Arbitration Compelled for Parties to Policy, But Not for Non-Party to Policy

    The court denied the non-insureds motion to compel arbitration, but compelled arbitration for the insurer and insured. Ill. Cas. Co. v. Kladek, Inc., 2023 U.S. Dist. LEXIS 131677 (D. Minn. July 31 2023).

    In the underlying case, several models sued Kladek, Inc., alleging that Kladek used photos of them in advertisements for its strip club without their consent or authorization. Kladek was insured by Illinois Casualty Company (ICC) under a Businessowners policy. ICC sought a declaratory judgment that it owed no duty to defend or indemnify Kladek in the underlying case. The Models were named as interested parties in UCC’s lawsuit

    A Cyber Protection Endorsement to the policy included an arbitration agreement, unlike the Businessowners Liablity Coverage portion of the policy. The Models moved to compel arbitration and stay proceedings. Both Kladek and ICC opposed the Models requests based upon lack of standing. Separately Kladek moved to compel arbitration of only the Cyber Endorsement dispute.

    The court first concluded that the Models could not use equitable estoppel to compel Kladek and ICC to arbitrate their dispute. Under Minnesota law, a non-signatory to an arbitration agreement could compel arbitration by equitable estoppel when the non-signatory party’s claims arose directly from violations of the terms of a contract containing an arbitration clause. Here, however, ICC’s declaratory judgment claim did not arise out violations of the terms of a contract. Nor did ICC assert any claims against the Models. Rather, ICC sought clarification of its legal oblgations under the policy and named the Models as an interested party. The arbitration agreement only applied to “us”, ICC and an “insured.” Because the Models did not have standing to compel arbitration, their motion was dismissed. 

    ICC also opposed Kladek’s motion to compel arbitration because Kladek failed to provide timely notice of the underlying case. The court decided this procedural issue should be left for the arbitrator to decide. Further, the arbitrator was the proper one decide the scope of the arbitration and whether the arbitration agreement only covered the Cyber Endorsement.

    Finally, the court agreed to stay instead of dismiss the declaratory judgment action becasue the arbitration would not resovle the entire controversy.