Summary
recognizing Poly-America as controlling after considering Sanders
Summary of this case from Nii-Moi v. Mcallen Hospitalist Grp.Opinion
No. 09-10-00286-CV
Submitted on September 29, 2010.
Opinion Delivered November 4, 2010.
On Appeal from the 253rd District Court, Liberty County, Texas, Trial Cause No. CV0901665.
Before McKEITHEN, C.J., KREGER and HORTON, JJ.
MEMORANDUM OPINION
Phoebie Yarbrough Stahlecker purchased an insurance policy from Ranchers and Farmers Mutual Insurance Company ("Ranchers"). When her home was damaged by Hurricane Ike, Stahlecker submitted a claim to Ranchers. Stahlecker later sued Ranchers for fraud, conspiracy to commit fraud, breach of contract, violations of the Insurance Code, and breach of the duty of good faith and fair dealing. Ranchers filed a motion to compel arbitration, which the trial court denied. In one issue, Ranchers challenges the denial of its motion to compel arbitration. We reverse and remand.
Stahlecker also sued Southwest Adjusters of Texas, LLC, the insurance adjuster. Southwest is not a party to this appeal.
Applicable Law
This is an appeal pursuant to section 51.016 of the Civil Practice and Remedies Code, which authorizes interlocutory appeals of matters subject to the Federal Arbitration Act. See Tex. Civ. Prac. Rem. Code Ann. § 51.016 (West Supp. 2010); see also 9 U.S.C.A. § 16 (West 2009).
The arbitration agreement states that it is governed by both the Federal Arbitration Act and the Texas General Arbitration Act. When an "agreement references both the Texas Act and the FAA," the FAA controls. EZ Pawn Corp. v. Mancias, 934 S.W.2d 87, 91 (Tex. 1996) (orig. proceeding).
A party seeking to compel arbitration must: (1) establish the existence of an arbitration agreement subject to the FAA; and (2) show that the arbitration agreement covers the nonmovant's claims. In re FirstMerit Bank, N.A., 52 S.W.3d 749, 753 (Tex. 2001) (orig. proceeding). "Because state and federal policies continue to favor arbitration, a presumption exists favoring agreements to arbitrate under the FAA, and courts must resolve any doubts about an arbitration agreement's scope in favor of arbitration." Id. (footnotes omitted).
"An insurance policy is a contract entered into between the parties whereby each party becomes bound by the terms of the agreement." Ruiz v. Gov't Employees Ins. Co., 4 S.W.3d 838, 841 (Tex. App.-El Paso 1999, no pet.). When a party's suit is based on that agreement, the party "cannot enforce all of it except the arbitration clause." In re Advance PCSHealth L.P., 172 S.W.3d 603, 607 (Tex. 2005) (orig. proceeding); see In re Farmers Ranchers Mut. Ins. Co., No. 04-08-00128-CV, 2008 Tex. App. LEXIS 3651, at *4 (Tex. App.-San Antonio May 21, 2008, orig. proceeding) (mem. op.). "Once the trial court concludes that the arbitration agreement encompasses the claims, and that the party opposing arbitration has failed to prove its defenses, the trial court has no discretion but to compel arbitration and stay its own proceedings." FirstMerit, 52 S.W.3d at 753-54.
The Arbitration Agreement
The insurance policy contains the following "Compulsory Dispute Resolution Endorsement":
Should any dispute arise between YOU and US; from, through or by this policy, including any statutory law or common law right YOU have against US (excepting an alleged material misrepresentation contained in the application), then such dispute shall be arbitrated in accordance with the rules and procedures under the Federal Arbitration Act and the Texas General Arbitration Act subject to the following:
1. YOU and WE shall waive OUR respective rights to litigate those issues in dispute in a court of law, including the right to jury trial, stay any arbitration proceeding or contest any award.
2. Arbitrators shall be chosen from a list provided by the American Arbitration Association. One arbitrator to be chosen by YOU and the other to be chosen by US, and an umpire to be chosen by the two arbitrators before they enter upon arbitration.
