In the Missouri Court of Appeals
Eastern District
DIVISION FOUR
WILLIE LEONBERGER, ) No. ED103669
)
Plaintiff/Respondent, ) Appeal from the Circuit Court of
) the City of St. Louis
vs. )
) Honorable David L. Dowd
MISSOURI UNITED SCHOOL )
INSURANCE COUNCIL, )
)
Defendant, )
)
and )
)
UNITED EDUCATORS, A RECIPROCAL )
RISK RETENTION GROUP, )
)
Defendant/Appellant. ) Filed: May 24, 2016
Introduction
United Educators, A Reciprocal Risk Retention Group (Appellant) appeals from the trial
court’s Order and Judgment denying Appellant’s Motion to Compel Arbitration and granting
Willie Leonberger’s (Respondent) Motion to Stay Arbitration. We affirm.
Factual and Procedural Background
Accident
In 2011, Respondent drove a school bus for the North Callaway R-1 School District
(District). The District was Respondent’s employer. On January 18, 2011, Respondent was
driving the bus when he accidentally struck and killed student Hunter Pitt (Pitt) after Pitt
disembarked the bus.
Insurance Coverage
I. MUSIC Policy
The District was a member of and procured liability insurance for its bus drivers from the
Missouri United School Insurance Council (MUSIC).1 Arthur J. Gallagher Risk Management
Services (Gallagher Services) was MUSIC’s claims administrator. The District’s MUSIC policy
had limits of $2,500,000 per occurrence. “Occurrence” was defined by the MUSIC policy to
mean an accident. The MUSIC policy stated:
[W]e have the right and duty to investigate, defend and settle any Claim or
Occurrence to which this Coverage Agreement applies….An excess insurance
policy or reinsurance contract may provide coverage to members of MUSIC once
the loss exceeds a certain dollar amount. Thus, any loss is subject to the terms,
language and conditions of the particular excess insurance policy or contract, if
applicable….It is this excess insurance that allows the Program to cap large losses
at an affordable level, but allows MUSIC, through its claims administrators, to
manage and control all losses within the self-insured retention....
II. FRA Policy
For liability claims, MUSIC entered into a “Facultative Reinsurance Agreement” (FRA)
with Appellant to provide all coverage under the MUSIC policy in excess of $500,000. The
FRA provides in paragraph 2 that Appellant’s liability would “follow that of [MUSIC] subject in
all respect to the terms, conditions, exclusions and limits of liability of [the MUSIC policy],
except when otherwise specifically provided herein.”
In paragraph 4 of the FRA, Appellant declares MUSIC “must notify” Appellant “as soon
as practicable of any occurrence reasonably likely to involve” the FRA, so Appellant:
1
MUSIC is a protected self-insurance program. It was established in 1985 for the purpose of providing property and
casualty coverage as well as risk management services under one comprehensive plan at a low cost for its members,
which include public school districts, community colleges, and affiliated organizations in Missouri.
2
shall have the right and be given the opportunity:
a. to approve in advance, counsel selected by a Covered Organization2
(which we will not unreasonably withhold or delay) or to require the Covered
Organization to revoke that counsel’s appointment....
b. to be associated at our own expense with the Covered Organization or
the Covered Organizations underlying Covered Parties as defined under the
Reinsured’s Memorandum of Coverage, or both, in the defense and control of
claims, or the trial of any suits or other legal proceedings, relative to any
occurrence that in Reinsurer’s opinion, may create liability for Reinsurer under
the terms of this agreement, in which event the Covered Organization shall
cooperate with Reinsurer in all things in the defense of that claim, suit, or other
legal proceeding; or
c. at the Reinsurer’s sole option, to take over the defense of any claim,
suit, or legal proceeding and to exercise the DEFENSE AND SETTLEMENT
rights of Reinsured that are contained in its Memorandum of Coverage.
(Emphasis in original.)
The FRA provides with regard to settlement:
[Appellant] will not settle any claim without the agreement of [MUSIC].
