Allstate v. Watts

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE

ALLSTATE PROPERTY AND CASUALTY INSURANCE COMPANY,
Plaintiff/Appellee,

v.

WATTS WATER TECHNOLOGIES, INC., Defendant/Appellant.
__________________________________________________________

STATE FARM FIRE AND CASUALTY INSURANCE COMPANY,
Plaintiff/Appellee,

v.

WATTS REGULATOR COMPANY, Defendant/Appellant.

No. 1 CA CV 16-0500, 1 CA-CV 16-0559 (Consolidated)
FILED 2-6-2018

Appeal from the Superior Court in Mohave County
No. S8015CV201600190
The Honorable Charles W. Gurtler, Judge

Appeal from the Superior Court in Maricopa County
No. CV2016-005213
The Honorable James T. Blomo, Judge (Retired)

REVERSED AND REMANDED

COUNSEL

Bauman Loewe Witt & Maxwell, PLLC, Scottsdale
By Frank B. Jancarole
Counsel for Appellee Allstate
Manning & Kass Ellrod, Ramirez, Trester, LLP, Phoenix
By Scott A. Alles, Keith R. Ricker
Co-Counsel for Appellee State Farm

Grotefeld, Hoffmann, Schleiter, Gordon, Ochoa & Evinger, LLP, Geneva,
Illinois
By Jonathan Tofilon
Co-Counsel for Appellee State Farm

Grotefeld, Hoffmann, Schleiter, Gordon, Ochoa & Evinger, LLP,
Minneapolis, Minnesota
By Daniel W. Berglund
Co-Counsel for Appellee State Farm

Lewis Brisbois Bisgaard & Smith LLP, Phoenix
By James K. Kloss, Adam S. Polson
Counsel for Appellant Watts

OPINION

Judge John C. Gemmill1 delivered the opinion of the Court, in which
Presiding Judge Kenton D. Jones and Judge Jon W. Thompson joined.

G E M M I L L, Judge:

¶1 Watts Water Technologies, Inc. (“Watts”) appeals the denial
of its motions to dismiss and compel arbitration. The parties disagree about
whether these product liability subrogation claims are subject to mandatory
contractual arbitration. For the following reasons, we reverse and remand
for proceedings consistent with this opinion.

BACKGROUND

¶2 In April 2014, a Watts-made water supply line allegedly failed
at the residence of Terry and Lisa McNemar, causing property damage. The
McNemars’ insurer, Allstate Property and Casualty Insurance Company

1 The Honorable John C. Gemmill, Retired Judge of the Arizona Court
of Appeals, Division One, has been authorized to sit in this matter pursuant
to Article 6, Section 3, of the Arizona Constitution.

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Opinion of the Court

(“Allstate”), paid $53,149.65 for the McNemars’ loss and nearly two years
later, in March 2016, filed a subrogation action against Watts.

¶3 In June 2014, Russell and Pam Vaughn suffered property
damage following the alleged malfunction of a reverse osmosis water filter
manufactured by Watts. The Vaughns were insured by State Farm Fire and
Casualty Insurance Company, Inc. (“State Farm”). State Farm paid
$15,675.00 for the Vaughns’ loss and filed a subrogation action against
Watts in April 2016.

¶4 At the time of the incidents causing property damage,
Allstate, State Farm (collectively, “the Insurers”), and Watts were parties to
a Property Subrogation Arbitration Agreement (“the Agreement”)
promulgated by Arbitration Forums, Inc. (“AF”), which required that
signatory companies forego litigation and arbitrate property subrogation
claims. Article First of the Agreement, signed by Allstate in 1996 and State
Farm in 2003, provided in pertinent part:

Signatory companies are bound to forego litigation and in
place thereof submit to arbitration any questions or disputes
which may arise from . . . any fire subrogation or property
damage claim not in excess of $100,000.

The Agreement, signed by Watts in 2005, also provided, in Article Fifth, that
“AF, representing the signatory companies, is authorized to . . . (a) make
appropriate Rules and Regulations for the presentation and determination
of controversies under this Agreement.”2

¶5 In November 2014, AF advised its signatory members
through an e-bulletin that, effective January 1, 2015, it was adding a “new
exclusion” to the Agreement that would remove product liability claims
arising from allegedly defective products from the claims subject to
mandatory arbitration between signatory companies. The November e-
bulletin further advised:

2 Article Fifth further authorized AF to: “(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.” (Emphasis in original.)

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Opinion of the Court

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.

