No
No. 98-013
IN THE SUPREME COURT OF THE STATE OF MONTANA
1998 MT 335
WILLIAM AND GWYN YOUNG,
Plaintiffs and Appellants,
v.
SECURITY UNION TITLE INSURANCE COMPANY,
SECURITY UNION TITLE COMPANY OF IDAHO, d/b/a
FLATHEAD TITLE COMPANY, n/k/a ALLIANCE TITLE,
COLDWELL BANKER WACHHOLZ AND COMPANY,
and FRED AND DONNA EARLY,
Defendants and Respondents.
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APPEAL FROM: District Court of the Eleventh Judicial District,
In and for the County of Flathead,
The Honorable C.B. McNeil, Judge presiding.
COUNSEL OF RECORD:
For Appellants:
Peter F. Carroll, Attorney at Law; Kalispell, Montana
For Respondents:
Daniel W. Hileman; Kaufman, Vidal & Hileman, P.C.;
Kalispell, Montana (for Security Union)
Marshall Murray, Attorney at Law; Kalispell, Montana
(for Coldwell Banker)
Randy Ogle, Ogle and Worm; Kalispell, Montana (for Earlys)
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Submitted on Briefs: March 26, 1998
Decided: December 30, 1998
Filed:
__________________________________________
Clerk
Justice Terry N. Trieweiler delivered the opinion of the Court.
¶1. The plaintiffs, William and Gwyn Young, brought this action in the District
Court for the Eleventh Judicial District in Flathead County to recover damages from
the defendants, Security Union Title Insurance Company (Insurer), Security Union
Title Company of Idaho (Title Company), Coldwell Banker Wachholz and Company,
and Fred and Donna Early, based on limitations to the use of real property
purchased by Youngs from Earlys which were allegedly not disclosed at the time of
purchase. The Insurer and the Title Company moved for an order compelling
arbitration pursuant to a provision for arbitration in the title insurance policy, and
that motion was granted. However, when Youngs refused to pay in advance the
anticipated costs of arbitration, the arbitrator for the American Arbitration
Association declined to proceed; the Insurer and Title Company moved for summary
judgment based on Youngs' alleged refusal to comply with the court's order
compelling arbitration and; that motion was granted. Youngs appeal from the
District Court's order granting summary judgment to the Insurer and the Title
Company. We reverse the order and judgment of the District Court.
¶2. The dispositive issue on appeal is whether the title insurance policy issued by
Security Union Title Insurance Company includes a valid and binding arbitration
clause.
FACTUAL BACKGROUND
¶3. The plaintiffs, William and Gwyn Young, filed a complaint in the District Court
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for the Eleventh Judicial District in Flathead County on November 6, 1996, in which
Security Union Title Insurance Company, Security Title Company of Idaho,
Coldwell Banker Wachholz Company, and Fred and Donna Early were named as
defendants.
¶4. Youngs' complaint alleged that in June 1994 they purchased real property from
Earlys and that Coldwell Banker Wachholz Company, a real estate broker, acted as
a dual agent representing both the sellers and the buyers in that transaction.
¶5. Youngs alleged that prior to their purchase of property from Earlys the Title
Company reviewed real estate records in Flathead County and reported no defects in
the title to the property, nor restrictions on their use of the property, and that the
Insurer sold them a policy of title insurance which insured the marketability of the
title.
¶6. Youngs further alleged that in July 1996 they learned of a sanitary restriction on
the property they had purchased and that the septic system on the property violated
that restriction. They alleged that the restriction was evident from Flathead County
property records, should have been noticed by the Title Company, and was a defect
against which the Insurer insured them, but that the Insurer had refused to
indemnify them pursuant to its contract with them.
¶7. For these reasons, Youngs alleged that the sellers and brokers misrepresented
material facts to them and that the Insurer and Title Company breached material
terms of their contracts with the Youngs, and that as a result of the conduct of all
defendants, they had been significantly damaged.
¶8. After being served with the complaint, the Insurer and Title Company demanded
that Youngs submit their dispute to arbitration pursuant to paragraph 14 of the title
insurance policy, which provides, in relevant part, as follows:
Unless prohibited by applicable law, either the Company or the Insured may demand
arbitration pursuant to the Title Insurance Arbitration Rules of the American Arbitration
Association. Arbitrable matters may include, but are not limited to, any controversy or
claim between the Company and the Insured arising out of or relating to this policy, any
service of the Company in connection with its issuance or the breach of a policy provision
or other obligation. . . .
