Boghos v. Certain Underwriters at Lloyd's of London

Opinion

This case presents issues concerning the effect and enforceability of an arbitration clause in a contract of disability insurance. The lower courts refused to compel arbitration of contract and tort claims brought by the insured against the insurer after the latter ceased paying benefits. We reverse and remand for further proceedings.

I. Background

Antone Boghos owned a plumbing business. In September 1998, he applied to a Los Angeles insurance broker for disability insurance underwritten by Certain Underwriters at Lloyd’s of London (hereafter the Underwriters). Boghos requested and the Underwriters eventually granted coverage for monthly payments of up to $10,000 for up to 60 months in the event Boghos, because of accident or sickness, became unable to perform the material and substantial duties of his occupation. An endorsement to the policy defined those duties as “administrative and executive duties only.” Another endorsement excluded from coverage “any disease or disorder or condition(s) due to or arising from the lumbar sacral back and adjacent and related structures.” In his application, Boghos represented that he had earned $176,080 from his business in the prior year. Boghos signed both pages of the two-page application, thereby acknowledging his understanding and agreement that “any dispute concerning this insurance must be submitted to binding arbitration . . . ,’^[1]

The policy also included, as part of Lloyd’s standard form “Certificate of Insurance,” a “Service of Suit Clause.” As relevant here, the clause provides: “Service of Suit Clause. In the event of the failure of Underwriters to pay any amount claimed to be due under the insurance described herein, Underwriters have agreed that, at the request of Assured (or Reinsured) they will submit to the jurisdiction of a court of competent jurisdiction within the United States. Nothing in this clause constitutes or should be understood to constitute a waiver of Underwriters’ rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another Court as permitted by the laws of the United States or of any State in the United States. In any suit instituted against any one of them upon the insurance described herein, Underwriters have agreed to abide by the final decision of such Court or of any Appellate Court in the event of an appeal.”

In November 2001, Boghos sued the Underwriters for ceasing to pay benefits under the policy. In his complaint, Boghos alleged that he received, in May 2000, “a traumatic blow to the back of his head, neck and buttocks which caused him to lose consciousness. As a result of the incapacitating injuries [Boghos] suffered during the accident,” his complaint continued, “he has been unable to return to work since the accident.” In a subsequent declaration, Boghos further described his continuing injuries as “constant vertigo and headaches, causing [him] to lose thirty-five pounds from constant vomiting,” requiring him to take prescription drugs, and leaving him “unable to concentrate and to be active enough to pursue” his administrative and

In a typical service of suit clause, one or more parties agree to submit to the jurisdiction of courts for designated purposes related to the contract in which the clause appears. Here, the Underwriters have agreed, “[i]n the event of [their] failure ... to pay any amount claimed to be due under the [policy],” and “at the request of Assured,” to “submit to the jurisdiction of a court of competent jurisdiction within the United States.”

Courts in other jurisdictions have generally enforced arbitration clauses in contracts, including insurance contracts, that have also included service of suit clauses, rejecting the argument that consent to service creates an ambiguity or waives the right to compel arbitration. These courts have reasoned that the two clauses do not conflict because the service of suit clause should be interpreted, in view of the presumption favoring arbitration, as intended to facilitate enforcement of the arbitration clause.^[3] The only California case on point is consistent with the general rule. In Appalachian Insurance Co. v. Rivcom Corp. (1982) 130 Cal.App.3d 818 [ 182 Cal.Rptr. 11 ], the Court of Appeal held that a service of suit clause did not supersede, or create an ambiguity in light of, a clause requiring that the value of any loss be determined by appraisal, a form of arbitration expressly subject by statute to California arbitration law. (Id., at pp. 824, 827-828; see Code Civ. Proc., § 1280, subd. (a).) The court reasoned that both clauses could operate because the service of suit clause allowed the insured to sue in court if the insurer refused to pay the appraised value. (Appalachian Insurance Co. v. Rivcom Corp., supra, at pp. 827-828.)

Boghos advances several arguments against this conclusion. None is persuasive.

First, Boghos argues that, given the service of suit clause, the arbitration clause cannot be enforced without rendering the former surplus-age. Boghos thus invokes the general rule of contract interpretation that “[t]he whole of a contract is to be taken together, so as to give effect to every part, if reasonably practicable, each clause helping to interpret the other.” (Civ. Code, § 1641.) The rule’s effect, among other things, is to disfavor constructions of contractual provisions that would render other provisions surplusage. (Berg v. MTC Electronics Technologies Co. (1998) 61 Cal.App.4th 349 , 361-362 [ 71 Cal.Rptr.2d 523 ].) To enforce the policy’s arbitration clause according to its terms does not render the service of suit clause surplusage. The service of suit clause continues to have real effect because it requires the Underwriters to submit to the jurisdiction of United States courts in actions to compel arbitration or to enforce arbitral awards, thus easing burdens the insured might encounter in obtaining jurisdiction over the Underwriters in London. (Hart v. Orion Insurance Company, supra, 453 F.2d 1358 , 1361.)

