EDUCATIONAL SERVICE CENTERS RISK FUNDING TRUST et al v. CERTAIN UNDERWRITERS AT LLOYD'S, LONDON SUBSCRIBING TO POLICY NO. PK1005718, LLOYD'S SYNDICATE 2987

Filing 31

ORDER GRANTING DEFENDANT'S MOTION TO DISMISS - Defendant's motion to dismiss or, in the alternative to compel arbitration, dkt. 22 , is GRANTED in part and DENIED in part. Plaintiffs' motion to file a surreply is GRANTED. Dkt. 26 . This case is DISMISSED; final judgment will issue in separate entry. SEE ORDER. Signed by Judge James Patrick Hanlon on 1/6/2021. (KAA)

Case 2:20-cv-00167-JPH-MJD Document 31 Filed 01/06/21 Page 1 of 12 PageID #: 954

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF INDIANA
TERRE HAUTE DIVISION
EDUCATIONAL SERVICE CENTERS RISK
FUNDING TRUST,
METROPOLITAN SCHOOL DISTRICT OF
SHAKAMAK,

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)
)
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Plaintiffs,
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)
v.
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)
CERTAIN UNDERWRITERS AT LLOYD'S, )
LONDON SUBSCRIBING TO POLICY NO. )
PK1005718, LLOYD'S SYNDICATE 2987, )
)
Defendant.
)

No. 2:20-cv-00167-JPH-MJD

ORDER GRANTING DEFENDANT'S MOTION TO DISMISS
Plaintiffs seek a declaratory judgment that an insurance policy they hold
with Defendant provides coverage for litigation defense and indemnification
coverage. Before the Court is Defendant's motion to dismiss or to compel
arbitration. For the reasons below, Plaintiffs' claims are subject to mandatory
arbitration and this case should be dismissed. Defendant's motion is therefore
GRANTED except for Defendant's request for attorney's fees, which is DENIED.
I.
Facts and Background
Because Defendants' motion is brought under Rule 12(b)(1) and 12(b)(3),
the Court accepts and recites "the well-pleaded facts in the complaint as true."
McCauley v. City of Chicago, 671 F.3d 611, 616 (7th Cir. 2011); Scott Air Force
Base Props., LLC v. Cty of St. Clair, Ill., 548 F.3d 516, 519 (7th Cir. 2008).

1

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Defendant, Certain Underwriters at Lloyd's, issued a Public Entity
Package Policy ("Policy") with Plaintiffs—Education Service Centers Risk
Funding Trust ("ESCRFT") and Metropolitan School District of Shakamak (the
"District")—as assureds. Dkt. 17 at 4. The Policy is an indemnity-only excess
insurance policy that provides certain liability coverage subject to its
limitations, terms, and conditions. See id.; dkt. 22-1.
General Policy Condition No. 2 is an arbitration provision:
Arbitration: In the event the ASSURED and
Underwriters are unable to agree as to the amount
recoverable by the ASSURED from Underwriters under
the terms and conditions of this Policy, each party shall
name a competent and disinterested arbitrator, and the
two so chosen shall, before proceeding further, appoint
a competent and disinterested umpire. The arbitrators
together shall calculate the indemnity due, and failing
to agree, shall submit their differences to the umpire.
The award in writing, duly verified by any two, shall
determine the points in question. Both parties shall pay
the cost of their arbitrators and equally pro rate the cost
of the umpire. The ASSURED’S portion of such fee does
not accrue to the ULTIMATE NET LOSS.
The decision by the arbitrators shall be binding on
Underwriters and the ASSURED, and that judgment
may be entered in any court of competent jurisdiction.
Dkt. 22-1 at 16.
In December 2019, the District learned of allegations that one of its
students had engaged in sexual misconduct with S.H., a minor student. Dkt.
17 at 1. The Indiana State Police told District administrators that the
investigation of these allegations was confidential and directed the District to
keep it confidential, which it did. Id. at 1–2.
2

