FILED
Dec 27 2016, 10:14 am
CLERK
Indiana Supreme Court
Court of Appeals
and Tax Court
ATTORNEYS FOR APPELLANT ATTORNEY FOR APPELLEE
John D. Papageorge Brad M. Gordon
Jeffrey D. Stemerick Grotefeld, Hoffman, Schleiter,
Taft Stettinius & Hollister, LLP Gordon, Ochoa, & Evinger, LLP
Indianapolis, Indiana Chicago, Illinois
IN THE
COURT OF APPEALS OF INDIANA
Watts Water Technologies, Inc., December 27, 2016
Appellant-Defendant, Court of Appeals Case No.
45A04-1604-CT-831
v. Appeal from the Lake Superior
Court
State Farm Fire & Casualty Co. The Honorable Diane Kavadias
a/s/o Richard Lucka, Schneider, Judge
Appellee-Plaintiff. Trial Court Cause No.
45D11-1507-CT-125
Brown, Judge.
Court of Appeals of Indiana | Opinion 45A04-1604-CT-831 | December 27, 2016 Page 1 of 19
[1] Watts Water Technologies, Inc. (“Watts”) appeals the trial court’s order
denying its motion to compel arbitration. Watts raises three issues which we
consolidate and restate as whether the trial court erred in denying its motion.
We affirm.
Facts and Procedural History
[2] Watts and State Farm Fire & Casualty, Co. (“State Farm”) were signatories to
a Property Subrogation Arbitration Agreement (the “Arbitration Agreement”),
which provided in part:
By signing this Agreement, the company accepts and binds itself
to the following:
Article First
Compulsory Provisions
Signatory companies must forego litigation and submit any
personal, commercial, or self-insured property subrogation claims
to Arbitration Forums, Inc. (herein after referred to as AF).
*****
Article Fourth
Non-Compulsory Provisions
The parties may, with written consent, submit a claim:
(a) that exceeds this forum’s monetary limit
(b) where a non-signatory wants to participate.
Once a company gives written consent, all Articles and Rules of this
forum are applicable, and the company may not revoke its consent.
*****
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Article Fifth
AF’s Function and Authority
AF, representing the signatory companies, is authorized to:
(a) make appropriate Rules and Regulations for the presentation and
determination of controversies under this Agreement;
(b) determine the location, and the means by which, arbitration
cases are heard;
(c) determine qualification criteria and provide for the selection and
appointment of arbitrators;
(d) establish fees;
(e) invite other insurance carriers, noninsurers, or self-insureds to
participate in this arbitration program, and compel the
withdrawal of any signatory for failure to conform to the
Agreement or the Rules issued thereunder.
*****
Article Sixth
Withdrawals
Any signatory company may withdraw from this Agreement by
notice in writing to AF. Such withdrawal will become effective
sixty (60) days after receipt of such notice except as to cases then
pending before arbitration panels. The effective date of
withdrawal as to such pending cases shall be upon final
compliance with the finding of the arbitration panel on those
cases.
Appellant’s Appendix at 41-42.
[3] In November 2014, Arbitration Forums gave notice to the parties that it
intended to amend the Arbitration Agreement. The notification stated:
Effective January 1, 2015, the following changes to AF’s
Property Program will be implemented:
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A new exclusion to Article Second of the Property Subrogation
Arbitration Agreement to read:
• “No company shall be required, without its written consent, to
arbitrate any claim or suit if: (i) it is a product liability claim
arising from an alleged defective product.”
*****
While the use of the Property Program to resolve disputes
involving product liability claims arising from an alleged
defective product will no longer be compulsory as of January 1,
2015, cases filed prior to January 1, 2015, will remain in
arbitration’s jurisdiction and will be processed to hearing.
Id. at 74.
[4] Effective January 1, 2015, the amended Arbitration Agreement (the “Amended
Arbitration Agreement”) provided:
Article Second
Exclusions
No company shall be required, without its written consent, to
arbitrate any claim or suit if:
*****
(i) it is a product liability claim arising from an alleged defective
product.
Id. at 72.
