Jackpot Harvesting, Inc. v. Applied Underwriters, Inc.

• Decision Date: 28 March 2019
• Docket Number: H044953
• Court: California Court of Appeals Court of Appeals
• Parties: JACKPOT HARVESTING, INC. et al., Plaintiffs and Respondents, v. APPLIED UNDERWRITERS, INC. et al., Defendants and Appellants.

33 Cal.App.5th 719

245 Cal.Rptr.3d 316

JACKPOT HARVESTING, INC. et al., Plaintiffs and Respondents,

v.APPLIED UNDERWRITERS, INC. et al., Defendants and Appellants.

H044953

Court of Appeal, Sixth District, California.

Filed March 28, 2019

Spencer Y. Kook, Travis Wall, Hinshaw & Culbertson, for Defendants and Appellants.

Larry J. Lichtenegger, Thomas R. Duffy, Duffy Law & Mediation, for Plaintiffs and Respondents.

DANNER, J.

Applied Underwriters, Inc. and two entities associated with it appeal the trial court’s denial of Applied’s motion to compel arbitration. Applied offered workers’ compensation insurance to Jackpot Harvesting, Inc. and two related companies through a number of agreements and documents, one of which contained an arbitration agreement. After its insurance premiums rapidly increased, Jackpot believed that Applied and the two entities had mishandled claims made under the policy and had wrongfully failed to disclose how they calculated insurance premiums. Jackpot filed suit in Monterey County Superior Court.

Applied sought to compel arbitration of the dispute based on the arbitration agreement contained in one of the agreements. Jackpot opposed the motion to compel, arguing that the arbitration agreement was invalid under the California Insurance Code. Applied contended that, pursuant to the Federal Arbitration Act, only the arbitrator could decide the threshold question of whether the arbitration agreement was enforceable, and the trial court did not have the authority to make this determination.

In a written order, the trial court rejected Applied’s arguments and denied Applied’s motion to compel arbitration. The trial court found that it had the authority to determine the validity of the arbitration agreement, and it concluded that the arbitration agreement was invalid under California law. The trial court also declined Applied’s request that the court issue a written statement of decision further explaining the factual and legal basis for its finding that it had the authority to adjudicate the enforceability of the arbitration agreement.

Applied and the two entities associated with it appeal the trial court’s order denying Applied’s motion to compel arbitration and argue that the trial court erred in both its legal conclusions and by failing to issue a statement of decision under Code of Civil Procedure sections 632 and 1291. Finding no error, we affirm the trial court’s order.

I. FACTS AND PROCEDURAL BACKGROUND

Applied Underwriters, Inc. (Applied), Applied Underwriters Captive Risk Assurance Company, Inc. (AUCRA), and California Insurance Company (CIC) (collectively, the Applied Entities) are all indirect subsidiaries of Berkshire Hathaway Inc.¹ The Applied Entities sold a workers’ compensation insurance policy to Jackpot Harvesting, Inc., Blacky Trucking Company, Inc., and L&J Farms (collectively, Jackpot) as part of Applied’s "EquityComp program." As described by Applied, the EquityComp program is "a multi-component loss sensitive workers’ compensation program through which participants can obtain workers’ compensation insurance coverage—which employers must carry as a matter of law in California—while also allowing employers to share in underwriting profits should their claims loss experience turn out favorably."² According to a proposal that Applied provided to Jackpot, the program was the "best long term, cost effective workers’ compensation solution available for middle market insureds in a broad range of industries in all states."

As part of Jackpot’s purchase of the policy, the Applied Entities entered into the following two agreements with Jackpot in late 2013 or early 2014:³ (1) a one-page "Request to Bind Coverages & Services" (Request to Bind), which was essentially an application from Jackpot to Applied for the EquityComp program and (2) a 10-page "Reinsurance Participation Agreement" that set out the "profit sharing" component of the program.⁴

The Request to Bind stated that Jackpot "request[s] that Applied Underwriters, Inc. through its affiliates and/or subsidiaries ... pursuant to the Workers’ Compensation Program Proposal & Rate Quotation ... cause to be issued to [Jackpot] one or more workers’ compensation insurance policies and such other insurance coverages identified in the Proposal ... subject to [Jackpot] executing the following agreements ... (1) Reinsurance Participation Agreement; and where available, (2) Premium Finance Agreement."⁵ The Request to Bind, therefore, required that Jackpot enter into the Reinsurance Participation Agreement as part of its participation in the EquityComp program.