If [MUSIC] or any Covered Organization refuses to consent to a reasonable
settlement [Appellant] recommends that is acceptable to a claimant, our liability
for losses associated with that claim is limited to the amount of Damages as
defined under [the MUSIC policy] for which the claim could have been settled ....
In addition, [MUSIC] and [Appellant] agree that notification of any settlement
demand that involves [Appellant’s] limit will be given to the [Appellant] by
[MUSIC] prior to consenting to any settlement.
Proceedings
On January 19, 2011, MUSIC and Gallagher Services learned of the accident. MUSIC
confirmed “coverage is applicable and there are no coverage issues on this Auto Liability Claim.
No exclusions apply.” It also recognized liability for Respondent was probable with “90-100%
fault on the bus driver.” MUSIC notified Appellant of the accident. Appellant acknowledged
the claim and assigned claims attorney Rhonda Hurwitz (Hurwitz). The Pitts notified MUSIC
that they had retained an attorney. MUSIC retained an attorney to represent Respondent.
2
The FRA defines “Covered Organization” to mean the original insured, here the District, and “Covered Party” to
mean an employee of the original insured, here Respondent.
3
Hurwitz asked Respondent’s attorney to copy her directly on all emails and updates. Appellant
requested a separate attorney represent the school district. Attorney Bob Numrich (Numrich)
was retained for that purpose.
Criminal Case
On May 20, 2011, the Callaway County prosecuting attorney charged Respondent with
second-degree involuntary manslaughter. MUSIC retained criminal attorney Rusty Antel (Antel)
for Respondent. Antel advised Respondent to plead guilty to the prosecutor’s charge. Pursuant
to Antel’s advice, Respondent pled guilty to the charge of second-degree involuntary
manslaughter. Numrich provided MUSIC and Appellant with the details of Respondent’s plea.
Appellant informed MUSIC it was considering denying coverage based on Respondent’s plea
due to the MUSIC policy’s (and hence, FRA policy’s) exclusions in Section 19 (o) and (p) of
coverage for criminal acts.
On December 16, 2011, MUSIC’s claims adjuster wrote:
Our intention all along was to get this to mediation. Now however, it
appears [Appellant] may want to issue a reservation of rights due to the alleged
criminal act of [Respondent]. [Respondent] may have been charged due to
pressure by the family in this matter, but he was not convicted. This 79-year-old
man pled out to keep from going to prison for involuntary manslaughter. The fact
of the matter is, he was still in the course and scope of his duties as a district
employee when this unfortunate accident occurred. We will have a conference
call shortly to try and resolve this issue.
The following day, the supervising claims adjuster noted: “Now since criminal charges
were filed and the driver signed the affidavit, there is a question from excess [Appellant] if there
is coverage for the driver. Anita [Khiene (Khiene), an employee of Gallagher Services] has been
notified and a conference call will be set up to discuss.”
The Pitt family made a formal policy limits demand. Hurwitz e-mailed Respondent’s
attorney and Numrich and asked them to provide her with a copy of Respondent’s sentencing
4
hearing transcript. The conference call was cancelled. The claims adjuster noted the Pitt family
absolutely declined mediation, and Numrich relayed to the Pitts’ attorney MUSIC was not going
to tender their limits.
On January 18, 2012, the Callaway County circuit court sentenced Respondent to five
years and suspended execution of sentence subject to probation and community service.
Civil Case
On February 14, 2012, the Pitts filed a wrongful death action against Respondent, the
school district, the district transportation manager, and the district superintendent. A few days
later, the supervising adjuster noted:
[Respondent] has pleaded guilty and now excess carrier is advising that
since bus driver pleaded guilty to stay out of jail, excess say[s] now there is no
coverage for bus driver. We have just been notified that suit has been filed but
not served and will need to discuss further with excess carriers.