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[5] On July 23, 2015, State Farm a/s/o Richard Lucka filed a complaint against
Watts alleging that Lucka purchased a water heater with a Watts brand
connector and that the connector failed on November 30, 2014, causing water
damage to Lucka’s home and property. The complaint alleged: Count I,
“Products Liability – Defective Manufacturing;” Count II, “Products Liability –
Defective Design;” Count III, “Products Liability – Negligent Manufacturing;”
Count IV, “Negligent Design;” and Count V, “Breach of Implied
Merchantability.” Id. at 11-13 (capitalization removed). State Farm alleged
that it was subrogated to the rights of the insured, Lucka, to the extent of its
payments to or for Lucka. On October 28, 2015, State Farm filed an amended
complaint correcting the address where the incident occurred.
[6] On December 17, 2015, Watts filed a Motion to Dismiss or, In the Alternative,
to Stay Proceedings and Compel Arbitration. On March 22, 2016, the court
denied Watts’s motion. Specifically, the order states:
Findings of Facts
1. [State Farm] filed a claim against [Watts] for, among other
things, a product liability claim.
2. This cause of action stems from a defective Watts water heater
connector that failed resulting in water damage on November 30,
2014 to the home of Richard Lucka, State Farm insured.
3. The water damaged Mr. Lucka’s home and property resulting
in State Farm paying $27,805.00 under his insurance policy.
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4. An engineer inspected the Watts water heater connector and
determined it was defective on January 7, 2015.
5. State Farm did not make a final payment to Mr. Lucka until
January 29, 2015.
6. State Farm and Watts are members of Arbitration Forums,
Inc. (hereinafter referred to as AF).
7. AF has the ability to []make appropriate Rules and
Regulations for the presentation and determination of
controversies under an agreement with AF.
8. AF exercised their right and changed the articles of their
Property Subrogation Arbitration Agreement that added the
exclusion and now reads, “No company shall be required,
without its written consent, to arbitrate any claim or suit if: (i) it
is a product liability claim arising from an alleged defective
product.”
9. This new exclusion was effective as of January 1, 2015.
Conclusions of Law
10. The determination of whether an enforceable agreement to
arbitrate exists is a matter of contract interpretation, and most
importantly, a matter of the parties’ intent. Precision Homes of
Indiana, Inc. v. Pickford, 844 N.E.2d 126 (Ind. Ct. App. 2006)[,
trans. denied].
11. State law governs the initial question of whether the parties
entered into a valid agreement to arbitrate. Mislenkov v. Accurate
Metal Detinning, Inc., 743 N.E.2d 286 (Ind. Ct. App. 2001).
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12. A court may order arbitration of a particular dispute only
where the court is satisfied that both parties agreed to arbitrate
that dispute. Granite Rock Co. v. Int’l Brotherhood of Teamsters, et
al., 130 S. Ct. 2847 (2010).
13. “An agreement to arbitrate is a matter of contract: ‘it is a
way to resolve those disputes – but only those disputes – that the
parties have agreed to submit to arbitration.” Chiron Corp. v.
Ortho Diagnostic Sys., Inc., 207 F.3d 1126 (9th Cir. 2000).
14. State Farm and Watts were both members of AF and gave
AF the ability to make rules and regulations as AF saw fit.
15. AF wrote a notification about a new policy was [sic] sent in
November of 2014. The new exclusion was to be effective
January 1, 2015.
16. The notification draws the attention of the parties to
understand that, “While the use of the Property Program to
resolve disputes involving product liability claims arising from an
alleged defective product will no longer be compulsory as of
January 1, 2015, cased [sic] filed prior to January 1, 2015, will
remain in arbitration’s jurisdiction and will be processed to
hearing.”
17. This statement by AF makes the filing date the triggering
event for the new policy not the date of the injury.
18. As a part of the AF agreement, participants had a way to
withdraw from the services of AF.
19. Neither, State Farm nor Watts withdrew from the AF
agreement. By not withdrawing from participating in AF, State
Farm and Watts subjected themselves to the new exclusion.
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Id. at 7-9.
Discussion
[7] The issue is whether the trial court erred in denying Watts’s motion to compel
arbitration. 1 Watts argues that neither the Amended Arbitration Agreement
nor Arbitration Forums’ notice terminated its right to arbitrate State Farm’s
property subrogation claim that accrued prior to January 1, 2015. Watts asserts
that Arbitration Forums is a nonparty to the Arbitration Agreement and that its
“take on the subject is simply not relevant to the intent of Watts or State Farm.”
