Packer, Thomas Company v. Federal Insurance Co., Case No. 4:09-cv-2469 (N.D. Ohio Jan. 12, 2010)
Issue Discussed: Motion to Dismiss Declaratory Judgment Action and to Compel Arbitration
Submitted by Michele L. Jacobson, Esq, Talona H. Holbert, Esq
Date Promulgated: October 10, 2022
Packer, Thomas Company v. Federal Insurance Co., Case No. 4:09-cv-2469 (N.D. Ohio Jan. 12, 2010)
Court: United States District Court, Northern District of Ohio, Eastern Division
Date Decided: January 12, 2010
Issue Decided: Motion to Dismiss Declaratory Judgment Action and to Compel Arbitration
Submitted by Michele L. Jacobson, Esq. and TaLona H. Holbert, Esq.[1]
In Packer, Thomas Company v. Federal Insurance Co., the United States District Court for the Northern District of Ohio, Eastern Division granted the insurer’s motion to dismiss the insured’s declaratory judgment action and granted its motion to compel arbitration. The court held that it had diversity-of-citizenship jurisdiction over the “controversy between the parties” and that, accordingly, the FAA applied to the motion to compel arbitration. Reasoning that (1) the parties had agreed to arbitrate; (2) the arbitration agreement applied to the dispute at issue; and (3) all of the insured’s claims were subject to arbitration, the court compelled arbitration and held that the insured’s declaratory judgment action should be dismissed under the FAA.
The matter at issue arose from litigation involving Packer, Thomas Company’s (the insured) termination of an employee. The employee, who was not a party to the subject dispute, filed suit against the insured alleging breach of contract and age discrimination and also filed a demand for arbitration. The insured then made a demand for defense and indemnification upon Federal Insurance Company (the insurer) with respect to the employee’s lawsuit. The insurer denied the insured’s demand due to the insured’s alleged failure to provide timely notice of the litigation, pursuant to the relevant insurance policy. Subsequently, the insured sought a declaration of rights via an action filed in the Mahoning County Court of Common Pleas, requesting the following three declarations: (1) the plaintiff is an insured as defined in the subject policy; (2) the insurer has a duty to defend and indemnify the insured in the underlying litigation; and (3) the insurer was not prejudiced in relation to the timeliness of the notification of the claim. In response, the insurer removed the lawsuit to federal District Court in the Northern District of Ohio and filed an unopposed[2] motion to compel arbitration and dismiss the insured’s declaration of rights action, or, in the alternative, to stay the action pending arbitration.
The court began its analysis by examining whether it had jurisdiction over the dispute under the Federal Arbitration Act (“FAA”). Noting that under Section 2 of the FAA “arbitration agreements in contracts involving commerce are valid, irrevocable, and enforceable”, the court stated that Section 4 of the FAA allows federal district courts to enforce arbitration agreements to the extent the district court would have had subject matter jurisdiction under Title 28 over “a suit arising out of the controversy between the parties” in the absence of any such arbitration agreement. Packer, Thomas Company v. Federal Insurance Co., Case No. 4:09-cv-2469, at *3 (N.D. Ohio Jan. 12, 2010) (internal quotations and citations omitted). The court found that the “controversy” between the parties, that is, the “substantive conflict”, was the insured’s declaratory judgment action, over which the district court had diversity jurisdiction and thus, the FAA empowered it to enforce the arbitration agreement between the parties.
In enforcing the parties’ arbitration agreement under the FAA, the court had to decide whether to dismiss or stay the insured’s declaratory judgment action pending arbitration. The Northern District of Ohio sits within the Sixth Circuit, which applies a four pronged test to determine whether to compel arbitration and dismiss or stay an action. The test, which is set forth in “Stout v. J.D. Byrider, 228 F.3d 709, 714 (6th Cir. 2000) (the Stout test), requires courts to examine: (1) whether the parties agreed to arbitrate; (2) the scope of the arbitration agreement; (3) whether, to the extent the matter involves federal statutory claims, Congress intended for the claims to be arbitrated; and (4) whether to stay proceedings as to any non-arbitrable claims, pending arbitration, to the extent only some of the subject claims are arbitrable.
As to the first prong of the Stout test, the court examined the terms of the parties’ insurance policy, which included an Employment Practices Liability Coverage Section, a Fiduciary Liability Coverage Section, and a Directors and Officers Liability Coverage Section. The policy also contained a Coordination of Coverage Section which provided that any loss covered under the Employment Practices Liability Coverage Section in conjunction with either of the two other aforementioned sections, would first be covered under the former. The Employment Practices Liability Coverage section requires that any dispute between the parties be submitted to arbitration if the dispute “[arose] from or in connection with any factual or alleged coverage” under the section. Packer, Thomas Company, Case No. 4:09-cv-2468, at *5-6. The court determined that each of the three declarations that the insured sought arose from or in connection with the underlying litigation for which the insured sought coverage under the policy. As such, the court ruled that the parties agreed to arbitrate the matter “by the express terms of the policy”, noting that neither party alleged that the clause was improperly included in the contract. Id. at *6.
The court found that the remaining prongs of the Sixth Circuit’s Stout test supported compelling arbitration and completely dismissing the insured’s declaratory judgment action. With respect to the second prong, the scope of the policy’s arbitration provision “clearly extend[ed] to disputes arising out of employment lawsuits and arbitration demands.” Id. As the insured did not raise any federal statutory claims, the court ruled that the third prong of the Stout test did not apply. As for the fourth prong, all of the insured’s claims were subject to arbitration. Accordingly, the court compelled arbitration and dismissed the insured’s declaratory judgment action.
[1] Michele L. Jacobson is a Partner at Stroock & Stroock & Lavan LLP, where she serves as Chair of the National Litigation Practice Group, Head of the New York General Litigation Practice Group, Co-Chair of the Insurance Industry Practice Group, and member of the Executive Committee. She concentrates her practice on complex insurance and reinsurance matters in the property, casualty and life fields. She has represented clients in a wide array of disputes involving issues of misrepresentation, coverage, standard-of-conduct, broker negligence, underwriting and claims handling, YRT rate increases, and insurance regulatory issues. Ms. Jacobson regularly appears in state and federal courts, as well as before arbitration Panels throughout the country.
TaLona H. Holbert is an Associate in the Insurance Industry Practice Group of Stroock & Stroock & Lavan LLP, where she serves on the Associates’ Committee. She is also a co-chair of the ARIAS Forms and Procedures Committee. She concentrates her practice on complex insurance and reinsurance matters in the property, casualty, and life fields.
[2] Pursuant to Local Rule 7.1, the District Court of the Northern District of Ohio may rule, without hearing, on unopposed motions at any time after the opposition filing deadline expires. LOCAL Civ. R. 7.1(d) and (g).
