A general liability policy’s arbitration clause was binding on an additional insured who was an intended third-party beneficiary of the policy and who sought benefits under the policy. (Philadelphia Indem. Ins. Co. v. SMG Holdings, Inc. (2019) — Cal.App.5th —)
Facts
Future Farmers of America (FFA) is an agricultural organization for youth. SMG Holdings, Inc. (SMG) serves as property manager for the City of Fresno (City) in connection with the Fresno Convention Center.
In 2009, SMG entered into a license agreement with FFA so that FFA could use the convention center for FFA’s 2013 annual convention. The license agreement required FFA to obtain a general liability insurance policy “in a form acceptable to SMG” and to name SMG as an additional insured on the policy.
FFA subsequently obtained a general liability policy from Philadelphia Indemnity Insurance Company (Philadelphia). Although the Philadelphia policy did not expressly name SMG as an additional insured, the policy included a “deluxe endorsement” that extended coverage to (a) “managers, landlords, or lessors of premises” for liability arising out of “premises leased or rented” to the named insured, and (b) “any … organization where required by a written contract” but only for liability arising out of the named insured’s negligence. The policy also included an arbitration endorsement which provided that “if we and the insured do not agree whether coverage is provided under this Coverage Part for a claim made against the insured, then either party may make a written demand for arbitration.”
In April 2013, Timothy Sailors attended the FFA event at the Fresno Convention Center. While Sailors was walking in the parking lot of the convention center, Sailors stepped into a pothole, fell and suffered severe injuries. The parking lot where the accident happened was not included in the license agreement between SMG and FFA.
Sailors filed a personal injury action against various parties, including SMG as property manager of the convention center. SMG tendered the defense of the lawsuit to Philadelphia on the ground that SMG qualified as an additional insured on the Philadelphia policy. Philadelphia declined to defend SMG, asserting that the additional insured language did not cover SMG’s alleged liability arising from Sailors’ fall in the parking lot.
SMG and Philadelphia continued to correspond about the matter, and in 2016, after failing to agree on coverage, Philadelphia demanded arbitration of the coverage dispute. When SMG resisted, Philadelphia petitioned the superior court to compel arbitration against SMG. The trial court denied the petition, concluding that there was no binding arbitration agreement between Philadelphia and SMG. Philadelphia appealed.
Holding
The California Court of Appeal reversed, and held that the coverage dispute between Philadelphia and SMG was subject to arbitration.
Under California law, a nonsignatory to an arbitration agreement may be compelled to arbitrate if the nonsignatory is a third-party beneficiary of the contract. Here, the license agreement between SMG and FFA required FFA to obtain a policy and to name SMG as an additional insured. Further, the policy that FFA purchased from Philadelphia included an additional endorsement covering “managers, landlords, or lessors of the premises” as well as “any person or organization where required by a written contract executed prior to the occurrence ….” Read together, the license agreement and the policy itself showed that SMG was an intended beneficiary of the policy.
Further, a nonsignatory to an arbitration agreement may be equitably estopped from avoiding arbitration if the nonsignatory knowingly seeks the benefits of a contract containing an arbitration clause. Here, SMG’s tender to Philadelphia constituted a knowing claim for contract benefits, namely defense and indemnity. Accordingly, SMG was equitably estopped from disclaiming applicable contract burdens such as the arbitration clause. In short, a party cannot claim the benefits of a contract and simultaneously attempt to avoid the burdens of the contract.
Comment
It is becoming more common for liability insurance policies to contain arbitration provisions. If the arbitration provision is clearly worded and prominently placed in the policy, the provision will presumably be given effect. However, the potential advantages and disadvantages of arbitration should carefully be considered before commencing proceedings to enforce such a provision.
The SMG case discussed above is noteworthy because of the fact that the arbitration provision was deemed binding on a party who qualified as an additional insured under the policy. The additional insured was deemed a third-party beneficiary of the policy, and was equitably estopped from avoiding the arbitration provision.