¶6 AF did not include the foregoing e-bulletin language
regarding claims accrued or “cases filed prior to January 1, 2015” within the
revised Agreement (“Amended Agreement”) promulgated by AF in
January 2015. Instead, only the following exclusion (i) was added to Article
Second:

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.

(Emphasis in original). The Amended Agreement does not include any
language specifying whether the new exclusion applied to claims accruing
before 2015 but not filed until after January 1, 2015. Neither Watts nor the
Insurers signed the Amended Agreement with the new exclusion removing
product liability claims from compulsory arbitration.

¶7 In 2016, the Insurers filed product liability actions against
Watts in superior court, based on the losses that occurred in 2014. Watts
moved for dismissal of the lawsuits or alternatively for a stay and order
compelling arbitration. Watts argued the claims accrued before January
2015 and were therefore subject to mandatory arbitration under the
Agreement in effect in 2014. After briefing and oral argument, the superior
court in State Farm’s case denied Watts’s motion, finding the Agreement
“was modified and the matter before the Court is not subject to mandatory
arbitration.” The superior court in Allstate’s case concluded that “as both
Plaintiff and Defendant are signatories to the AF Agreement, they are
bound by the provisions of the same, including the right of AF to delineate
when its services will be provided,” and, therefore, denied the motion.
Watts timely appeals the superior court’s orders denying the motions to
dismiss and compel arbitration. We have consolidated these appeals.
Appellate jurisdiction is based upon Arizona Revised Statutes (“A.R.S.”)

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Opinion of the Court

sections 12-120.21(A)(1) (2018) and -2101.01(A)(1) (2018). See also Brumett v.
MGA Home Healthcare, L.L.C., 240 Ariz. 420, 430-31, ¶¶ 20-21 (App. 2016).

ANALYSIS

¶8 Watts argues the superior court erred in denying its motions
to dismiss and compel arbitration because AF’s change to the Agreement
does not govern claims arising before the change. The Insurers maintain
that AF was authorized by the Agreement to exclude product liability
claims because of its power to make “appropriate Rules and Regulations
for the presentation and determination of controversies under th[e]
Agreement,” and therefore the superior court correctly determined product
liability claims filed after January 1, 2015 were “excluded” from compulsory
arbitration. The parties ask us to determine which is applicable — the
Agreement, based on date of loss, or the Amended Agreement, based on
date of filing.3

¶9 The validity and enforceability of an arbitration agreement
are mixed questions of fact and law that we review de novo. Estate of
DeCamacho ex rel. Guthrie v. La Solana Care & Rehab, Inc., 234 Ariz. 18, 20-21,
¶ 9 (App. 2014) (citing Schoneberger v. Oelze, 208 Ariz. 591, 594, ¶ 12 (App.
2004)). We also review de novo a trial court’s decision whether to compel
arbitration. Sun Valley Ranch 308 Ltd. P’ship ex rel. Englewood Props., Inc. v.
Robson, 231 Ariz. 287, 291, ¶ 9 (App. 2012) (citing Nat’l Bank of Ariz. v.
Schwartz, 230 Ariz. 310, 311, ¶ 4 (App. 2012)).

¶10 A written arbitration agreement “is valid, enforceable and
irrevocable, save upon such grounds as exist at law or in equity for the

3 The insured homeowners are not signatories to the AF Agreement.
The parties have focused on the dates of the property losses and the dates
the subrogation actions were filed in superior court. The parties have not
addressed the dates the Insurers paid the claims. Generally, an insurer’s
right to subrogation does not arise until it has made payment for the
property damage and thereby becomes subrogated to the claim. See Safeway
Ins. v. Collins, 192 Ariz. 262, 266, ¶ 19 (App. 1998) (citing Hamman-McFarland
Lumber Co. v. Ariz. Equip. Rental Co., 16 Ariz. App. 188, 190 (1972), and St.
Paul Fire & Marine Ins. v. Glassing, 887 P.2d 218, 220 (Mont. 1994)). The
record on appeal does not establish when the Insurers made payments and
became subrogated to their insureds’ claims. The parties have not argued
or briefed whether the date of payment by the Insurers was significant, and
we do not address that issue.

