109 Cal. App. 4th 1728; 1 Cal. Rptr. 3d 447; 2003 Cal. App.
LEXIS 980; 2003 Cal. Daily Op. Service 5812;
2003 Daily Journal
DAR 7309
ANTONE BOGHOS, Plaintiff
and Respondent, v. LLOYD'S OF LONDON et at., Defendants and Appellants.
H024481
COURT OF APPEAL OF
CALIFORNIA, SIXTH APPELLATE DISTRICT
109 Cal. App. 4th 1728;
1 Cal. Rptr. 3d 447; 2003 Cal. App. LEXIS 980; 2003 Cal. Daily Op. Service
5812; 2003 Daily Journal DAR 7309
May 29, 2003, Filed
NOTICE: NOT CITABLE - SUPERSEDED BY GRANT OF
REVIEW
SUBSEQUENT HISTORY: The Publication Status of
this Document has been Changed by the Court from Unpublished to Published June
30, 2003. Rehearing denied by Boghos v. Lloyd's of London, 2003 Cal. App. LEXIS
1016 (Cal. App. 6th Dist., June 27, 2003)
Later proceeding at Boghos v. Lloyds of London,
2003 Cal. LEXIS 5738 (Cal., Aug. 1, 2003)
Later proceeding at Boghos v. Lloyds of London,
2003 Cal. LEXIS 6617 (Cal., Sept. 2, 2003)
Review granted, Depublished by Boghos v. Lloyds
of London, 5 Cal. Rptr. 3d 32, 77 P.3d 3, 2003 Cal. LEXIS 7207 (Cal., 2003)
Later proceeding at Boghos v. Lloyds of London,
2003 Cal. LEXIS 8504 (Cal., Oct. 20, 2003)
Later proceeding at Boghos v. Lloyds of London,
2003 Cal. LEXIS 10303 (Cal., Dec. 9, 2003)
Application granted by Boghos v. Lloyds of
London, 2004 Cal. LEXIS 1184 (Cal., Jan. 28, 2004)
Application granted by Boghos v. Lloyds of
London, 2004 Cal. LEXIS 1185 (Cal., Jan. 28, 2004)
Later proceeding at Boghos v. Lloyds of London,
2004 Cal. LEXIS 1220 (Cal., Jan. 30, 2004)
PRIOR HISTORY: Superior Court of Santa
Clara County, No. CV803331. Jamie Jacobs-May, Judge
COUNSEL: Leboeuf, Lamb, Greene & MacRae,
Dean Hansell, Sharon C. Corda for Defendants and Appellants.
Bohn & Bohn, Robert H. Bohn, Michael J.
Quirk and F. Paul Bland, Jr., for Plantiff and Respondent.
JUDGES: RUSHING, P.J. WE CONCUR: PREMO, J.
WUNDERLICH, J.
OPINIONBY: Rushing
OPINION: RUSHING, P.J.--Certain Underwriters at Lloyd's,
International Risk Management Group, and Petersen International Underwriters
(collectively "Lloyd's") petitioned to compel arbitration of Antone
Boghos's claims for denial of long-term disability benefits. The trial court
denied the petition. On appeal, Lloyd's argues (1) the insurance policy
unambiguously requires arbitration of Boghos's claims; and (2) the arbitration
clause was not unconscionable. We will affirm.
FACTS AND PROCEDURAL BACKGROUND
Antone Boghos owned and operated a plumbing
business. In 1998, he applied for a long-term disability insurance policy.
Petersen International Underwriters handled the application. Certain
Underwriters at Lloyd's underwrote the policy. On January 8, 1999, the policy
took effect.
The certificate of insurance includes a
"Service of Suit Clause." It provides, in pertinent part: "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." n1
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n1 The first paragraph of the service of suit
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."
