Arbitration Clause V. Service of Suit Clause

Law Talk

An Appellate Court case dealt with arbitration clauses in insurance contracts. However, the rationale applies to all types of contracts.

Antone Boghos ("Boghos"), the owner of a plumbing business, had a disability insurance contract with a Los Angeles insurance broker. The policy was underwritten by certain underwriters at Lloyd's of London ("Underwriters"). The Underwriters "granted coverage for monthly payments of up to $10,000 for up to 60 months in the event Boghos, because of accident or sickness became unable to perform the material and substantial duties of his occupation." The contract also contained an arbitration clause, which provided that "any dispute concerning this insurance must be submitted to binding arbitration..."

In May 2000, Boghos was involved in an accident that caused severe injuries. As a result, he was unable to return to work. Underwriters began paying Boghos his disability benefits. In December, Underwriters informed Boghos that they would no longer continue paying. As a result, in November 2001, Boghos sued the Underwriters. In turn, Underwriters tried to get the case out of the court system and seek arbitration. The trial court and the appellate court denied their request. However, the Supreme Court did not agree with the lower courts.

The main issue in this case is the interplay between a "service of suit" clause and an arbitration clause in the same contract. The service of suit clause, in this case, stated that if Underwriters fail to pay, then Boghos can take them to court. On the other hand, the arbitration clause stated that all disputes would be arbitrated. So how did the court reconcile the two?

First, the court tries to give effect to the parties' intentions and their reasonable expectations. The Federal Arbitration Act has a preference for arbitration and, in cases such as these; the courts will lean toward arbitrating a dispute rather than going through litigation.

Luckily, the contract contained language-establishing priority between the two clauses. The first sentence of the arbitration clause stated: "Notwithstanding any other item set forth herein, the parties hereby agree that any dispute which arises shall be settled in Binding Arbitration." The phrase, "notwithstanding any other item," clearly indicates an intention to arbitrate all disputes even if another clause, read in isolation, would seem to demand otherwise.

The court decided that the "service of suit" clause forces Underwriters to submit to the jurisdiction of the courts in only two actions. First, when the parties themselves agree, not to arbitrate. Second, after the parties have gone through arbitration, and are trying to enforce an arbitration award. Boghos tried to argue that this right was already guaranteed by law and therefore unnecessary in the contract. This is because an arbitration award is not self executing. That is to say that if a party is required to do something (like paying money) after an arbitration award and that party does not comply, one would have to go to court to enforce the arbitration award. However, a contract term is not redundant because is confers a right already in a statute.

Furthermore, the court stated that a reasonable person reading the bolded arbitration provision and signing under the disclaimer, "underst[oo]d and agree[d] that any dispute concerning this insurance must be submitted to binding arbitration." Boghos could not argue otherwise.

For these reasons, the court felt the parties had agreed to arbitrate their disputes when they entered into an agreement. This is yet another example of the strong presumption in favor of arbitration.