(Arbitration Clause Applied to Third-Party Beneficiary Claiming Coverage Under Policy as an Additional Insured for Personal Injury Claim)

(May 2020) -  In Philadelphia Indem. Ins. Co. v. SMG Holdings, Inc., 44 Cal.App.5th 834 (January 28, 2020), the California Second District Court of Appeal reversed the trial court's denial of Philadelphia Indemnity Insurance Company's ("Philadelphia") motion to compel arbitration of a coverage dispute with SMG Holdings, Inc. ("SMG") in connection with its status as an additional insured under a liability policy issued to Philadelphia's named insured, Future Farmers of America ("Future Farmers"). The Philadelphia policy included an arbitration clause.

The parties' dispute arose out of an underlying personal injury lawsuit filed by an individual who was injured in an accident in the parking lot of the Fresno Convention Center. Future Farmers had entered into an agreement with SMG for an event at the center. The agreement did not encompass the parking lot for the center.

As part of the agreement, Future Farmers was required to make SMG an additional insured under its liability policy. In that regard, Future Farmers was insured under a liability policy issued by Philadelphia. The policy included a "deluxe endorsement" extending coverage to "managers, landlords, or lessors of premises" for liability arising out of "the ownership, maintenance or use of that part of the premises leased or rented to the named insured" (Future Farmers). It also covered "any person or organization where required by written contract executed prior to the occurrence but only for liability arising from the named insured's negligence."

SMG tendered the defense of the personal injury lawsuit to Philadelphia contending that it was an additional insured under the Future Farmers policy in connection with the liability arising out of the accident. Philadelphia denied coverage of SMG's tender because the accident did not occur on a part of the premises leased by Future Farmers. Further, none of the facts underlying the accident indicated that Future Farmers was negligent.

Subsequently, Philadelphia demanded arbitration under the arbitration clause in its policy with SMG. In response, SMG refused to submit to arbitration. SMG contended that the arbitration clause only applied to "insureds," and since Philadelphia contended that it was not an additional insured under the policy for the accident, it could not compel arbitration of the parties' coverage dispute.

The trial court agreed with SMG and denied Philadelphia's motion to compel arbitration. Philadelphia had argued in its motion that SMG was an express third party beneficiary of the coverage afforded by the Future Farmers policy. Hence, it could be compelled to arbitrate the parties' coverage dispute.

In reversing the trial court's decision, the Court of Appeal reasoned as follows:

Under the third party beneficiary theory, a nonsignatory may be compelled to arbitrate where the nonsignatory is a third party beneficiary of the contract. (Crowley Maritime Corp. v. Boston Old Colony Ins. Co.  (2008) 158 Cal.App.4th 1061, 1069 (Crowley).) Whether a nonsignatory is an intended third party beneficiary to the contract is determined from the parties' intent, as gleaned from the contract as a whole and the circumstances under which it arose. (Epitech, Inc. v. Kann  (2012) 204 Cal.App.4th 1365, 1371-1372.)

Under the equitable estoppel theory, a nonsignatory " 'is estopped from avoiding arbitration if it knowingly seeks the benefits of the contract containing the arbitration clause.'" (Crowley, supra, 158 Cal.App.4th at p. 1070.) Equitable estoppel, thus, " 'precludes a party from claiming the benefits of a contract while simultaneously attempting to avoid the burdens that contract imposes.' " (Corner v. Micor, Inc. (9th Cir. 2006) 436 F.3d 1098, 1101.)

. . .

We conclude that SMG is an intended third party beneficiary of the policy. The license agreement between SMG and Future Farmers obligated Future Farmers to obtain coverage "in form acceptable to SMG" and to name SMG as an additional insured. The policy Future Farmers obtained covered, via a "deluxe endorsement," ""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 ...." (Italics added.) Read together, the license and policy show SMG was an intended beneficiary of the policy.

In addition, the Court of Appeal held that SMG was equitably estopped from avoiding arbitration. The Court of Appeal stated as follows:

SMG's tender also constitutes a knowing claim of contract benefits, namely defense and indemnity. Accordingly, SMG is estopped from disclaiming applicable contract burdens such as the arbitration clause. (See Boucher v. Alliance Title Co., Inc. (2005) 127 Cal.App.4th 262, 269 ["'[A] party may be estopped from asserting that the lack of his signature on a written contract precludes enforcement of the contract's arbitration clause when he has consistently maintained that other provisions of the same contract should be enforced to benefit him'"].)

SMG, however, contends its tender did not constitute claiming a benefit or seeking enforcement of the policy for estoppel purposes. It maintains a tender is not an enforcement action - adding that only Philadelphia brought the civil enforcement action; SMG merely "informally" tendered its defense via letter. We are not persuaded. We know of no authority for the proposition that to seek the benefit of a policy one must bring a civil action to enforce it (and concomitantly a defense tender is insufficient). Nor could we find such a proposition cogent. Indeed, it defies logic to require a named insured demanding coverage to submit coverage disputes to arbitration, while freeing from that obligation an unnamed insured demanding the same coverage. SMG's tender under the policy - requesting "a full defense and indemnity in this matter" - can only be interpreted as a claim to the policy's benefits. As such SMG is estopped from disclaiming the arbitration provision of the policy.

Lastly, the Court of Appeal held that the scope of the arbitration clause encompassed SMG's coverage dispute with Philadelphia as it did qualify as an insured under the policy for certain risks, although Philadelphia contended that SMG was not an insured for the particular claim tendered by SMG.

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