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The declaration of insurance contains an
arbitration clause. It provides, in pertinent part: "BINDING ARBITRATION:
Not withstanding any other item set forth herein, the parties hereby agree that
any dispute which arises shall be settled in Binding Arbitration." n2
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n2 The full text of the arbitration clause is as
follows: "BINDING ARBITRATION: Not withstanding any other item setforth
herein, the parties hereby agree that any dispute which arises shall be settled
in Binding Arbitration. By agreeing to Binding Arbitration, all parties
acknowledge and agree that they waive their right to a trial by jury. Binding
Arbitration will be held before a neutral arbitrator who will be agreed to by
all parties. If the parties cannot agree as to the arbitrator, or believe that
a single arbitrator cannot adequately settle the dispute, then an arbitration
panel made up of three arbitrators shall be formed. One arbitrator shall be
appointed by Us. The second arbitrator shall be appointed by You. The third
arbitrator shall be agreed by the two appointed arbitrators. The venue shall be
in Los Angeles County or at another location if agreed by all parties. The
arbitration will be governed by the commercial arbitration rules of the
American Arbitration Association. Costs for the arbitration shall be equally
split among the parties." Boghos's insurance application also contained an
arbitration provision that provides that disputes concerning the insurance be
submitted to arbitration if the disputed amount exceeds the jurisdictional
amounts for small claims courts and is not resolved after an Underwriters'
review. This arbitration provision also contained a waiver of the right to jury
trial. In its argument, Lloyd's focuses upon the insurance policy arbitration
clause.
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In May 2000, Boghos suffered injury to his neck
and head. The injury resulted in constant headaches, vertigo, loss of
concentration, diminished work strength and an inability to continue his
plumbing business.
Boghos applied for long-term disability
benefits. Lloyd's commenced payments to Boghos. However, in December 2000, Lloyd's
notified Boghos that they were discontinuing payments to him.
In November 2001, Boghos filed suit against Lloyd's,
arguing that Lloyd's wrongfully refused to pay disability benefits. Boghos's
complaint included claims for bad faith denial of insurance, breach of
contract, breach of the implied covenant of good faith and fair dealing, and
intentional infliction of emotional distress.
In February 2002, Lloyd's moved to compel
arbitration of Boghos's claims. The trial court denied the petition to compel
arbitration. It found that Lloyd's consented, under the service of suit clause,
to the court's jurisdiction to resolve failure to pay claims, and that any
ambiguity in the policy resulting from conflicting provisions should be
resolved in Boghos's favor. The trial court also found that the arbitration
clause was unconscionable.
Lloyd's appeals.
STANDARD OF REVIEW
HN(1) Whether an arbitration agreement applies to
a controversy is a question of law. If no conflicting extrinsic evidence to aid
interpretation was introduced, then the appellate court exercises its
independent judgment. ( Brookwood v. Bank of America (1996) 45 Cal.App.4th
1667, 1670 [53 Cal. Rptr. 2d 515].) If the trial court resolved disputed facts
to reach its decision, then we review that decision to see if it is supported
by substantial evidence. ( Engineers & Architects Assn. v. Community
Development Dept. (1994) 30 Cal.App.4th 644, 653 [35 Cal. Rptr. 2d 800].)
DISCUSSION
(2a)According to Lloyd's, the service of suit
clause constitutes a consent to the court's jurisdiction only for the purpose of enforcing
arbitration awards. Because Boghos's lawsuit against Lloyd's is not an action to
enforce an arbitration award, Lloyd's claims the arbitration provision clearly
applies, and therefore the trial court erred in refusing to compel arbitration.
For five reasons, we disagree.
First, the plain language of the service of suit
clause contradicts Lloyd's argument. There is nothing in the clause limiting
its applicability to the enforcement of arbitration awards. There is nothing in
the clause even referring to arbitration. The only limitation upon the clause's
applicability is the requirement that the insurer fail "to pay any amount
claimed to be due under the insurance described herein ... ." To say that
the phrase "failure ... to pay any amount claimed to be due under the
insurance described herein" really means only actions to enforce
arbitration awards turns the plain language of the clause upon its head.
