Southern United Fire Ins. Co. v. Knight, 1971559.

Decision Date02 April 1999
Docket NumberNo. 1971559.,1971559.
Citation736 So.2d 582
CourtAlabama Supreme Court

Marda W. Sydnor and Dorothy A. Powell of Parsons, Lee & Juliano, P.C., Birmingham, for appellant.

Chuck Hunter, Birmingham, for appellee.

HOUSTON, Justice.

Southern United Fire Insurance Company ("Southern United"), the defendant in an action pending in the Jefferson Circuit Court, appeals from the denial of its motion to compel arbitration of the various tort and contract claims filed against it by the plaintiff, Darron L. Knight. In denying the motion, the circuit court entered an order "dissolving [the] arbitration requirement." We affirm.

Knight purchased an automobile insurance policy from Southern United. After a dispute arose over the terms of coverage under that policy, Knight sued Southern United, seeking damages based on allegations of, among other things, fraud, breach of contract, intentional infliction of emotional distress, and bad-faith failure to pay an insurance claim. Southern United moved to compel arbitration, based on two broad arbitration provisions—one that appeared in the application Knight had signed and one that appeared in the policy that was later issued.1 The arbitration provision in the application appeared immediately above Knight's signature, in bold type larger than some of the other type on the application; that provision was incorporated by reference into the policy. (For purposes of this opinion, the two provisions will sometimes be referred to in the singular.)

Knight responded to Southern United's motion by contending that he never agreed to arbitrate; he challenged the enforceability of the arbitration provision on various specific grounds, including fraudulent inducement and unconscionability. The trial court based its ruling on certain "ambiguities" that, it concluded, existed in the policy. Specifically, the trial court stated that the policy's requirement that disputes concerning the amount of a covered loss be resolved by a panel of appraisers was irreconcilably at odds with the arbitration provision. The trial court also concluded that the arbitration provision was unenforceable for lack of mutual assent, because there were no specific references in the provision to the "cost of an arbitrator's services."

After carefully reviewing the record and the briefs, we conclude that the trial court's order is due to be affirmed, but not for the reasons stated by the trial court.2 It is well settled that this Court can affirm a judgment on any valid ground supported by the record. See Smith v. Equifax Services, Inc., 537 So.2d 463 (Ala. 1988).

The Federal Arbitration Act ("FAA"), 9 U.S.C. § 1 et seq., preempts contrary state law (specifically, contrary law based on Ala.Code 1975, § 8-1-41(3) and public policy) and renders enforceable a written predispute arbitration agreement but only if that agreement appears in a contract evidencing a transaction that "involves" interstate commerce. Jim Burke Automotive, Inc. v. Beavers, 674 So.2d 1260 (Ala.1995); Lopez v. Home Buyers Warranty Corp., 670 So.2d 35 (Ala.1995). This Court has held that even an intrastate transaction "involves" interstate commerce if it has a substantial effect on the generation of goods or services for interstate markets and their distribution to the consumer. See Delta Construction Corp. v. Gooden, 714 So.2d 975 (Ala.1998), citing Hurst v. Tony Moore Imports, Inc., 699 So.2d 1249 (Ala.1997). Unquestionably, insurance transactions that stretch across state lines or intrastate insurance transactions that otherwise have the requisite (substantial) effect on interstate commerce constitute "Commerce among the several States," so as to make them subject to regulation by Congress under the Commerce Clause of the United States Constitution. See United States v. South-Eastern Underwriters Ass'n, 322 U.S. 533, 64 S.Ct. 1162, 88 L.Ed. 1440 (1944); Mutual Assurance, Inc. v. Wilson, 716 So.2d 1160 (Ala.1998); United States v. Lopez, 514 U.S. 549, 115 S.Ct. 1624, 131 L.Ed.2d 626 (1995). The party seeking to compel arbitration has the burden of proving the existence of a contract calling for arbitration and proving that that contract evidences a transaction affecting interstate commerce. Jim Burke Automotive, Inc. v. Beavers, supra. The dispositive issue, as we see it, is whether Southern United carried its burden of proving that Knight's purchase of the insurance policy substantially affected interstate commerce.

