American International Specialty Lines Insurance Company v. Electronic Data Systems Corporation and Eds/shl Corporation

Citations: 347 F.3d 665; 2003 WL 22389816Docket: 03-1526

Court: Court of Appeals for the Seventh Circuit; November 25, 2003; Federal Appellate Court

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The case involves American International Specialty Lines Insurance Company (AISLIC) disputing the arbitrability of coverage under a liability insurance policy issued to MCI and its subsidiaries. The policy includes a "Subsidiary Coverage" provision protecting any past subsidiary of the Named Insured. A claim arose from a project by MCI's subsidiary MCIS for the New York Police Department, which alleged wrongful acts. Before the claim was made, MCIS was sold to EDS, and EDS argued that it retained coverage under the policy since the claim was made while the policy was active and involved acts committed before the sale. AISLIC acknowledged that the sale did not eliminate coverage but denied EDS/SHL's claim due to lack of timely notice and consent for a $20 million settlement. 

EDS/SHL requested arbitration under the policy's ADR clause, prompting AISLIC to file a lawsuit seeking to prevent arbitration and declare the claim meritless. AISLIC later added EDS as a defendant to strengthen its position that EDS/SHL was not a legitimate subsidiary. The district court ordered arbitration, leading to a $14 million award for EDS/SHL, which AISLIC subsequently appealed, arguing solely that EDS/SHL was not entitled to arbitration, not contesting the merits of the award itself.

EDS/SHL argues that AISLIC waived its right to challenge arbitrability by participating in the arbitration process, including raising the issue of nonarbitrability before the arbitrators. The court acknowledges that while AISLIC could not wait to see the arbitration outcome before contesting arbitrability, it did raise the issue initially and only participated in arbitration due to a district court's order, which may have been unappealable. AISLIC attempted to appeal this order, but the appeal was dismissed for reasons not related to its appealability.

The legal framework regarding the appealability of arbitration orders is complex. According to 9 U.S.C. § 16(b)(2), an order directing arbitration is generally nonfinal and nonappealable unless it is issued in a case specifically brought to obtain that relief. In this instance, AISLIC was the plaintiff seeking an injunction against arbitration, which might suggest that the order to arbitrate was merely interlocutory. However, if the district court dismissed AISLIC's claim simultaneously with ordering arbitration, then that order would be final and appealable. This principle is supported by the Supreme Court's ruling in Green Tree Financial Corp.-Alabama v. Randolph, which states that an order to arbitrate is appealable if it resolves the entire case on the merits. Previous cases that suggested orders to arbitrate were never final in such contexts are no longer valid post-Green Tree.

The judge's order regarding the defendants' motion to compel arbitration and dismiss the case is ambiguous. It states that the motion is granted but also indicates that the action is dismissed pending arbitration resolution, suggesting a stay rather than a complete dismissal. The lack of a final judgment under Fed. R.Civ. P. 58 supports this interpretation, yet the order to arbitrate may still be considered final and immediately appealable if no further issues remain in the district court, despite the absence of a Rule 58 judgment. EDS/SHL's appeal was dismissed as untimely, but they can refile after obtaining a Rule 58 judgment. The intent to resolve the arbitrability issue prompted AISLIC and EDS/SHL to request a Rule 58 judgment, which the judge did not issue, indicating he viewed the order to arbitrate as nonfinal. Consequently, AISLIC was compelled to participate in arbitration without waiving its objections to it. Their failure to appeal the order should not preclude appellate review of arbitrability, as their request for a Rule 58 judgment demonstrated a genuine effort to seek review. Additionally, challenging arbitrability before the arbitrators does not forfeit AISLIC's right to revisit the issue in court, as there are no restrictions against presenting the same argument in multiple forums.

The document addresses the right of EDS/SHL to initiate arbitration with AISLIC regarding insurance proceeds linked to claims by the New York Police Department that arose before MCIS was sold to EDS. AISLIC acknowledges that the liability incurred by MCIS is covered under the insurance policy, as the events occurred within the policy period. The policy's terms suggest that coverage remains valid for acts of the subsidiary prior to its sale, ensuring the insurer's risk is not increased by the sale. 

AISLIC argues that only MCI, the Named Insured, can invoke arbitration, based on a policy provision stating that the Named Insured acts on behalf of all Insureds. However, since MCI no longer has an interest in MCIS, it lacks incentive to select a dispute resolution method. This interpretation would unjustly restrict EDS/SHL's right to arbitration, which contradicts the commercial purpose of the policy. 

Moreover, the policy's definition of "subsidiary" pertains to current control, indicating that past subsidiaries like MCIS retain coverage despite MCI's divestment. The policy allows Insureds to reject the Insurer's choice of alternative dispute resolution (ADR) mechanisms, implying that EDS/SHL could assert its preference for arbitration if MCI fails to act. Consequently, it would be unreasonable for AISLIC to prevent EDS/SHL from exercising its arbitration rights by not making a choice when MCI has no stake in the dispute.

The policy stipulates that if "the Named Insured" is sold, coverage remains effective for Wrongful Acts prior to the sale, with specific reference to MCI. The insurer, AISLIC, seeks to limit coverage against wrongful acts committed by new ownership post-sale, emphasizing the policy's restriction on assignment without consent to manage risks. It distinguishes between past subsidiaries as insureds rather than assignees. AISLIC argues for an evidentiary hearing to clarify the term "Named Insured" and the status of EDS/SHL as a genuine subsidiary. However, it is determined that there is no substantial dispute over EDS/SHL's entitlement to arbitration, as AISLIC's interpretations are deemed commercially unreasonable and do not support the need for further inquiry. The court reinforces that ambiguities in insurance contracts are to be interpreted against the insurer only after unsuccessful attempts at clarification, and evidence gathering for arbitrability should be avoided to uphold arbitration's purpose of efficiency. The court concludes that EDS/SHL's claim against AISLIC, related to liability coverage for the New York Police Department, has been pending for four years, warranting resolution without further delay. The ruling is affirmed.