Second, Lloyd's interpretation would either
render the service of suit clause surplusage or make it unlawful. Specifically,
if the service of suit clause is construed to only apply to actions to enforce
arbitration awards, the clause would be surplusage. This is because HNthe California
Arbitration Act already gives parties an independent right to petition courts
for enforcement of arbitration awards. (Code Civ. Proc., ¤ 1285; see also 9
U.S.C. ¤ 207.) n3 Since the parties already have by statute the right claimed
by Lloyd's to be conferred by the service of suit clause, Lloyd's
interpretation means the clause is unnecessary. HN(3) An interpretation that renders part
of a contract surplusage should be avoided. ( City of El Cajon v. El Cajon
Police Officers' Assn. (1996) 49 Cal.App.4th 64, 71 [56 Cal. Rptr. 2d 723].)
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n3 Code of Civil Procedure section 1285
provides: HN"Any party to an
arbitration in which an award has been made may petition the court to confirm,
correct or vacate the award. The petition shall name as respondents all parties
to the arbitration and may name as respondents any other persons bound by the
arbitration award." Title 9 United States Code section 207 provides, in
pertinent part: HN"Within three years after an arbitral award falling under the
Convention is made, any party to an arbitration may apply to any court having
jurisdiction under this chapter for an order confirming the award against any
other party to the arbitration."
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(2b) Additionally, if the service of suit clause
is construed to only apply to the confirmation of arbitration awards based upon
claims for failure to pay, then the clause would implicitly prohibit
confirmation actions of any other type of claim asserted. If interpreted in this
manner, then the clause would be in contravention of the California statutory
and federal law already noted, that creates a general right to petition a court
for confirmation of any arbitration award. ( City of El Cajon v. El Cajon Police
Officers' Assn., supra, 49 Cal.App.4th at p. 71.) Accordingly, this interpretation
of the service of suit clause would violate the canon of construction requiring
that HN"[a] contract must
receive such an interpretation as will make it lawful, operative, definite,
reasonable, and capable of being carried into effect, ... ." (Civ. Code, ¤
1643.)
Third, despite Lloyd's claim to the contrary, Lloyd's
interpretation is not the only construction that gives meaning to the
arbitration provision. Lloyd's says we should adopt its view of the service of
suit clause because otherwise the arbitration clause will never apply. We disagree. If
the service of suit clause is interpreted according to its plain terms, then it
allows the insured to utilize the courts for claims involving the insurer's
"failure ... to pay any amount claimed to be due under the insurance ...
." Other claims--not involving the insurer's failure to pay--would still
be subject to the arbitration clause. In fact, Lloyd's concedes that "it
is possible for serious disputes to arise under first party policies involving
issues not necessarily connected to an insurer's failure to pay a claim ...
." In addition, the service of suit clause would permit the insured to
choose, at its option, to arbitrate even failure to pay claims. Thus, even in
the case of failure to pay claims, arbitration could still be an option, should
the insured so desire. For these reasons, we reject Lloyd's view that only its
construction of the service of suit clause gives effect to the arbitration
provision.
