Lexington Ins. Co. v. S. Energy Homes, Inc.

101 So.3d 1190

LEXINGTON INSURANCE COMPANY AND CHARTIS, INC.

v.SOUTHERN ENERGY HOMES, INC.

1091617.

Supreme Court of Alabama.

Aug. 17, 2012.

John W. Dodson and L. Jackson Young, Jr., of Ferguson, Frost & Dodson, LLP, Birmingham, for appellants.

W. Scott Simpson, Howard K. Glick, and Hunter C. Sartin of Simpson, Glick & Burford, PLLC, Birmingham, for appellee.

MURDOCK, Justice.

Lexington Insurance Company and Chartis, Inc. (hereinafter referred to collectively as “Lexington”), appeal from an order of the Winston Circuit Court appointing a third arbitrator to the arbitration panel established to settle a dispute between Lexington and Southern Energy Homes, Inc. (“SEH”).¹ We reverse and remand.

I. Facts and Procedural History

SEH designs and builds manufactured homes in Winston County. From January 1, 2002, through October 31, 2004, SEH purchased from Lexington three commercial general-liability (“CGL”) policies. An endorsement to a CGL policy insuring SEH from January 1, 2002, through December 31, 2002 (“the 2002 policy”), provides that SEH is responsible for a $100,000 self-insurance retention (“SIR”) “per occurrence.” Endorsements to two successive CGL policies that together provided coverage to SEH through October 31, 2004, provide that SEH is responsible for a $250,000 SIR per occurrence. The SIR applies both to costs of defense incurred by SEH and to amounts SEH pays in settlement or pursuant to a judgment.

The 2002 policy contains the following arbitration clause:

“Notwithstanding the Service of Suit clause above, in the event of a disagreement as to the interpretation of this policy, it is mutually agreed that such dispute shall be submitted to binding arbitration before a panel of three (3) Arbitrators, consisting of two (2) party-nominated (non-impartial) Arbitrators and a third (impartial) Arbitrator (hereinafter ‘umpire’) as the sole and exclusive remedy.

“The party desiring arbitration of the dispute shall notify the other party, said notice shall include the name, address, and occupation of the Arbitrator nominated by the demanding party. The other party shall within 30 days following receipt of the demand, notify in writing the demanding party of the name, address, and occupation of the Arbitrator nominated by it. The two (2) Arbitrators so selected shall within 30 days of the appointment of the second Arbitrator, select an umpire. If the Arbitrators are unable to agree upon an umpire, each Arbitrator shall submit to the other Arbitrator a list of three (3) proposed individuals from which list each Arbitrator shall choose one (1) individual. The names of the two individuals chosen shall be subject to a draw, whereby the individual drawn shall serve as umpire.

“The parties shall submit their case to the panel by written and oral evidence at a hearing time and place selected by the umpire. Said hearings shall be held within thirty (30) days of the selection of the umpire. The panel shall be relieved of all judicial formality, shall not be obligated to adhere to the strict rules of law or evidence, shall seek to enforce the intent of the parties hereto and may refer to, but are not limited to, relevant legal principles. The decision of at least two (2) of the three (3) panel members shall be binding and final and not subject to appeal except for grounds of fraud or gross misconduct by the Arbitrators. The award issued will be within 30 days of the close of the hearings. Each party shall bear the expenses of its designated Arbitrator and shall jointly and equally share with the other the expense of the umpire and the arbitration proceeding.

“The arbitration proceeding shall take place in or in the vicinity of Boston, Massachusetts.... The procedural rules of this arbitration shall, except as provided otherwise herein, be in accordance with the Commercial Rules of the American Arbitration Association.”

(Emphasis added.) The SIR endorsement to the 2002 policy contains an arbitration clause that reads exactly the same as the arbitration clause in the body of that policy, except that it does not contain a forum-selection clause and it states at its conclusion that “[a]ll other terms, exclusions, and conditions of this policy remain unchanged.”

CGL policies insuring SEH from January 1, 2003, through October 31, 2003 (“the 2003 policy”), and from November 1, 2003, through October 31, 2004 (“the 2004 policy”), each contain an arbitration clause identical to the arbitration clause contained in the body of the 2002 policy. The SIR endorsements to the 2003 policy and the 2004 policy do not contain arbitration clauses.