Respondent’s attorney prepared a litigation plan. By this point, Appellant’s involvement
was so significant Respondent’s attorney addressed Respondent’s litigation plan directly to
Hurwitz. Respondent’s attorney filed an Answer on Respondent’s behalf, in which Respondent
admitted to having acted negligently in causing Pitt’s death. That same day, the conference call
finally took place. The claims adjuster described the call as follows:
Conference call was held. The plan going forward is [to] take the stance
that coverage will be denied to [Respondent]. This will leave plaintiff recovery
limited to the statutory cap which is now about $395K. That will give us leverage
going forward to force this to mediation. We can say, either go to mediation and
get realistic or coverage will be denied to [Respondent].
Hurwitz and Khiene asked for a draft reservation of rights letter. Claims adjuster Debra
Walker (Walker) forwarded a draft to Hurwitz. The draft did not include exclusion 19(o).
Hurwitz instructed the claims adjuster to add exclusion 19(o) to the letter. MUSIC and
5
Appellant issued a letter to District, but not Respondent or his attorneys, reserving rights to deny
coverage due to the criminal acts exclusion in sections 19 (o) and (p) of the MUSIC policy.
In July of 2012, the Pitts’ attorney contacted Respondent’s attorney to advise that if there
was a reservation of rights, his clients would be interested in a Section 537.0653 agreement. That
same day, Respondent’s attorney contacted Appellant and MUSIC stating he was not aware of a
reservation of rights. A week later, Respondent’s attorney e-mailed MUSIC and Appellant
requesting the reservation of rights be withdrawn. In response, the claims adjuster emailed
Hurwitz the following:
I have talked with Anita this morning and she directed me to you
regarding this matter. It is my recommendation we rescind the reservation of
rights and defend this matter. Otherwise, we are on the hook for not only the
policy limits, but a Bad Faith Claim against MUSIC.
Appellant refused and Respondent’s attorney was advised the reservation of rights would
not be withdrawn. In August of 2012, Respondent entered into a Section 537.065 agreement
with the Pitt family. In September of 2012, MUSIC filed a declaratory judgment action in
Callaway County seeking a declaration that the policy afforded no coverage to Respondent. On
3
All statutory references are to RSMo 2006. Section 537.065 provides a claimant and tort-feasor may contract to
limit recovery to specified assets or insurance contract:
Any person having an unliquidated claim for damages against a tort-feasor, on account of bodily injuries or
death, may enter into a contract with such tort-feasor or any insurer in his behalf or both, whereby, in consideration
of the payment of a specified amount, the person asserting the claim agrees that in the event of a judgment against
the tort-feasor, neither he nor any person, firm or corporation claiming by or through him will levy execution, by
garnishment or as otherwise provided by law, except against the specific assets listed in the contract and except
against any insurer which insures the legal liability of the tort-feasor for such damage and which insurer is not
excepted from execution, garnishment or other legal procedure by such contract. Execution or garnishment
proceedings in aid thereof shall lie only as to assets of the tort-feasor specifically mentioned in the contract or the
insurer or insurers not excluded in such contract. Such contract, when properly acknowledged by the parties thereto,
may be recorded in the office of the recorder of deeds in any county where a judgment may be rendered, or in the
county of the residence of the tort-feasor, or in both such counties, and if the same is so recorded then such tort-
feasor's property, except as to the assets specifically listed in the contract, shall not be subject to any judgment lien
as the result of any judgment rendered against the tort-feasor, arising out of the transaction for which the contract is
entered into.
6
December 3, 2012, the Pitt family tried its wrongful death case against Respondent in the circuit
court of the City of St. Louis, after four changes of venue. On December 21, 2012, the trial court
in the City of St. Louis entered judgment in favor of the Pitt family and against Respondent in
the amount of $11,494,637.38. The Pitt family then began garnishment proceedings, which are
currently on appeal in this Court. On April 3, 2013, the Callaway County circuit court dismissed
MUSIC’s declaratory judgment case, declining to rule based on the judgment rendered by the St.
Louis City circuit court and subsequent garnishment proceedings.
