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Texas Appellate Court Advises if You Claim Under A Contract, You Are Subject To All Its Terms, Even Arbitration

Case: Lexington Insurance Company v. Exxon Mobil Corporation and ExxonMobil Oil Corporation
           Court of Appeals of Texas, Ninth District
           2017 Tex. App. LEXIS 3819, 09-16-00357-cv (4/27/2017)

This dispute arose out of Exxon’s attempt to obtain coverage as an additional insured under the umbrella policy issued to one of its contractors for its exposure arising from the April 2013 Exxon refinery fire which resulted in injuries to at least ten people, two of whom subsequently died. Exxon sued Lexington, as the umbrella carrier of Brock Services, who had three employees injured in the fire, for coverage. Lexington responded by moving to compel arbitration based on the arbitration clause in their policy. The trial court instead ruled the coverage dispute was easily determined “by a factual analysis requiring no interpretation of the policy itself,” and denied arbitration.

On review, the Court of Appeals for the Ninth District, Beaumont, employed the doctrine of “direct benefits estoppel,” through which non-parties to arbitration agreements may be bound to arbitrate when they seek to enforce all other terms of the contract. The Court of Appeals reversed, concluding, “Exxon is not entitled to enforce some of the umbrella policy’s terms but to defeat others,” citing In re FirstMerit Bank, N.A., 52 S.W.3d 749, 755 (Tex. 2001), which held, “[A] litigant who sues based on a contract subjects him or herself to the contract’s terms.” The case was remanded to the district court with instructions to compel arbitration over “Exxon’s rights, if any, under Lexington’s umbrella policy.”

In so holding, the Ninth Circuit rejected Exxon’s plea that it did not negotiate or agree to the arbitration clause and that holding them to it would be “unconscionable.” The Court noted Exxon had the right to inspect the policies obtained by Brock and there was no evidence Brock or Lexington refused that opportunity. The Court further noted, “[g]enerally, in the absence of fraud, misrepresentation, or deceit, parties are bound by the terms of a contract they have had an opportunity to read regardless of whether they read it or thought it had different terms.”

The Ninth Circuit noted it was error for the trial court to construe the policy, finding that “[o]nce Lexington and Exxon disagreed about whether the policy covered the casualty, and Lexington established that the umbrella policy contained a valid arbitration agreement that required disputes over coverage to be arbitrated, the trial court was required to submit the matter to arbitration regardless of the merits of the respective parties’ arguments.”

The Court also rejected Exxon’s defense that Lexington could not invoke arbitration as it had already breached the terms of the policy by denying them coverage, noting both Texas and federal law provide for the survival of an arbitration agreement despite breach of other terms.

Finally, the court rejected Exxon’s arguments that enforcement of the arbitration provision would frustrate Texas Insurance Code provisions allowing Texas Courts to exercise jurisdiction over surplus lines carriers who sell policies to Texas residents, noting referring a case to arbitration does not divest a Texas court of jurisdiction over the dispute, as the Texas court would still have jurisdiction to enforce the agreement and render judgment on the award. Thus, even though the trial court would not determine the merits of the coverage dispute, retaining jurisdiction over the enforcement of the results of the arbitration satisfied the Texas Insurance Code requirements. 

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