Fourth, Lloyd's position conflicts with rules of
interpretation that remaining ambiguities within contracts, particularly
adhesive contracts, be resolved against the drafter. ( Badie v. Bank of
America
(1998) 67 Cal.App.4th 779, 800 [79 Cal. Rptr. 2d 273].) As Lloyd's concedes,
this insurance policy, which Lloyd's drafted, is a contract of adhesion. Thus,
under settled rules of contract interpretation, any remaining ambiguity that
may exist between the service of suit and arbitration clauses should be
construed against Lloyd's. (4) "While it has been held that 'doubts
concerning the scope of arbitrable issues are to be resolved in favor of
arbitration' [citation], that rule was announced in the context of a commercial
contract devoid of allegations or evidence of adhesion. The agreement in this
case may be more analogous to standardized insurance contracts in which it has
long been established that HN'ambiguous clauses ... are to be interpreted against the
insurer ... .' [Citation.]" ( Victoria v. Superior Court (1985) 40 Cal.3d 734,
744 [222 Cal. Rptr. 1, 710 P.2d 833]; see also Lawrence v. Walzer &
Gabrielson (1989) 207 Cal. App. 3d 1501, 1506-1507 [256 Cal. Rptr. 6].) (2c)Thus,
any unresolved conflict between the service of suit clause, wherein Lloyd's
agrees at the request of the insured to submit to the court's jurisdiction, and
the arbitration clause, which provides that "Not withstanding any other
item set forth herein, ... ." any dispute shall be arbitrated, must be
decided against Lloyd's, since Lloyd's drafted this contract of adhesion.
Lloyd's cites Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 9
[10 Cal. Rptr. 2d 183, 832 P.2d 899], for the familiar rule that the
Legislature has expressed a strong public policy in favor of arbitration, and
therefore courts should " ' "indulge every intendment to give effect
to such proceedings." ' [Citations.]" But that rule does not permit
us to ignore standard rules of contract interpretation. Nor does it mandate
that every arbitration clause be deemed to cover every type of dispute. As
discussed above, there are many reasons why Lloyd's interpretation must be
rejected and why the arbitration clause here must be construed to exclude the
arbitration of the insured's failure to pay claims. In the circumstances of
this case, the public policy in favor of arbitration does not outweigh those
considerations.
Finally, we find distinguishable cases cited by Lloyd's.
McDermott Intern. v. Lloyds Underwriters of London (5th Cir. 1991) 944
F.2d 1199, the primary authority relied upon by Lloyd's, did not apply
California rules of contract interpretation. McDermott expressly found that
the insured could not benefit from the traditional rule that ambiguities within
contracts, particularly adhesion contracts, are construed against the drafter.
(See id. at p. 1207.)
We also are not persuaded by Continental Cas.
Co. v. Certain Underwriters at Lloyd's (N.D. Cal., Jul. 21, 1993, No. C-92-4094-DLJ)
1993 WL 299232. There, the court interpreted a similar service of suit clause
and arbitration provision. The court decided the purpose of the service of suit
clause was to ensure payment of arbitration awards pursuant to the arbitration
provision. The court concluded that this interpretation was "plausible
because it gives the service of suit clause and arbitration provision effect,
... ." ( Id. at *11.) Besides the fact that there is a dearth of reasoning in Continental, we find it
unpersuasive since it did not discuss the fact that the California Arbitration
Act already gives parties an independent right to petition courts for
enforcement of arbitration awards. (Code Civ. Proc., ¤ 1285; see also 9 U.S.C.
¤ 207.) Further, under our interpretation, both the service of suit clause and
arbitration provision are given effect: the arbitration clause applies to
all claims other than those involving failure to pay, and an insured may also
exercise the choice to arbitrate claims based upon the failure to pay.
In contrast to the cases cited by Lloyd's, we
find more persuasive the reasoning of Transit Cas. Co. v. Certain
Underwriters (Mo. App. 1998) 963 S.W.2d 392, 399. In considering a nearly
identical arbitration and service of suit clause, Transit rejected the insurer's
claim that the service of suit clause only applied to enforcement of
arbitration awards. In so doing, Transit stated " '[i]f Lloyd's--one of the
largest and most experienced underwriters in history--wanted to make its own
boilerplate service of suit clause only an "aid to arbitration," it
could have employed simple English words to say so.' [Citation.] ... This is
the reason for the rule that courts construe ambiguities in contracts against
those that draft them. [Citation.] The Reinsurers are in no position to
complain at this point about the fact that they failed to draft the language as
they would now like for this court to interpret it." (Id. at p. 398.)
We find Transit more convincing than McDermott and the other
authorities cited by Lloyd's. We therefore reject Lloyd's claim that the
service of suit clause is unambiguous and applies only to enforce arbitration
awards.