On June 12, 2013, Respondent filed a lawsuit against MUSIC alleging bad faith refusal to
settle and bad faith failure to defend. On July 10, 2015, the trial court granted Respondent leave
to file a first amended petition adding a claim of breach of fiduciary duty against MUSIC and
adding Appellant as a party defendant to the same three claims asserted against MUSIC.
On July 29, 2015, Appellant wrote Respondent’s counsel purporting to demand and
initiate arbitration pursuant to a provision in the FRA contract, which states:
If any dispute should arise between the Reinsured and the Reinsurer with
reference to the interpretation of this Agreement or their rights with respect to any
transaction involved whether such dispute arises before or after termination of this
Agreement, such dispute, upon the written request of either party shall be
submitted to [an arbitration panel].
Respondent filed a motion to stay the threatened arbitration proceeding and Appellant
filed a competing motion to compel arbitration. On October 15, 2015, the Court granted
Respondent’s motion and denied Appellant’s motion. This appeal follows.
Points on Appeal
In its first point, Appellant claims the trial court erred in denying its motion to compel
arbitration and granting Respondent’s motion to stay arbitration because Respondent’s third-
party beneficiary claims are within the scope of the arbitration clause, in that the language of the
7
arbitration clause limiting arbitration to disputes between the parties does not exclude arbitration
of purported third-party beneficiary claims.
In its second point, Appellant maintains the trial court erred in denying its motion to
compel arbitration and granting Respondent’s motion to stay arbitration because the arbitration
clause in the reinsurance agreement is valid and enforceable under Section 435.350, in that the
reinsurance agreement is a reinsurance contract and not an insurance contract.
In its third point, Appellant contends the trial court erred in denying its motion to compel
arbitration and granting Respondent’s motion to stay arbitration because the portion of Section
435.350 rendering arbitration clauses in insurance contracts unenforceable does not apply to
Appellant’s reinsurance agreement, in that the Liability Risk Retention Act (LRRA) preempts
Section 435.350.
Standard of Review
An appellate court’s review of a trial court’s denial of a motion to compel arbitration is
de novo. Sturgeon v. Allied Professionals Ins. Co., 344 S.W.3d 205, 209 (Mo.App. E.D. 2011).
The interpretation of a contract is a question of law. State v. Nationwide Life Ins. Co.,
340 S.W.3d 161, 182 (Mo.App. W.D. 2011). The primary rule in interpreting a contract is to
ascertain the parties’ intent and give effect to that intent. Id. To ascertain the parties’ intent, we
rely on the plain and ordinary meaning of the words in the contract and consider the document as
a whole. Id.
Discussion
For purposes of clarity, we discuss the points out of the order in which they were
presented by Appellant in its brief.
In deciding an appeal from an order refusing to compel arbitration, an appellate court
considers three issues: (1) the court must determine whether a valid arbitration agreement exists;
8
(2) if a valid arbitration agreement exists, the court must determine whether the specific dispute
falls within the scope of the arbitration agreement; and (3) if a valid arbitration contract exists
and if the subject dispute is within the scope of the arbitration provision, then the court must
determine whether the arbitration agreement is subject to revocation under applicable contract
principles. Johnson v. Vatterott Educational Centers, Inc., 410 S.W.3d 735, 737 (Mo.App. W.D.
2013).4
Point II – Whether a Valid Arbitration Agreement Exists
Appellant maintains its contract with MUSIC is not an ordinary insurance contract, but a
reinsurance contract and is thus exempt from the prohibition against mandatory arbitration in
insurance contracts set forth in Section 435.350 of the Missouri Arbitration Act:
A written agreement to submit any existing controversy to arbitration or a
provision in a written contract, except contracts of insurance and contracts of
adhesion, to submit to arbitration any controversy thereafter arising between the
parties is valid, enforceable and irrevocable, save upon such grounds as exist at
law or in equity for the revocation of any contract. Contracts which warrant new
homes against defects in construction and reinsurance contracts are not
“contracts of insurance or contracts of adhesion” for purposes of the arbitration
provisions of this section.
(Emphasis added.) Section 435.350.