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Opinion of the Court

revocation of any contract.” A.R.S. § 12-1501 (2018); accord A.R.S. § 12-
3006(A) (2018); see also U.S. Insulation, Inc. v. Hilro Constr. Co., 146 Ariz. 250,
256 (App. 1985). When a party denies the existence of an agreement to
arbitrate, the trial court “shall proceed summarily to the determination of
the issue so raised.” A.R.S. § 12-1502(A) (2018); see also A.R.S. § 12-3006(B)
(“The court shall decide whether an agreement to arbitrate exists or a
controversy is subject to an agreement to arbitrate.”). “Although it is
commonly said that the law favors arbitration, it is more accurate to say that
the law favors arbitration of disputes that the parties have agreed to
arbitrate.” S. Cal. Edison Co. v. Peabody W. Coal Co., 194 Ariz. 47, 51, ¶ 11
(1999) (citing Clarke v. ASARCO Inc., 123 Ariz. 587, 589 (1979), and Pima Cty.
v. Maya Constr. Co., 158 Ariz. 151, 154 (1988)); see also Smith v. Pinnamaneni,
227 Ariz. 170, 176, ¶ 22 (App. 2011) (“[A] party is bound to arbitrate only
those disputes which it has contractually agreed to arbitrate.”).

¶11 The parties do not contest the validity of the Agreement or the
Amended Agreement. The parties acknowledge that each signed the
Agreement to forego litigation and submit to arbitration all claims
described therein.4 The parties also agree that the Amended Agreement
was effective January 2015 and applies to all claims accruing thereafter.
Watts, however, contends the Amended Agreement did not negate its right
to arbitration of claims that arose before January 2015, but were filed after
January 1, 2015. The Insurers argue in response that the Amended
Agreement unambiguously applies to all claims filed after January 1, 2015,
regardless of when the claim arose.

¶12 To resolve this conflict, we look to the plain language of the
Agreement and Amended Agreement. See US W. Commc’ns, Inc. v. Ariz.
Corp. Comm’n, 185 Ariz. 277, 280 (App. 1996) (explaining the purpose of
contract interpretation “is to determine and enforce the parties’ intent”
(citing Taylor v. State Farm Mut. Auto. Ins., 175 Ariz. 148, 152 (1993))). “[I]t
is axiomatic that any agreement must be construed as a whole, and each
part must be read in light of all the other parts.” C & T Land & Dev. Co. v.
Bushnell, 106 Ariz. 21, 22 (1970) (citing Goodman v. Newzona Inv. Co., 101
Ariz. 470, 473 (1966)). We apply a common-sense approach and consider
the language used and the organizational structure of the contract. See Sw.
Sav. & Loan Ass’n v. SunAmp Sys., Inc., 172 Ariz. 553, 560 (App. 1992) (citing
Burkons v. Ticor Title Ins, 168 Ariz. 345, 350-51 (1991)); see also Fishman v.
LaSalle Nat’l Bank, 247 F.3d 300, 302-03 (1st Cir. 2001) (“Common sense is as

4 Although Allstate contends it “did not have a direct contractual
relationship” with Watts, it agrees that each party was “bound by the rules
and services administered and offered by AF.”

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much a part of contract interpretation as is the dictionary or the arsenal of
canons.”).

¶13 Based on the language of the Agreement in effect in 2014
when the property damage occurred, arbitration of product liability claims
less than $100,000 was compulsory — the Insurers and Watts had agreed
upon it. The Insurers contend, however, that the Agreement was amended
and superseded in 2015 by the Amended Agreement and that AF had the
power to promulgate new exclusions because Article Fifth of the
Agreement authorized AF to “make appropriate Rules and Regulations for
the presentation and determination of controversies under this
Agreement.” To evaluate this provision, we must examine the
organizational structure and language of the Agreement.

¶14 Article First of the Agreement describes with specificity the
disputes the signatory companies agreed to arbitrate, limited by the
exclusions in Article Second. Articles First and Second therefore delineate
the controversies the parties agreed to arbitrate.

¶15 Article Fifth separately empowers AF to make rules and
regulations for the arbitration of “controversies under this Agreement” —
that is, to promulgate procedures for the presentation of evidence and
conduct of the arbitrations. AF’s unilateral addition of a new exclusion of
product liability claims from mandatory arbitration was not a mere
procedural rule change. Rather, it was a significant, substantive change. Cf.
Thurston v. Judges’ Retirement Plan, 179 Ariz. 49, 51 (1994) (“[I]t is generally
agreed that a substantive law creates, defines and regulates rights while a
procedural one prescribes the method of enforcing such rights or obtaining
redress.”). Nowhere does Article Fifth authorize AF to change, expand, or
contract the disputes the signatories specifically agreed to arbitrate in
Articles First and Second. The other portions of Article Fifth — addressing
details such as fees, locations, means, and selection of arbitrators, see supra
note 2 — further confirm that Article Fifth does not authorize AF to amend
Articles First or Second and thereby unilaterally expand or contract the
controversies the parties have agreed to arbitrate.