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On April 22, 2019, the District received a notice of tort claim letter,
alleging that the school corporation and others were liable for injuries and
damages to S.H. Id. at 2. On April 25, 2019, the District contacted
Defendant's managing agent about the potential claims involved. Id.
On November 12, 2019, S.H. and J.H., individually and as natural
parent and next friend of S.H. ("Underlying Plaintiffs"), filed a lawsuit against
the District and others in the Greene County, Indiana Superior Court under
Cause No. 28D01-1911-CT-000015 ("Underlying Lawsuit"). Id. at 9. The
District notified its excess insurer—Defendant here—of the lawsuit, but
Defendant responded that it would not provide a defense in the Underlying
Lawsuit and would not provide indemnity coverage for amounts sought by
Underlying Plaintiffs. 1 Id. at 9–10.
In February 2020, ESCRFT and the District filed this case in Greene
County, Indiana, seeking a declaratory judgment that the Policy provides
coverage for litigation defense and indemnification, and that Plaintiffs gave
timely notice under the Policy and circumstances. Dkt. 1-2. Defendant
removed the case to this Court, dkt. 1, and filed a motion seeking dismissal of
this action or, in the alternative, an order compelling arbitration. Dkt. 13.
II.
Applicable Law

1 There are conflicting statements in the briefing about whether a duty to defend
would be contested in this action, but the Court does not address that issue because
this case is ripe regardless and neither party argues that it affects the arbitration
provision's application. Dkt. 23 at 9; dkt. 24 at 7; dkt. 25 at 2.

3

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Defendants may move under Federal Rule of Civil Procedure 12(b)(1) to
dismiss claims for lack of subject-matter jurisdiction or under 12(b)(3) to
dismiss for improper venue. When faced with a 12(b)(1) motion, the plaintiff
"bears the burden of establishing that the jurisdictional requirements have
been met." Ctr. for Dermatology and Skin Cancer, Ltd. v. Burwell, 770 F.3d 586,
588-89 (7th Cir. 2014). When seeking to enforce an arbitration provision and
dismiss for improper venue under 12(b)(3), the party seeking to enforce a
provision has the burden of establishing the existence of the provision. Dr.
Robert L. Meinders, D.C., Ltd. v. United Healthcare, Inc., 800 F.3d 853, 857 (7th
Cir. 2015).
III.
Analysis
A. Ripeness
Defendant contends that Plaintiffs' complaint is not ripe, since liability
has not been established in the Underlying Lawsuit. Dkt. 25 at 2. Plaintiffs
respond that this case is ripe because Defendants have "disclaimed any
contractual obligation to indemnify Plaintiffs" and the District faces "a
potentially catastrophic financial circumstance." Dkt. 26-1 at 2–5. 2
While the general rule is "that decisions about indemnity should be
postponed until the underlying liability has been established," Lear Corp. v.
Johnson Elec. Holdings Ltd., 353 F.3d 580, 583 (7th Cir. 2003), indemnity may
be ripe before liability is established if there is a "probabilistic injury," Bankers

Plaintiffs moved for leave to file a surreply, dkt. 26-1, after Defendant raised ripeness
arguments in its reply brief. Dkt. [26]. That motion is GRANTED.
2

4

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Trust Co. v. Old Republic Ins. Co., 959 F.2d 677, 680-81 (7th Cir. 1992); see
also Wooten v. Loshbough, 951 F.2d 768, 769 (7th Cir. 1991). In Bankers
Trust, the Seventh Circuit found a "probabilistic injury" based on a sufficient
probability that the insured would be held liable for an amount that it could
not afford. Id. Concluding that the possibility that there will be no liability
does not "take[] the case out of Article III's grant of jurisdiction over cases and
controversies," the court held that the declaratory judgment action was ripe
even with no liability determination. Bankers Trust, 959 F.2d at 681
Here, under Bankers Trust, Plaintiffs have shown a "probabilistic injury."
Like in that case, here Plaintiffs face damages in the Underlying Lawsuit that, if
awarded, "would have a devastating effect on Shakamak and likely render it
unable to continue as a viable public school." Dkt. 26-1 at 8. The District has
no other excess insurance policy to cover the damages, id. at 14, and
Defendant has disclaimed coverage, dkt. 17 at 2, so Plaintiffs face a
"probabilistic injury" under Bankers Trust, 959 F.2d at 681.
This case's indemnity dispute is therefore ripe.
B. The arbitration provision
The Policy's arbitration provision provides:
Arbitration: In the event the ASSURED and
Underwriters are unable to agree as to the amount
recoverable by the ASSURED from Underwriters under
the terms and conditions of this Policy, each party shall
name a competent and disinterested arbitrator, and the
two so chosen shall, before proceeding further, appoint
a competent and disinterested umpire. The arbitrators
together shall calculate the indemnity due, and failing
to agree, shall submit their differences to the umpire.
5

