A group of insurance policy purchasers and rival insurance agents who are suing a gaggle of big insurance companies for allegedly failing to train and supervise an insurance broker who committed fraud will not be bound by a mandatory arbitration clause in the contract between the brokerage and the insurance companies whose policies they sold, the South Carolina Supreme Court has ruled.
Most of the plaintiffs in the case are customers of Southern Risk Insurance Company. They allege that Laura Willis, a Southern Risk employee, committed fraud by forging insurance documents and pocketing their payments, leaving them with either no coverage or reduced coverage. Two competing agents allege that Willis also engaged in illegal business practices that effectively blocked them from the local market. They’re suing Willis, Southern Risk, and six insurance companies whose policies they sold.
Three of those insurers sought to compel arbitration, citing a mandatory arbitration clause in their contract with Southern Risk. Abbeville County Circuit Court Judge Eugene Griffith denied the motion, but the Court of Appeals reversed that ruling in 2016.
But April 10, the Supreme Court unanimously reversed and sent the suit back to circuit court, ruling that even though the plaintiffs’ claims were premised on duties that would not exist if not for the contracts between Southern Risk and the insurers, the mandatory arbitration clauses did not apply to plaintiffs who were not parties to those agreements and were unaware that the clauses existed.
Chief Justice Donald Beatty, writing for the court, said that the law’s presumption in favor of arbitration agreements applies to the scope of an agreement, not to the existence of such an agreement or to the identity of the parties who may be bound to such an agreement.
“To hold otherwise would arguably allow Respondents to commit unfair trade practices and conspire to destroy the businesses of other insurance agencies while shielding themselves from the possibility of a jury trial with an arbitration clause agreed to only by the conspiring parties,” Beatty wrote.
The policy favoring arbitration cannot justify requiring litigants to forego a judicial remedy when they have not agreed to do so, Beatty wrote. Moreover, because arbitration, while favored, exists solely by agreement of the parties, a presumption against arbitration arises where the party resisting arbitration is a non-signatory to the written agreement to arbitrate.
Beatty wrote that the pact between Southern Risk and the insurers was made solely for their own benefit and any benefits the plaintiffs obtained from it were indirect. There was no evidence that Southern Risk’s customers knew when they paid for their insurance policies that any claims of fraud or unfair trade practices would be subjected to an arbitration provision, Beatty said.
Tommy Hite Jr. of Hite & Stone in Abbeville, who represents the plaintiffs, said that his clients didn’t even know there was an arbitration clause in the companies’ agreement, and didn’t rely on it in any way.
“The Supreme Court said we are not going to enforce that clause against a non-signatory, someone who didn’t even know the clause existed,” he said. “The Court of Appeals had taken away the right to a jury trial, and the right to a jury trial is one of the most important things in this country. We are very, very happy with the decision. It’s been a long battle.”
Mitchell Brown of Nelson Mullens in Columbia represented the defendants. He could not be reached for comment.
The 15-page decision is Wilson v. Willis (Lawyers Weekly No. 010-023-19). The full text of the decision is available online at sclawyersweekly.com.
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