Dunlop et al v. State Farm Mutual Automobile Insurance Company

Filing 28

ORDER by Judge Claudia Wilken GRANTING 15 PETITION TO COMPEL ARBITRATION AND 11 MOTION TO STAY. (ndr, COURT STAFF) (Filed on 12/7/2012)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA

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SCOTT DUNLOP et al.,

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No. C 12-2362 CW

Plaintiffs,

ORDER GRANTING
PETITION TO COMPEL
ARBITRATION AND
MOTION TO STAY
(Docket Nos. 15 &
11).

v.
STATE FARM MUTUAL AUTOMOBILE
INSURANCE CO. and DOES 1-20,
Defendants.
________________________________/

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United States District Court
For the Northern District of California

Plaintiffs Scott and Sandra Dunlop bring this action against
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Defendant State Farm Mutual Automobile Insurance Company for
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breach of contract and breach of the implied covenant of good
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faith and fair dealing.

Defendant State Farm moves to compel

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arbitration and to stay the proceedings pending arbitration.
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Plaintiffs oppose both motions.

The Court now takes the matter

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under submission on the papers and grants both motions.
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BACKGROUND
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On August 8, 2008, the Dunlops were driving through Colusa
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County when they collided with an uninsured motorist on California
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State Route 45.

Docket No. 1, Notice of Removal, Ex. 2 (1AC)

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¶¶ 13-17.

As a result of the collision, the Dunlops and their two

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minor children suffered serious bodily injuries.

Id. ¶ 15.

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After the accident, the Dunlops filed a claim with State
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Farm, their auto insurer.

Id. ¶ 18.

The Dunlops’ insurance

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policy specifically provides coverage for any injuries caused by
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an accident with an uninsured motorist.

Declaration of Lawrence

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D. Goldberg, Ex. A, at 11-16.
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Under that provision of the policy,

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any disputes between the insured and State Farm about the

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insured’s right to recover from the uninsured motorist or about

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the amount of damages owed by the insurer “must be decided by

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agreement.”

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an agreement, then either side may commence arbitration to resolve

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the dispute according to the specific procedures set forth in

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California’s uninsured motorist statute, Cal. Ins. Code

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§ 11580.2(f).1

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Id. at 12.

If the two sides are unable to reach such

Id.

On February 18, 2009, six months after the accident, State

United States District Court
For the Northern District of California

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Farm sent the Dunlops a letter notifying them that their insurance

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claim was subject to a two-year statute of limitations under the

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state’s uninsured motorist statute.

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stated:

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Id., Ex. B, at 1.

The letter

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Under California law, Insurance Code 11580.2, and your
State Farm automobile policy, within two years from the
date of the accident, you must:

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1.

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2.

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3.

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File a lawsuit for bodily injury in the proper
court against the uninsured motorist; or
Reach agreement with us about the amount due under
Uninsured Motorist Coverage; or
Formally start arbitration proceedings by making a
written request, sent to us by Certified Mail,
Return Receipt Requested.

Id. at 2.

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The exact terms of the policy are as follows:

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Two questions must be decided by agreement between the
insured and us: (1) Is the insured legally entitled to
collect damages from the owner or driver of the
uninsured motor vehicle; and (2) If so, in what amount?
If there is no agreement, upon written request of the
insured or us, these questions shall be decided by
arbitration as provided by section 11580.2 of the
California Insurance Code.
Goldberg Decl., Ex. A, at 12.
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Six months later, on August 7, 2009, the Dunlops filed suit

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against the uninsured motorist in Colusa County Superior Court.

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1AC ¶ 20.

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soon be submitting a Statement of Damages to the court and asking

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the court to schedule a prove-up hearing.

In June 2010, they notified State Farm that they would

Goldberg Decl., Ex. C.

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On October 29, 2010, State Farm sent the Dunlops a letter

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stating that it needed “additional time to consider [their] claim”

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because it was “await[ing] receipt of the judgment from [their]

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3rd party lawsuit.”

Id., Ex. D.

The letter also requested copies

United States District Court
For the Northern District of California

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of the Dunlops’ medical records and stated that State Farm would

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keep them informed about its own ongoing investigation into the

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accident.

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Dunlops’ attorney responded to State Farm’s letter by informing

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the company that a prove-up hearing had been scheduled for later

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that month in the family’s suit against the uninsured motorist.

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Id., Ex. E.

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Id.

The following week, on November 3, 2010, the

On December 13, 2010, two weeks after the prove-up hearing,

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the court entered a default judgment against the uninsured

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motorist for just over $1.7 million dollars.

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Dunlops sent State Farm a copy of the judgment on January 19,

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2011.

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$300,000 -- the coverage limit for uninsured motorist claims under

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their policy.

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correspondence between the parties, State Farm responded to the

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Dunlops’ demand with a counter-offer to settle the entire claim

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for $62,900.

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later, on March 15, 2012, filed this suit against State Farm in

Id., Ex. G, at 3-4.

