Boghos v. Certain Underwriters at Lloyd's

• Decision Date: 18 July 2005
• Docket Number: No. S117735.,S117735.
• Citation: 115 P.3d 68,36 Cal.4th 495,30 Cal.Rptr.3d 787
• Parties: Antone BOGHOS, Plaintiff and Respondent, v. CERTAIN UNDERWRITERS AT LLOYD'S OF LONDON, et al., Defendants and Appellants.
• Court: California Supreme Court

30 Cal.Rptr.3d 787

36 Cal.4th 495

115 P.3d 68

Antone BOGHOS, Plaintiff and Respondent, v. CERTAIN UNDERWRITERS AT LLOYD'S OF LONDON, et al., Defendants and Appellants.

No. S117735.

Supreme Court of California.

July 18, 2005.

LeBoeuf, Lamb, Greene & MacRae, Dean Hansell, Sharon C. Corda and Jared M. Katz, Los Angeles, for Defendants and Appellants.

Hancock Rothert & Bunshoft, Paul J. Killion and Leslie Kurshan, San Francisco, for Unionamerica Insurance Company as Amicus Curiae on behalf of Defendants and Appellants.

Fred J. Hiestand for The Civil Justice Association of California as Amicus Curiae on behalf of Defendants and Appellants.

Bohn & Bohn, Robert H. Bohn; Trial Lawyers for Public Justice, Michael J. Quirk, Walnut Creek, F. Paul Bland, Jr., and Kate Gordon for Plaintiff and Respondent.

Robinson, Calcagnie & Robinson and Sharon J. Arkin, Newport Beach, for Consumer Attorneys of California as Amicus Curiae on behalf of Plaintiff and Respondent.

Public Citizen Litigation Group, Scott L. Nelson, Brian Wolfman; Kasdan, Simonds, Riley & Vaughan and Vance C. Simonds, Irvine, for Public Citizen, Inc., as Amicus Curiae on behalf of Plaintiff and Respondent.

Deborah Zuckerman, Michael Schuster; Kemnitzer, Anderson, Barron & Ogilvie and Nancy Barron, San Francisco, for AARP and The National Association of Consumer Advocates as Amicus Curiae on behalf of Plaintiff and Respondent.

WERDEGAR, J.

This case presents issues concerning the effect and enforceability of an arbitration clause in a contract of disability insurance. The lower courts refused to compel arbitration of contract and tort claims brought by the insured against the insurer after the latter ceased paying benefits. We reverse and remand for further proceedings.

I. Background

Antone Boghos owned a plumbing business. In September 1998, he applied to a Los Angeles insurance broker for disability insurance underwritten by Certain Underwriters at Lloyd's of London (hereafter the Underwriters). Boghos requested and the Underwriters eventually granted coverage for monthly payments of up to $10,000 for up to 60 months in the event Boghos, because of accident or sickness, became unable to perform the material and substantial duties of his occupation. An endorsement to the policy defined those duties as "administrative and executive duties only." Another endorsement excluded from coverage "any disease or disorder or condition(s) due to or arising from the lumbar sacral back and adjacent and related structures." In his application, Boghos represented that he had earned $176,080 from his business in the prior year. Boghos signed both pages of the two-page application, thereby acknowledging his understanding and agreement that "any dispute concerning this insurance must be submitted to binding arbitration. . . ."¹

The policy became effective on January 8, 1999. It contained the following arbitration clause, printed bold: "BINDING ARBITRATION: Not withstanding [sic] any other item setforth [sic]² herein, the parties hereby agree that any dispute which arises shall be settled in Binding Arbitration. By agreeing to Binding Arbitration, all parties acknowledge and agree that they waive their right to a trial by jury. Binding Arbitration will be held before a neutral arbitrator who will be agreed to by all parties. If the parties cannot agree as to the arbitrator, or believe that a single arbitrator cannot adequately settle the dispute, then an arbitration panel made up of three arbitrators shall be formed. One arbitrator shall be appointed by Us. The second arbitrator shall be appointed by You. The third arbitrator shall be agreed by the two appointed arbitrators. The venue shall be in Los Angeles County or at another location if agreed by all parties. The arbitration will be governed by the commercial arbitration rules of the American Arbitration Association. Costs for the arbitration shall be equally split among the parties."

The policy also included, as part of Lloyd's standard form "Certificate of Insurance," a "Service of Suit Clause." As relevant here, the clause provides: "Service of Suit Clause. In the event of the failure of Underwriters to pay any amount claimed to be due under the insurance described herein, Underwriters have agreed that, at the request of Assured (or Reinsured) they will submit to the jurisdiction of a court of competent jurisdiction within the United States. Nothing in this clause constitutes or should be understood to constitute a waiver of Underwriters' rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another Court as permitted by the laws of the United States or of any State in the United States. In any suit instituted against any one of them upon the insurance described herein, Underwriters have agreed to abide by the final decision of such Court or of any Appellate Court in the event of an appeal."

