DMS Servs., Inc. v. Superior Court of Los Angeles Cnty.

• Decision Date: 15 May 2012
• Docket Number: No. B235819.,B235819.
• Citation: 2012 Daily Journal D.A.R. 6285,12 Cal. Daily Op. Serv. 5257,205 Cal.App.4th 1346,140 Cal.Rptr.3d 896
• Court: California Court of Appeals Court of Appeals
• Parties: DMS SERVICES, INC. et al., Petitioners, v. The SUPERIOR COURT of Los Angeles County, Respondent;Zurich Services Corp. et al., Real Parties in Interest.

12 Cal. Daily Op. Serv. 5257

140 Cal.Rptr.3d 896

2012 Daily Journal D.A.R. 6285

205 Cal.App.4th 1346

DMS SERVICES, INC. et al., Petitioners,

v.The SUPERIOR COURT of Los Angeles County, Respondent;Zurich Services Corp. et al., Real Parties in Interest.

No. B235819.

Court of Appeal, Second District, Division 7, California.

May 15, 2012.

Roxborough, Pomerance, Nye & Adreani, Woodland Hills, Nicholas P. Roxborough and Joseph C. Gjonola for Petitioners DMS Services, LLC, Diversified Maintenance Services, Inc., DMS Facility Services, LLC and DMS Facility Services, Inc.

Kamala D. Harris, Attorney General, Paul D. Gifford, Senior Assistant Attorney General, William L. Carter and Amy J. Winn, Deputy Attorneys General, for Insurance Commissioner Dave Jones as Amicus Curiae on behalf of Petitioners.

Locke Lord, Los Angeles, Steven T. Whimer, Julie L. Young, and Stephen A. Tuggy, for Real Parties in Interest Zurich Services Corporation, Zurich American Insurance Company and American Zurich Insurance Company.SNR Denton U.S., San Francisco, and Sean McEneaney for American Insurance Association as Amicus Curiae on behalf of Real Parties in Interest.PERLUSS, P. J.

DMS Services, LLC, Diversified Maintenance Services, Inc., DMS Facility Services, LLC and DMS Facility Services, Inc. (collectively DMS) petitioned this court for a writ of mandate seeking to vacate the trial court's order compelling arbitration of its cause of action for breach of contract and related claims against Zurich Services Corporation (ZSC), the third party administrator for DMS's workers' compensation insurance claims, and its cause of action for declaratory relief against Zurich American Insurance Company and American Zurich Insurance Company (collectively Zurich Insurance). The court ordered arbitration of each of those claims based on an arbitration clause in DMS's workers' compensation insurance agreements with Zurich Insurance. Even though ZSC was not a signatory to the insurance agreements, the court concluded ZSC could compel arbitration under the doctrine of equitable estoppel. Because DMS is not an agent or alter ego of Zurich Insurance and its claims against ZSC are not founded upon, or inextricably intertwined with, the insurance agreements containing the arbitration provision, the trial court erred in compelling arbitration of the claims against ZSC under equitable estoppel principles. Accordingly, we grant the petition as to DMS's claims against ZSC. Because DMS's declaratory relief claim against Zurich Insurance was included for protective purposes only, we discharge as improvidently granted the order to show cause directed to the order compelling arbitration of that claim.

FACTUAL AND PROCEDURAL HISTORY

1. DMS's Deductible Agreements with Zurich Insurance

DMS is in the business of providing commercial janitorial services. From 2005 through 2011 DMS annually purchased workers' compensation insurance policies from Zurich Insurance. Those policies did not contain an arbitration clause. However, Zurich Insurance also required DMS to sign annual deductible agreements, which purported to supersede any deductible endorsement to the workers' compensation policies. Those ancillary agreements contained an arbitration provision mandating any dispute arising out of the interpretation, performance or alleged breach of the policy agreement to be settled by binding arbitration in Illinois administered by the American Arbitration Association.

2. DMS's Claims Administration Contract with ZSC

During the same period, that is, from 2005 through 2011, DMS annually contracted with ZSC to act as a third party administrator for workers' compensation claims filed under the Zurich Insurance policies. Among other things, ZSC was responsible for reviewing claims and loss reports; investigating all qualified claims; creating and maintaining claim files; and adjusting, settling or defending claims. None of DMS's agreements with ZSC contained an arbitration clause.

3. Zurich Insurance's Arbitration Demand Seeking Monies Owed Under Policies

In February 2011 Zurich Insurance initiated arbitration proceedings against DMS before the American Arbitration Association (the AAA arbitration) pursuant to the arbitration provision in its deductible agreements with DMS. Zurich sought more than $3.5 million in payment from DMS for premiums and reimbursement of workers' compensation insurance claim deductibles.

