This past week, the Supreme Court of Texas addressed the issue of arbitration provisions in an insurance policy enforced by non-signatories. In Jody James Farms, JV v. Altman Group, Inc., No. 17-0062, 2018 WL 2168306 (May 11, 2018) the underlying claim arose from a dispute involving a crop revenue coverage insurance policy purchased by Jody James Farms from Rain & Hail, LLC and reinsured by the Federal Crop Insurance Corporation. The policy was purchased through the Altman Group, an independent insurance agency. The policy included an arbitration provision for disputes under the contract. Neither the Altman Group nor its employees were named in the policy.

James suffered a grain sorghum crop loss and filed a claim with Rain & Hail which was denied on several bases including for failure to provide timely notice of the damage. The parties arbitrated the dispute and the arbitrator agreed with Rain & Hail that James failed to timely present notice of the claim. As a result, James sued the Altman Group and is agent (together the “Agency”) for breach of fiduciary duty and deceptive trade practices for the agency’s failure to timely submit the crop-loss claim to Rain & Hail. The Agency moved to compel arbitration which James opposed. The court granted the arbitration which was resolved in favor of the Agency. The court of appeals confirmed the arbitrator’s award and James appealed—challenging the arbitrator’s authority to determine whether a non-signatory can compel a signatory to arbitrate under the policy.

The central issue was whether the arbitration provision in the underlying insurance agreement between James and Rain & Hail reflected an intent to allow third parties like the Agency to arbitrate as well. The Court concluded that it did not. Specifically, an arbitration is a reflection of the parties’ intent and the Court could not find that the underlying policy reflected an intent between the parties to arbitrate claims outside of those between signatories. Considering the policy, the Court noted that the Agency’s alleged failure to inform Rain & Hail of James’ claim in a timely matter was not a dispute between Rain & Hail and James.

The Court further addressed and rejected the Agency’s alternative arguments for arbitration under theories including agency, third-party beneficiary status and estoppel. Although an agent of a signatory may, at times, invoke an arbitration clause against another signatory, because the record did not reflect that Rain & Hail had control over the Agency’s actions in relaying James’ claim, the Agency could not compel arbitration. Arbitration may also be enforced with respect to third-party beneficiaries when the contracting parties intended to secure a benefit to the third party and entered into a contract to confer a benefit to the third party. However, because neither the insurance agreement nor the Federal Crop Insurance Act conferred a direct benefit to the Agency, the Agency could not compel arbitration based on a third-party benefit. Finally, the court rejected the Agency’s argument in favor of arbitration based on direct-benefit and alternative theories of estoppel since the underlying policy did not directly impose obligations or duties on the Agency and the Agency’s relationship to Rain & Hail was not close enough to imply James’ consent to arbitrate the suit.

The Court concluded that James and the Agency did not agree to arbitrate their dispute and James could not be compelled to arbitrate under the agency, third-party beneficiary, or estoppel theories. Accordingly, the Court reversed and remanded the case and vacated the arbitrator’s award.

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