If the FRA contract is a true reinsurance agreement, then the arbitration clause is valid. If
the FRA contract is not a true reinsurance contract, but rather a contract of insurance only, then
the arbitration clause is invalid under Section 435.350 and the trial court’s judgment will be
affirmed.
4
Whether the arbitration clause is subject to revocation is not at issue in this case.
9
Is the FRA contract one of insurance or reinsurance?
A. General Law
In an insurance agreement, an insurance company directly insures the holder of the policy
of insurance issued by the company. In a reinsurance agreement, an insurance company is
indemnified by another insurance company for all or parts of losses suffered by the former
insurance company under the contracts of direct insurance it has issued to its policyholders. J.C.
Penney Life Ins. Co. v. Transit Cas. Co. in Receivership, 299 S.W.3d 668, 673 (Mo.App. W.D.
2009), citing 14 ERIC MILLS HOLMES & L. ANTHONY SUTIN, HOLMES’ APPLEMAN
ON INSURANCE 2D § 102.1 (2000). The reinsurer agrees to protect the reinsured company
either wholly or partially from risks the reinsured company has undertaken with its
policyholders, or original insureds. Id. The direct insurance policies between the reinsured
company and its original insured remain in effect at the same time as the reinsurance agreement
between the reinsured company and the reinsurer. Id.
A reinsurance contract is purely a contract indemnifying against loss and no action will
lie until the loss has been paid. Homan v. Employers Reinsurance Corp., 136 S.W.2d 289, 296
(Mo. 1939); O’Hare v. Pursell, 329 S.W.2d 614, 620 (Mo. 1959). The difference between
contracts of indemnity against loss and contracts of indemnity against liability is that in the
former, the insurance company does not become liable until loss has actually been suffered and
the amount of the insurance does not become available until the assured has paid the loss. Id. In
the latter, the obligation of the insurance company becomes fixed when the liability attaches to
the insured. Id.
There are certain identifiers within the plain language of the FRA contract between
Appellant and MUSIC which compel us to conclude it is not strictly a reinsurance contract.
10
B. Loss v. Liability
The FRA contract does not merely cover a loss by MUSIC and trigger Appellant’s
liability for payment only upon the occurrence of a loss. Homan, 136 S.W.2d at 296; O’Hare,
329 S.W.2d at 620. Rather, the FRA contract provides Appellant’s liability “shall follow that of
[MUSIC].” The FRA contract also provides Appellant’s liability under the contract to be
“subject in all respect to the terms, conditions, exclusions and limits of liability” of the MUSIC
policy with its insureds. The contract does not, by its own terms, merely become liable upon
MUSIC’s loss. Rather, its terms plainly insert Appellant into and declare its control over the
claims asserted against MUSIC’s insureds.
C. Control
The FRA contract details the manner in which Appellant may control and participate in
claims and litigation involving MUSIC’s insureds. The terms of the FRA contract allow
Appellant to approve in advance counsel selected to represent MUSIC’s insureds in claims made
against them; to associate in the defense and control of claims and trials; to retain sole discretion
to take over the defense of any claim, suit, or legal proceeding; and to exercise the defense and
settlement rights of the insureds. These asserted rights to be involved with, defend, and control
litigation and claims asserted against MUSIC’s original insureds are similar to the terms of the
purported reinsurance agreement in O’Hare, where the reinsurer agreed to be responsible for
investigating, defending, and adjusting all claims against and involving the original insureds.
See O’Hare, 329 S.W.2d at 621-22; J.C. Penney, 299 S.W.3d at 674. In O’Hare, the reinsurer
was authorized to and agreed to do all things it deemed expedient including the commencement,
defense and compromise of, or withdrawal from, lawsuits and claims involving the original
insureds. O’Hare, 329 S.W.2d at 616-17; J.C. Penney, 299 S.W.3d at 675. Such terms
11
convinced our Supreme Court the contract in O’Hare was of insurance rather than reinsurance,
because they went beyond the mere insurance of a loss. We find a similar result is dictated in the
instant case, for the same reason.
