South Carolina Supreme Court Says “No” to Binding Non-Signatories to Arbitration ClauseThe Supreme Court of South Carolina recently determined that non-signatory insureds could not be compelled to arbitrate their claims under an arbitration clause in an agency agreement where the insureds did not obtain a direct benefit from that agreement.

In Wilson v. Willis,  the court considered 14 lawsuits that had been filed against an agent, the insurance broker who hired her, their insurance agency (Southern Risk Insurance), and six insurers for which their office sold policies. Twelve of the suits were filed by insureds who were customers of the agent, and two lawsuits were filed by other insurance agents (collectively, petitioners) who were in competition with the defendant agent and Southern Risk Insurance. The suits asserted various causes of action, including violations of the Unfair Trade Practices Act, and claimed that the broker, Southern Risk Insurance, and the insurers failed to prevent their agent from defrauding the insureds and stifling competition in the local insurance market.

Approximately one year into the lawsuit, three of the insurers filed motions to compel arbitration and dismiss the suits. Those insurers argued that a 2010 agency agreement they had signed with Southern Risk Insurance contained an arbitration provision and that petitioners were third-party beneficiaries to that agreement. The insurers argued that the petitioners were bound by the arbitration clause, which required arbitration of “any dispute or disagreement [that arose] in connection with the interpretation of th[e] [a]greement, its performance or nonperformance, its termination, the figures and calculations used or any nonpayment of accounts,” and were equitably estopped from asserting their non-signatory status, because any claims asserted by petitioners were based upon duties that would not exist but for the 2010 agency agreement.

The trial court denied the motion to compel arbitration, and the court of appeals reversed, finding that the petitioners were equitably estopped from asserting their non-signatory status. In reversing, the court of appeals relied on the direct benefits test it had articulated in Pearson v. Hilton Head Hospital. Under that test, a non-signatory to an agreement containing an arbitration clause will be bound by that clause if the non-signatory receives a direct benefit from the agreement that contains the clause. In other words, under the direct benefits test, a non-signatory cannot assert his or her non-signatory status under an agreement containing an arbitration clause while simultaneously maintaining that other aspects of that agreement apply to his or her benefit. The court of appeals held that, because the petitioners’ claims arose out of duties created by the 2010 agency agreement and the relationship the agreement created between the insurers and Southern Risk Insurance, they were equitably estopped from asserting their non-signatory status.

On de novo review, the Supreme Court of South Carolina reversed, finding that the arbitration clause was not enforceable against the petitioners. The court emphasized the distinction between direct benefits and indirect benefits, explaining that a direct benefit is one that flows directly from the agreement containing the arbitration clause. On the other hand, an indirect benefit is one where a non-signatory exploits the contractual relationship created by the agreement, rather than the agreement itself. The court noted that the petitioners were unaware of the 2010 agency agreement until the insurers filed their motions to compel arbitration, the petitioners had not asserted a claim for breach of contract, and there was no evidence that the petitioners had knowingly exploited or received a direct benefit from the agency agreement itself. Therefore, any benefit the petitioners gained from the agency agreement was indirect, and they could not be compelled to arbitrate their claims under a theory of equitable estoppel under South Carolina law.

As state courts continue to grapple with the circumstances in which an arbitration clause may be enforced against a non-signatory, insurers seeking to enforce arbitration clauses in such a manner should take extra precaution to make the intention to include non-signatories clear, such as including explicit language in agency agreements that the arbitration clause applies to all third-party beneficiaries of the agreement and informing the insureds that any claims they have related to their policies may be subject to arbitration pursuant to an agency agreement.

We all know how prevalent bad faith claims are. It seems like almost every case involving disputed policy benefits includes one. Many have no merit and should be disposed of on summary judgment. The rest, however, arguably have at least some degree of legitimacy. While it may not seem that difficult to identify those that present significant exposure, the large verdicts we continue to see suggest otherwise. So how can insurers distinguish between a garden-variety bad faith claim with, at most, low six-figure exposure versus one that could result in a multimillion-dollar verdict?

First, it’s important to recognize that insurers instinctively evaluate cases based on factors that are insurer-centric: What is the amount of policy benefits? What are the terms of the policy? Did the company make the right decision? What kind of witness will the corporate representative(s) make? What will it cost to defend the case? These questions are familiar to all of us—and rightfully so. They are particularly useful for evaluating a breach of contract claim, or even a bad faith claim prior to summary judgment. However, they have less relevance once it becomes clear that the bad faith claim will be submitted to a jury. Good plaintiffs’ lawyers rely on different factors when evaluating a case: How sympathetic is the plaintiff? How badly did the plaintiff need the benefits? Has the plaintiff changed his or her position based on the denial? Did the insurer give the plaintiff the runaround? Does the basis for denial resonate with an average person? Is there evidence indicating the insurer was more concerned about the financial impact of the coverage decision than processing the claim correctly? The answers to these questions often provide the most reliable indication of whether the jury may render a headline-grabbing verdict.