Knight alleges in his complaint that he is a resident of Jefferson County; however, no evidence in the record indicates where Knight resides or where he was residing when he purchased the policy. Southern United's address, as shown on Knight's policy, is "P. 0. Box 190429, Mobile, Alabama 36619." This suggests that Southern United is an Alabama corporation. Knight argues that he is an Alabama resident and that he bought the insurance policy in Alabama from an Alabama corporation to cover his pickup truck for personal use. The trial court stated in its order that the policy was issued out of Mobile. On the other hand, Southern United argues that the policy issued to Knight "involves" interstate commerce because the policy's coverage territory included other states and because the policy applied to an accident or loss involving an insured automobile while it was being transported between ports within the coverage territory. The policy does state that the coverage territory extends beyond the borders of Alabama and that an insured automobile is protected against a loss occurring while it is being transported between ports in the coverage territory, which, according to the policy, includes the "United States, its territories or possessions, Puerto Rico, and Canada."

However, if what Knight argues is true, we fail to see how his purchase of a personal automobile policy in Alabama from an Alabama insurance company had a substantial effect on interstate commerce. We note that the policy did not cover an automobile used for business purposes, other than farming or ranching, and that there is no evidence that Knight was engaged in either farming or ranching. We can see only one conceivable connection between this insurance transaction and interstate commerce—this intrastate transaction may be one of many such transactions that help fund Southern United's business, thus enabling it to issue other policies that substantially affect interstate commerce. However, we decline to hold, based on the record before us, that such a tenuous connection would be sufficient to invoke the FAA. See United States v. Lopez, supra (recognizing that there is an outer limit to Congress's power under the Commerce Clause).

Southern United had the burden of proving that Knight's purchase of the policy had a substantial effect on the generation of goods or services for an interstate market and their distribution to the consumer. Because the record does not indicate that Southern United met that burden, we must affirm the trial court's order; we affirm it on the ground that the FAA is not applicable, and, therefore, that federal law has not preempted state law barring specific enforcement of a predispute agreement to arbitrate, § 8-1-41(3), Ala.Code 1975.



SEE, J., concurs specially.

COOK, J., concurs in the result.

HOOPER, C. J., and MADDOX, J., dissent.

SEE, Justice (concurring specially).

I concur with the majority's holding that Southern United Fire Insurance Company ("Southern United") failed to establish that its sale of an insurance policy to Darron Knight had a substantial effect on interstate commerce. I write specially, however, to emphasize the limited nature of this holding.

"[A]s a threshold matter ..., for the FAA [Federal Arbitration Act] to apply, the party seeking to compel FAA arbitration must show the existence of a written agreement that contains an arbitration clause and affects interstate commerce." Harrison v. Nissan Motor Corp., 111 F.3d 343, 348 n. 8 (3d Cir.1997). Although the effects on interstate commerce must be substantial, see United States v. Lopez, 514 U.S. 549, 558-59, 115 S.Ct. 1624, 131 L.Ed.2d 626 (1995) ("We conclude, consistent with the great weight of our case law, that the proper test requires an analysis of whether the regulated activity `substantially affects' interstate commerce."), those effects can be considered in the aggregate. See Wickard v. Filburn, 317 U.S. 111, 128, 63 S.Ct. 82, 87 L.Ed. 122 (1942).

This case concerns a local company selling an insurance policy to a local consumer. Southern United does not assert that this transaction has any interstate characteristics other than the coverage area of this one policy.3 Southern United argues, without citing authority, that this insurance policy affects interstate commerce, and it makes this argument solely on the basis that the policy provides for the coverage of Knight if he travels outside the State of Alabama. Southern United does not, however, allege that Knight has traveled outside the State or that he ever will. Southern United does not even allege that it has any other policyholders whose premiums or activities could in the aggregate substantially affect interstate commerce.4 Based on the limited facts before this Court,5 I cannot conclude that the issuance of this insurance policy by an Alabama company to a single Alabama consumer evidences the requisite substantial effect on interstate commerce necessary to implicate the Federal Arbitration Act. Therefore, I agree with the majority's decision to uphold the trial court's denial of the motion to compel arbitration because Southern United failed to establish that the sale of the insurance policy substantially affected interstate commerce.

MADDOX, Justice (dissenting).

On the question of the interstate nature of the transaction involved here, the...

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