These terms also fulfill the criteria set forth in Homan to determine whether a contract is
truly one of reinsurance or insurance, whereby: (1) the reinsurer agreed to be subject to all of the
general and special terms and conditions of the reinsured’s underlying policies; (2) the reinsurer
contracted for the right to participate jointly with the reinsured in the investigation, adjustment,
and settlement of claims; (3) the reinsurer’s liability followed and otherwise arose coincident to
the reinsured’s liability; and (4) the reinsurance was defined as excess and applied only to the
liability of the reinsured carrier in excess of certain amounts named. Homan, 136 S.W.2d at 297-
99.
In the instant case, the FRA contract provides $2,000,000 per occurrence/claim in excess
to MUSIC’s $500,000 per occurrence/claim to reach the total stated coverage amount of
$2,500,000. MUSIC refers to Appellant as “Excess” in its correspondence and records. The
FRA contract provides Appellant’s liability “shall follow that of [MUSIC],” and be “subject in
all respect to the terms, conditions, exclusions and limits of liability” of the MUSIC policy with
its insureds. The terms of the FRA contract allow Appellant to approve in advance counsel
selected to represent MUSIC’s insureds in claims made against them; to associate in the defense
and control of claims and trials; and to retain sole discretion to take over the defense of any
claim, suit, or legal proceeding and to exercise the defense and settlement rights of the insureds.
All of these examples are analogous to those set forth in Homan that make the contract one of
insurance, not reinsurance. Id. at 297-99.
12
Of interest, yet not necessary to our disposition of this appeal, is that in the proceedings
sub judice, Hurwitz, Appellant’s counsel assigned directly to the Pitt family’s claims against
Respondent, corresponded directly with Respondent’s own counsel. Respondent’s counsel sent
his litigation plan directly to Hurwitz. Hurwitz e-mailed Respondent’s counsel and MUSIC’s
counsel and asked them to provide her with a copy of Respondent’s sentencing hearing transcript
from his guilty plea. Although in this case we need not look outside the four corners of the FRA
contract to determine what kind of insurance agreement it is because its terms are not in any way
ambiguous, it is notable Appellant actively put into practice each and every aspect of control and
participation it reserved for itself in the FRA contract.
D. Liability to Original Insured
This result leads to Appellant’s third-party liability directly to Respondent, the original
insured. Respondent is a third-party beneficiary of the FRA contract and thus can maintain an
action on the contract. See O’Hare, 329 S.W.2d at 621-22; J.C. Penney, 299 S.W.3d at 674.
Reinsurance contracts may be drafted in such a form and with such provisions as to
create a liability on the part of the reinsurer not only to the reinsured insurer but also directly to
the original insured. Homan, 136 S.W.2d 289; O’Hare, 329 S.W.2d at 620; First Nat. Bank of
Kansas City v. Higgins, 357 S.W.2d 139, 143 (Mo. 1962); J.C. Penney, 299 S.W.3d at 674.
“In fact, in any case where the contract of reinsurance is more than a mere contract of
indemnity, and is made for the benefit of the policyholders of the reinsured, and by it the
reinsurer assumes the liability of the latter upon its policies, the liability of the reinsurer may be
directly enforced by the insured, or by his privies.” O’Hare, 329 S.W.2d at 620; First Nat. Bank
of Kansas City, 357 S.W.2d at 143.
13
Ordinarily, the original insured has no interest in the reinsurance. 14 APPLEMAN ON
INSURANCE 2D § 102.1; J.C. Penney, 299 S.W.3d at 673. “Indeed, a reinsurance contract
‘operates solely as between the reinsurer and the reinsured. It creates no privity between the
original insured and the reinsurer.’” J.C. Penney, 299 S.W.3d at 673-74, quoting O’Hare, 329
S.W.2d at 620. “This is because the contract of insurance and the contract of reinsurance are
totally distinct and unconnected.” J.C. Penney, 299 S.W.3d at 674. “An ordinary contract of
reinsurance is one of indemnity against loss, and no action will lie until the loss has been paid.”