Id. at 2.

1AC ¶ 29.

Id., Ex. F.

The

They also submitted a demand for

On March 15, 2011, after further

The Dunlops refused and, exactly one year

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Alameda Superior Court.

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2012 and State Farm moved to compel arbitration in July 2012.

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Id. at 1.

The case was removed in May

LEGAL STANDARD
When parties “have agreed that their arbitration agreement

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will be governed by the law of California,” a court must apply the

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California Arbitration Act (CAA), Cal. Civ. Proc. Code §§ 1280 et

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seq., to determine whether that agreement is valid.

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Sci. v. Stanford Univ., 489 U.S. 468, 470 (1989) (holding that the

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CAA is not preempted by the Federal Arbitration Act, 9 U.S.C. § 1

Volt Info.

United States District Court
For the Northern District of California

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et seq.).

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comprehensive, all-inclusive statutory scheme applicable to all

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written agreements to arbitrate disputes.”

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v. Benowitz, 234 Cal. App. 3d 192, 198 (1992).

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The CAA was enacted in 1961 in order to create “a

Am. Home Assurance Co.
It provides:

On petition of a party to an arbitration agreement
alleging the existence of a written agreement to
arbitrate a controversy and that a party thereto refuses
to arbitrate such controversy, the court shall order the
petitioner and the respondent to arbitrate the
controversy if it determines that an agreement to
arbitrate the controversy exists, unless it determines
that:

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(a) The right to compel arbitration has been waived by
the petitioner; or

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(b) Grounds exist for the revocation of the agreement.

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Cal. Civ. Proc. Code § 1281.2.

In other words, a trial court may

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only deny a petition to compel arbitration if it finds that the
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party seeking arbitration waived its rights under the agreement or
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that the agreement itself was revocable.

United Teachers of L.A.

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v. L.A. Unified Sch. Dist., 54 Cal. 4th 504, 516 (2012).
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The party opposing the petition bears the burden of
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establishing waiver or revocation.
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Saint Agnes Med. Ctr. v.

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PacifiCare of Cal., 31 Cal. 4th 1187, 1195 (2003).

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fails to do so, then the trial court must grant the petition and

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stay the proceedings pending arbitration.

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§ 1281.4; MKJA, Inc. v. 123 Fit Franchising, LLC, 191 Cal. App.

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4th 643, 658 (2011) (“The purpose of the statutory stay [under

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section 1281.4] is to protect the jurisdiction of the arbitrator

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by preserving the status quo until arbitration is resolved.”

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(citations omitted)).

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United States District Court
For the Northern District of California

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If that party

Cal. Civ. Proc. Code

DISCUSSION
I.

Petition to Compel Arbitration
Plaintiffs oppose State Farm’s petition to compel arbitration

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on two grounds.

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bound by the default judgment Plaintiffs obtained against the

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uninsured motorist in December 2010.

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even if State Farm did not consent to be bound by the default

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judgment, it still waived its arbitration rights through its

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conduct.

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arguments in turn.

First, they argue that State Farm consented to be

Second, they contend that

The following discussion addresses each of these

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A.

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Plaintiffs contend that State Farm implicitly consented to be

Consent to Default Judgment

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bound by the default judgment Plaintiffs obtained against the

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uninsured motorist in state court.

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They point specifically to State Farm’s February 18, 2009 and

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October 29, 2010 letters as proof of the company’s consent.

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id., Exs. B & D.

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bound by the default judgment is ultimately a merits question, the

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Court declines to decide it on a motion to compel arbitration.

See Goldberg Decl., Ex. F.

See

Because the question of whether State Farm is

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The California Supreme Court has held that when an insured is
bound by a valid arbitration agreement with its insurer, disputes

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about whether the insurer is bound by a default judgment obtained

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against a third-party tortfeasor must be decided by arbitration.

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Bouton v. USAA Cas. Ins. Co., 43 Cal. 4th 1190, 1194, 1201-03

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(2008) (“[W]e hold that it is for an arbitrator, and not a court,

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to decide whether the default judgment [the insured] obtained

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against the underinsured tortfeasor binds [the insurer].”).

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court reasoned that “the binding nature of a default judgment

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United States District Court
For the Northern District of California

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. . . falls squarely within those questions of liability and

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damages statutorily subject to arbitration” under section 11580.2

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of the Insurance Code.

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address the “binding nature of a default judgment” if it first

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finds the arbitration agreement between the parties to be invalid.

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Applying this principle to the present case reveals that

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Plaintiffs’ argument -- that State Farm cannot compel arbitration

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because it is bound by the default judgment -- puts the cart

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before the horse.

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by Plaintiffs’ default judgment unless it first finds, as a

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threshold matter, that the parties are not bound by their original

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arbitration agreement.

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State Farm waived its arbitration rights -- addresses this

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threshold question more directly.

Id. at 1194.

The

A court may therefore only

The Court cannot find that State Farm is bound

Plaintiffs’ second argument here -- that

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B.