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The award in writing, duly verified by any two, shall
determine the points in question. Both parties shall pay
the cost of their arbitrators and equally pro rate the cost
of the umpire. The ASSURED’S portion of such fee does
not accrue to the ULTIMATE NET LOSS.
The decision by the arbitrators shall be binding on
Underwriters and the ASSURED, and that judgment
may be entered in any court of competent jurisdiction.
Dkt. 22-1 at 16. Defendant argues that, under this provision, Plaintiffs' claim
must be arbitrated. Dkt. 23 at 7–9. Plaintiffs respond that their claim is about
coverage, not an "amount recoverable" under the Policy, so it is outside the
arbitration provision's scope. Dkt. 24 at 3. There is no dispute that the Policy
contains a valid and enforceable arbitration provision; the question is whether
the parties' dispute is within the scope of that provision. See id.
The Federal Arbitration Act, 9 U.S.C. § 2, "does not require parties to
arbitrate when they have not agreed to do so, . . . nor does it prevent parties
who do not agree to arbitrate from excluding certain claims from the scope of
their arbitration agreement." Volt Info. Sciences v. BD. of Trustees, 109 S. Ct.
1248, 1255 (1989). "It simply requires courts to enforce privately negotiated
agreements to arbitrate . . . in accordance with their terms." Id. "To determine
whether a contract's arbitration clause applies to a given dispute, federal
courts apply state-law principles of contract formation." Gore v. Alltell
Communications, Inc., 666 F.3d 1027, 1032 (7th Cir. 2012). "Once it is clear,
however" that a contract "provides for arbitration of some issues . . . any doubt
about the scope of the arbitration clause is resolved in favor of arbitration as a

6

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matter of federal law." Id. (citing Moses H. Cone Mem'l Hosp. v. Mercury Constr.
Corp., 460 U.S. 1, 24-25 (1983)).
Here, the Policy is an indemnification, excess-insurance contract that
limits the District's potential financial liability for covered events by covering
additional liability once the District has paid a certain amount. See dkt. 17 at
5–6. The core issue is therefore whether and to what extent Defendant must
indemnify Plaintiffs under the Policy. See id. at 10 (requesting a declaratory
judgment that Defendant must provide indemnification). The parties disagree
on those things, which determine "the amount recoverable . . . under the terms
and conditions of this Policy." Dkt. 22-1 at 16. While the "amount recoverable"
will be nothing if, as Defendant argues, there is no coverage, the fundamental
nature of the parties' dispute remains the "amount recoverable."
Plaintiffs rely on Welborn v. MedQuist, Inc. to argue that the arbitration
provision is too narrow to apply here. Dkt. 24 at 8–10 (citing 301 F.3d 634 (7th
Cir. 2002)). Welborn involved a contract for MedQuist to provide all of Welborn
Clinic's medical transcription services. 301 F.3d at 635–36. One piece of that
contract—with the heading "Payments and Charges"—included an arbitration
provision calling "for the arbitration of disputes over 'any invoice amount.'" Id.
at 636. Welborn Clinic eventually sued for breach of contract, fraud, deceptive
trade practices, and conversion, and MedQuist invoked the arbitration
provision. Id. at 635–36. The Seventh Circuit held that some claims had to be
arbitrated as disputes over "any invoice amount," while other claims were not
within the arbitration provision's scope. Id. at 639–40.
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Plaintiffs argue that this case is like Welborn because the contracts in
both cases are far narrower than a "very broad, standard arbitration clause"
like what the American Arbitration Association recommends. Dkt. 24 at 8
(quoting Welborn, 301 F.3d at 639). That overlooks, however, that the contract
here serves a narrower purpose than the contract in Welborn. Moreover, the
Welborn court sent several claims—including fraud and breach of contract—to
arbitration because they fit the language of the narrower arbitration provision.
301 F.3d at 640 (Welborn "must win, if anywhere, at arbitration."). Indeed,
those claims were "clearly arbitrable." Id.
Welborn therefore teaches that claims must be arbitrated if they fit the
language of the arbitration provision, understood in its context. See id. at 638–
40; Gore, 666 F.3d at 1032. And indeed—in this case—the arbitration
provision's content, placement, and context suggest a broader application. The
"amounts recoverable" language fits the narrow purpose of the contract—an
indemnification, excess-insurance policy. And unlike in Welborn, the
arbitration provision here is not under a narrow heading. See 301 F.3d at 636
(discussing the arbitration provision "[u]nder the heading 'Payments and
Charges'"). Instead, the provision is a "General Policy Condition[ ]," dkt. 22-1
at 16, and is not listed with the "Specific Excess Limits" that Plaintiffs argue
limit its scope, see id.; dkt. 24 at 10.
Plaintiffs' argument based on Premcor USA, Inc. v. American Home
Assurance Co., is similarly unpersuasive. 400 F.3d 523 (7th Cir. 2005). That
case did not involve arbitration, but the interpretation of "'amount recoverable'
8

