Seventh Circuit: Arbitration proper in asbestos insurance dispute

By Heather Isringhausen Gvillo | Nov 5, 2014

CHICAGO (Legal Newsline) – The U.S. Court of Appeals for the Seventh Circuit has held that arbitration was proper in an asbestos insurance dispute in which the plaintiff rejected relief in arbitration only to seek the same relief in a court action.

Judge Richard A. Posner delivered the Oct. 28 opinion reversing the district court’s judgment. Judges William J. Bauer and Frank H. Easterbrook concurred.

Plaintiff Hennessy Industries, a manufacturer of car parts, has been involved in asbestos litigation since the 1980s and is seeking coverage by defendant National Union Fire Insurance Company for asbestos personal injury claims.

The two companies entered into a confidential cost-sharing agreement in 2008, and Hennessy asked National Union to insure it for settlement and defense costs arising out of asbestos lawsuits. However, the two parties could not agree over what was owed.

Hennessy argued that National Union withheld payments and violated the agreement. The plaintiff demanded arbitration in accordance with a provision of the agreement in order to resolve the dispute.

This appeal arises out of Hennessy’s suit filed last year in the U.S. District Court for the Northern District of Illinois, Eastern Division, alleging National Union’s delays in providing coverage had been “vexatious and unreasonable.”

National Union, on the other hand, moved the district court to order arbitration and dismiss Hennessy’s suit, which was denied. The district court held that Hennessy’s claim arose under Illinois statutory law rather than under the cost-sharing agreement.

National Union appealed.

On appeal, Posner explained that “National Union is asking that an additional issue be submitted to arbitration rather than that the arbitrator be instructed to resolve an issue in an existing arbitration a certain way.”

As a result, the appeals court found that the district court had jurisdiction over the matter and properly denied the defendant’s request for dismissal.

In its appeal, National Union argued a passage from the cost-sharing agreement that the district court relied upon in its decision is a waiver of any claim that Hennessy might have. The clause states that “the arbitrators shall not be empowered or have jurisdiction to award punitive damages, fines or penalties.”

National Union further argues that the cost-sharing agreement requires arbitration of any dispute requiring interpretation of the agreement, and because Hennessy’s claim requires an interpretation of the agreement it must be arbitrated.

The appeals court concluded that National Union’s belief that the Federal Arbitration Act preempts section 155 of the Illinois Insurance Code is not a persuasive argument.

“Apart from the fact (not itself decisive) that it is part of the state’s insurance code, it is concerned only with the conduct of insurance companies, specifically delay by them in paying claims to their insureds,” Posner wrote.

Citing an Illinois intermediate appellate court decision, Hennessy argued that “arbitrators have no authority to enforce section 155 because it provides that if specified conditions are met ‘the court may allow as part of the taxable costs in the action reasonable attorney fees [and] other costs …’”

The appeals court found it odd that Hennessy would take such a position considering it disables the plaintiff from seeking penalties in arbitration – the very penalties that it is seeking under section 155 in court.

Posner elaborated, stating that section 155 addresses remedies rather than jurisdiction or venue and “provides a remedy in a specified type of ‘action’; it does not create a cause of action; it presupposes rather than authorizes a suit.”

 “We can’t think why arbitrators would be thought incompetent to enforce section 155, especially since if the parties don’t want it enforced they can, as in this case, agree in the arbitration clause to deny the arbitrators the authority to enforce it,” Posner wrote. “Hennessy is not some hapless consumer who has to be protected by the courts from improvidently consenting to arbitrate a dispute with a big bad seller.”

The appeals court added that National Union is correct that Hennessy waived any right to ask the arbitrator to award punitive damages, fines or penalties.

“Having submitted a dispute to arbitration that explicitly excludes a particular remedy, a party can’t sue in court for the excluded remedy,” it held.

As a result, the appeals court instructs the district court to order arbitration of Hennessy’s section 155 claims and dismiss its suit.

From Legal Newsline: Reach Heather Isringhausen Gvillo at asbestos@legalnewsline.com

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