Id. “The reinsurer is solely and exclusively liable to the reinsured and has no contractual
obligation or liability to the original insured.” Id.
Nevertheless, barring any statutory restrictions against it, a reinsurance contract may be
drafted in such a way as to make the reinsurer liable to both the reinsured company and the
original insured. Id. If the reinsurer assumes the liability of the reinsured company on its
policies, then the policyholders, or their privies, may directly enforce this liability against the
reinsurer. Id. As the Missouri Supreme Court explained in O’Hare:
‘[W]here, in reinsuring risks for which policies are outstanding, reinsurer
contracts with reinsured to assume the policies and to pay the holders thereof all
such sums as reinsured may become liable to pay, the persons to whom these
original policies are payable acquire a direct right of action against reinsurer, and
may sue in their own names and recover on the contract of reinsurance.’
Id.
E. Public Policy
Reinsurance contracts are agreements negotiated between insurers. Therefore, both
parties to the agreement are presumed to have a degree of sophistication regarding insurance
contracts. As a result, courts will generally enforce the written terms contained in reinsurance
certificates and treaties without reference to contra-insurer rules of construction protecting
14
unsophisticated insureds, such as Section 435.350. See, Charles F. Corcoran, III, Reinsurance
Litigation: A Primer, 16 W. New Eng. L. Rev. 41, 45-46 (1994). However, with regard to
general insurance policies, Missouri’s prohibition of mandatory arbitration clauses in insurance
contracts is for the protection of the insured. Sturgeon, 344 S.W.3d at 217. The FRA contract is
not a mere reinsurance policy between MUSIC and Appellant, but rather a general insurance
policy upon which Respondent can bring an action against Appellant; namely, his claims for bad
faith refusal to settle, bad faith refusal to defend, and breach of fiduciary duty; and Section
435.350 prevents Appellant from enforcing its arbitration clause against him.
F. Conclusion
The terms of the FRA contract clearly indicate that despite its moniker, the contract is not
strictly a reinsurance agreement, excusing it from the prohibition against mandatory arbitration
clauses set forth in Section 435.350. It is not a mere contract of indemnity against loss but is, in
fact, a contract of indemnity against liability. Homan, 136 S.W.2d at 299. By its terms it
provides excess insurance and is, in essence, a co-insurer for MUSIC’s insureds. The contract
does not simply operate to provide reinsurance between two sophisticated insurance companies,
MUSIC and Appellant. As such, it is an insurance contract and its mandatory arbitration clause
is unenforceable and cannot be enforced against Respondent under Section 435.350.
Accordingly, Point II is denied.
Point I − Whether Dispute within Scope of Arbitration Agreement
Because we have found the arbitration agreement cannot be enforced against Respondent
for the reasons set forth supra in our discussion of Point II, our analysis could end here.
However, we further find Respondent’s third-party beneficiary claims do not fall within the
scope of the arbitration clause. Johnson, 410 S.W.3d at 737.
15
Appellant maintains Respondent’s third-party beneficiary claims are within the scope of
the arbitration clause because the language of the arbitration clause limiting arbitration to
disputes between the parties does not exclude third-party beneficiary claims.
The arbitration clause in the FRA contract provides:
If any dispute should arise between the “Reinsured” [MUSIC] and the
“Reinsurer” [Appellant] with reference to the interpretation of this Agreement or
their rights with respect to any transaction involved . . . such dispute, upon the
written request of either party, shall be submitted to three arbitrators, one to be
chosen by each party, and the third by the two so chosen.
Thus, by the plain language of the arbitration clause, disputes subject to arbitration are limited to
disputes between MUSIC, the reinsured, and Appellant, the reinsurer. When interpreting the
language of an insurance contract, appellate courts give the language its plain meaning. Shahan
v. Shahan, 988 S.W.2d 529, 535 (Mo.banc 1999). The plain or ordinary meaning is the meaning
that the average layperson would understand. Id.