Appellant’s Brief at 16. Watts contends that this Court should avoid an
interpretation of the Arbitration Agreement that would render State Farm’s
agreement to arbitrate illusory. It argues that State Farm is collaterally
estopped from relitigating the issue of whether the Arbitration Agreement in
effect when its claim accrued governs the arbitrability of the claim. Watts also
asserts that State Farm did not allege a product liability claim subject to the
product liability exclusion.
[8] State Farm argues that Arbitration Forums, pursuant to the rule-making
authority expressly granted to it by Watts, clearly made the date of filing
determinative. State Farm contends that by carving out an exception for only
claims which had been filed prior to January 1, 2015, the only reasonable
1
On July 25, 2016, Watts filed a motion to strike material not in the record. Specifically, it argued that the
Declaration of Timothy McKernan, which State Farm included in its Addendum, was not filed in the trial court
and is not part of the record on appeal. By separate order, we grant Watts’s motion to strike.
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construction of Arbitration Forums’ amendment is that the exclusion would
apply to all other unfiled claims, notwithstanding whether a party could have
filed a claim in 2014 or earlier. It argues that to extend the Amended
Arbitration Agreement to include product defect cases filed in 2015 would
contradict the plain language of the rule and the intentions of Arbitration
Forums and the signatories it represented as expressed in that language. It
further contends that Watts’s argument that Arbitration Forums’ own rule is
extrinsic evidence is mistaken because the Arbitration Agreement expressly
authorized all rules and regulations issued by Arbitration Forums. State Farm
also argues that Watts has no vested right to arbitration of any matter until a
claim is formally filed and that Watts had only a contingent right to arbitrate
claims based on the parties’ mutual status as signatories. It states that the
Amended Arbitration Agreement is not illusory because a disputed claim filed
prior to a revision of the rules must be arbitrated with Arbitration Forums, and
that it alleged a product liability claim subject to the product liability exclusion.
[9] Our standard of review in this case is de novo. Showboat Marina Casino P’ship v.
Tonn & Blank Constr., 790 N.E.2d 595, 597 (Ind. Ct. App. 2003) (citing
Mislenkov v. Accurate Metal Detinning, Inc., 743 N.E.2d 286, 290 (Ind. Ct. App.
2001)). It is well settled that Indiana recognizes a strong policy favoring
enforcement of arbitration agreements. Homes By Pate, Inc. v. DeHaan, 713
N.E.2d 303, 306 (Ind. Ct. App. 1999). Nevertheless, arbitration is a matter of
contract, and a party cannot be required to submit to arbitration unless the party
has agreed to do so. Id.
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[10] Under Indiana contract law, the party seeking to compel arbitration has the
burden of demonstrating the existence of an enforceable arbitration agreement.
Showboat Marina Casino P’ship, 790 N.E.2d at 597-598 (citing Wilson Fertilizer &
Grain, Inc. v. ADM Milling Co., 654 N.E.2d 848, 849 (Ind. Ct. App. 1995), trans.
denied). In determining whether the parties have agreed to arbitrate a particular
dispute, the court “will decide whether the dispute, on its face, is covered by the
language of the arbitration provision.” St. John Sanitary Dist. v. Town of
Schererville, 621 N.E.2d N.E.2d 1160, 1162 (Ind. Ct. App. 1993). When
determining whether the parties have agreed to arbitrate a dispute, we also
apply ordinary contract principles governed by state law. Showboat Marina
Casino P’ship, 790 N.E.2d at 598 (citing Mislenkov, 743 N.E.2d at 289 (citing St.
John Sanitary Dist., 621 N.E.2d 1160 at 1162)). “In addition, ‘[w]hen construing
arbitration agreements, every doubt is to be resolved in favor of arbitration,’ and
the ‘parties are bound to arbitrate all matters, not explicitly excluded, that
reasonably fit within the language used.’” Id. (quoting Mislenkov, 743 N.E.2d at
289 (citing St. John Sanitary Dist., 621 N.E.2d at 1162)). However, parties are
only bound to arbitrate those issues that by clear language they have agreed to
arbitrate; arbitration agreements will not be extended by construction or
implication. Id.
