State Farm Gen. Ins. Co. v. Watts Regulator Co., B271236

• Decision Date: 30 November 2017
• Docket Number: B271236
• Citation: 226 Cal.Rptr.3d 691,17 Cal.App.5th 1093
• Court: California Court of Appeals Court of Appeals
• Parties: STATE FARM GENERAL INSURANCE COMPANY, Plaintiff and Respondent, v. WATTS REGULATOR CO., Defendant and Appellant.

17 Cal.App.5th 1093

226 Cal.Rptr.3d 691

STATE FARM GENERAL INSURANCE COMPANY, Plaintiff and Respondent,

v.WATTS REGULATOR CO., Defendant and Appellant.

B271236

Court of Appeal, Second District, Division 8, California.

Filed November 30, 2017

Lewis Brisbois Bisgaard & Smith, Karl R. Loureiro and William E. Pallares, Los Angeles, for Defendant and Appellant.

Grotefeld, Hoffmann, Schleiter, Gordon, Ochoa & Evinger, Todd C. Harshman, San Francisco; Grotefeld Hoffman and Daniel Berglund for Plaintiff and Respondent.

GRIMES, J.

SUMMARY

A nonprofit organization (Arbitration Forums, Inc. or AF) provides arbitration services for insurers and self-insured companies who become members of AF by signing its "Property Subrogation Arbitration Agreement" (the AF arbitration agreement). Plaintiff State Farm General Insurance Company and defendant Watts Regulator Company are members of AF that signed the AF arbitration agreement many years ago. After notice to its members in November 2014, AF changed the AF arbitration agreement, effective January 1, 2015, to exclude product liability claims from the kinds of claims subject to compulsory arbitration under the agreement.

A few months later, plaintiff filed this lawsuit, alleging subrogated product liability claims against defendant arising from a loss that occurred in November 2012. Defendant filed a motion to compel arbitration, contending it had a vested right, under the AF arbitration agreement in effect before January 1, 2015, to compulsory arbitration of the claim.

We find no basis for any vested right to arbitration under the circumstances of this case, where the parties have agreed to be bound by contractual terms and rules determined by a third party. We therefore affirm the trial court's denial of defendant's motion to compel arbitration.

FACTS

Plaintiff and defendant became signatories to the AF arbitration agreement, independently of each other, some years before November 28, 2012, when a water loss damaged the home of one of plaintiff's insureds. The damage is alleged to have been caused by a defect in a supply line manufactured by defendant.

The original AF arbitration agreement

At the time of the November 2012 water damage, the relevant provisions of the AF arbitration agreement were these:

Article First (headed "Compulsory Provisions") stated: "Signatory companies must forego litigation and submit any personal, commercial, or self-insured property subrogation claims to Arbitration Forums, Inc."

Article Second contained eight exclusions from the compulsory arbitration requirement. When plaintiff and defendant became signatories, and at the time of the loss in November 2012, none of the eight listed exclusions applied to the claim at issue in this case.

Article Fifth described "AF's Function and Authority." Among other matters, it stated that: "AF, representing the signatory companies, is authorized to: [¶] (a) make appropriate Rules and Regulations for the presentation and determination of controversies under this Agreement ...." AF was also authorized to "(e) invite other insurance carriers, noninsurers, or self-insureds to participate in this arbitration program, and compel the withdrawal of any signatory for failure to conform to the Agreement or the Rules issued thereunder."

Article Sixth governed withdrawals from the agreement. It provided: "Any signatory company may withdraw from this Agreement by notice in writing to AF. Such withdrawal will become effective sixty (60) days after receipt of such notice except as to cases then pending before arbitration panels. The effective date of withdrawal as to such pending cases shall be upon final compliance with the finding of the arbitration panel on those cases."

The revised AF arbitration agreement

In November 2014, AF issued an e-bulletin, advising its members that, effective January 1, 2015, AF would change its Property Subrogation Arbitration Agreement to exclude product liability claims from compulsory arbitration. Effective January 1, 2015, the change was: "No company shall be required, without its written consent, to arbitrate any claim or suit if: (i) it is a product liability claim arising from an alleged defective product."

The November 2014 e-bulletin further advised members that, while arbitration of product liability claims would no longer be compulsory as of January 1, 2015, "cases filed prior to January 1, 2015, will remain in arbitration's jurisdiction and will be processed to hearing. [¶] Parties may still consent to use the Property Program to resolve product liability claims on a per-case basis on and after January 1, 2015."

Neither plaintiff nor defendant withdrew from the AF arbitration agreement.