3. The site of the proceedings shall be the nearest city, over one hundred thousand people if YOU initiate the demand for arbitration; otherwise the proceedings shall take place in Beaumont, Jefferson County, Texas.
4. The arbitrators are relieved from all judicial formalities and are not bound by the Texas Rules of Civil Procedure [or] the Texas Rules of Civil Evidence. YOU and WE shall be bound by the decision of the arbitration panel rendered at the conclusion of the proceedings. Judgment upon the final decision of the arbitrators may be entered in any court of competent jurisdiction.
5. All costs, charges and expenses resulting from arbitration shall be apportioned equally between YOU and US. Such costs, charges and expenses shall not be considered as claim expense and shall not apply towards satisfaction of the deductible.
6. Any demand for arbitration must be initiated no later than twelve (12) months immediately subsequent to the accrual of either party's respective cause of action.
7. If any term, condition or provision of this paragraph shall be found invalid or unenforceable for any reason, such invalidity shall not affect the other provisions of this Agreement or paragraph and such provisions shall be fully severable and this Agreement or paragraph shall be construed and enforced as if the invalid provision had not been included herein.
Valid Agreement to Arbitrate
In the trial court, Stahlecker did not dispute the existence of a valid arbitration agreement and did not object to the insurance policy introduced at the hearing on Ranchers' motion. For the first time on appeal, she contends that Ranchers failed to conclusively establish the existence of a valid agreement to arbitrate. Because there are no written findings of fact and conclusions of law and the order is silent as to the reason for the trial court's ruling, Stahlecker argues that the ruling can be affirmed on any theory supported by the record. However, "the trial court's judgment implies all findings necessary to support it, provided the necessary findings are raised by the pleadings and supported by the evidence Volume Millwork, Inc. v. W. Houston Airport Corp., 218 S.W.3d 722, 729 (Tex. App.-Houston [1st Dist] 2006, pet. denied) (emphasis added) (citations omitted). Because the existence of the arbitration agreement was undisputed in the trial court, we will not imply a finding to the contrary. See Tex. R. App. P. 33.1(a); see also Kerr-McGee Corp. v. Helton, 133 S.W.3d 245, 251 (Tex. 2004); In re Steger Energy Corp., No. 04-01-00556-CV, 2002 Tex. App. LEXIS 7029, at **12-13 (Tex. App.-San Antonio Apr. 24, 2002, orig. proceeding) (not designated for publication) (declining to consider alternative objections to arbitration that were not raised before the trial court).
Scope of Arbitration Agreement
Ranchers contends that the trial court erred by denying the motion to compel arbitration because Stahlecker's contractual and extra-contractual claims fall within the scope of the arbitration agreement.
Stahlecker does not address this issue in her appellate brief.
"To determine whether a party's claims fall within an arbitration agreement's scope, we focus on the complaint's factual allegations rather than the legal causes of action asserted." FirstMerit, 52 S.W.3d at 754. "Generally, if the facts alleged `touch matters' that are covered by, have a `significant relationship' to, are `inextricably enmeshed' with, or are `factually intertwined' with the contract that contains the arbitration agreement, the claims are arbitrable." Bath Junkie Franchise, Inc. v. Hygiene, L.L.C, 246 S.W.3d 356, 366 (Tex. App.-Beaumont 2008, no pet.). "In other words, to come within the scope of the arbitration provision, a party's allegations need only be factually intertwined with arbitrable claims or otherwise touch upon the subject matter of the agreement containing the arbitration provision." Id.
The arbitration agreement states, "Should any dispute arise between YOU and US; from, through or by this policy, including any statutory law or common law right YOU have against US (excepting an alleged material misrepresentation contained in the application), then such dispute shall be arbitrated . . . [.]" (emphasis added). Such a broad provision favors arbitration. See Bath Junkie, 246 S.W.3d at 366; see also In re Conseco Fin. Servicing Corp., 19 S.W.3d 562, 570 (Tex. App.-Waco 2000, orig. proceeding); Babcock Wilcox Co. v. PMAC, Ltd., 863 S.W.2d 225, 230 (Tex. App.-Houston [14th] 1993, writ denied).