[11] Whether the parties agreed to arbitrate any disputes is a matter of contract
interpretation, and most importantly, a matter of the parties’ intent. MPACT
Const. Grp., LLC v. Superior Concrete Constructors, Inc., 802 N.E.2d 901, 906 (Ind.
2004). “Courts in Indiana have long recognized the freedom of parties to enter
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into contracts and have presumed that contracts represent the freely bargained
agreement of the parties.” Id. (quoting Trimble v. Ameritech Publ’g, Inc., 700
N.E.2d 1128, 1129 (Ind. 1998)). Consequently, imposing on parties a policy
favoring arbitration before determining whether they agreed to arbitrate could
frustrate the parties’ intent and their freedom to contract. Id. “The Supreme
Court has made this clear – ‘arbitration is a matter of contract and a party
cannot be required to submit to arbitration any dispute which he has not agreed
so to submit.’” Id. (quoting AT & T Techs., Inc. v. Commc’ns Workers of Am., 475
U.S. 643, 648, 106 S. Ct. 1415 (1986)).
[12] To the extent Watts asserts that Arbitration Forums’ notice regarding the
amendment is extrinsic or that Arbitration Forums did not have the authority to
amend the Arbitration Agreement to provide for the product liability exclusion,
we disagree. Watts agreed to the terms of the Arbitration Agreement, and
Article Fifth of the Arbitration Agreement stated that Arbitration Forums,
“representing the signatory companies, is authorized to . . . make appropriate
Rules and Regulations for the presentation and determination of controversies
under this Agreement . . . .” Appellant’s Appendix at 42. We conclude that the
notice and amendment fall within Arbitration Forums’ authority.
[13] As for Watts’s argument that the language of the amendment did not remove
the requirement of arbitration from State Farm’s claim, we observe that the
notice from Arbitration Forums regarding the amendment states: “While the
use of the Property Program to resolve disputes involving product liability
claims arising from an alleged defective product will no longer be compulsory
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as of January 1, 2015, cases filed prior to January 1, 2015, will remain in
arbitration’s jurisdiction and will be processed to hearing.” Id. at 74 (emphasis
added). Further, the Amended Arbitration Agreement, which was effective
January 1, 2015, provided that “[n]o company shall be required, without its
written consent, to arbitrate any claim or suit if . . . it is a product liability claim
arising from an alleged defective product.” Id. at 72 (emphasis added). We
cannot say that the language in the notice or amendment is ambiguous. The
notice and Amended Arbitration Agreement indicate that the filing date of a
claim or suit determines whether compulsory arbitration applies to the claim or
suit. State Farm filed its complaint against Watts on July 23, 2015.
Accordingly, it is not subject to compulsory arbitration. See State Farm Fire &
Cas. Co. v. Watts Regulator Co. (filed September 29, 2016), Ill. App. Ct. No. 2-16-
0275, slip op. at 7 (addressing an event in which Cecilia Montero’s home
sustained water damage on September 7, 2013, the Arbitration Agreement, and
the November 2014 notice regarding the amendment effective January 1, 2015,
and holding that “[t]he amendment clearly states that cases filed prior to
January 1, 2015, will remain subject to compulsory arbitration. Necessarily, if
a claim was filed on or after January 1, 2015, the only reading of the
amendment is that the claim does not remain subject to the agreement. Here,
Montero’s claim was filed on April 15, 2015, and, therefore, it is not subject to
compulsory arbitration through Arbitration Forums”).
[14] Watts cites Homes by Pate, Inc. v. DeHaan, 713 N.E.2d 303 (Ind. Ct. App. 1999),
Chesterfield Mgmt., Inc. v. Cook, 655 N.E.2d 98 (Ind. Ct. App. 1995), reh’g denied,
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trans. denied, and Nolde Bros., Inc. v. Local No. 358, 430 U.S. 243 (1977), for the
assertion that State Farm’s duty to arbitrate survived the amendment. The
arbitration provisions addressed in those cases did not include language
providing an entity with the authority to “make appropriate Rules and
Regulations for the presentation and determination of controversies under this
Agreement,” language to which the parties in this case expressly agreed upon.
