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State Farm Fire & Casualty Company, As Subrogee of William Arnold, et al. v. Pentair

September 7, 2012


The opinion of the court was delivered by: Judge Edmond E. Chang


Plaintiff State Farm brought a property subrogation case to recover monetary damages for reimbursements it made to its insureds for real and property damage caused by the allegedly-defective design of sump pumps manufactured and distributed by Defendant Pentair.*fn1 R. 6 at 2. Pentair believes the claims are subject to arbitration, and has moved to compel arbitration and dismiss the complaint. R. 15. For the reasons explained below, the Court grants the motion to compel arbitration and will stay the case.


The following facts are drawn from the complaint. State Farm is an Illinois corporation and is engaged in the business of issuing insurance policies throughout the United States. R. 6 at 3. State Farm alleges that Pentair engaged in the design, manufacture, distribution, and marketing of defective sump pumps. Id. at 2-3. According to State Farm, between July 2007 and August 2011, water loss occurred in the homes of 108 of State Farm's insureds due to the failure of Pentair pumps, which allowed water to accumulate in the homes. Id. at 4-5. Pursuant to the insurance policies, State Farm paid over $900,000 in real and personal property damages to its insureds, and is now subrogated to all "rights, claims and causes of action that State Farms' insureds may have against Pentair." Id. at 4.

State Farm and Pentair are signatories to an arbitration agreement implemented by an alternative dispute resolution service called Arbitration Forums, Inc. The Property Subrogation Arbitration Agreement requires mandatory arbitration for personal or commercial property subrogation when the "Company Claim" amount is less than or equal to $100,000. R.17-1 at 4; R. 17-2 at 1. The Arbitration Agreement states, in relevant part, "Signatory companies must forego*fn2 litigation and arbitrate any personal or commercial property subrogation or self-insured property claims through Arbitration Forums, Inc." R. 17-1. As of February 1, 2010, the Arbitration Forums, Inc. rules regarding compulsory arbitration were amended to state, "[c]ompulsory arbitration is applicable to a maximum of $100,000 Company Claim Amount in the Automobile, Medical Payment, Property, and Uninsured Motorists Forums." R. 17-2 at 1. But nowhere in the arbitration agreement or in the amended rules is there an express definition of "Company Claim."

Pentair argues that each of State Farm's 108 subrogated claims falls within the scope of the Arbitration Agreement because each individual claim is worth less than $100,000, and thus, Pentair argues, State Farm must arbitrate each claim. R 17 at 6. State Farm responds that the claim falls outside the scope of the Arbitration Agreement because when the claims are aggregated, they exceed the $100,000 compulsory arbitration limit. R. 19 at 1, 4-5.


Under the Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq., if the parties have entered into an arbitration agreement and the asserted claims are within its scope, a motion to compel arbitration must be granted. 9 U.S.C. §§ 3-4; Sharif v. Wellness Int'l Network Ltd., 376 F.3d 720, 726 (7th Cir.2004) (citing Kiefer Specialty Flooring, Inc. v. Tarkett, Inc., 174 F.3d 907, 909 (7th Cir.1999)). Section 3 of the FAA specifically requires granting a motion to stay a lawsuit where "the issue involved in such suit . . . is referable to arbitration" under a written agreement. 9 U.S.C. § 3. And Section 4 requires that the court order the parties to proceed in arbitration if there is an agreement to arbitrate. 9 U.S.C. § 4.

Here, State Farm does not dispute that the parties are bound by an enforceable contract; State Farm and Pentair are in fact signatories to the Arbitration Agreement, and there is no dispute as to the agreement's validity. Nor does State Farm dispute the application of the contract to the particular type of controversy; State Farm admits that the Arbitration Agreement applies to subrogation claims. Instead, the dispute arises over whether individual underlying claims-each payment to each insured-may be aggregated so as to exceed the $100,000 threshold and relieve State Farm of the obligation to arbitrate. This in turn depends on how the undefined term "Company Claim" is interpreted. R. 19 at 4-6; R. 20 at 6-8.

Pentair argues that the interpretation of "Company Claim" in the arbitration contract is a procedural question that must be decided by the arbitrator, R. 25 at 2, while State Farm argues that this is a substantive question that would therefore be a question of arbitrability for this Court to decide, R. 24 at 2. As a general matter, the question of whether the parties agreed to arbitrate a matter must be decided by the court, because a party can only be compelled to arbitrate those issues it has agreed to submit to arbitration. See AT&T Techs., Inc. v. Communications Workers of Am., 475 U.S. 643, 648-49 (1986). But the category of issues that are "question[s] of arbitrability" for the court to decide is not as broad as it sounds:

Linguistically speaking, one might call any potentially dispositive gateway question a "question of arbitrability," for its answer will determine whether the underlying controversy will proceed to arbitration on the merits. The Court's case law, however, makes clear that, for purposes of applying the interpretive rule, the phrase "question of arbitrability" has a far more limited scope. Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002). Put generally, the limited scope of what constitutes a "question of arbitrability" for the court to decide is confined to the kind of narrow circumstance where contracting parties would likely have expected a court to have decided the gateway matter, where they are not likely to have thought that they had agreed that an arbitrator would do so, and, consequently, where reference of the gateway dispute to the court avoids the risk of forcing parties to arbitrate a matter that they may well not have agreed to arbitrate.

Id. at 83-84. And put more specifically, Howsam described the narrow questions of arbitrability that are reserved for the court to decide: (1) "a gateway dispute about whether the parties are bound by a given arbitration clause," and (2) "a disagreement about whether an arbitration clause in a concededly binding contract applies to a particular type of controversy." Id.

Here, the parties do not dispute that they are bound by the contract (the first category described above), nor do they dispute that subrogation claims arising from property damage are not the type of controversy covered by the arbitration agreement (the second category described above). Instead, the parties argue over whether a "Company Claim," for purposes of setting the dollar-amount at stake, comprises one claim relating to one insured or instead may comprise all of the subrogee's consolidated claims. That dispute does not fall within Howsam's "question of arbitrability" definition, and instead more closely resembles a procedural question that an arbitrator would be better-positioned to interpret.

The cases cited by State Farm address questions of "whether a particular dispute concerns a subject that the parties have agreed to arbitrate," Niro v. Fearn Int'l Inc., 827 F.2d 173, 175 (7th Cir. 1987) (emphasis added), such as whether the parties agreed to arbitrate issues of laches, Int'l Union of Operating Eng'rs, Local 150 v. Flair Builders, Inc., 406 U.S. 487, 491 (1972), or grievances concerning labor-management layoffs, AT&T Techs., 475 U.S. at 651, but this case does not involve a question of subject matter.*fn3 Instead, this case involves a question that is similar to determining what the procedural requirements are, and those questions are normally reserved for the arbitrator. Niro, 827 F.2d at 175; see, e.g., Howsam, 537 U.S. at 85 (holding that the NASD time limit rule was a matter for the arbitrator to decide, not a question of arbitrability); Green Tree Fin. Corp v. Bazzle, 539 ...

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