In Los Angeles Unified Sch. Dist. v. Safety National Casualty Corp. (No. B275597, filed 7/12/17), (“LA Unified”), a California appeals court held that a California state court has the discretion under state law to refuse ordering a bad faith lawsuit to arbitration, despite an arbitration clause in the insurance policy, if the clause does not expressly require application of Federal Arbitration Act (“FAA”) procedure.
In LA Unified, the school district brought a bad faith action against 27 insurers over coverage for claims by hundreds of students for decades of abuse by two of the district’s teachers. The complaint alleged 203 causes of action and claimed over $200 million in damages. Safety National had provided high-level excess insurance to the district in the 1980s with limits of $5 million per occurrence excess of $20 million, and a self-insured retention of $1.5 million.
Safety National moved to compel arbitration under an arbitration clause in its policy, but the motion was denied. The dispute centered on the difference between the procedural rules of the FAA and California law. On appeal, Safety National made two arguments: that under the procedural requirements of the FAA, which applied because the insurance transaction involved interstate commerce, the court was required to order arbitration. Second, the insurer argued that its relationship, and hence dispute, with the district, did not arise out of the same transaction or series of transactions as the other insurers being sued, such that there was no danger of inconsistent rulings in allowing the arbitration to proceed separately.
The appeals court rejected those claims. Citing Cronus Investments, Inc. v. Concierge Services (2005) 35 Cal.4th 376, the LA Unified court concluded that the FAA does not preempt application of California arbitration procedure rules and, in fact, in the absence of an express provision requiring application of the FAA in the contract, California arbitration procedure applies in California courts.
Unlike the FAA, Code of Civil Procedure 1281.2(c) expressly permits a court to refuse to order arbitration where “A party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party, arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact.”
Having concluded that there was no preemption, and that state law applied, the LA Unified court held that the trial court’s denial of the motion to compel arbitration was proper. The court pointed out that not only did Safety National’s dispute arise out of the same underlying facts of abuse by the two school teachers, but that the district had expressly alleged that all of the abuse constituted a single occurrence.
In that regard, the appeals court rejected the insurer’s claim that “there is no real possibility of either the court or the arbitration panel ruling that there was only one occurrence.” While acknowledging the insurer’s citation to authorities in other jurisdictions following the “rule” that “multiple acts of sexual abuse against different victims do not constitute one occurrence,” the LA Unified court said that issue could not be decided on the record in the case to date and, quoting the trial court: “While the Court is in no position to make that assessment at this time, the gravamen of this case will require the Court to ultimately resolve this important coverage question.”
With the question of number of occurrences as yet undecided, the court noted that it would have to be determined in a separate arbitration regardless, thus posing a danger of inconsistent rulings. And the court rejected the insurer’s contention that the fact its coverage was at such a high level of excess would moot the question in any case on a theory that its layer of coverage would never be invaded: “The standard under §1281.2(c) requires only a ‘possibility’ of conflicting rulings on a common issue of law or fact. Certainly, and at the very least, there is such a possibility here.”
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