Appellant’s Appendix at 42, 73. Nor do those cases involve such an entity
providing for a property liability exclusion similar to the language in the notice
and Amended Arbitration Agreement. See Homes by Pate, Inc., 713 N.E.2d at
305-306, 309 (addressing a residential building contract and two-year warranty
which required arbitration with respect to disputes as to whether particular
repairs were covered by the warranty and holding that a logical reading of the
warranty led to the conclusion that, so long as a defect occurred within the two-
year period of warranty coverage, any dispute concerning that coverage must be
arbitrated); Chesterfield Mgmt. Inc., 655 N.E.2d at 102 (addressing an arbitration
provision in a lease and observing that the lease’s arbitration clause provided in
part that “[a]ny dispute under any of the paragraphs of this Lease shall be
settled by arbitration”); Nolde Bros., Inc., 430 U.S. at 244, 252-254, 97 S. Ct. at
1068, 1072-1073 (addressing whether a party to a collective-bargaining contract
may be required to arbitrate a contractual dispute over severance pay pursuant
to an arbitration clause of that agreement even though the dispute, although
governed by the contract, arose after its termination, noting that the parties
drafted their broad arbitration clause against a backdrop of well-established
federal labor policy favoring arbitration, and holding “even though the parties
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could have so provided, there is nothing in the arbitration clause that expressly
excludes from its operation a dispute which arises under the contract, but which
is based on events that occur after its termination. The contract’s silence, of
course, does not establish the parties’ intent to resolve post-termination
grievances by arbitration. But in the absence of some contrary indication, there
are strong reasons to conclude that the parties did not intend their arbitration
duties to terminate automatically with the contract”).
[15] With respect to Watts’s argument that State Farm’s duty to arbitrate is illusory,
we observe that Watts does not argue that Arbitration Forums’ duty under the
Amended Arbitration Agreement is illusory. Article Sixth of the Agreement
allows any signatory to withdraw from the Agreement by notice in writing to
Arbitration Forums. In addition, other categories of damage to property
remain subject to compulsory arbitration under the Amended Arbitration
Agreement. The Amended Agreement and the notice require that State Farm
arbitrate certain claims asserted before January 1, 2015. The fact that product
liability claims are not subject to compulsory arbitration under the Amended
Agreement does not render the agreement illusory. See Watts Regulator Co. (filed
September 29, 2016), Ill. App. Ct. No. 2-16-0275, slip op. at 8 (rejecting Watts’s
argument that State Farm could avoid their obligations to arbitrate).
[16] As for Watts’s assertion that State Farm is collaterally estopped from
relitigating the issue of whether the Arbitration Agreement in effect when its
claim accrued governs the arbitrability of the claim, we note that issue
preclusion, or collateral estoppel, bars subsequent relitigation of the same fact
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or issue where that fact or issue was necessarily adjudicated in a former lawsuit
and that same fact or issue is presented in a subsequent suit. Nat’l Wine &
Spirits, Inc. v. Ernst & Young, LLP, 976 N.E.2d 699, 704 (Ind. 2012) (citing
Hayworth v. Schilli Leasing, Inc., 669 N.E.2d 165, 167 (Ind. 1996)), reh’g denied,
cert. denied, 133 S. Ct. 2780 (2013). Where, as here, a defendant seeks to
prevent a plaintiff from asserting a claim that the plaintiff has previously
litigated and lost, the use has been termed “defensive” collateral estoppel. Small
v. Centocor, Inc., 731 N.E.2d 22, 28 (Ind. Ct. App. 2000), reh’g denied, trans.
denied. There are three requirements for the doctrine of collateral estoppel to
apply: (1) a final judgment on the merits in a court of competent jurisdiction; (2)
identity of the issues; and (3) the party to be estopped was a party or the privity
of a party in the prior action. Nat’l Wine & Spirits, 976 N.E.2d at 704.
Furthermore, two additional considerations are relevant in deciding whether
the defensive use of collateral estoppel is appropriate: “whether the party
against whom the judgment is pled had a full and fair opportunity to litigate the
issue, and whether it would be otherwise unfair under the circumstances to
permit the use of collateral estoppel.” Id. (quoting Small, 731 N.E.2d at 28).