On March 26, 2015, plaintiff filed a complaint in the superior court against defendant seeking subrogation for plaintiff's payments to its insured in connection with the November 28, 2012, water damage to his home. The complaint alleged causes of action for negligence, strict products liability and breach of implied warranties. Plaintiff did not submit these claims to AF for arbitration at any time before suit was filed.

On July 22, 2015, defendant filed a motion to compel arbitration, asserting that plaintiff's claims were, at the time the claims arose, subject to the AF arbitration agreement that each of them had signed.

In its opposition to the motion, plaintiff, citing AF's changes to the AF arbitration agreement effective January 1, 2015, contended that arbitration was no longer compulsory.

Defendant's reply to plaintiff's opposition argued that, when the claim at issue arose in November 2012, plaintiff and defendant were parties to a binding contract mandating that the claim be arbitrated, so defendant had a "previously-vested right [to arbitration] unless the parties specifically intended to retroactively terminate their rights." Thus, defendant contended, "the present arbitration agreement, as of January 1, 2015, has no bearing on whether this claim is arbitrable," and instead "the terms of the arbitration agreement applicable at the time the claim arose govern as to whether this matter is subject to arbitration." Further, defendant argued, AF is not a party to the AF arbitration agreement, "and its ‘interpretation’ of the agreement between [defendant] and Plaintiff carries no legal weight."

The trial court denied defendant's motion to compel arbitration. Defendant filed a timely notice of appeal.

DISCUSSION

Defendant contends, in substance, that once plaintiff and defendant had signed on to the AF arbitration agreement, AF could not "unilaterally" amend the terms of that agreement to exclude product liability claims that accrued before the effective date of the amendment. As will appear, we find no merit in this contention.

1. Legal Principles

The governing legal principles are well established. The policy underlying both the California Arbitration Act ( Code Civ. Proc., § 1280 et seq. ) and the Federal Arbitration Act ( 9 U.S.C. § 1 et seq. ) " ‘is to ensure that arbitration agreements will be enforced in accordance with their terms .’ " ( Avery v. Integrated Healthcare Holdings, Inc. (2013) 218 Cal.App.4th 50, 59, 159 Cal.Rptr.3d 444 ( Avery ).) Arbitration is "a matter of contract" and the policy favoring arbitration does not displace the need for a voluntary agreement to arbitrate. ( Ibid. ) "Although the FAA preempts any state law that stands as an obstacle to its objective of enforcing arbitration agreements according to their terms, ... we apply general California contract law to determine whether the parties formed a valid agreement to arbitrate their dispute[.]" ( Id. at pp. 59-60, 159 Cal.Rptr.3d 444, citation omitted.)

"Interpreting a written document to determine whether it is an enforceable arbitration agreement is a question of law subject to de novo review when the parties do not offer conflicting extrinsic evidence regarding the document's meaning." ( Avery, supra, 218 Cal.App.4th at p. 60, 159 Cal.Rptr.3d 444.)

2. This Case

We begin with several pertinent points.

First, this is not an ordinary arbitration agreement, where one party has contracted with another party to resolve disputes arising under their agreement in an arbitral forum rather than in court. In this case, plaintiff and defendant have not contracted with each other directly. Both of them, acting independently and along with many other insurers and self-insured companies, have signed an agreement prepared and promoted by the organization providing the arbitration services that are described in the agreement.

Second, AF places limits on the property subrogation disputes that are subject to compulsory arbitration. These limits appear in Arbitration Forums, Inc. Rules (the AF rules).¹ Thus, for example, the AF rules provide that compulsory arbitration is applicable to a maximum claim amount of $100,000, and the AF rules limit jurisdiction to accidents or losses occurring in the United States, Puerto Rico and the U.S. Virgin Islands. None of these limitations appears in the AF arbitration agreement—only in the AF rules.

Third, as already described, signatories to the AF arbitration agreement authorize AF to make those rules. In Article Fifth, signatories agree that "AF, representing the signatory companies, is authorized to: [¶] (a) make appropriate Rules and Regulations for the presentation and determination of controversies under this Agreement[.]" Defendant says this provision merely "allow[s] AF to make appropriate procedural rules" (italics added) and does not "allow[ ] AF to make rules regarding the provisions of the Arbitration Agreement itself[.]" That is not the case, as demonstrated by the jurisdictional, monetary and geographical limitations that do not appear in the agreement, but do appear in the AF rules. Those rules clearly operate to limit the scope of a signatory's agreement in Article First to submit "any" property subrogation claims to AF. Thus it is plain that signatories are bound by both the AF arbitration agreement and the...