$25.5 Million Oklahoma Verdict: Jackpot Justice or Case StudyA good example is the recent $25.5 million verdict in Oklahoma against Aetna. The case involved the 2014 denial of health insurance coverage for a specific cancer treatment on the basis that it was experimental. The plaintiff, Orrana Cunningham, who died in May 2015, suffered from stage 4 nasopharyngeal cancer near her brain stem. Her doctors at M.D. Anderson recommended proton beam therapy, a targeted form of radiation that could pinpoint her tumor without the potential for blindness or other side effects of standard radiation. After Aetna denied coverage for this treatment, Cunningham and her husband Ron, a retired Oklahoma City firefighter, mortgaged their dream home to pay for the $92,000 therapy. They also started a GoFundMe page.

At trial, plaintiff’s counsel presented evidence that Medicare covers proton beam therapy and that insurers often cover it for an array of pediatric cancer patients. He also presented evidence that Aetna did not carefully review the claim. For example, Aetna’s medical director testified that he sometimes reviewed up to 80 claims per day. At the same time, Aetna’s counsel told the jury that Aetna was proud of how the claim was handled. The jury disagreed. It concluded that Aetna recklessly disregarded the duty it owed to Ms. Cunningham, rendering a verdict for $15.5 million in mental anguish damages and $10 million in punitive damages.

Reviewing the factors noted above, the risk of a large verdict was obvious. The plaintiff was sympathetic. She and her husband badly needed the benefits. They had to mortgage their house as a result of the denial and ask their friends for money. And the jury didn’t buy the basis for the denial, finding instead that the insurer was more concerned about its profits than carefully administering Ms. Cunningham’s claim.

Bad faith claims are so prevalent, it is easy to become desensitized to the risk they pose.  Nevertheless, once summary judgment has been denied, these claims can present significant exposure for insurers. The factors listed above that are considered by both insurers’ and insureds’ attorneys will help you decide when to fight and when to write a check.

The Bradley team will continue to monitor and report on significant bad faith developments.

Ex-Spouse May Not Be Removed as Beneficiary of Life Insurance Policy under New York’s Revocation on Divorce StatuteA recent Second Circuit opinion highlights an important nuance in New York’s revocation on divorce statute, N.Y. Est. Powers & Trusts Law § 5-1.4. In New York Life Insurance Company v. Sahani, the Second Circuit affirmed the district’s courts finding that a decedent’s ex-spouse was entitled to life insurance policy proceeds despite divorcing the decedent the year prior.

In 2001, New York Life Insurance Company issued a $250,000 whole life insurance policy to the decedent. The decedent’s mother, Shukti Singh, was the beneficiary of the whole life policy. In 2007, the decedent married Seema Sahani. Shortly thereafter, the decedent transferred ownership of the whole life policy to Sahani and designated her as the primary beneficiary. Also in 2007, New York Life issued a $1 million term life insurance policy on the decedent’s life to Sahani. Sahani was both the beneficiary and owner of the term life policy. In 2013, the decedent and Sahani divorced. In 2014, the decedent died. Both Sahani and the decedent’s mother, Singh, made claims to New York Life under both policies.

New York’s revocation on divorce statute, EPTL § 5-1.4(a), provides that a divorce revokes any revocable disposition made by a divorced individual to his or her former spouse in a life insurance policy.  Among other things, Singh argued that New York’s revocation on divorce statute applied under these facts and revoked Sahani’s beneficiary designation under the policies. The Second Circuit disagreed. Looking “first to plain language of the statute,” the court held “§ 5-1.4(a) does not apply to the situation here.” According to the court, “the beneficiary designation was not ‘revocable’ because the decedent was not ‘empowered’ to cancel it, since Sahani—not the decedent—was the owner of both policies at the time of the divorce.” As the opinion highlights, Sahani was entitled to the policies’ death benefits because she was the owner and beneficiary of the policies. Conversely, if the facts were slightly altered and the decedent had retained ownership of the policies, the ex-spouse would not have been awarded the death benefits because New York’s revocation statute would have revoked her beneficiary designation.

Moreover, the Sahani opinion is instructive for an additional reason—it is an interpleader action. When faced with Sahani’s and Signh’s claims, New York Life interplead the funds and moved for discharge pursuant to 28 U.S.C. § 2361. Early in the lawsuit, the district court granted New York Life’s motion and dismissed New York Life from the lawsuit. Unlike some states’ revocation on divorce statutes, New York’s statute does not expressly insulate insurers from liability to a former spouse when interpleading the contested funds (compare § 5-1.4 with Tex. Fam. Code Ann. § 9.301(c)(2), insulating insurer from liability where insurer interpleads proceeds). However, interpleader should still be considered a viable option where uncertainty exists as to the facts or operation of the statute. Insurers are afforded some protection under the New York law. In New York, insurers are not liable for making a payment to a former spouse unless the insurer “received written notice of the divorce, annulment, or remarriage” at the insurer’s “main office.”

This blog continues a series of blogs addressing this issue and the particulars of revocation on divorce statutes nationwide. If there is a specific state you are interested in or a global question that needs to be addressed, please comment below.