Zurich American Insurance Co. v. Watts Industries, Inc.

United States Court of Appeals for the Seventh Circuit · 2005 · Evidence

EvidenceArbitrationPreclusionFederal Arbitration Actarbitrabilityscope of arbitrationpreclusionres judicata

Facts

Watts entered into six one-year insurance contracts with Zurich covering June 30, 1991 through June 30, 1997, and each contract was supported by a deductible agreement containing a broad arbitration clause. After municipalities sued Watts and its former subsidiary in California, Watts sought coverage from Zurich, Zurich refused, and Watts sued Zurich in California state court for breach of contract and bad faith. Zurich then demanded arbitration under the deductible agreements, but Watts refused to arbitrate on four of the six agreements. A California state court later entered a final judgment concluding that Zurich had breached duties under the 1994-1995 and 1995-1996 insurance contracts, and Watts argued that this judgment limited any arbitrable dispute to those two years.

Issue

When valid, broad arbitration clauses exist in six deductible agreements, may a court limit arbitration to two agreements based on the preclusive effect of a prior California state court judgment, or is that preclusion question for the arbitrator to decide?

Rule

In deciding a motion to compel arbitration, the court determines whether the parties agreed to arbitrate and whether the dispute falls within the scope of the arbitration agreement, not the merits of the underlying dispute. A party seeking to compel arbitration need show only (1) an agreement to arbitrate, (2) a dispute within the scope of the agreement, and (3) refusal by the opposing party to arbitrate. Procedural questions and defenses that grow out of the dispute and bear on its final disposition, including the asserted preclusive effect of a prior judgment used as a defense to arbitration, are presumptively for the arbitrator.

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Rivergate Packaging, based in Milwaukee, bought four consecutive annual excess-liability policies from North Harbor Indemnity. Each year also included a separate deductible agreement with a broad clause requiring arbitration of any dispute arising under that deductible agreement. After a Wisconsin state court entered a final judgment resolving coverage questions for policy years three and four, Rivergate refused to arbitrate years one and two, arguing the judgment necessarily eliminated any remaining dispute for those years.

North Harbor petitions in federal court to compel arbitration on all four deductible agreements. What is the best ruling?

Explanation. To compel arbitration, the movant need show only an agreement to arbitrate, a dispute within the agreement’s scope, and refusal to arbitrate. Where the parties concede valid broad arbitration clauses and the opponent invokes a prior judgment as a defense that would narrow or defeat the claims, that preclusion issue bears on final disposition and is presumptively for the arbitrator, not the court.