Severe weather rolled through Houston County on April 6, 2019, damaging property owned by a school district. At the time of the storm, the district had coverage underwritten by the Texas Rural Education Association Risk Management Cooperative (TREA). The policy did not include an arbitration clause. TREA, however, executed a reinsurance contract with Travelers to cover part of its risk under the district’s policy. The reinsurance contract included an arbitration clause. A dispute arose between the district and the insurers, resulting in a lawsuit in which the district alleged claims against Travelers for negligence, common law fraud, conspiracy, misrepresentation, and violations of the Texas Unfair Compensation and Unfair Practices Act and DTPA. Travelers moved to dismiss the claims or, alternatively, to compel arbitration. The trial court denied the motions. Travelers appealed.
These are the facts in The Travelers Indemnity Company v. Grapeland Independent School District (No. 12-22-0311-CV; delivered May 10, 2023). In an opinion by Justice Hoyle, the Tyler Court of Appeals affirmed. Travelers argued that the school district, a non-signatory to the arbitration provision in the reinsurance contract, could nonetheless be compelled to arbitrate under a direct-benefits estoppel theory. This theory “applies to parties who seek to derive a direct benefit from a contract with an arbitration agreement…,” either through a lawsuit or when a party “deliberately seeks and obtains substantial direct benefits from the contract itself” (citing Jody James Farms, JV v. Altman Group, Inc., 547 S.W.3d 624, 629 (Tex. 2018)). However, in order to activate direct benefits estoppel, “a claim [must depend] on the contract’s existence and cannot stand independently—that is, the alleged liability arises solely from the contract or must be determined by reference to it—[in which case] equity prevents a person from avoiding the arbitration clause that was part of the agreement.” But if the claim “arises from general obligations imposed by state law, including statutes, torts, and other common law duties, direct benefits estoppel is not implicated even if the claim refers to or relates to the contract or would not have arisen but for the contract’s existence.” Jody James, 547 S.W.3d at 637.
Travelers contended that because the school district asserted “claims that arise out of or relate to the [reinsurance contract],” direct benefits estoppel applied. The court, however, noting that it had decided a prior case on virtually the same facts (Travelers Indemnity Company v. Alto ISD, No. 12-21-00143, 2022 WL 1668859 (Tex. App.—Tyler May 25, 2022, pet. denied), disagreed. According to the court, Travelers statement of the law omitted a crucial part of the analysis: the school district’s allegations, while they certainly relate to the reinsurance contract, involve whether the district “receiv[ed] an inappropriate settlement for its claims under the Policy—not the Reinsurance Contract, and that Traveler’s liability, if any, is premised on insurance code, tort, and DTPA duties that are general, noncontract obligations arising from its role as the adjuster of the claims under the Policy—not the reinsurer of TREA’s liability under the Reinsurance Contract” (emphasis added). Travelers thus failed to show that the arbitration provision was valid and enforceable against the district, and the trial court did not abuse its discretion in denying the motion to compel arbitration.
This case is interesting, not only for its discussion of direct benefits estoppel in the arbitration context, but for the fact that Travelers lost once at the Tyler Court of Appeals on nearly identical facts and then went back for a second helping. The reinsurer’s liability must be pretty considerable to nourish a hope that the court of appeals would change its mind so quickly, especially when SCOTX declined review in the first case.
