Mandatory Arbitration Clause Stands Firm

February 6, 2017 / Writing and Speaking

By Don R. Sampen, published, Chicago Daily Law Bulletin
[January 24, 2017]

The 1st District Appellate Court held that an insurer’s claims for fraud and breach of contract against the marketer of one of its insurance products were subject to arbitration. The court so held despite the failure of the marketer to demand arbitration within the one-year time period set forth in the marketing agreement. Guarantee Trust Life Insurance Co. v. Platinum Supplemental Insurance, Inc., 2016 IL App (1st) 161612 (Dec. 9, 2016).

The insurer, Guarantee Trust was represented by Reed Smith LLP. Kirkland & Ellis LLP represented the marketing firm’s president, Wayne Briggs.

Guarantee Trust and Platinum entered into a contract in 2002 providing for the exclusive marketing and sale by Platinum of a long-term care insurance product to be underwritten by Guarantee Trust.

Pursuant to the contract, through mid-2015, based on applications procured by Platinum, Guarantee Trust issued more than 186,000 policies and paid Platinum more than $226 million in commissions and other compensation.

The contract contained a “mandatory binding arbitration” provision requiring that all disputes arising out of or related to the contract be subject to arbitration under American Arbitration Association rules. The same provision stated that “[e]ither party may within one year from the date of the alleged breach or occurrence resulting in the dispute” make a demand for arbitration by mail.

In 2012, a Colorado purchaser of one of the policies brought suit against Guarantee Trust, Platinum and an independent solicitor, alleging bad faith, breach of contract and related claims for denial of coverage under the purchaser’s policy. During that litigation, Guarantee Trust learned that Platinum had violated the contract in various ways, including by not adequately training or supervising its employees and using marketing materials not approved by Guarantee Trust.

The Colorado lawsuit resulted in a judgment against Guarantee Trust for $1.9 million, which Guarantee Trust appealed. In the meantime, Guarantee Trust demanded that Platinum indemnify Guarantee Trust pursuant to a contractual indemnification provision in the parties’ contract.

In 2015, Guarantee Trust brought the current action seeking rescission and alleging fraud, breach of fiduciary duty and breach of contract against both Platinum and its president and signatory to the contract, Briggs.

Platinum and Briggs subsequently filed a motion to stay and compel arbitration, based on the arbitration provision in the contract. Guarantee Trust responded by arguing that the demand was beyond the one-year period provided for such demands.

It further argued that Briggs was not entitled to arbitrate because he was not a party to the contract and signed only as Platinum’s agent.

The trial court granted an order compelling arbitration between Guarantee Trust and Platinum, but it declined to compel arbitration between Guarantee Trust and Briggs. The court nonetheless stayed Guarantee Trust’s claims against Briggs pending the outcome of the arbitration. Guarantee Trust and Briggs both took an appeal as of right pursuant to Illinois Supreme Court Rule 307(a).

Analysis

In an opinion by Justice Mary K. Rochford, the 1st District affirmed. She initially observed that the court reviews orders to compel arbitration de novo if, as this order was, entered without an evidentiary hearing. She further observed that the arbitration provision in the contract here, which required the arbitration of disputes “related” to the contract, would be broadly construed.

Rochford then turned to the one-year time limitation language. Construing the entire arbitration provision as a whole, she said that the parties had agreed to make arbitration mandatory with respect to all disputes. No relevant provision in the contract, moreover, contemplated the resolution of disputes by any means other than arbitration.

She further said that, to read the one-year limitation language as authorizing court litigation “when no party has made an arbitration demand within one year” of the breach, would “in effect, be making a new contract” by supplying language “not present in the contract.”

Accordingly, it was “clear” to Rochford that Guarantee Trust’s claims against Platinum had to be arbitrated. She did not state what effect of the one-year limitation was on the dispute.

She also addressed Briggs’ argument that, as an agent of Platinum, he too should be allowed to compel arbitration of Guarantee Trust’s claims against him. Rochford disagreed, stating that he did not sign the contract containing the arbitration provision in his individual capacity. She also noted that the 1st District had rejected the “agency” exception to the rule that only parties can enforce arbitration agreements.

Rochford did, however, agree with Briggs that Guarantee Trust’s claims against him were properly stayed. She said the stay was warranted because of the overlap of issues with Guarantee Trust’s claims against Platinum, which were subject to arbitration. The stay was warranted because the disposition of those claims could make further litigation against Briggs unnecessary.

Justice Thomas E. Hoffman specially concurred stating that, in his view, Guarantee Trust’s reliance on the one-year limitation language in the agreement went to a matter of “procedural arbitrability,” which was for the arbitrator to decide.

Key point

Where an agreement contains an arbitration provision broadly mandating the arbitration of all disputes related to the agreement, and not otherwise providing for court litigation, language allowing a party to make an arbitration demand within one year of the breach or occurrence does not authorize court litigation if the demand is not made within a year.

  • Chicago

    Illinois 60603

    10 South LaSalle Street Chicago, Illinois 60603

    T: 312.855.1010 TF: 800.826.3505 F: 312.606.7777 Office Managing Partner: Dennis D. Fitzpatrick

  • New York

    New York 10005

    28 Liberty Street 39th Floor New York, New York 10005

    T: 212.805.3900 TF: 800.826.3505 F: 212.805.3939 Office Managing Partner: Tyler Jay Lory

  • Irvine

    California 92614

    17901 Von Karman Avenue Suite 650 Irvine, California 92614

    T: 949.260.3100 TF: 800.826.3505 F: 949.260.3190 Office Managing Partner: Ian R. Feldman

  • Florham Park

    New Jersey 07932

    100 Campus Drive Florham Park, New Jersey 07932

    T: 973.410.4130 TF: 800.826.3505 F: 973.410.4169 Office Managing Partner: Carl M. Perri

  • Michigan City

    Indiana 46360

    200 Commerce Square Michigan City, Indiana 46360

    T: 219.262.6106 TF: 800.826.3505 F: 312.606.7777 Office Managing Partners: Paige M. Neel, Kimbley A. Kearney

  • Appleton

    Wisconsin 54914

    4650 W. Spencer Street Appleton, Wisconsin 54914

    T: 920.560.4658 TF: 800.826.3505 F: 920.968.4650 Office Managing Partner: Patrick L. Breen