HN If the contract language is clear and not
absurd, it will be followed. (Civ. Code, ¤ 1638.) We construe the contract as a
whole, giving effect to every part if reasonably practicable, with each clause
assisting us in interpreting the other. (Civ. Code, ¤ 1641.) If possible, we
construe a contract so as to give effect to all its provisions or particulars.
(Code Civ. Proc., ¤ 1858.) We try to avoid interpretations that render part of
the instrument surplusage. ( City of El Cajon v. El Cajon Police Officers'
Assn., supra, 49 Cal.App.4th at p. 71.) When an instrument is susceptible to
two interpretations, the court should select the construction making the
instrument lawful, operative, definite, reasonable and capable of being carried
into effect. ( Badie v. Bank of America, supra, 67 Cal.App.4th at p.
800.) When ordinary principles of contract interpretation do not resolve an
ambiguity, the contract language should be construed against the party that
drafted the language. (Civ. Code, ¤ 1654.) This rule applies with special force
to contracts of adhesion. ( Neal v. State Farm Ins. Co. (1961) 188 Cal. App.
2d 690, 695 [10 Cal. Rptr. 781]; Badie v. Bank of America, supra, 67 Cal.App.4th at p.
803.)
Applying these principles, we agree with the
trial court's conclusion that the service of suit clause clearly states that Lloyd's
agreed to consent to the court's jurisdiction "[i]n the event of the
failure of Underwriters to pay any amount claimed to be due under the insurance
...." To the extent that there is an unresolved ambiguity between the
service of suit clause and the arbitration clause, that ambiguity must be
resolved against Lloyd's, the drafter of the contract.
We conclude that the service of suit clause
shows that Lloyd's agreed to consent to the court's jurisdiction for claims
based upon the failure to pay. Since Boghos has asserted a claim based upon Lloyd's
failure to pay, Lloyd's is subject to the court's jurisdiction, the arbitration
clause is inapplicable, and the motion to compel arbitration was properly
denied.
(5) Lloyd's also argues that the trial court
wrongly concluded that the arbitration clause was unconscionable. We disagree.
As already noted, besides deciding that the
plain language of the policy showed that Lloyd's consented to the court's
jurisdiction, the trial court also decided that the agreement lacked mutuality
based upon certain language under the service of suit clause. The language is
as follows: "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." Under the trial court's view, by permitting Lloyd's to commence,
remove or transfer an action, the quoted language allowed Lloyd's to "opt
out" of arbitration. Since the insurance policy granted no similar right
to Boghos, the trial court decided the arbitration clause was unconscionable.
Relying upon the trial court's finding of
unconscionability, Boghos contends that if Lloyd's policy provisions compel
arbitration of his claims, then we should hold that the arbitration clause is
unconscionable. If the policy is construed to prohibit Boghos from litigating
his claims in court, then Boghos says the arbitration clause must be read in
tandem with the reservation of rights language, and since the reservation of
rights language allows Lloyd's to "opt out" of arbitration, there is
a lack of mutuality, thereby rendering the arbitration clause unconscionable.
Lloyd's, on the other hand, contends that
"[o]nce it is accepted that the consent to jurisdiction and reservation of
the right to sue found in the service-of-suit clause refers only to the enforcement of arbitration awards
and does not provide for litigation as an alternative to arbitration, it
becomes clear that the service-of-suit clause did not give [Lloyd's] any
greater right to litigate than [Boghos] was given."
As already discussed, we have interpreted the
service of suit clause to provide that Lloyd's consents to the jurisdiction of
the court for the purposes of claims based upon failure to pay. Thus, we necessarily reject Lloyd's argument
since it is premised upon a contrary interpretation--namely that the service of
suit clause only applies to the enforcement of arbitration awards. Similarly, we
necessarily reject Boghos's argument, since it is contingent upon us deciding
that Lloyd's policy provisions compel arbitration of his claims.
