Reliance Insur Co v. Raybestos Products , 382 F.3d 676 ( 2004 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
Nos. 03-1494 & 03-1495
RELIANCE INSURANCE CO.,
Plaintiff,
v.
RAYBESTOS PRODUCTS CO.,
Defendant/Third-Party Plaintiff-Appellee,
v.
UNITED STATES FIDELITY & GUARANTY CO.
and WESTCHESTER FIRE INSURANCE CO.,
Third-Party Defendants-Appellants.
____________
Appeals from the United States District Court for the
Southern District of Indiana, Indianapolis Division.
No. IP 97-0027-C-Y/B—Richard L. Young, Judge.
____________
ARGUED SEPTEMBER 16, 2003—DECIDED AUGUST 27, 2004
____________
Before FLAUM, Chief Judge, and DIANE P. WOOD and
WILLIAMS, Circuit Judges.
DIANE P. WOOD, Circuit Judge. Once again, we confront
a case in which parts of a complex situation are arguably
2 Nos. 03-1494 & 03-1495
subject to arbitration, while other parts are not. The district
court thought that the arbitration agreements at issue did not
encompass one part of the dispute, and thus that judicial
proceedings should proceed in parallel to the arbitral
proceedings. In our view, however, this construes the agree-
ment to arbitrate too narrowly. We therefore reverse and
remand for entry of an order directing the controversy in
question to be submitted to arbitration.
I
Raybestos Products (an indirect subsidiary of Raytech
Corporation) manufactures brakes at a plant in
Crawfordsville, Indiana. Some time in late 1996 or early
1997, Raybestos learned that there was environmental pol-
lution at the Crawfordsville facility, which was likely to entail
substantial clean-up costs. Raybestos carried insurance
against this risk from several different providers, including
Reliance Insurance, United States Fidelity & Guaranty
Company (USF&G), and Westchester Fire Insurance
Company. Some of the plans were for different years, others
were for excess coverage; some plans included arbitration
clauses, others did not.
Initially, Raybestos submitted a claim only to Reliance for
indemnification of these costs. In January 1997, invoking
the diversity jurisdiction of the court, Reliance (an Illinois
company with its principal place of business in Pennsylva-
nia) filed this action against Raybestos (a Delaware corpora-
tion with its principal place of business in Indiana), seeking
a declaration of noncoverage. Five years of litigation followed
over a variety of aspects of that insurance contract.
Throughout this time, presumably for strategic reasons,
Raybestos was not actively pursuing payment from any of
its other carriers. This turned out to be a bad choice when
Reliance filed for bankruptcy and it became apparent that
Nos. 03-1494 & 03-1495 3
it would be unable to pay the full amount of the clean-up
costs (assuming that Raybestos prevailed on the merits).
At that point, Raybestos turned to the other three car-
riers, filing a third-party complaint against USF&G (a
Maryland corporation with its principal place of business in
Minnesota), Westchester (a New York corporation with its
principal place of business in New York), and National
Union (a Pennsylvania corporation with its principal place
of business in New York).
There is some evidence that, despite the long delay,
Raybestos had attempted to give USF&G notice of the claim
back in February 1997; Westchester received no notice of
the claim until the third-party complaint was filed. The ques-
tion of the timeliness or adequacy of Raybestos’s notices is
not before us at this point, however, and thus we have nothing
further to say about it. What is important is the fact that the
third-party complaint alleged that USF&G and Westchester
had failed to defend and indemnify Raybestos in breach of
two specific USF&G policies and seven specific Westchester
policies, identified by policy number and dates of coverage.
These contracts each included the following arbitration
clause:
6. ARBITRATION
Should any dispute arise out of or related to this en-
dorsement and contract of insurance which cannot be
resolved in the normal course of business with respect
to the validity or interpretation of this [sic] [which?]
insurance contract, or the performance of the respective
obligations of the parties to this insurance contract, then,
upon written demands of either party to the contract,
the matter or matters upon this agreement cannot be
reached shall be settled by arbitration in accordance
with the rules of the American Arbitration Association,
or the Defense Research Institute arbitration program.