In November 2001, Boghos sued the Underwriters for ceasing to pay benefits under the policy. In his complaint, Boghos alleged that he received, in May 2000, "a traumatic blow to the back of his head, neck and buttocks which caused him to lose consciousness. As a result of the incapacitating injuries [Boghos] suffered during the accident," his complaint continued, "he has been unable to return to work since the accident." In a subsequent declaration, Boghos further described his continuing injuries as "constant vertigo and headaches, causing [him] to lose thirty-five pounds from constant vomiting," requiring him to take prescription drugs, and leaving him "unable to concentrate and to be active enough to pursue" his administrative and executive duties. At some unspecified point thereafter, the Underwriters apparently began to pay disability benefits. In December 2000, however, Boghos received a letter from the Underwriters refusing to continue paying. In his complaint, Boghos alleged claims for breach of contract, breach of the covenant of good faith and fair dealing, and intentional infliction of emotional distress.

The Underwriters moved to compel arbitration of all claims. The trial court denied the petition, holding among other things that the policy's service of suit clause conflicted with the arbitration clause and that any ambiguity between the two should be resolved in Boghos's favor by refusing to compel arbitration. The Court of Appeal affirmed, adding its own conclusion that the arbitration clause was unenforceable under decisions of this court holding that persons who have agreed to arbitrate rights based on statute cannot be required to pay costs they would not have to pay if suing in court. (See Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 99 Cal.Rptr.2d 745, 6 P.3d 669 (Armendariz) and Little v Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, 130 Cal.Rptr.2d 892, 63 P.3d 979 (Little).) We granted the Underwriters' petition for review.

II. Discussion

A. The Arbitration and Service of Suit Clauses

The lower courts, as mentioned, concluded the policy's arbitration and service of suit clauses conflicted, thereby creating an ambiguity that had to be resolved in favor of the insured. We conclude the lower courts erred.

Our goal in construing insurance contracts, as with contracts generally, is to give effect to the parties' mutual intentions. (Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1264, 10 Cal.Rptr.2d 538, 833 P.2d 545; see Civ.Code, § 1636.) "If contractual language is clear and explicit, it governs." (Bank of the West, at p. 1264, 10 Cal.Rptr.2d 538, 833 P.2d 545; see Civ.Code, § 1638.) If the terms are ambiguous, we interpret them to protect "`the objectively reasonable expectations of the insured.'" (Bank of the West, at p. 1265, 10 Cal.Rptr.2d 538, 833 P.2d 545, quoting AIU Ins. Co. v. Superior Court (1990) 51 Cal.3d 807, 822, 274 Cal.Rptr. 820, 799 P.2d 1253.) Only if these rules do not resolve a claimed ambiguity do we resort to the rule that ambiguities are to be resolved against the insurer. (Bank of the West, at p. 1264, 10 Cal.Rptr.2d 538, 833 P.2d 545.)

When a party to an arbitration agreement challenges the agreement as unenforceable, we decide the issue based on the same state law standards that apply to contracts generally. (Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 971-972, 64 Cal.Rptr.2d 843, 938 P.2d 903.) The United States Arbitration Act (9 U.S.C. § 1 et seq.), commonly known as the Federal Arbitration Act (hereafter FAA), creates a presumption in favor of arbitrability (Engalla v. Permanente Medical Group, Inc., supra, at p. 971, 64 Cal.Rptr.2d 843, 938 P.2d 903; see 9 U.S.C. § 2) and permits courts to refuse to enforce agreements to arbitrate only "upon such grounds as exist at law or in equity for the revocation of any contract" (9 U.S.C. § 2). Similarly, title 9 of the Code of Civil Procedure (§ 1280 et seq.) expresses a strong public policy favoring the enforcement of valid agreements to arbitrate. (Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 9, 10 Cal.Rptr.2d 183, 832 P.2d 899.)

In a typical service of suit clause, one or more parties agree to submit to the jurisdiction of courts for designated purposes related to the contract in which the clause appears. Here, the Underwriters have agreed, "[i]n the event of [their] failure . . . to pay any amount claimed to be due under the [policy]," and "at the request of Assured," to "submit to the jurisdiction of a court of competent jurisdiction within the United States."

Courts in other jurisdictions have generally enforced arbitration clauses in contracts, including insurance contracts, that have also included service of suit clauses, rejecting the argument that consent to service creates an ambiguity or waives the right to compel arbitration. These courts have reasoned that the two clauses do not conflict because the service of suit...