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The law of the situs of the land shall apply to an arbitration under the Title Insurance
Arbitration Rules.
¶9. Following receipt of the demand for arbitration, Youngs moved the District
Court to stay arbitration based on their contention that the Insurer had violated § 27-
5-114(4), MCA (1989), by its failure to provide notice on the first page of the
insurance contract that it was subject to arbitration; and based on their contention
that pursuant to § 27-5-114(2)(c), MCA, agreements to submit controversies relating
to insurance policies to arbitration are not enforceable.
¶10. The Insurer and Title Company objected to Youngs' motion to stay arbitration,
and in reliance on paragraph 14 of the title insurance policy, moved the court for an
order compelling arbitration. The Insurer and Title Company acknowledged that
Montana law invalidates arbitration clauses in insurance policies, but contended that
the law did not apply to title insurance policies. They also argued that since Youngs
did not object to the existence of the clause in the policy when it was issued in 1994,
their objection in the District Court was untimely.
¶11. The District Court denied Youngs' motion to stay arbitration and granted the
Insurer and Title Company's motion to compel arbitration. There is no explanation
in the District Court's order for its decision, except the court's belief that Youngs had
failed to file a response to the motion to compel arbitration and, therefore, the
District Court presumed it was well-taken. However, the District Court file indicates
that Youngs had, in fact, filed a response.
¶12. Six months after the District Court's order compelling arbitration, the Insurer
and Title Company moved for summary judgment based on their allegation that
Youngs had refused to comply with the court's order and submit their dispute to
arbitration.
¶13. In fact, Youngs had not refused to participate in arbitration, but had refused to
advance the anticipated costs of arbitration for the reason that they were financially
unable to do so. The American Arbitration Association had apparently sent a
stipulation to the parties providing that the arbitrator would be compensated at the
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rate of $125 per hour during hearings, and $100 per hour for study time, and
requesting that each party pay in advance the total expected cost of the arbitrator's
fees, plus his expenses. Youngs stated that they could not financially afford to do so
and, therefore, the AAA advised that arbitration would not proceed without
satisfactory arrangements for prepayment of fees.
¶14. In response to the Insurer's motion for summary judgment, Youngs pointed out
that William is a self-employed painter with little work to do during the winter
months; Gwyn is employed at a local market where she earns $8.25 an hour, but is
only guaranteed twenty hours of work per week; that their combined income ranges
from $650 to $1350 per month; and that their average expenses exceed $1000 per
month. They stated that while they were not refusing to participate in arbitration,
based on their financial reality they were unable to prepay or guarantee payment of
a proportionate share of the costs and fees for arbitration.
¶15. The District Court granted the motion for summary judgment with no
explanation, other than that good cause had been shown. The parties then stipulated
to stay further proceedings against Earlys and Coldwell Banker pending Youngs'
appeal from the District Court's summary judgment order.
DISCUSSION
¶16. Does the title insurance policy issued by Security Union Title Insurance
Company include a valid and binding arbitration clause?
¶17. Our standard of review on appeal from summary judgment orders is de novo.
Motaire v. Northern Montana Joint Refuse Disposal Dist. (1995), 274 Mont. 239, 242,
907 P.2d 154, 156; Mead v. M.S.B., Inc. (1994), 264 Mont. 465, 470, 872 P.2d 782, 785.
We review a district court's summary judgment to determine whether it was
correctly decided pursuant to Rule 56, M.R.Civ.P., which provides that summary
judgment is only appropriate where there is no genuine issue of material fact, and
the moving party is entitled to judgment as a matter of law.
¶18. On appeal, Youngs make the following arguments:
¶19. 1. They did not refuse to comply with the District Court's order compelling
arbitration. They simply were unable to prepay costs or guarantee payment of any
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predetermined proportion of costs. However, there is no statutory requirement that
they do so, nor were they required to do so by the rules of the American Arbitration
Association;
¶20. 2. The District Court erred when it denied Youngs' motion to stay arbitration
because the agreement did not comply with the notice requirements of § 27-5-114(4),
MCA (1989);
¶21. 3. Arbitration provisions in insurance contracts are invalid pursuant to § 27-5-
114(2)(c), MCA; and
¶22. 4. The Federal Arbitration Act is inapplicable because the contract in dispute
did not involve interstate commerce.
