State Farm Mutual Automobile Insurance Co. v. Cincinnati Insurance Co.

OPINION

TOUSSAINT, Chief Judge.

Respondent insurance company refused to arbitrate a car accident because its insured instructed it not to provide coverage, pay or defend the action. Appellant insurance company moved to compel arbitration, and the district court denied the motion. Appellant contends that (1) the district court erred by denying its motion to compel respondent to arbitrate; (2) respondent’s refusal to pay the claim based on the instruction of the insured violates public policy and the Unfair Claims Practices Act, Minn.Stat. § 72A.201, subd. 8(3) (2000); (3) appellant is entitled to attorney fees under the arbitration agreement; and (4) the proceedings in the underlying action against respondent’s insured should be stayed pending conclusion of arbitration. We affirm.

FACTS

This case arises out of a motor-vehicle accident. Glen Meyer hired Michelle Miller’s husband, Loren, to plow his driveway. As Loren was plowing Meyer’s driveway, Michelle drove in the driveway to speak to Loren. At about the same time, Meyer backed out of his garage, drove forward around his rock garden, and then, while looking at and waving to Loren, collided with Michelle’s vehicle.

At the time of the accident, the Millers were insured by appellant State Farm Mutual Insurance Company (State Farm). State Farm paid for the property damage to Michelle’s vehicle, but Michelle also sustained out-of-pocket expenses as a result of the policy’s $500 deductible. State Farm attempted to recover from Meyer, the amounts it had paid to Michelle and Michelle’s out-of-pocket expenses. When Meyer refused to disclose the identity of his insurer, State Farm and Michelle sued him. State Farm later learned that Meyer was insured by respondent Cincinnati Insurance Company (Cincinnati), but Meyer had instructed Cincinnati not to provide coverage, pay the claim, or defend him. Cincinnati stood ready to defend and indemnify Meyer, but Meyer elected not to invoke his liability coverage and instead decided to defend the matter himself.

State Farm filed a petition for arbitration pursuant to its intercompany arbitration agreement with Cincinnati. While Cincinnati admitted that it was a signatory to the agreement it argued that the agreement only takes effect if Cincinnati’s insured invokes coverage.

State Farm moved to compel Cincinnati to arbitrate. The district court denied State Farm’s motion, concluding that (1) the disputed claim does not fall within the scope of the arbitration agreement; (2) Cincinnati is under no obligation to defend, indemnify, or arbitrate on its insured’s behalf because its insured had not tendered defense of the claim to it; (3) the insurance policy between Cincinnati and its insured did not confer third-party-beneficiary status on State Farm; and (4) the Minnesota Unfair Claims Practices Act does not affect State Farm’s claim. State Farm appeals.

ISSUES

I. Did the district court err by denying appellant’s motion to compel arbitration?

II. Did respondent’s refusal to pay the claim based on the instruction of its insured violate public policy and the Unfair Claims Practices Act, Minn. Stat. § 72A.201, subd. 8(3) (2000)?

III. Did the district court err by denying appellant’s request for attorney fees under the terms of the parties’ inter-company arbitration agreement?

IV. Did the district court err by denying appellant’s motion to stay the underlying proceeding between appellant’s insured and respondent’s insured?

ANALYSIS

Motion to Compel Arbitration

This court reviews the district court’s denial of a motion to compel arbitration de novo. Johnson v. Piper Jaffray, Inc., 530 N.W.2d 790, 795 (Minn.1995). When considering a motion to compel arbitration, the court’s inquiry is limited to determining (1) whether a valid arbitration agreement exists; and (2) whether the dispute falls within the scope of the arbitration agreement. Amdahl v. Green Giant Co., 497 N.W.2d 319, 322 (Minn.App.1993).

State Farm argues that the district court erred by denying its motion to compel Cincinnati to arbitrate. The parties do not dispute that a valid arbitration agreement exists. We are asked to determine whether the dispute falls within the scope of the arbitration agreement. See id. Whether or not a party has agreed to arbitrate a particular dispute is a matter of contract interpretation, which this court reviews de novo. Stiglich Constr., Inc. v. Larson, 621 N.W.2d 801, 802 (Minn.App.2001) (citation omitted), review denied (Minn. Mar. 27, 2001).

State Farm and Cincinnati are parties to an intercompany automobile-insurance arbitration agreement. The agreement requires arbitration of any questions or disputes which may arise from any automobile physical damage' subrogation or property damage claim not in excess of $100,000. The parties concede that this is such a claim. But the agreement expressly does not apply and arbitration is not required as to claims against which a company asserts a defense of lack of coverage on grounds other than delayed notice, no notice, or noncooperation.

