Cortez Byrd Chips, Inc. v. Bill Harbert Construction Co., 120 S.Ct. 1331, 68 U.S.L.W. 4214 (U.S. Supreme Court-March 21, 2000)
Although not an insurance case as such, the United States Supreme Court's recent decision in Cortez Byrd Chips will undoubtedly affect the litigation and dispute resolution posture of insurance coverage actions and underlying bodily injury, personal injury, professional liability, or errors and omissions actions that may be subject to arbitration agreements. As most lawyers and businesspersons are aware, arbitration clauses have been used with increasing frequency in commercial transactions. The typical arbitration clause provides that any dispute "arising under" or "arising out of" or "relating to" the agreement is subject to binding arbitration rather than litigation.
Since the mid-1980s, the Supreme Court has been very supportive of this movement toward privatized dispute resolution and has tended to enforce these agreements rigorously under the authority of the Federal Arbitration Act ("FAA"), originally passed in 1926, which provides that any arbitration agreement contained in a contract involving interstate commerce may be specifically enforced by court order compelling any resistant parties to the agreement to arbitrate. See 9 U.S.C. [ss][ss]1-15.
By definition, arbitration agreements are contained in contracts. As a result, a substantial number of arbitration clauses will not implicate insurance because breach of contract claims are generally not covered under general liability policies. However, many of the claims arising out of contractual relations gone sour can implicate insurance through claims of defamation, advertising injury, professional negligence, dishonesty, and so on. As a result, claims implicating insurance may be involved in arbitration.
Notwithstanding that the parties at the outset of a contract "consent" to arbitration, after a claim arises, one or more parties may see an advantage in seeking to avoid arbitration or to challenge an adverse arbitration decision. As a result, a good deal of litigation can attend arbitration. Generally, a party seeking to enforce an arbitration clause can seek a court order compelling cooperation from the resisting party in any court that has personal and subject matter jurisdiction over the resisting party. The FAA is not itself an independent source of federal jurisdiction. Thus, going to federal court over arbitration normally requires that the disputants be citizens of different states and that the amount in controversy exceed the federal jurisdictional minimum of $75,000. Even if federal jurisdiction is lacking, the FAA applies in state court proceedings provided that there is the requisite connection to interstate commerce, a standard met relatively easily under the Court's modern precedents about what constitutes interstate commerce.
Arbitration clauses may also contain choice of law clauses governing the dispute or other agreements affecting the dispute such as waiver or certain defenses, evidentiary admissions, or expansion or limitation of remedies normally permitted under the chosen law or general commercial principles. As a result, a signatory to an arbitration clause may find itself, after the fact, less than enthused about arbitration, all of which heightens the tactical litigation surrounding arbitration. In addition, the conduct of the arbitration itself may give rise to concerns. …