¶23. In response, the Insurer and Title Company contend as follows:
¶24. 1. Youngs' refusal to share in the cost of arbitration equates with a refusal to
participate in arbitration and, therefore, was a refusal to comply with the District
Court's order;
¶25. 2. Although arbitration provisions in insurance policies are invalid pursuant to
§ 27-5-114(2)(c), MCA, that section does not apply to title insurance policies; and
¶26. 3. Because Youngs accepted the insurance policy in June 1994 without objecting
to the arbitration provision, they waived the right to object to it now.
¶27. We conclude that § 27-5-114(2)(c), MCA, is dispositive of Youngs' appeal.
¶28. Paragraph 14 of Youngs' policy of title insurance provides that the Insurer may
demand arbitration "unless prohibited by applicable law." The applicable law in
Montana provides as follows:
(2) A written agreement to submit to arbitration any controversy arising between the
parties after the agreement is made is valid and enforceable except upon grounds that exist
at law or in equity for the revocation of a contract. Except as permitted under subsection
(3), this subsection does not apply to:
....
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(c) any agreement concerning or relating to insurance policies or annuity contracts except
for those contracts between insurance companies . . . .
Section 27-5-114(2)(c), MCA.
¶29. Neither the Insurer nor the Title Company contend that Montana's statutory
provision exempting insurance policies from arbitration requirements is invalid or
otherwise unenforceable as a matter of law. What they do contend is that the
provision does not pertain to title insurance policies. However, the defendants offer
no authority in support of such a distinction, and Montana statutory law would
appear to be to the contrary. Chapter 15, of Title 33, of the Montana Code
Annotated, which pertains to insurance contracts, does exclude title insurance from
some of its provisions; however, § 33-15-101(4), MCA, specifically makes that part of
Chapter 15 which defines an insurance "policy" applicable to title insurance. Section
33-15-102(1), MCA, provides that "'[p]olicy' means the written contract of or written
agreement for or effecting insurance, by whatever name called, and includes all
clauses, riders, endorsements, and papers attached thereto and a part thereof."
¶30. Therefore, we conclude that when § 27-5-114(2)(c), MCA, provides that
arbitration agreements in "insurance policies" are invalid and unenforceable, that
provision pertains to title insurance policies, as well as other types of insurance
coverage.
¶31. The Insurer contends that similar arbitration provisions have been upheld in
other jurisdictions, and cites Fleet Mortgage Corporation v. Lynts (E.D. Wis. 1995),
885 F. Supp. 1187, 1188-90. However, the issue in that case was simply whether a
lending institution was bound by the arbitration provision in a title insurance policy
when, in fact, it had only been provided with a closing letter and was not a party to
the policy. That case did not involve a statutory provision which invalidated
arbitration provisions in insurance policies.
¶32. The Insurer also contends that Youngs waived any objection to the arbitration
provision by not asserting that objection when the policy was issued in June 1994. In
support of that contention, they cite Imperial Savings Association v. Lewis (D. Utah
1990), 730 F. Supp. 1068. However, the issue in Imperial was not whether the
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arbitration provision in the insurer's policy was valid and enforceable, the issue was
whether the parties had in fact agreed to submit to arbitration in the first place.
Therefore, we find Imperial unpersuasive in support of the Insurer's contention that
its insured can waive the statutory protection provided by § 27-5-114(2)(c), MCA.
We conclude that Youngs properly asserted their rights pursuant to Montana's
statutory law when they moved for a protective order staying arbitration in a timely
manner after arbitration was demanded by the Insurer and the Title Company.
¶33. Because we conclude that the arbitration provision in Youngs' title insurance
policy was contrary to Montana's statutory law and, therefore, unenforceable, we
conclude that the District Court erred when it denied Youngs' motion to stay
arbitration and, therefore, erred when it granted summary judgment to the Insurer
and Title Company based on the allegation that Youngs had not cooperated in the
arbitration process.
¶34. We reverse the summary judgment order of the District Court and remand this
case to the District Court for further proceedings consistent with this opinion.
/S/ TERRY N. TRIEWEILER
We Concur:
/S/ JIM REGNIER
/S/ JAMES C. NELSON
/S/ WILLIAM E. HUNT, SR.
/S/ W. WILLIAM LEAPHART
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