"[T]ort claims and claims other than breach of contract are not automatically excluded from a contractual arbitration clause." Gregory v. Electro-Mech. Corp., 83 F.3d 382, 384 (11th Cir. 1996) (involving such claims as fraud, breach of good faith and fair dealing). Also, "statutory claims may be the subject of an arbitration agreement, enforceable pursuant to the FAA." Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 26, 111 S.Ct. 1647, 114 L.Ed.2d 26 (1991); see Jack B. Anglin Co. v. Tipps, 842 S.W.2d 266, 270-71 (Tex. 1992) (Deceptive Trade Practices Act); see also Conseco, 19 S.W.3d at 570-71 (DTPA and Debt Collections Act); see LDF Constr., Inc. v. Bryan, No. 10-08-00315-CV, 2010 Tex. App. LEXIS 1913, at **15-16 n. 2 (Tex. App.-Waco Mar. 10, 2010, orig. proceeding) (not yet released for publication) (fraudulent lien statute). Statutory and tort claims are arbitrable when they are "factually intertwined with arbitrable claims or otherwise touch upon the subject matter of the agreement. . . ." Bath Junkie, 246 S.W.3d at 366; see Tipps, 842 S.W.2d at 270-271.
In her petition, Stahlecker alleges that the policy covered her losses, but Ranchers wrongfully denied her claims, underpaid claims, failed to pay all additional living expenses, delayed payment, and failed to provide full payment. She alleges that Ranchers breached the insurance policy by failing and refusing to pay adequate compensation in accordance with the policy and Texas law. Stahlecker contends Ranchers engaged in unfair settlement practices, in violation of the Insurance Code, by (1) misrepresenting material facts regarding coverage, when her losses were caused by a covered occurrence; (2) failing to settle her claims in a prompt, fair, and equitable manner and in good faith, despite knowledge of its liability under the policy; (3) failing to both explain the basis, under the policy, for underpayment or inadequate settlement, and communicate whether future payments would be made; (4) failing to affirm or deny coverage, in writing, within a reasonable time, or submit a reservation of rights; and (5) refusing to fully compensate her in accordance with the policy, failing to conduct a reasonable investigation, performing an "outcome-oriented investigation" with its adjuster, and producing a "biased, unfair and inequitable evaluation." Stahlecker alleges that Ranchers failed to promptly pay her claims, in violation of the Insurance Code, by (1) failing to timely acknowledge her claims, begin an investigation, and request information reasonably necessary for investigation; (2) failing to timely accept or deny her entire claim and notify her, in writing, of the acceptance or rejection of her claims; and (3) delaying full payment beyond the statutory time period. Asserting a claim for breach of the duty of good faith and fair dealing, Stahlecker alleges that Ranchers refused to pay in full, without a basis for doing so, failed to adequately and reasonably investigate and evaluate her claims, and knew or should have known, through reasonable diligence, that liability was clear. She contends Ranchers committed fraud by knowingly or recklessly making false representations of material fact or concealing material information. Finally, Stahlecker asserts that Ranchers conspired with its adjuster to achieve an unlawful purpose or a lawful purpose by unlawful means.
Absent the insurance policy, there would be no relationship between Stahlecker and Ranchers. See Bath Junkie, 246 S.W.3d at 366; see also AutoNation USA Corp. v. Leroy, 105 S.W.3d 190, 197 (Tex. App.-Houston [14th Dist] 2003, orig. proceeding); Conseco, 19 S.W.3d at 570; Bryan, 2010 Tex. App. LEXIS 1913, at *15. Regardless of how Stahlecker's claims are classified, her factual allegations all arise out of that contractual relationship and cannot be maintained without reference to the policy. See Leroy, 105 S.W.3d at 197; see also In re Sw. Lodging, Inc., No. 08-01-00072-CV, 2001 WL 636930, at *4 (Tex. App.-El Paso June 7, 2001, no pet.) (not designated for publication). Specifically, her allegations arise from the fact that she did not receive the coverage that she thought she should receive under the policy and that she suffered damages as a result of Ranchers' conduct and representations regarding coverage. See Gregory, 83 F.3d at 384. Her allegations depend on Ranchers' alleged failure to comply with the policy and, absent that alleged breach, there would be no tort or statutory claims for Stahlecker to assert. See id. Accordingly, we conclude that Stahlecker's claims touch upon, relate to, and are intertwined with the insurance policy; her claims fall within the scope of the arbitration agreement. See Bath Junkie, 246 S.W.3d at 366-67; see also Tipps, 842 S.W.2d at 270-271.
