LOS ANGELES (Legal Newsline) – A California appeals court has ruled a courtroom, and not arbitration, is the proper place for an insurance company to sort out its dispute with the Los Angeles Unified School District in the wake of a sexual abuse scandal.

The California Court of Appeal Second Appellate District, Division Eight on July 12 affirmed a ruling denying a motion to compel arbitration from Safety National Casualty Corp., which sought to overturn a decision from the Superior Court of Los Angeles under the Federal Arbitration Act (FAA).

Safety National was one of 27 insurance companies that the Los Angeles Unified School District sued over the past two years for breach of contract in the aftermath of the Miramonte Elementary sexual abuse case. The companies refused to honor the district’s individual policies, alleging the school district’s negligence in staffing and supervision had resulted in “hundreds of students” exposed to abuse by two teachers. 

The district had agreed to pay a $139 million settlement to 81 students and 69 parents. It also sued the insurance companies for declaratory relief and damages of more than $200 million collectively.

Safety National filed its motion under the FAA on the grounds the policy held by the school district constituted proof of interstate commerce and contained a clause for arbitration in the event of a dispute.

The Superior Court rejected Safety National’s motion, stating although the FAA provisions apply substantively, the policy’s arbitration clause failed take the law’s procedural provisions into account. 

According to the Superior Court's opinion, provisions of the FAA must be specified in a choice-of-law clause – a clause that allows for disputes to be resolved under the laws of a determined jurisdiction – in order to be enacted.

The policy makes no mention of such a clause, it was determined.

The court concluded since the FAA’s provisions were not applicable, California law took precedence. California law allows courts to refuse arbitration, provided the case met the following conditions: The “party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party, arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact.”

As the suit against Safety National was part of ongoing litigation against multiple insurers and arbitration between Safety National and the school district could lead to conflicts of law or fact at the time, the court denied its request for arbitration, leading to the appeal.  

In its appeal, Safety National stated the Superior Court had erred in denying its motion. It argued the FAA still applied despite the non-reference to clause in the policy. 

Furthermore, the company argued if California law did apply, the court’s decision to deny its motion under section 1281.2’s “inconsistent rulings” condition was wrong, stating it lacks evidence to substantiate the claim.

The three-justice appellate court panel, however, refuted Safety National’s arguments. The court stated in its written opinion as the policy’s arbitration clause did not contain terms for state or federal procedural rules, it defaults to California law based on precedent set by Cronus Investments Inc. 6 v. Concierge Services (2005) 35 Cal.4th 376, 384.

"Indeed, defendant admits that plaintiff’s claims 'against all its insurers arise out of a common set of underlying claims,' but at the same time insists that plaintiff’s dispute 'with each insurer arises out of each separate insurance transaction,'" Justice Elizabeth Grimes wrote.

"We think not; the dispute arises out of each insurer’s refusal to defend or indemnify against the very same underlying claims, and further arises in the context of plaintiff’s claim, against all the insurers, that the Miramonte litigation constituted a single occurrence under the policies."

The justices determined the Superior Court’s decision to deny the motion sound. Safety National’s argument for the necessity of evidence was also seen as flawed since a motion to compel arbitration precludes discovery and the condition is hypothetical in nature.

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