On March 18, 2011 DMS filed a request for action with the Department of Insurance seeking an administrative ruling the deductible agreements, including the arbitration provision contained in them, were invalid because they had not been filed with and approved by the Department of Insurance in accordance with Insurance Code section 11658.¹

4. DMS's Action Against ZSC for Breach of the Claims Administration Agreement and Against Zurich Insurance for Declaratory Relief

On March 22, 2011 DMS filed the instant action against ZSC, asserting claims for breach of contract and tortious breach of the implied covenant of good faith and fair dealing. DMS alleged ZSC had breached its obligations as a third party administrator by mishandling claims made against the policies, causing DMS to overpay several claims. Anticipating ZSC's assertion the dispute was subject to the arbitration provision contained in the deductible agreements, DMS's complaint also included a cause of action for declaratory relief against Zurich Insurance seeking a judicial declaration the deductible agreement containing the arbitration provision was invalid because it violated Insurance Code section 11658.²

On April 19, 2011 DMS also filed a separate motion to stay the AAA arbitration pursuant to Code of Civil Procedure section 1281, subdivision (c), arguing that, in light of its lawsuit against ZSC, there was the “possibility of conflicting rulings on common issues of law and fact.”

5. ZSC and Zurich Insurance's Joint Motion To Compel Arbitration

On May 6, 2011 ZSC and Zurich Insurance filed a joint motion to compel arbitration of the instant action or, in the alternative, to stay it pending the outcome of the AAA arbitration between DMS and Zurich Insurance. ZSC argued arbitration was required under the deductible agreement because the action against it arose out of the interpretation of the insurance agreements, including the deductible agreements containing the arbitration provision. As to their motion to stay the action, ZSC and Zurich Insurance argued DMS's defenses in the arbitration—it only owes Zurich Insurance money because ZSC mishandled and mismanaged its workers' compensation claims—also form the basis for DMS's claims against ZSC in the instant litigation and could substantially affect the outcome of this litigation.

6. The Trial Court's Order Compelling Arbitration and Denying the Motion To Stay the AAA Arbitration Between DMS and Zurich Insurance

On August 5, 2011 after a full hearing on the motion to compel arbitration or stay the action, the court granted ZSC and Zurich Insurance's motion to compel arbitration. As to ZSC, the court found, although ZSC was not a party to the arbitration provision in the deductible agreements, and DMS was not suing under those agreements, DMS's claims were nonetheless “inextricably intertwined” with the deductible agreements DMS had signed. Accordingly, under the doctrine of equitable estoppel, the court concluded ZSC could compel arbitration under the deductible agreements even though it was not a signatory to those agreements.

As to Zurich Insurance, the trial court found the declaratory relief action to be within the scope of the arbitration agreement and the question whether the deductible agreement as a whole was invalid under Insurance Code section 11658 was for the arbitrator to decide in the first instance.

The trial court denied DMS's motion to stay the AAA arbitration, finding, in light of its arbitration order, there were no grounds to issue the stay under Code of Civil Procedure section 1281.2.

CONTENTIONS

DMS contends (1) the court erred in finding ZSC could compel arbitration under the doctrine of equitable estoppel; (2) the arbitration agreement is invalid because it was not filed with the Department of Insurance and approved in accordance with Insurance Code section 11658; and (3) the court, not the arbitrator, should determine the validity of the arbitration agreement in the first instance.

DISCUSSION

DMS's Claims Against ZSC

1. Standard of Review

We review the trial court's interpretation of an arbitration agreement de novo when, as here, that interpretation does not depend on conflicting extrinsic evidence. (See Jones v. Jacobson (2011) 195 Cal.App.4th 1, 12, 125 Cal.Rptr.3d 522 [“ ‘[w]hether an arbitration agreement applies to a controversy is a question of law to which the appellate court applies its independent judgment where no conflicting extrinsic evidence in aid of the interpretation was introduced in the trial court’ ”]; JSM Tuscany, LLC v. Superior Court (2011) 193 Cal.App.4th 1222, 1235, 123 Cal.Rptr.3d 429 ( JSM ) [same].) Our de novo review includes the legal determination whether and to what extent nonsignatories to an arbitration agreement can enforce the arbitration clause. ( Molecular Analytical Systems v. Ciphergen Biosystems, Inc. (2010) 186 Cal.App.4th 696, 708, 111 Cal.Rptr.3d 876 ( Molecular Analytical ) [absent conflicting extrinsic evidence, “ ‘[w]hether and to what extent [nonsignatories] can also enforce the arbitration clause is a question of law, which we review de novo’ ”].)

2. Governing Law

There is a strong public policy in favor of arbitration. ( St. Agnes Medical Center v. PacifiCare of California (2003) 31 Cal.4th 1187, 1195, 8 Cal.Rptr.3d 517, 82 P.3d 727 [recognizing strong federal and state public policies favoring arbitration]; Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 9, 10 Cal.Rptr.2d 183, 832 P.2d 899; Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 971–972, 64 Cal.Rptr.2d...