CIC simultaneously issued a "Workers’ Compensation and Employer’s Liability Insurance Policy" to Jackpot (the CIC Policy), which was made effective January 1, 2014; Applied had earlier provided to Jackpot a document called "Workers’ Compensation Program Summary & Scenarios," which provided an overview of the nature and costs of the program.

The parties dispute the relationship among these documents. Jackpot characterizes them as "interrelated agreements," while the Applied Entities refer to them variously as "separate components" of the EquityComp program and "EquityComp program documents." It is undisputed that, of these documents, Applied filed only the CIC Policy with the California Insurance Commissioner.

With respect to dispute resolution, the Request to Bind was the only document that contained an arbitration agreement. The Request to Bind provided, "[Jackpot] understands that Applied engages in alternative dispute resolution of conflicts. [Jackpot] further agrees that any claims, disputes and/or controversies between the parties involving the Proposal or any part thereof (including but not limited to the Agreements and Policies) shall be resolved by alternative dispute resolution and submitted to and determined exclusively by binding arbitration under the Federal Arbitration Act in conformity with the Arbitration Act of the State of Nebraska. Arbitration shall be in accordance with JAMS by a single arbitrator, with the arbitration held in Omaha, Nebraska." The Request to Bind further stated, "The agreement to arbitrate, as set forth above, is enforceable independent of any other agreements and/or policies between Applied, its affiliates and [Jackpot]."

The Reinsurance Participation Agreement did not contain an arbitration agreement. Its forum selection clause instead provided that the contracting party must bring any dispute in either federal court or in Nebraska state court. The Reinsurance Participation Agreement also stated that it "represent[s] the entire understanding and agreement between the Parties with respect to the subject matter hereof and supersedes all prior negotiations, proposals, letters of intent, correspondence and understandings relating to the subject matter hereof."

The CIC Policy also did not contain an arbitration agreement. Instead, the "dispute resolution process" outlined in the CIC Policy described specified circumstances in which the policyholder (i.e., Jackpot) must first send a written "Complaint and Request for Action" to CIC and later, following certain other procedural steps, could appeal to the Insurance Commissioner of the California Department of Insurance. Other than this right to administrative review under specified circumstances, the CIC Policy was silent as to the resolution of disputes.

After entering into the EquityComp program in January 2014, Jackpot became dissatisfied because, in Jackpot’s view, the Applied Entities wrongfully increased policy premiums and mishandled claims made under the policy. Jackpot filed suit in February 2017 in Monterey County Superior Court alleging, among other claims, that the Applied Entities had violated Insurance Code section 11658⁶ by selling an insurance policy in California without having first submitted all of the "collateral agreements"—including the Request to Bind and the Reinsurance Participation Agreement—for regulatory approval. Specifically, Jackpot claimed that the Request to Bind and the Reinsurance Participation Agreement were void because "the Request to Bind alters the dispute resolution provisions of the policies and the [Reinsurance Participation Agreement], among other provisions, alters the payment requirements under the CIC policies," and the Applied Entities had not submitted these agreements for prior regulatory approval, a violation of section 11658. Jackpot also alleged that Applied committed fraud by misrepresenting the Reinsurance Participation Agreement and the EquityComp program, causing Jackpot to incur excessive premiums and unnecessary fees, costs, and expenses.

Applied filed a motion in the trial court to stay the lawsuit and to compel arbitration of all of Jackpot’s claims against Applied based on the arbitration agreement contained in the Request to Bind. Jackpot in turn filed an opposition to Applied’s motion to compel arbitration in which it argued that the arbitration agreement was unenforceable "because it was not filed and approved by the Department of Insurance before being sold to Jackpot," thus violating section 11658 and California Code of Regulations, title 10, section 2268.⁷ Jackpot further argued that section 11658.5, which applies specifically to arbitration, did not preclude a finding by the trial court that the arbitration agreement was unenforceable under California law. Jackpot also contended that the arbitration agreement was unenforceable under Nebraska law.

At the hearing on the motion to compel arbitration, the trial court requested further briefing on the issue of whether Jackpot had made a "discrete challenge to the arbitration clause" in the Request to Bind.⁸ In its supplemental briefing, Jackpot argued that its position that the arbitration agreement in the Request to Bind was invalid was "analytically distinct" from its argument that the Reinsurance Participation Agreement was itself illegal.

The trial court held a second hearing on the motion to...