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South Carolina Supreme Court Rules That Non-Signatories Are Not Bound By Arbitration Clause In Insurance Agency Agreement

04.29.19

(Article from Insurance Law Alert, April 2019)

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The South Carolina Supreme Court ruled that non-signatories to an insurance agency agreement were not required to arbitrate claims against the parties to the agreement.  Wilson v. Willis, 2019 WL 1549924 (S.C. Apr. 10, 2019).

Numerous policyholders and insurance agents filed lawsuits against an insurance agent, a broker and six insurance companies, alleging fraud and unfair trade practices, among other claims.  The suits alleged that the agent and broker forged documents and engaged in unfair and illegal tactics to “corner the retail insurance market” and that the insurers failed to properly supervise those individuals.  Three insurers moved to compel arbitration based on an arbitration clause in their Agency Agreement.  The insurers argued that the plaintiffs were third-party beneficiaries to the Agency Agreement and/or were equitably estopped from asserting their non-party status.  A trial court denied the motions.  An appellate court reversed, ruling that plaintiffs were equitably estopped from arguing that their status as non-signatories to the Agency Agreement precluded enforcement of the arbitration clause because plaintiffs sought to benefit from enforcement of other provisions in that agreement.

The South Carolina Supreme Court reversed.  As a preliminary matter, the court emphasized that the presumption in favor of arbitration applies to claims that are encompassed by an arbitration agreement, but not to the identity of the parties who are bound by such an agreement.  With respect to the equitable estoppel issue, the court emphasized that in order for non-signatories to be precluded from relying on their non-signatory status, they must seek a “direct benefit” from the contract containing the arbitration clause.  In other words, for equitable estoppel to apply, non-signatories must “consistently maintain[] that other provisions of the same contract should be enforced to benefit [them].”

The South Carolina Supreme Court concluded that this standard was not met because the plaintiffs “have not knowingly exploited and received a direct benefit from the Agency Agreement.” The court noted that plaintiffs were not aware of the existence of the Agency Agreement until they brought their tort actions against the defendants.  The court acknowledged that while some of the claims (e.g., failure to issue policies, respondeat superior) would not have arisen in the absence of the Agency Agreement, “direct benefits estoppel is not implicated simply because a claim relates to or would not have arisen ‘but for’ a contract’s existence.”  The court stated:  “when the benefits to a nonsignatory are merely indirect, arbitration cannot be compelled.”