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Plaintiffs contend that, even if State Farm’s letters do not

Waiver of Arbitration Rights

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bind it to the default judgment, the letters still constitute a

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waiver of the company’s right to arbitrate the dispute.

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The California Supreme Court has cautioned that “no single

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test delineates the nature of conduct that will constitute a

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waiver of arbitration.”

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Rather, courts must consider a variety of factors in determining

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whether a party petitioning to compel arbitration has waived its

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right to arbitrate.

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parties have taken significant steps to prepare for litigation,

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whether the petitioner delayed in seeking arbitration, and whether

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the petitioner’s conduct “prejudiced” or “misled” the opposing

Id.

Saint Agnes, 31 Cal. 4th at 1195-96.

These factors include whether the

United States District Court
For the Northern District of California

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party in any way.

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touchstone typically is whether the petitioner’s conduct is “so

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inconsistent with the exercise of the right to arbitrate that it

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constituted an abandonment of that right.”

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Adelson, 6 Cal. 4th 307, 318 (1993).

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strong policy favoring arbitration, waivers of arbitration rights

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“are not to be lightly inferred.”

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1195 (citing Christensen v. Dewor Dev., 33 Cal. 3d 778, 782

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(1983)).

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Id. at 1196 (citations omitted).

The

Platt Pac., Inc. v.

Because of California’s

Saint Agnes, 31 Cal. 4th at

Plaintiffs’ waiver argument here focuses, in particular, on

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State Farm’s October 2010 letter.

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stated that it could not decide Plaintiffs’ insurance claim until

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it first received the judgment in Plaintiffs’ suit against the

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uninsured motorist.

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that this forced them to pursue the default judgment and thus was

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inconsistent with an intent to arbitrate.

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that they were “misled by State Farm” and “made to jump through

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numerous unnecessary, costly and time consuming hoops” in order to

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recover their insurance benefits.

In that letter, the company

Goldberg Decl., Ex. D.

Opp. 6.
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Plaintiffs assert

They further contend

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This argument fails for one basic reason: namely, Plaintiffs

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have not shown that they were prejudiced by State Farm’s October

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2010 letter.

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the party seeking to establish a waiver based on the opposing

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party’s conduct must show that it was somehow prejudiced by that

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conduct).

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them to undertake costly litigation in pursuit of a default

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judgment, Plaintiffs’ own evidence indicates that they decided to

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pursue litigation before they received the letter.

See Saint Agnes, 31 Cal. 4th at 1203 (holding that

Although they contend that State Farm’s letter induced

Indeed,

United States District Court
For the Northern District of California

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Plaintiffs filed suit against the uninsured motorist in August

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2009, more than a year before State Farm requested a copy of the

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judgment in that case.

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letter in June 2010, more than four months before they received

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the State Farm letter, indicating that they were planning to

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pursue a default judgment against the uninsured motorist.

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Goldberg Decl., Ex. C.

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waive its arbitration rights by inducing the opposing party to

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litigate arbitrable issues needlessly, see, e.g., Burton v.

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Cruise, 190 Cal. App. 4th 939, 948 (2010) (recognizing that a

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“party’s conduct in stretching out the litigation process [] may

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cause prejudice by depriving the other party of the advantages of

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arbitration”), Plaintiffs have not shown that State Farm induced

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them to do so here.

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What’s more, Plaintiffs sent State Farm a

See

Thus, while it is true that a party can

State Farm’s February 2009 letter likewise does not support

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Plaintiffs’ waiver argument.

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Plaintiffs with options, one of which was to sue -- Plaintiffs

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chose that option.

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of their right to arbitrate.

That letter merely presented

The letter also expressly informed Plaintiffs
Plaintiffs have not identified
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anything in the letter that induced them to forfeit their

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arbitration rights, misrepresented State Farm’s position, or

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otherwise prejudiced them.

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constitutes conduct inconsistent with an intent to arbitrate.

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Accordingly, without a showing of prejudicial or inconsistent

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conduct by State Farm, Plaintiffs cannot establish that the

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company waived its arbitration rights under the insurance policy.

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II.

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Nor have they shown how the letter

Motion to Stay
As noted above, California law requires the court to grant a

United States District Court
For the Northern District of California

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party’s motion to stay if that party prevails on a petition to

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compel arbitration.

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191 Cal. App. 4th at 658.

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petition to compel arbitration here, its motion to stay must be

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granted.

Cal. Civ. Proc. Code § 1281.4; MKJA, Inc.,
Because State Farm has prevailed on its

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CONCLUSION

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For the reasons set forth above, State Farm’s petition to

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compel arbitration (Docket No. 15) and its motion to stay the

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proceedings pending arbitration (Docket No. 11) are GRANTED.

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case shall be administratively closed, subject to reopening if a

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petition to enforce the arbitration award is filed.

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This

IT IS SO ORDERED.

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Dated: 12/7/2012

CLAUDIA WILKEN
United States District Judge

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