Unconscionability
Ranchers contends that the trial court erred by denying its motion to compel arbitration because Stahlecker failed to establish her defenses of procedural and substantive unconscionability.
"Unconscionability includes two aspects: (1) procedural unconscionability, which refers to the circumstances surrounding the adoption of the arbitration provision, and (2) substantive unconscionability, which refers to the fairness of the arbitration provision itself." In re Halliburton Co., 80 S.W.3d 566, 571 (Tex. 2002) (orig. proceeding). "[S]ince the law favors arbitration, the burden of proving a defense to arbitration is on the party opposing arbitration." FirstMerit, 52 S.W.3d at 756. "Unconscionability principles are applied to prevent unfair surprise or oppression." In re Palm Harbor Homes, Inc., 195 S.W.3d 672, 679 (Tex. 2006).
Procedural Unconscionability
Procedural unconscionability "relates to the actual making or inducement" of the arbitration clause. In re Oakwood Mobile Homes, Inc., 987 S.W.2d 571, 573 n. 3 (Tex. 1999) (orig. proceeding). "The focus is on the facts surrounding the bargaining process." In re Rangel, 45 S.W.3d 783, 786 (Tex. App.-Waco 2001, orig. proceeding).
"The principles of unconscionability do not negate a bargain because one party to the agreement may have been in a less advantageous bargaining position." Palm Harbor, 195 S.W.3d at 679. Nor do claims of unsophistication or inability to understand "establish procedural unconscionability as to adoption of the arbitration agreement." Id. "Under the FAA, unequal bargaining power does not establish grounds for defeating an agreement to arbitrate absent a well-supported claim that the clause resulted from the sort of fraud or overwhelming economic power that would provide grounds for revocation of any contract." AdvancePCS, 172 S.W.3d at 608.
In the trial court, Stahlecker challenged the arbitration agreement as procedurally unconscionable, arguing that the agreement: (1) is inconspicuous; (2) is ambiguous for lack of explanations regarding the process and consequences of arbitration; and (3) results from a disparity in bargaining power. Stahlecker argues that she was unsophisticated, she was not allowed to choose her insurer, she did not understand the policy terms, and the agreement was not sufficiently explained in the policy.
The heading of the arbitration agreement states, in bold-face capital letters, " TEXAS COMPREHENSIVE HOMEOWNERS PROGRAM COMPULSORY DISPUTE RESOLUTION ENDORSEMENT." The arbitration agreement is not hidden within the policy, but is found on its own separate page. The agreement provides that any dispute shall be arbitrated, that the parties waive their right to litigate in a court of law, including the right to a jury trial, and that the parties will be bound by the arbitration panel's decision. An arbitration agreement need not take any specific form, and this arbitration agreement was clearly identified and evidences an intent to arbitrate. See In re Macy's Tex., Inc., 291 S.W.3d 418, 419 (Tex. 2009) (orig. proceeding); see also Wachovia Secs., LLC v. Emery, 186 S.W.3d 107, 113 (Tex. App.-Houston [1st Dist] 2005, orig. proceeding); In re Orkin Exterminating Co., No. 01-01-00035-CV, 2001 Tex. App. LEXIS 5245, at *4 n. 2 (Tex. App.-Houston [1st] Aug. 2, 2001, orig. proceeding) (not designated for publication). The arbitration agreement is both conspicuous and unambiguous.