The election as to which of these arbitration programs
4 Nos. 03-1494 & 03-1495
will be used will be made by the party to this contract
who did not make written demand for arbitration. If
that party fails to make that election within twenty
days, then the party making written demand for
arbitration shall have the right to make that election.
It is agreed that no award for punitive damages may be
made in any arbitration proceeding regardless of the
rules of the arbitration program selected.
Invoking that clause, USF&G and Westchester filed a mo-
tion in the district court seeking an order compelling arbi-
tration. National Union notified Raybestos that it believed
that it too had at least one contract containing an arbitration
clause, but that none of its other contracts did. Raybestos
then dismissed the part of the case against National Union
that depended on the contract with the arbitration clause.
Pointing out that at least the remaining claims based on
the National Union policies were inevitably going to remain
before the district court, Raybestos opposed the motions to
compel arbitration. It argued that it was unfair to force it to
litigate and arbitrate essentially the same claims (though
against different companies, and under different policies) at
the same time. It points out, correctly, that inconsistent
results are possible: the court might find that USF&G or
Westchester must pay but not National Union, while the
arbitrators might find the reverse. Relying exclusively on
these policy-based concerns, the district court denied the
USF&G/Westchester motion and refused to compel arbitra-
tion and to stay the litigation pending arbitration. The two
insurance companies have appealed, as they are permitted
to do under 9 U.S.C. § 16(a)(1)(A) and (B).
II
Before turning to the district court’s reasons for refusing
to compel arbitration, we look first at the question whether
the dispute between Raybestos and USF&G and Westchester
Nos. 03-1494 & 03-1495 5
fall within the scope of the arbitration clause. If not, of course,
then this would be an independent ground on which we might
affirm the district court’s result, particularly because our
review of a decision refusing to compel arbitration is de novo,
Kresock v. Bankers Trust Co., 21 F.3d 176, 177-78 (7th Cir.
1994), except insofar as it rests on findings of fact, in which
case we use the clearly erroneous standard, Frynetics (Hong
Kong) Ltd. v. Quantum Group, Inc., 293 F.3d 1023, 1027 (7th
Cir. 2002).
The two insurance companies argue that even the ques-
tion of arbitrability should be submitted to the arbitrators
here, but we think this goes too far. The Supreme Court
held in First Options of Chicago, Inc. v. Kaplan, 514 U.S.
938 (1995), that arbitrability issues are normally for the
court, unless there is “clear and unmistakable evidence”
that the parties agreed to arbitrability. Id. at 944 (internal
marks omitted). We find no such evidence here. Nonethe-
less, this is of little help to Raybestos, when one looks to the
underlying issues. They include the following questions: (1)
whether a notice from the Indiana Department of Environ-
mental Management to enforce cleanup of the site is a
“suit” for which the insurance company must provide a
defense; (2) whether coverage exists for the circumstances
leading up to the enforcement action; (3) when did the con-
tamination occur; and (4) what was the triggering event for
coverage under each policy. These questions surely “arise
out of or [are] related to” the contracts of insurance.
Raybestos tries to avoid this result by suggesting that the
arbitration provision applies only to the endorsement, and
not to the insurance contract as a whole, but that is clearly
not the case. The endorsements themselves state that they
“form part of policy number ___.” The arbitration clause
itself, as a quick glance will show, says that it relates both
to the endorsement and to the “contract of insurance.”
There is nothing in the language of the policy, the endorse-
ments, or the arbitration clause, to support Raybestos’s
6 Nos. 03-1494 & 03-1495
restrictive reading. These disputes fall within the arbitra-
tion clauses unless something external pulls them back out.
