Travelers Indem. Co. v. Grapeland Indep. Sch. Dist., No. 12-22-00311-CV, 2023 WL 3371072 (Tex. App. May 10, 2023)

Issue Discussed: Application of Direct Benefits Estoppel to Compel Nonsignatory to Arbitration

Submitted by Robert W. DiUbaldo, Oliver M. Phillipson

Date Promulgated: May 10, 2023

Case Summary: Travelers Indemnity Company (“Travelers”) entered into a reinsurance contract (the “Reinsurance Contract”) with the Texas Rural Education Association Risk Management Cooperative (“TREA”), which in turn provided property insurance coverage to Grapeland Independent School District (“Grapeland”). The Reinsurance Contract contained an arbitration clause providing that any dispute between Travelers and TREA, “arising out of, or relating to the formation, interpretation, performance or breach” of the Reinsurance Contract shall be subject to arbitration.

Grapeland filed suit against, inter alia, Travelers and TREA over a dispute pertaining to the settlement of Grapeland’s property damage claim arising out of damage it sustained during a hail- and windstorm. As against Travelers, Grapeland asserted claims for negligence, common law fraud, conspiracy to commit fraud, misrepresentation, violation of the Texas Unfair Compensation and Unfair Practices Act, and violation of the Texas Deceptive Trade Practices Act (“DTPA”). Travelers moved the trial court to either dismiss Grapeland’s claims against it, or to stay the litigation, in favor of arbitration based on the arbitration clause in the Reinsurance Contract. The trial court denied Travelers’ motion, and Travelers appealed.

On appeal, Travelers sought reversal of the trial court’s decision and contended that, even though Grapeland was a nonparty to the Reinsurance Contract, the court should apply the doctrine of direct benefits estoppel and find that Grapeland’s claims, insofar as they arise out of or relate to the Reinsurance Contract, were subject to arbitration because of the contract’s arbitration clause. The appeals court disagreed and affirmed the trial court’s denial of Travelers’ motion.

The appeals court noted that direct benefits estoppel can be used to compel a party to arbitration, even where that party is a nonsignatory to the contract containing an arbitration provision. Direct benefits estoppel may apply when a nonsignatory party (i) seeks to derive a direct benefit from such contract through a lawsuit; or (ii) deliberately seeks and obtains substantial direct benefits from the contract itself. In view of Grapeland’s claims against Travelers, the appeals court declined to apply direct benefits estoppel, finding that Grapeland’s suit seeks damages arising out of an allegedly inappropriate settlement of its property damage claims under the policy issued by TREA, and not under the Reinsurance Contract. The appeals court found that Travelers putative liability arose out of its role as the adjuster of claims arising out of the TREA policy and sounded in tort or arose out of violations of the TDPA or the insurance code—noncontract claims unrelated to Travelers obligations under the Reinsurance Contract. The appeals court therefore held that Grapeland’s lawsuit was not subject to the arbitration clause and affirmed the judgement of the trial court.