We note that the FAA would likely preempt any conspicuousness requirement imposed by Texas law. See AutoNation USA Corp. v. Leroy, 105 S.W.3d 190, 199 (Tex. App.-Houston [14th] 2003, orig. proceeding); see also In re Orkin Exterminating Co., No. 01-01-00035-CV, 2001 Tex. App. LEXIS 5245, at *4 n. 2 (Tex. App.-Houston [1st] Aug. 2, 2001, orig. proceeding) (not designated for publication).
Additionally, Stahlecker's claims that she was unsophisticated, did not understand the policy, and was not allowed to choose her insurer do not amount to procedural unconscionability. See Palm Harbor, 195 S.W.3d at 679; see also AdvancePCS, 172 S.W.3d at 608; see also Halliburton, 80 S.W.3d at 572; Smith v. H.E. Butt Grocery Co., 18 S.W.3d 910, 912 (Tex. App.-Beaumont 2000, pet. denied); Farmers, 2008 Tex. App. LEXIS 3651, at **6-7. As the insured, Stahlecker bore a "duty to read the policy and, failing to do so, is charged with knowledge of the policy terms and conditions." Ruiz, 4 S.W.3d at 841; see In re Green Tree Servicing LLC, 275 S.W.3d 592, 603 (Tex. App.-Texarkana 2008, orig. proceeding); see also Farmers, 2008 Tex. App. LEXIS 3651, at *7. Ranchers was not required to explain the agreement to Stahlecker. See Ruiz, 4 S.W.3d at 841; see also Green Tree, 275 S.W.3d at 603; Farmers, 2008 Tex. App. LEXIS 3651, at *7.
As previously stated, procedural unconscionability requires a showing of "fraud or overwhelming economic power." AdvancePCS, 172 S.W.3d at 608. In this case, the record contains no evidence suggesting that Stahlecker was incapable of reading and understanding the arbitration agreement or that Ranchers engaged in fraud or misrepresentations regarding the arbitration agreement. See AdvancePCS, 172 S.W.3d at 608; see also Green Tree, 275 S.W.3d at 603; Rangel, 45 S.W.3d at 786-87. Because the record is devoid of evidence establishing fraud or overwhelming economic power, we cannot say that the arbitration agreement is procedurally unconscionable. See AdvancePCS, 172 S.W.3d at 608.
Substantive Unconscionability
"The test for substantive unconscionability is whether, `given the parties' general commercial background and the commercial needs of the particular trade or case, the clause involved is so one-sided that it is unconscionable under the circumstances existing when the parties made the contract.'" Palm Harbor, 195 S.W.3d at 678; FirstMerit, 52 S.W.3d at 757. "Substantive unconscionability refers to whether the arbitration provision ensures preservation of the substantive rights and remedies of a litigant." In re Odyssey Healthcare, Inc., 310 S.W.3d 419, 422 (Tex. 2010) (orig. proceeding).
Stahlecker argues that the arbitration clause is substantively unconscionable because it contains a fee-splitting provision that deprives her of a statutory right and remedy provided by section 541.152 of the Insurance Code.
In the trial court, Stahlecker also argued that the arbitration agreement is substantively unconscionable because it is contradicted by other provisions in the insurance policy. She abandons this argument on appeal, except in support of her unpreserved challenge to the existence of the arbitration agreement. See In the Interest of C.P.V.Y., 315 S.W.3d 260, 269 (Tex. App.-Beaumont 2010, no pet.) (Error is not preserved for appellate review when the "trial objection does not comport with the issue [] raise[d] on appeal."). She also abandons her argument that the enforcement of the arbitration agreement "would not do justice, avoid prejudice, or promote judicial convenience."
The Insurance Code allows a prevailing plaintiff to recover actual damages, court costs, and reasonable and necessary attorney's fees. See Tex. Ins. Code Ann. § 541.152(a)(1) (West 2009). The arbitration agreement, however, requires that "[a]ll costs, charges and expenses resulting from arbitration" be apportioned equally between the parties to the contract.
