Duty To Defend Insurance Case

Here is a type of case insurance lawyers do not see very often.  It is from the Southern District of Texas, Corpus Christi Division.  It is styled, Lamarr Womack & Associates, L.P.; dba LWA Architects, et al v. Lexington Insurance Company.

LWA filed a claim against Lexington seeking a defense and indemnity under the policy with Lexington.  Lexington tendered a defense under a reservation of rights to dispute coverage, claiming LWA had notice of the claim prior to purchasing the insurance policy and failed to disclose it in their application.  Lexington initiated arbitration seeking a declaration that it owes LWA neither a defense nor indemnity for the underlying claim.

LWA filed this declaratory judgment action, seeking a judicial determination of those issues and making a claim for breach of contract.  Lexington filed for dismissal under Federal Rule 12(b)(6), arguing that LWA failed to state a claim on which relief may be granted because of the arbitration agreement.

When a party challenges the court’s jurisdiction on the basis of a binding arbitration agreement, the court considers two questions: (1) whether there is a valid agreement to arbitrate between the parties; and (2) whether the claim falls within the scope of the arbitration agreement.

Here, bot parties agree the arbitration agreement appears in the body of the policy.  The present challenge is to the scope of the agreement.

Whether a claim falls within the scope of the arbitration agreement is a question for the court.  When the contract delegates the arbitrability question to an arbitrator, the court may not override the contract.  This is true even if the court thinks that the argument applies to a particular dispute is groundless.

Express incorporation of the rules of the arbitration service constitutes clear and unmistakable evidence that the parties have agreed to arbitrate arbitrability.  Here, the agreement incorporates the Commercial Arbitration Rules of the American Arbitration Association.  Those rules provide: “The arbitrator shalll have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim or counter claim.

On its face, the complaint in this action and its supporting documents state a claim within this Court’s subject matter jurisdiction.  Lexington’s invocation of the arbitration agreement contained within the policy precludes this Court from granting relief on the merits of the claim.  While permitted, dismissal is not the prescribed remedy to be issued when a lawsuit must be referred to arbitration.  The Federal Arbitration Act at 9 U.S.C., Section 3 states:

If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.

The dispute regarding the scope of the arbitration agreement and whether those claims fall within that scope is a matter to be determined by the arbitrator.  Until that determination is made the Court stays the action pending completion of the arbitration proceeding.