Enforceability of Arbitration Provisions in Insurance Contracts

November 1st, 2011
By: Evan Rothman, Stephens Friedland LLP

Earlier this summer, the California Court of Appeal, in Mission Viejo Emergency Medical Associates v. Beta Healthcare Group, 197 Cal.App.4th 1146 (2011), reversed a trial court ruling denying the enforcement of an arbitration provision in a professional liability insurance policy.  The Court of Appeal held that the Plaintiffs failed to meet their burden of proof regarding the unenforceability of the arbitration provision and found that the provision was not substantively unconscionable. 

Mission Viejo arose out of a malpractice lawsuit against a partner in the Mission Viejo Emergency Medical Associates (“MVEMA”) partnership, in which the jury awarded a judgment of nearly $12 million, which was later reduced to just over $5 million.  The insurer in the malpractice case, HealthPro, paid the policy limit amount of $2 million.  MVEMA then filed suit against HealthPro and others alleging several causes of action, including breach of contract and breach of the duty of good faith and fair dealing.  The defendants moved to compel arbitration under the insurance policy’s arbitration provision, a provision which had been slightly modified each year when MVEMA renewed its policy.  MVEMA challenged this motion relying solely on a declaration of its managing partner, Dr. Rover Winokur, which alleged that he was never informed of the arbitration provision in the HealthPro policy.  The trial court found that because the arbitration clause was never mentioned to MVEMA, “plaintiffs did not knowingly and voluntarily waive their right to a jury trial and consent to binding arbitration.”

On appeal, the defendants argued that they had established prima facie evidence of the existence of the arbitration clause and that plaintiffs had failed to demonstrate that the clause was unenforceable either because Plaintiffs did not consent to the provision or that it was unconscionable.  The Court of Appeal agreed with defendants and reversed the trial court’s ruling. 

Plaintiffs admitted the existence of the arbitration provision but claimed that they were never informed of it by HealthPro.  The Court of Appeal, however, found the arbitration provision to be “clear and conspicuous” as it was “positioned and printed in a form which adequately attracted the reader’s attention.”  The provision was in the table of contents under the heading of “Arbitration of Disputes with Us” and the clause itself was printed in all capital letters and was underlined.  This, the court held, constituted prima facie evidence of the existence of the arbitration provision.

The Court of Appeal also held that MVEMA consented to the arbitration provision despite the defendants failure to mention its existence, because under California law “[t]he insured will be bound by clear and conspicuous provisions in [an insurance] policy, even if the insured did not read or understand those provisions.”  MVEMA’s failure to read the policy was “not [a] sufficient reason to hold a clear and conspicuous policy provision unenforceable.”  MVEMA could not “accept the benefits under the policy while denying the existence of inconvenient terms.” 

Finally, the Court found that the arbitration provision was not unconscionable.  Plaintiffs argued that because the arbitration provision had been modified each year that its terms were unconscionable.  The Court held, however, that the provision was not “so one-sided as to ‘shock the conscience’” and that the “fundamental provision regarding arbitration was not substantively unconscionable” and therefore did not need to address the issue of procedural unconscionability.  The court expressly noted, however, that the issue regarding what terms of the provision apply, may be addressed by the trial court since these issues had not been properly developed.

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