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language" under Illinois law in the context of determining when excess coverage
begins. Id. at 527. Moreover, the outcome in Premcor was driven by several
context-dependent policy provisions. Id. Here by contrast, as explained above,
the Policy and its arbitration provision support arbitrability when read in
context.
For these reasons, it cannot "be said with positive assurance that the
arbitration clause is not susceptible of an interpretation that covers the
asserted dispute." Gore, 666 F.3d at 1032. Plaintiffs' claim therefore must be
arbitrated.
C. Costs and attorney's fees
Finally, Defendant alleges that it is entitled to recover reasonable costs
and attorneys' fees. Dkt. 23 at 10. In determining whether such relief is
warranted, the Court must "undertake an objective inquiry into whether the
party or his counsel should have known that his position was groundless."
Cuna Mut. Ins. Soc. v. Office and Professional Employees Intern. Union, Local 39,
443 F.3d 556, 560 (7th Cir. 2006). Here, Plaintiffs' position was not
groundless.
As Plaintiffs noted, contracts often contain "a very broad, standard
arbitration clause, similar to that recommended by the American Arbitration
Association." See Welborn, 301 F.3d at 639. The arbitration provision here
does not contain such broad, standard language, so it was necessary to turn to
the provision's content, placement, and context. It was therefore not
groundless to argue that this was a coverage dispute not covered by the
9

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arbitration clause. Therefore, Defendant's motion to recover attorneys' costs
and fees is DENIED.
D. Remedy
Defendant seeks dismissal or an order compelling arbitration and staying
the proceedings. Dkt. 22. "District courts should retain jurisdiction over a suit
that must be interrupted for reference of an issue to another forum rather than
dismiss it if, should it be dismissed, there might later be grounds for
reinstating it." Tice v. American Airlines, Inc., 288 F.3d 313, 318 (7th Cir. 2002)
(noting that plaintiff could reinstate his suit if he obtained a favorable
interpretation from the arbitrators). In Tice, the Seventh Circuit noted that a
stay "is the normal procedure when an arbitrable issue arises in the course of a
federal suit." Id.
Here, the arbitrable issue did not arise in the course of this federal suit;
instead, this suit is solely a dispute over the arbitrable issue. The outcome of
the arbitration therefore will not impose any further obligations on this Court,
so dismissal is appropriate. See Schultz v. Epic Sys. Corp., 376 F.Supp.3d 927,
939 (W.D. Wis. 2019) (recognizing "a judicially-created exception to the general
rule which indicates district courts may, in their discretion dismiss an action
rather than stay it where it is clear the entire controversy between the parties
will be resolved by arbitration."); Sanchez v. CleanNet USA, Inc., 78 F.Supp.3d
747, 758 (N.D. Ill. 2015); see also Johnson v. Orkin, LLC, 928 F.Supp.2d 989,
1008 (N.D. Ill. 2013) ("Although the Seventh Circuit has yet to hold outright
that dismissal of a suit is appropriate when all claims are subject to
10

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arbitration, it has affirmed district courts' dismissals of suits when a court
finds that all of the claims are arbitrable.").
IV.
Conclusion
Defendant's motion to dismiss or, in the alternative to compel
arbitration, dkt. [22], is GRANTED in part and DENIED in part. Plaintiffs'
motion to file a surreply is GRANTED. Dkt. [26]. This case is DISMISSED;
final judgment will issue in separate entry.
SO ORDERED.
Date: 1/6/2021

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Distribution:
Ryan M. Henderson
BATESCAREY LLP
[e-mail]
David L. Koury
BATES CAREY LLP
[e-mail]
Joseph D. O'Connor
BUNGER & ROBERTSON
[e-mail]
Maryanne Pelic
BUNGER & ROBERTSON
[e-mail]
Abigail E. Rocap
BATESCAREY LLP
[e-mail]
Mark Wohlford
BOSE MCKINNEY & EVANS, LLP (Indianapolis)
[e-mail]
Philip R. Zimmerly
BOSE MCKINNEY & EVANS, LLP (Indianapolis)
[e-mail]

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