith refusal to pay, and a declaratory judgment that the...