Action Against Workers' Comp Claims Administrator Not Covered by Insurer's Arbitration Provision, Court of Appeal Rules

by Hinshaw & Culbertson LLP

[author: Gail E. Cohen]

In DMS Services, Inc. v. Superior Court, the Plaintiff brought suit in California state court for breach of contract, bad faith and related claims against the third-party administrator, or TPA, responsible for managing its workers’ compensation claims. It also sued its workers’ compensation insurer, Zurich Insurance, for declaratory relief contending that the insurer’s high deductible insurance agreement (also known in the industry as a payment agreement) containing an arbitration clause was invalid under California Insurance Code section 11658 since it was not approved by the Department of Insurance.

In a pattern not uncommon in these cases, Plaintiff’s lawsuit came on the heels of the insurer’s demand and pursuit of arbitration for monies owed by the insured for insurance claim deductibles and unpaid losses.

In response, the insurer and TPA filed a joint petition to compel arbitration of all of the state court claims under the arbitration clause contained in the insurer’s high-deductible agreement, or, in the alternative, to stay the action pending the outcome of the arbitration between the insured and insurer. DMS, in turn, filed a separate motion to stay the arbitration arguing that there was the “possibility of conflicting rulings on common issues of law and fact.” The trial court granted the petition, rejected the Plaintiff’s request for a stay, and Plaintiff appealed.

The California Court of Appeal, Second Appellate District, reversed, holding that the claims against the TPA were not subject to arbitration and that, as a consequence, it need not address the merits of the Plaintiff’s contentions concerning the invalidity of the deductible agreement.

In reversing the ruling as to the arbitrability of the claims against the TPA, the court of appeal emphasized that the TPA was not a signatory to the deductible agreement containing the arbitration clause and further highlighted the fact that there was a separate claims service agreement between the TPA and the insured which did not contain an arbitration provision. It also reasoned that the insured’s claims against the TPA for breach of its administration agreement were not “founded in” and “inextricably intertwined” with the insurance policies, the test for binding a nonsignatory to an arbitration agreement under the equitable estoppel doctrine. E.g., Molecular Analytical Systems v. Cipergen Biosystems, Inc., 186 Cal. App. 4th 696, 708 (2010), cited with approval.

Note: A pivotal factor underlying the court of appeal’s conclusion was its finding that the TPA, though affiliated with the insurer Zurich, was not, nor alleged to be, an agent of the insurer. In so ruling, the court factually distinguished the federal district court’s decision in NS Holdings LLC Inc. v. American International Group Inc. According to the DMS court, in NS Holdings, the TPA at issue (also a company related to the insurer) entered into a claims services agreement with the insurer, and thus was its agent and covered by the insurer’s arbitration agreement with its insured, even if it was not a signatory to that agreement.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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