Texas Court: Policy Arbitration Clause not Valid in Dispute With Non-Signatory Party

The Texas Supreme Court in late May ruled that a party to an insurance contract that mandates arbitration of disputes is not required to enter arbitration in a dispute against another party that is not a signatory to the contract.

The high court made that determination in a case involving a dispute over a crop insurance policy that was obtained by the insured through an independent insurance agency.

“Jody James Farms, JV purchased a Crop Revenue Coverage Insurance Policy from Rain & Hail, LLC, through the Altman Group, an independent insurance agency,” Justice Eva Guzman stated in the court’s written opinion.

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The policy contains a clause stating that policy disputes that can’t be resolved by mediation must submit to arbitration in an effort to settle the argument. The policy at issue defines the parties to the contract as Rain & Hail and Jody James, according to Justice Guzman.

“Neither the Altman Group nor any of its employees is expressly named in the policy, and neither the Altman Group nor any of its employees signed the agreement,” Justice Guzman wrote.

A dispute arose after Rain & Hail declined to cover a grain sorghum loss suffered by Jody James. The insurer said the claim was denied in part because the insured had failed to provide “timely notice” of the loss. Rain & Hail asserted other reasons for denying the claim, as well.

According to the written opinion, “Jody James claimed it promptly called an Altman Group agent, Laurie Diaz, to report the loss.”

Jody James and Rain & Hail ultimately arbitrated the dispute and the arbitrator sided with the insurer, agreeing that Jody James had not provided timely notice of the loss. The arbitrator also determined that Jody James “‘did not state a presentable loss’ because crops from performing and non-performing farm units were commingled.”

After receiving the adverse ruling in arbitration with Rain & Hail, Jody James then sued the Altman Group and Diaz — collectively referred to in the opinion as the agency — for breach of fiduciary duty and deceptive trade practices.

Jody James asserted that the agency failed to “timely submit the crop-loss claim,” which “resulted in denial of coverage” and a loss to Jody James of $68,000. Jody James sought to recoup the total amount of the loss plus attorney’s fees and interest.

The agency requested that the trial court compel arbitration, which it did despite Jody James’ opposition.

The arbitrator favored the agency in resolving the dispute, “issuing a take-nothing arbitration award,” and the trial court upheld that decision, Guzman wrote.

The Supreme Court said it accepted Jody James’ case because it “challenges the arbitrator’s authority to determine whether a non-signatory can compel a signatory to arbitrate.”

Upon review, the justices found that compelled arbitration between the agency and Jody James was wrong because the Altman Group was not signatory to the contract requiring mediation/arbitration in disputes between Rain & Hail and Jody James.

“No party may be compelled to arbitrate unless they have agreed to arbitrate or are bound by principles of agency or contract law to do so. Jody James and the Agency did not agree to arbitrate any matter—not the question of arbitrability and not the merits of this dispute,” the court’s opinion states.

The high court vacated the arbitrator’s take-nothing award and sent the case back to the trial court

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