The district court found, and Raybestos argues here, that
there is such an external force: simple fairness. At its core,
Raybestos’s argument is that it is unfair to force it to
litigate and to arbitrate the same legal and factual issues
with different parties. The short answer to this is that the
Federal Arbitration Act (FAA) makes no exception to the
enforceability of arbitration clauses when this type of inef-
ficiency exists. Duplicative actions are not entirely avoid-
able in a complex economy where multiple party dealings
are the rule, not the exception, and disputes do not neces-
sarily arise in a neat, bipolar fashion. Aspects of the same
case often proceed simultaneously in state and in federal
court, because the Supreme Court has cautioned that
abstention should be the exception, not the rule, in these
cases. See Colorado River Water Conservation Dist. v. United
States, 424 U.S. 800 (1976). Ordinary tort litigation arising
out of a single accident or defective product must often
proceed in several state courts because of the lack of a
single forum in which personal jurisdiction will be possible
over every defendant. The situation Raybestos faces is no
different.
Our conclusion is not in any tension with the one reached by
the Fourth Circuit in the two cases on which Raybestos relies:
Schlumberger Indus., Inc. v. Nat’l Surety Corp., 36 F.3d
1274 (4th Cir. 1994); and Owens-Illinois, Inc. v. Meade, 186
F.3d 435 (4th Cir. 1999). In Schlumberger, a variety of
insurers filed a declaratory judgment action in federal court
to determine their liability to the insured. At the same time,
the insured had filed a similar action in state court against
the various insurers. After some complicated maneuvers,
both cases ended up consolidated in federal court. 36 F.3d
at 1276-78. The insurers moved to remand the cases to
state court on the ground that there was no diversity, but
the district court refused and issued a merits ruling in their
Nos. 03-1494 & 03-1495 7
favor. On appeal, the court of appeals on its own motion
found that the district court had indeed lacked subject
matter jurisdiction. Id. at 1284. It rejected the argument
that this defect could be fixed by dismissing the non-diverse
parties, because it found that those parties were indispens-
able under FED. R. CIV. P. 19(b). Id. at 1287-88. This
situation is nothing like the one before us: it does not
involve agreements to arbitrate, and it does involve the
application of the indispensable party rule (which, contrary to
Raybestos’s position, is not among the reasons recognized
by the FAA as grounds for refusing to enforce an arbitral
agreement).
Owens-Illinois at least involved arbitration, but it is no
nearer the mark than Schlumberger. In Owens-Illinois, the
plaintiffs filed tort actions in state court. Owens-Illinois
then filed a motion to compel arbitration in a separate fed-
eral court action and a motion to stay the proceedings in the
state court. The district court concluded that it had no
jurisdiction over the federal action, because there was a
lack of complete diversity. It also held that it could not dis-
miss the non-diverse parties because they were (once again)
indispensable under Rule 19(b). 186 F.3d at 438-39. The
court of appeals agreed, commenting in passing that going
forward in two fora created a potential for inconsistent
results because the federal court might compel arbitration
against some of the parties, while the state court might go
forward with litigation. Id. at 441. We have only one court,
which is deciding what to do with the arbitration clauses in
question. There is no possibility that a state court will order
arbitration between Raybestos and Westchester, for
example, while the federal court refuses to do so. Neither of
these cases, in short, establishes any principle that would
allow Raybestos here to avoid the force of the arbitration
clauses to which it agreed.
8 Nos. 03-1494 & 03-1495
III
We are not unsympathetic to the concerns that motivated
the district court’s decision. Busy courts do not welcome the
idea of duplicative proceedings, whether before several
different judicial bodies, or before some courts and some
arbitral bodies. But, opposed to that concern is the right of
parties to agree to alternative methods of dispute resolu-
tion, and the strong message from the Supreme Court that
these agreements must be honored. If there is to be a
duplicative proceeding exception, it is for Congress to add
it to the FAA; it is not for us to create because one party
may have put itself in a bad position. Because arbitration
is a creature of agreement, parties often find ways to min-
imize the risk of inconsistent results through contractual
provisions that either provide an exception to the duty to
arbitrate for multi-party situations, or otherwise to find
ways to coordinate duplicative proceedings.
In this case, however, Raybestos must live up to its bar-
gain and arbitrate its claims against USF&G and Westchester.
The order of the district court refusing to compel arbitration
is REVERSED and the case is REMANDED to the court for
entry of such an order.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—8-27-04