[17] The parties cite to various trial court orders from multiple states. Some are in
favor of Watts, and others favor State Farm. Specifically, Watts cites to trial
court orders from Tennessee, Georgia, Nevada, and Utah. State Farm cites to
trial court orders from Georgia, Massachusetts, and Minnesota. As these
orders and decisions produce different results, and under the circumstances
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presented, we cannot say it would be fair to permit the use of collateral estoppel
by Watts.
[18] We next turn to Watts’s argument that State Farm did not allege a product
liability claim subject to the product liability exclusion. Watts cites to the
Indiana Products Liability Act, Ind. Code §§ 34-20, and asserts that State
Farm’s claims do not constitute product liability claims because State Farm did
not allege “physical harm” or “sudden, major damage” to Lucka’s property or
home. Appellant’s Brief at 24-25. Watts asserts that State Farm’s complaint
alleging that the damage happened “[o]n or about” November 30, 2014,
suggests gradually evolving damage and not the physical harm necessary for
product liability claims. Id. (quoting Appellant’s Appendix at 18). Watts also
argues that the complaint does not allege the nature of any defect in Watts’s
connector or the nature of the risk the defect presented. Watts also asserts that
a broad interpretation of the product liability exclusion would swallow the
general rule requiring arbitration.
[19] State Farm argues that nowhere is a signatory required to comply with any
particular state’s pleading standard to meet the exception and that whether or
not the claim is subject to dismissal under Indiana state law has no bearing
upon the interpretation of the arbitration agreements. State Farm also argues
that Watts failed to raise any of the alleged pleading deficiencies to the trial
court and has waived this issue. In reply, Watts contends that the trial court
expressly ruled that State Farm’s claim was a product liability claim and that it
did not waive the argument.
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[20] Even assuming that Watts did not waive this issue and that an examination of
Indiana statutory law regarding products liability is necessary, we cannot say
that reversal is warranted. Ind. Code § 34-20-1-1 governs the applicability of
the article addressing product liability actions and provides:
This article governs all actions that are:
(1) brought by a user or consumer;
(2) against a manufacturer or seller; and
(3) for physical harm caused by a product;
regardless of the substantive legal theory or theories upon which
the action is brought.
Ind. Code § 34-6-2-105 provides that “‘[p]hysical harm’, for purposes of IC 34-
20, means bodily injury, death, loss of services, and rights arising from any such
injuries, as well as sudden, major damage to property,” and “[t]he term does
not include gradually evolving damage to property or economic losses from
such damage.”
[21] Ind. Code § 34-20-2-1 is titled “Grounds,” and addresses the grounds for a
product liability action as follows:
Except as provided in section 3 of this chapter, a person who
sells, leases, or otherwise puts into the stream of commerce any
product in a defective condition unreasonably dangerous to any
user or consumer or to the user’s or consumer’s property is
subject to liability for physical harm caused by that product to the
user or consumer or to the user’s or consumer’s property if:
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(1) that user or consumer is in the class of persons that the
seller should reasonably foresee as being subject to the
harm caused by the defective condition;
(2) the seller is engaged in the business of selling the
product; and
(3) the product is expected to and does reach the user or
consumer without substantial alteration in the condition in
which the product is sold by the person sought to be held
liable under this article.
[22] State Farm alleged: Count I, “Products Liability – Defective Manufacturing;”
Count II, “Products Liability – Defective Design;” Count III, “Products
Liability – Negligent Manufacturing;” and Count IV, “Negligent Design.”
Appellant’s Appendix at 18-20. State Farm’s amended complaint also alleged
that Watts manufactured the connector and/or its components, that the
connector failed causing water damage resulting in damages to Lucka’s
property, that damages of $27,805 were incurred, and that the connector and/or
its components were defective and unreasonably dangerous at the time it left
Watts. We cannot say that State Farm’s claims did not fall within the exclusion
in the Amended Arbitration Agreement which stated: “No company shall be
required, without its written consent, to arbitrate any claim or suit if . . . it is a
product liability claim arising from an alleged defective product.” Appellant’s
Appendix at 72.
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Conclusion
[23] For the foregoing reasons, we affirm the trial court’s order denying Watts’s
motion to compel arbitration.
[24] Affirmed.
Robb, J., and Mathias, J., concur.
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