Respondent’s claims against MUSIC and Appellant for bad faith refusal to settle, bad
faith refusal to defend, and breach of fiduciary duty are not within the scope of nor covered by
this clause because these claims are not a dispute between Appellant and MUSIC. Moreover,
just because the arbitration clause does not explicitly exclude third-party claims against MUSIC
or Appellant does not mean they are implicitly included within the scope of the arbitration
clause, as Appellant asserts. Such an argument runs contrary to basic tenets of contractual
interpretation. Courts are not permitted to create ambiguities in order to distort the language of
an unambiguous policy. Shahan, 988 S.W.2d at 535. In the absence of the existence of an
ambiguity, appellate courts must enforce the policy as written, giving the language of the policy
its ordinary meaning. Trans World Airlines, Inc. v. Associated Aviation Underwriters, 58
S.W.3d 609, 622 (Mo.App. E.D. 2001).
16
“In interpreting an insurance contract, we must keep in mind that insurance policies are
contracts; thus, the rules of contract construction apply.” Drury Co. v. Missouri United School
Ins. Counsel, 455 S.W.3d 30, 36 (Mo.App. E.D. 2014). “The words of a policy must be given
their plain and ordinary meaning consistent with the reasonable expectation and objectives of the
parties, unless it is obvious that a technical meaning was intended.” Id. “We read insurance
policies as a whole to determine the parties’ intent, and give effect to this intent by enforcing the
contract as written.” Id. “We must endeavor to give each provision a reasonable meaning and to
avoid an interpretation that renders some provisions useless or redundant.” Id. Appellant’s
argument that the absence of language excluding third-party beneficiary claims from the
mandatory arbitration clause implies their inclusion without any words to that effect in the FRA
agreement fails as a matter of statutory interpretation.
For these reasons, Point I is denied.
Point III – Preemption
In its third point, Appellant contends the portion of Section 435.350 rendering arbitration
clauses in insurance contracts unenforceable does not apply to Appellant’s reinsurance
agreement because the LRRA preempts Section 435.350. This very issue has recently been
addressed and decided by this Court contrary to Appellant’s position. Appellant’s status as a risk
retention group does not excuse it from Section 435.350’s prohibition of arbitration clauses in
contracts of insurance, nor does the LRRA provide preemption on this basis. Sturgeon, 344
S.W.3d at 217. The LRRA allows risk retention groups to operate as insurance groups by
entering into insurance contracts, but the states’ interpretation of those insurance contracts is not
part of the preemption provided by the LRRA. Sturgeon, 344 S.W.3d at 216. In Sturgeon, we
found indisputable evidence of this in the LRRA itself:
17
Nothing in this chapter shall be construed to affect either the tort law or
the law governing the interpretation of insurance contracts of any State, and the
definitions of liability, personal risk liability, and insurance under any State law
shall not be applied for the purposes of this chapter, including recognition or
qualification of risk retention groups or purchasing groups.
15 U.S.C. Section 3901(b); Sturgeon, 344 S.W.3d at 216.
Section 435.350 of the Missouri Arbitration Act prohibiting mandatory arbitration
clauses in insurance contracts does not regulate Appellant’s operation as a risk retention group.
Sturgeon, 344 S.W.3d at 216. The purpose of Section 435.350 of the Missouri Arbitration Act is
to regulate the business of insurance. Id. The Missouri statute was enacted for the purpose of
regulating insurance in that it was designed to regulate the operation of an insurance contract. Id.
For the foregoing reasons, Point III is denied.
Conclusion
The trial court’s order and judgment is affirmed.5
SHERRI B. SULLIVAN, P.J.
Kurt S. Odenwald, J., and
Lisa P. Page, J., concur.
5
Appellant’s motion to strike the supplemental legal file is denied.
18
Willie Leonberger, Plaintiff/Respondent v. Missouri United School Insurance Council, and United Educators, a Reciprocal Risk Retention Group
Combined Opinion