Cincinnati argues that the agreement does not apply to the present claim because its insured never tendered to it the defense of the claim, and thus, Cincinnati’s duty to defend and indemnify its insured never materialized. We agree with Cincinnati. [TJender of defense is a condition precedent to the creation of an obligation to indemnify. Seifert v. Regents of Univ. of Minn., 505 N.W.2d 83, 87 (Minn.App.1993), review denied (Minn. Oct. 28, 1993). Likewise, the tender of defense is a condition precedent to the duty to defend. Pedro Cos. v. Sentry Ins., 518 N.W.2d 49, 51 (Minn.App.1994). To constitute tender of defense, the insurer must have knowledge that the suit is potentially within the policy’s coverage coupled with knowledge that the insurer’s assistance is desired. Home Ins. Co. v. Nat’l Union Fire Ins. of Pittsburgh, Pennsylvania, 643 N.W.2d 307, 320 (Minn.App.2002) (quotation omitted). State Farm attempts to bring the dispute under the terms of the parties’ arbitration agreement by arguing that Meyer’s failure to tender defense of the claim to Cincinnati amounts to noncooperation. The duty of the insured to cooperate with its insurer, however, arises after a tender of defense.

State Farm also asserts that the district court erred by concluding it was not a third-party beneficiary of. the arbitration agreement signed by Cincinnati. Even if State Farm were to establish that it was a beneficiary to the arbitration agreement, the condition precedent required for the arbitration agreement to take effect, a tender of defense, still has not occurred.

Because Meyer has not tendered the defense ,to Cincinnati, the district court did not err by denying State Farm’s motion to compel arbitration.

Unfair Claims Practices Act

State Farm argues that Cincinnati’s refusal to pay the claim based on the instruction of the insured violates public policy and Minnesota’s Unfair Claims Practices Act, Minn.Stat. § 72A.201, subd. 8(3) (2000). We disagree.

The act defines various acts by-an insurer that constitute unfair settlement practices, including denying a liability claim because the insured has requested that the claim be denied. Id. But the act provides for administrative enforcement and does not create a private cause of action. Morris v. American Family Mut. Ins. Co., 386 N.W.2d 233, 235 (Minn.1986). Even if the act had some impact on State Farm’s private claim against Cincinnati, which it does not, Cincinnati’s actions do not constitute an unfair practice. Although Meyer instructed Cincinnati not to pay the claim, tendering of the defense was a condition precedent to this provision taking effect. In other words, Meyer’s actions could not constitute requesting that the claim be denied when he had not yet tendered the defense to Cincinnati.

State Farm also asserts that Cincinnati’s actions in refusing to arbitrate and in denying the claim based on the request of their insured is against public policy. Cincinnati has taken a legally permissible stance in this matter, however, and it is not authorized to defend and indemnify against the instructions of its insured. Therefore, we conclude there is no violation of public policy.

Attorney Fees

State Farm argues that the district court erred by denying its request for attorney fees under the arbitration agreement. It contends that Cincinnati has not acted in good faith, in violation of the Minnesota Unfair Claims Practices Act. We disagree.

“The construction and effect of a contract are questions of law for the court”. Turner v. Alpha Phi Sorority House, 276 N.W.2d 63, 66 (Minn.1979). The parties’ arbitration agreement provides that

[i]n the event that, after removal, the case is discovered to have been properly placed in arbitration and the Applicant refiles the case in arbitration, the Respondent must reimburse Applicant for all reasonable legal expenses and court costs incurred because of the improper objection to jurisdiction.

Because Meyer did not tender the defense, and Meyer’s actions did not amount to noncooperation under the agreement, the dispute does not fall under the arbitration agreement. Even if it did fall within the agreement, however, Cincinnati has not made an improper objection to jurisdiction. We conclude the district court did not err by determining that State Farm’s request for attorney fees was unwarranted.

Stay of Proceedings

State Farm asserts that because this dispute falls under the parties’ arbitration agreement, the district court erred when it denied its motion to stay the underlying proceeding between the insureds. We disagree. While a court must stay the proceedings and compel arbitration of claims subject to arbitration under a valid agreement, Minn.Stat. § 572.09 (2000), no such duty to arbitrate arose here. Accordingly, the district court did not err by denying State Farm’s motion to stay the underlying proceeding.

DECISION

This dispute does not fall within the parties’ intercompany arbitration agreement because Meyer refused to tender the defense to Cincinnati. Absent this condition precedent, Meyer’s actions did not amount to noncooperation under the agreement, and Cincinnati did not have a duty to arbitrate. The district court, therefore, did not err by denying State Farm’s motions to compel arbitration, to award attorney fees, or to stay the underlying proceeding.

Affirmed.