We do note that Boghos's and Lloyd's arguments
on this issue bolster our construction of the policy. By construing the service
of suit clause to provide that Lloyd's consents to the jurisdiction of the
court for purposes of claims based upon failure to pay, our interpretation
forestalls in this case any lack of mutuality problems. In other words, since
we have already decided that the policy permits Boghos to litigate his claims,
the problem envisioned by Boghos--that he is required to arbitrate his
failure to pay claims while Lloyd's under the reservation of rights clause has
the option of choosing to litigate such claims--does not occur. In fact, by
arguing that the agreement is not unconscionable so long as the service of suit
clause is construed to pertain only to enforcement of arbitration, Lloyd's
impliedly admits that the rejection of its interpretation results in the lack
of mutuality found by the trial court.
Boghos also argues that the arbitration clause
is unconscionable because it imposes prohibitive costs upon him. He relies upon
the fact that the arbitration clause requires him to pay half of the costs of
arbitration, and also upon the fact that excessive fees are imposed pursuant to
the American Arbitration Association's Commercial Arbitration Rules.
In Armendariz v. Foundation Health Psychcare
Services, Inc. (2000) 24 Cal.4th 83 [99 Cal. Rptr. 2d 745, 6 P.3d 669], the
California Supreme Court considered arbitration of claims brought under the
Fair Employment and Housing Act (FEHA). The court held that when such an
arbitration agreement is silent on costs, it would infer from that silence the
existence of an agreement on the part of the employer to bear the arbitration
forum costs. (Id. at p. 113; see also Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th
1064, 1082 [130 Cal. Rptr. 2d 892, 63 P.3d 979].) In Little v. Auto
Steigler, Inc., the California Supreme Court confirmed that "Armendariz
represents
the soundest approach to the problem of arbitration costs in the context of
mandatory employment arbitration." (Id. at p. 1085.)
We believe that Armendariz/Little's recognition that HN"arbitration costs
can present significant barriers to vindication of statutory rights" is
also applicable in the situation here, where a disability claimant seeks to
make the insurer pay disability benefits, and the insurer seeks to compel
arbitration of those claims, and make the insured share the costs of
arbitration. ( Little v. Auto Steigler, Inc., supra, 29 Cal.4th at p. 1084.)
In Ting v. AT&T (N.D. Cal. 2002) 182 F. Supp. 2d 902, 934, the court
applied the Armendariz rule in the context of a consumer contract arbitration
provision between AT&T and its customers. Ting quoted Armendariz for the proposition
that HN"the arbitration
agreement or arbitration process cannot generally require [the plaintiff] to
bear any type of expense that [she] would not be required to be if [she] were
free to bring the action in court. [Citation (emphasis in original).]" ( Ting
v. AT&T, supra, 182 F. Supp. 2d at p. 934, quoting Armendariz, supra, 24 Cal.4th at p.
110-111.) Because Boghos should not be forced to share in the cost of
arbitration, we believe that Lloyd's arbitration clause, which requires that
the parties split the costs, is unconscionable. n4
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n4 Because we have already decided that Lloyd's
is subject to the court's jurisdiction for Boghos's claims, and the arbitration
clause is inapplicable, we need not decide whether or not the unconscionable
costs provision within the arbitration clause is severable from the rest of the
agreement. We also deny Lloyd's request for judicial notice. Lloyd's has asked
that we take judicial notice of certain documents regarding Boghos's finances. Lloyd's
says the documents are relevant to Boghos's claim that the arbitration clause
is unconscionable because it requires the parties to pay their pro rata share
of the arbitration costs. Since we decide the costs clause is unconscionable on
a basis that does not necessitate examination of Boghos's finances, we
necessarily deny Lloyd's request for judicial notice.
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DISPOSITION
The trial court's order denying the petition to
compel arbitration is affirmed.
Premo, J., and Wunderlich, J., concurred.