Boghos argues that to read the service of suit clause in this manner would cause it to duplicate a right guaranteed by statute, once again rendering it surplusage. The Code of Civil Procedure, Boghos correctly points out, gives California courts personal and subject matter jurisdiction to compel arbitration and to enforce arbitral awards when a contract to arbitrate is made in this state. (See Code Civ. Proc., § 1293.)^[4] Nevertheless, the service of suit clause confers rights the relevant statutes do not. For example, through the service of suit clause the Underwriters consent to suit not just in California but in any “court of competent jurisdiction within the United

Boghos also argues that the service of suit clause, if read as intended to facilitate arbitration, narrows the circumstances under which the insurers must submit to the jurisdiction of a court. For purposes of this argument, Boghos interprets the language by which the Underwriters submit to jurisdiction (“[i]n the event of [their] failure ... to pay”) as an assertion that they do not submit to the court’s jurisdiction to compel arbitration of claims not involving a failure to pay, even though the arbitration clause is broad enough to cover such claims. The relevance of this additional argument to the issue before us, namely the enforceability of the arbitration clause, is not evident. The argument lacks merit, in any event. Regardless of the policy language, Code of Civil Procedure section 1293, as Boghos acknowledges, gives California courts personal and subject matter jurisdiction to enforce arbitration agreements formed in California. The service of suit clause, even if limited to claims based on the Underwriters’ failure to pay benefits, still gives Boghos the additional, nonstatutory right to require the Underwriters to appear not just in California courts but in any “court of competent jurisdiction within the United States.”

Boghos next argues the service of suit clause must take priority over the arbitration clause under the rule that more specific contractual provisions control over more general ones. (See Code Civ. Proc., § 1859;^[5] National Ins. Underwriters v. Carter (1976) 17 Cal.3d 380 , 386 [ 131 Cal.Rptr. 42 , 551 P.2d 362 ].) But this rule applies only when the provisions in question are truly inconsistent. (Code Civ. Proc., § 1859; National Ins. Underwriters v. Carter, supra, 17 Cal.3d at p. 386.) The arbitration clause here is neither inconsistent with, nor ambiguous in light of, the service of suit clause because the first sentence of the arbitration clause (“[Notwithstanding any other item set forth herein”) explicitly requires that clause to be enforced even if other provisions, read in isolation, might seem to dictate a different result.

B. Armendariz and Little

Boghos next contends the policy’s arbitration clause is unenforceable under Armendariz, supra, 24 Cal.4th 83 , and Little, supra, 29 Cal.4th 1064 , because it requires him to pay costs he would not have to pay were he suing in court, namely costs imposed by the American Arbitration Association (AAA)^[6] and

In Armendariz, supra, 24 Cal.4th 83 , we set out the conditions under which an employer can lawfully require its employees to arbitrate claims arising under the California Fair Employment and Housing Act (Gov. Code, § 12900 et seq.) (FEHA). Through the FEHA, we reasoned, the Legislature created substantive and procedural rights not just for the benefit of individuals but also for public purposes; accordingly, those statutory rights are unwaivable under Civil Code sections 1668^[7] 8and 3513.^[8] (Armendariz, atpp. 100-101.) To ensure that employer-mandated arbitration agreements would not become vehicles for the waiver of FEHA rights, we held that such agreements are enforceable only if they provide for neutral arbitrators, more than minimal discovery, a written award, and all of the types of relief that would otherwise be available in court and, in addition, “ ‘do[\ not require employees to pay either unreasonable costs or any arbitrators’ fees or expenses as a condition of access to the arbitration forum.’ ” (Armendariz, at p. 102, italics added, quoting Cole v. Burns Intern. Security Services (D.C. Cir. 1997) 323 U.S. App. D.C. 133 [ 105 F.3d 1465 , 1482].) We borrowed these requirements from an analogous federal decision, Cole, which had in turn formulated them to ensure that employer-mandated arbitration agreements did not violate title VII of the Civil Rights Act of 1964 (42 U.S.C. § 2000e et seq.).

In Little, supra, 29 Cal.4th 1064 , we extended Armendariz, supra, 24 Cal.4th 83 , and applied its requirements to employer-mandated arbitration of tort claims for wrongful discharge in violation of public policy (i.e., claims under Tameny v. Atlantic Richfield Co. (1980) 27 Cal.3d 167 [ 164 Cal.Rptr. 839 , 610 P.2d 1330 ]). Justifying the extension, we reasoned that Tameny claims, even though not statutory, are nevertheless “almost by definition unwaivable” (Little, at p. 1077) because they seek to enforce public policies that are carefully tethered to fundamental policies delineated in constitutional or statutory provisions (ibid.; see Silo v. CHW Medical Foundation (2002) 27 Cal.4th 1097 , 1104 [ 119 Cal.Rptr.2d 698 , 45 P.3d 1162 ]; Gantt v. Sentry Insurance (1992) 1 Cal.4th 1083 , 1095 [ 4 Cal.Rptr.2d 874 , 824 P.2d 680 ]). To extend the Armendariz requirements to Tameny claims was also consistent with the object of those requirements, which is “to

C. Remaining Issues

Our decision leaves certain issues to be decided on remand. The trial court, as mentioned, held that the policy’s service of suit clause conflicted with the arbitration clause and that any ambiguity between the two should be resolved in Boghos’s favor by refusing to compel arbitration. The Court of Appeal affirmed, adding its own erroneous conclusion that the arbitration provision was unenforceable under Armendariz, supra, 24 Cal.4th 83 , and Little, supra, 29 Cal.4th 1064 . Consequently, no court has yet addressed the questions of (1) whether the clause of the arbitration provision requiring Boghos to share the costs of arbitration and the arbitrator’s (or arbitrators’) fees is unenforceable under the general law of unconscionability, (2) whether Boghos’s ability to pay his share of the costs and fees is relevant to the question of unconscionability and, if so, whether he must prove he is factually unable to pay,^[10] (3) whether the clause of the arbitration provision selecting the venue of arbitration (“Los Angeles County or at another location if agreed by all parties”) is unconscionable, and (4) whether, if the cost-sharing clause, the venue-selection clause or both are unconscionable, the offending clause or