¶16 Based on a plain reading of the Agreement, therefore, AF was
not empowered to unilaterally amend the predetermined “controversies
under this Agreement.” The “controversies” subject to the Agreement were
those described in Article First and not excluded by Article Second. We
therefore conclude that these signatory parties — by agreeing AF would

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provide rules and regulations for arbitrations — did not empower AF to
change which controversies were subject to compulsory arbitration.5

¶17 Moreover, application of the Agreement to these claims is
confirmed by A.R.S. § 12-1501:

A written agreement to submit any existing controversy to
arbitration or a provision in a written contract 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.

(Emphasis added); accord A.R.S. § 12-3006(A). The statute indicates that an
“existing controversy” and “any controversy thereafter arising” become
“enforceable and irrevocable” upon the arising of the controversy, unless
the parties agree otherwise. There is no requirement for the formal filing of
a demand for arbitration or an action in court. The controversies at issue
here arose before 2015 and the Agreement became “enforceable and
irrevocable” between the signatories prior to the Amended Agreement.
Accordingly, the accrual of these property damage claims in 2014 triggered
the application of the Agreement providing mandatory arbitration of these
product liability claims.

¶18 Nevertheless, the Insurers rely upon the language of the
November 2014 e-bulletin to argue the Amended Agreement specifies the
operative date for the exclusion of product liability claims is the date the
claim was filed, not the date the claim arose. But the e-bulletin language is
not part of any agreement signed by the parties, nor is it part of the

5 State Farm at oral argument before this court contended that an
unpublished, unappealed order in Watts Water Technologies v. Arbitration
Forums, Inc., 1:14-cv-14411-RGW (D. Mass. Feb. 24, 2015), constituted res
judicata or collateral estoppel preventing Watts from arguing in this appeal
that AF did not have the power to unilaterally impose the product liability
exclusion. We disagree. In its February 2015 order, the Massachusetts
federal district court granted a motion to dismiss Watts’s complaint for
failure to state a claim because, according to the court, AF was not a party
to the Agreement. In dicta, the court expressed the view that the parties
had “implicitly recognize[d] the authority of AF to define the scope of the
arbitration services that it will offer.” We are not bound by that court’s
ruling, nor its differing interpretation of the Agreement.

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Amended Agreement. The Amended Agreement does not contain any new
language beyond exclusion (i). The e-bulletin presumably represents the
desire of AF, but this record reveals no contractual documents signed by
Watts or the Insurers stating that the Amended Agreement would apply to
all actions filed after January 1, 2015, even if the claims accrued prior to that
date.

¶19 The Insurers also rely on an opinion of the Illinois Court of
Appeals that addressed similar issues, State Farm Fire & Casualty Co. v. Watts
Regulator Co. (Montero), 63 N.E.3d 304 (Ill. App. Ct. 2016). The court in
Montero, however, conflated the e-bulletin language with the language of
the Amended Agreement. The Montero court twice quoted the Amended
Agreement as saying, “cases filed prior to January 1, 2015, will remain in
arbitration’s jurisdiction and will be processed to hearing.” Id. at 307-08,
¶¶ 4, 8. However, that language is found only in the e-bulletin; the
Amended Agreement contains no such language. The Montero opinion is
therefore unpersuasive.

¶20 The Insurers further rely on an Indiana Court of Appeals case,
Watts Water Technologies, Inc. v. State Farm Fire & Casualty Co. (Lucka), 66
N.E.3d 983 (Ind. Ct. App. 2016), which relied in part on the Montero case
and the e-bulletin language. The Lucka court also decided that AF’s
authority to make rules and regulations included the authority to add the
product liability exclusion at issue here. Id. at 989. We disagree with Lucka’s
analysis.

¶21 Finally, State Farm relies upon Article Sixth, Withdrawals, to
support its interpretation of the Agreement. The provision states:

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.

This provision specifically addresses claims pending at the time of
withdrawal. In contrast, the Amended Agreement does not address
whether the new exclusion of product liability claims applies to pending
claims or claims already accrued but not yet filed. The withdrawal
provision does not provide the answer to the issue before us.

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Opinion of the Court

CONCLUSION

¶22 The Agreement does not give AF the power to unilaterally
impose the product liability exclusion, and Watts and the Insurers never
agreed between themselves to apply the Amended Agreement to claims
arising before 2015. Accordingly, the Agreement in effect in 2014 applies to
these property damage claims and the Amended Agreement does not. We
therefore vacate the superior court’s orders denying Watts’s motions to
compel arbitration and remand for further proceedings consistent with this
opinion. We award taxable costs to Watts upon compliance with Arizona
Rule of Civil Appellate Procedure 21(b).

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