From January 1, 2002, through October 31, 2004, SEH was named as a defendant in 46 lawsuits alleging property damage and personal injury resulting from SEH's using a vinyl-on-gypsum product in the homes it manufactured (“the VOG litigation”). SEH gave notice of these lawsuits to Lexington. Further, on October 2, 2009, SEH gave written notice to Lexington that SEH had exhausted its SIR amounts in the VOG litigation and was entitled to reimbursement of $1,039,859.74 from Lexington. More than 120 days passed without SEH receiving a decision from Lexington as to whether it agreed with SEH's claim for this amount. On February 4, 2010, SEH made an arbitration demand pursuant to the arbitration clauses of the CGL policies, including the SIR endorsement to the 2002 policy.² SEH's arbitration demand stated: “The subject policy was issued and delivered to [SEH] in Addison, Alabama. Accordingly, Addison, Alabama, shall serve as the site of the subject arbitration.”

In the arbitration demand, SEH also identified its non-impartial arbitrator in accordance with the procedure provided in the arbitration clauses: G. Thomas Sullivan, a Birmingham attorney. On March 4, 2010, Lexington identified its non-impartial arbitrator: Robert H. Gaynor, a Boston attorney. Pursuant to the arbitration clauses, the non-impartial arbitrators were to select a third, impartial arbitrator called the “umpire.” That selection did not occur, and the trial court issued an order appointing the umpire. That order is the subject of this appeal.

As noted above, the arbitration clauses provide that the two non-impartial arbitrators “shall within 30 days of the appointment of the second Arbitrator, select an umpire.” On April 1, 2010, Sullivan wrote a letter to Gaynor that included required disclosures and stated as follows:

“I believe that we are to select the umpire called for by the arbitration clause within thirty (30) days of your appointment, which I understand occurred by letter dated March 4, 2010. I would be glad to discuss any suggestions you might have. Alternatively, if you think it would be more efficient, we can just proceed by each designating three potential arbitrators from which the other selects one, with the umpire being drawn from those two. Please advise me how you wish to proceed. I look forward to working with you.”

On April 2, 2010, Gaynor left a voice mail for Sullivan stating that he soon would be forwarding his list of three nominees to serve as umpire, along with his required disclosures, and advising Sullivan that he understood from the arbitration clauses in the CGL policies that the venue for arbitration would be Boston. Sullivan responded with another letter on April 5, 2010, in which he offered the names of his three nominees to serve as umpire, and added the following:

“As to venue of the arbitration, I believe that there is another arbitration clause in a rider to the policy which I believe is the provision under which [SEH] is proceeding. That said, however, I would suggest that venue is an issue for the parties to resolve as opposed to the arbitrators. In either case, I will review your designees upon receipt of your letter and we can discuss how to proceed from there with the umpire selection process.”

Three days later, on April 8, 2010, Sullivan sent a letter to the parties' counsel and to Gaynor that provided, in pertinent part:

“This letter serves to confirm that the party nominated arbitrators (myself and Mr. Robert H. Gaynor) have failed to select an umpire within the time period set out in the Arbitration clause. This also confirms that on behalf of [SEH] I have timely nominated three persons to serve as umpire, but that I have not received nominees from the arbitrator nominated by [Lexington]. As the Arbitration Agreement calls for the arbitration hearing to be conducted in this matter within thirty (30) days, it appears that a lapse in the selection process has occurred and the parties may wish to consider protecting their interest as they deem necessary.”

Later on the same day, April 8, SEH initiated a declaratory-judgment action in the Winston Circuit Court by filing a complaint seeking (1) a declaration that the venue of the arbitration proceeding should be based upon the absence of a forum-selection provision in the arbitration clause of the SIR endorsement to the 2002 policy; (2) a determination that Lexington had “forfeited its right to designate three nominees to serve as umpire because it failed to timely do so as required by the arbitration agreement”; and (3) the appointment by the trial court of an umpire pursuant to 9 U.S.C. § 5 of the Federal Arbitration Act (“the FAA”). It is undisputed that SEH did not initiate service of the complaint upon Lexington at the time it was filed.

On April 9, 2010, unaware of the pending declaratory-judgment action, Gaynor sent Sullivan a letter reiterating his view that the venue for the arbitration proceedings was Boston and expressing the concern that, “without addressing the locus of the arbitration, the appointment process for an umpire is premature.” Nonetheless, Gaynor provided in the letter the names of his three nominees to serve as umpire in the arbitration proceedings. Gaynor also addressed the issue of a “lapse” mentioned by Sullivan in his April 8, 2010, letter:

“You also mention in your April 8 correspondence that an...