In Security Service Federal Credit Union v. Sanders, 264 S.W.3d 292 (Tex. App.-San Antonio 2008, orig. proceeding), the San Antonio Court dealt with: (1) a general arbitration agreement that required the arbitrator to "assess attorney's fees and costs against consumers if they are unsuccessful in prosecuting a DTPA action, without the statutorily-required finding of groundlessness or its equivalent"; and (2) a loan arbitration agreement that required the parties to "each bear the expense of their own counsel and to bear other costs equally," despite the DTPA's provision allowing the prevailing plaintiff to recover attorney's fees and costs. Sanders, 264 S.W.3d at 299; see Tex. Bus. Com. Code Ann. § 17.50 (West Supp. 2010). The San Antonio Court found the provisions to be substantively unconscionable:
Given the public purpose served by the DTPA — encouraging individual consumers to prosecute consumer claims and making it economical for them to do so — we are of the opinion that the attorney's fees and costs provisions in both arbitration agreements are unconscionable when applied to DTPA claims. By agreeing to arbitrate their DTPA claim, the Sanderses did "not forgo the substantive rights afforded by the statute;" they "only submitted their claim] to . . . resolution in an arbitral, rather than a judicial, forum." Because the attorney's fees and costs provisions in these arbitration agreements substantially diminish the Sanderses' DTPA rights and are contrary to Texas public policy, the trial court did not abuse its discretion in concluding these provisions were substantively unconscionable as a matter of law as applied to the Sanderses' DTPA claims.
Sanders, 264 S.W.3d at 300 (internal citations omitted). The loan arbitration agreement could not be enforced because it contained a clause prohibiting severance. See id. at 300-01.
The Texas Supreme Court subsequently decided In re Poly-America, L.P., 262 S.W.3d 337 (Tex. 2008) (orig. proceeding), in which an arbitration clause in an employment contract provided: "[I]n the event of a claim, all fees related to arbitration — including but not limited to mediation fees, the arbitrators' fees, costs of procuring a location for a hearing, and court reporter fees — will be split equally between the employer and the employee, with the employee's contribution capped. . ." Poly-America, 262 S.W.3d at 353. The Supreme Court held:
[F]ee-splitting provisions that operate to prohibit an employee from fully and effectively vindicating statutory rights are not enforceable. However, this Court joins the majority of other courts which — though recognizing the same policy concerns articulated by courts holding fee-splitting arrangements per se unconscionable — require some evidence that a complaining party will likely incur arbitration costs in such an amount as to deter enforcement of statutory rights in the arbitral forum.
Id. at 356 (internal citations omitted). The contract allowed the arbitrator to modify unconscionable terms; thus, "if the cost provisions precluded Luna's enforcement of his non-waivable statutory rights, they would surely be unconscionable . . . and the arbitrator would be free to modify them." Id. at 357. "The arbitrator is better situated to assess whether the cost provision in this case will hinder effective vindication of Luna's statutory rights and, if so, to modify the contract's terms accordingly." Id.
Ranchers contends that, pursuant to Poly-America, Stahlecker failed to present evidence of the fee-splitting provision's unconscionability. We interpret that to mean that Stahlecker did not present the trial court with any evidence which would allow the court to rule the operative language as substantively unconscionable. We agree with this assessment. The Supreme Court stated in Poly-America that the arbitrator would be in a better position to "assess whether the cost provision . . . will hinder effective vindication" of a statutory right. Under the facts of this case, we believe the arbitrator in this dispute would be better able to resolve this question.
Conclusion
Because Stahlecker's claims fall within the scope of the arbitration agreement, and the agreement is neither procedurally unconscionable nor substantively unconscionable, we hold that the trial court erred by denying Ranchers' motion to compel arbitration. We sustain Ranchers' sole issue, reverse the trial court's order denying Ranchers' motion to compel arbitration, and remand this cause to the trial court for further proceedings consistent with this opinion.
REVERSED AND REMANDED.