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Arbitration: Signed Agreement to Arbitrate vs Rule Making Power

Posted by Ted A. Schmidt | Feb 26, 2018 | 0 Comments

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Arbitration: Signed Agreement to Arbitrate vs Rule Making Power

Allstate Prop. & Cas. Ins. Co. v. Watts Water Technologies, Inc., __ Ariz. Adv. Rep. __, No1 CA CV 16-0500 (App. Div. I, February 6, 2018) (J. Gemmill)

WHERE PARTIES SIGNED CONTRACT AGREEING TO ARBITRATE CLAIMS AND LATER AMENDED THE AGREEMENT EXCLUDING PRODUCTS CLAIMS, PRODUCT CLAIMS ACCRUING BEFORE AMENDMENT MUST BE ARBITRATED; ATTEMPT TO APPLY EXCLUSION TO PRODUCT CLAIMS ACCRUING BEFORE AMENDMENT BUT FILED AFTER BASED UPON AN E-BULLETIN NOT SIGNED BY THE PARTIES WAS A SUBSTANTIVE CHANGE NOT ALLOWED EVEN UNDER INSURER'S CONTRACTUAL RIGHT TO MAKE RULES AND REGULATIONS FOR THE PROCESSING OF CLAIMS

State Farm Fire and Casualty Insurance Company [State Farm] signed a contract in 2005 with Watts Water Technologies, Inc. [Watts] requiring the parties to arbitrate property subrogation claims of $100,000 or less. The contract also provided that State Farm had the right to make “appropriate Rules and Regulations for the presentation of and determination of controversies” under the agreement. In 2014 State Farm announced in an e-bulletin that effective January 1, 2015 it was adding an exclusion to the arbitration agreement for product liability claims “filed after January 1, 2015.” The amendment itself, however, was silent as to matters accruing prior to January 1, 2015 but filed after that date. In January 2015 an amendment to the agreement was added requiring that without “written consent” parties were no longer obligated to arbitrate product liability claims.  The amendment did not include the e-bulletin language excluding product liability claims filed after January 15, 2015 from arbitration and the parties never signed an agreement that such a deadline would apply to products claims accruing before January 1, 2015.

In 2016 State Farm filed several lawsuits alleging product liability against Watts all of which though filed after January 1, 2015 accrued prior to that date. Watts moved to dismiss or in the alternative for a stay and order compelling arbitration.  The Maricopa County Superior Court denied the motion and Watts appealed. The Arizona Court of Appeals consolidated these property subrogation matters and reversed and remanded.

The court of appeals found that where the amendment to the agreement did not address whether it was applicable to matters accruing before it was promulgated, the original agreement requiring arbitration would be controlling.   Since the exclusion as articulated in the e-bulletin would make a substantive change to the agreement, it could not be enforced as a “Rule or Regulation” promulgated by State Farm under its rule making power.

Finally, A.R.S. § 12-1501 requires this result:

A written agreement to submit any existing controversy to arbitration or a provision in a written contract to submit to arbitration any controversy thereafter arising between the parties is valid, enforceable and irrevocable, save upon such grounds as exist at law or in equity for the revocation of any contract.     

(Emphasis added)

About the Author

Ted A. Schmidt

Ted's early career as a trial attorney began on the other side of the fence, in the offices of a major insurance defense firm. It was there that Ted acquired the experience, the skills and the special insight into defense strategy that have served him so well in the field of personal injury law. Notable among his successful verdicts was the landmark Sparks vs. Republic National Life Insurance Company case, a $4.5 million award to Ted's client. To this day, it is the defining case for insurance bad faith, and yet it is only one of several other multi-million dollar jury judgments won by Ted during his career. He is certified by the State Bar of Arizona as a specialist in "wrongful death and bodily injury litigation".

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