The Supreme Court of South Carolina recently determined that non-signatory insureds could not be compelled to arbitrate their claims under an arbitration clause in an agency agreement where the insureds did not obtain a direct benefit from that agreement.
In Wilson v. Willis, the court considered 14 lawsuits that had been filed against an agent, the insurance broker who hired her, their insurance agency (Southern Risk Insurance), and six insurers for which their office sold policies. Twelve of the suits were filed by insureds who were customers of the agent, and two lawsuits were filed by other insurance agents (collectively, petitioners) who were in competition with the defendant agent and Southern Risk Insurance. The suits asserted various causes of action, including violations of the Unfair Trade Practices Act, and claimed that the broker, Southern Risk Insurance, and the insurers failed to prevent their agent from defrauding the insureds and stifling competition in the local insurance market.
Approximately one year into the lawsuit, three of the insurers filed motions to compel arbitration and dismiss the suits. Those insurers argued that a 2010 agency agreement they had signed with Southern Risk Insurance contained an arbitration provision and that petitioners were third-party beneficiaries to that agreement. The insurers argued that the petitioners were bound by the arbitration clause, which required arbitration of “any dispute or disagreement [that arose] in connection with the interpretation of th[e] [a]greement, its performance or nonperformance, its termination, the figures and calculations used or any nonpayment of accounts,” and were equitably estopped from asserting their non-signatory status, because any claims asserted by petitioners were based upon duties that would not exist but for the 2010 agency agreement.
The trial court denied the motion to compel arbitration, and the court of appeals reversed, finding that the petitioners were equitably estopped from asserting their non-signatory status. In reversing, the court of appeals relied on the direct benefits test it had articulated in Pearson v. Hilton Head Hospital. Under that test, a non-signatory to an agreement containing an arbitration clause will be bound by that clause if the non-signatory receives a direct benefit from the agreement that contains the clause. In other words, under the direct benefits test, a non-signatory cannot assert his or her non-signatory status under an agreement containing an arbitration clause while simultaneously maintaining that other aspects of that agreement apply to his or her benefit. The court of appeals held that, because the petitioners’ claims arose out of duties created by the 2010 agency agreement and the relationship the agreement created between the insurers and Southern Risk Insurance, they were equitably estopped from asserting their non-signatory status.
On de novo review, the Supreme Court of South Carolina reversed, finding that the arbitration clause was not enforceable against the petitioners. The court emphasized the distinction between direct benefits and indirect benefits, explaining that a direct benefit is one that flows directly from the agreement containing the arbitration clause. On the other hand, an indirect benefit is one where a non-signatory exploits the contractual relationship created by the agreement, rather than the agreement itself. The court noted that the petitioners were unaware of the 2010 agency agreement until the insurers filed their motions to compel arbitration, the petitioners had not asserted a claim for breach of contract, and there was no evidence that the petitioners had knowingly exploited or received a direct benefit from the agency agreement itself. Therefore, any benefit the petitioners gained from the agency agreement was indirect, and they could not be compelled to arbitrate their claims under a theory of equitable estoppel under South Carolina law.
As state courts continue to grapple with the circumstances in which an arbitration clause may be enforced against a non-signatory, insurers seeking to enforce arbitration clauses in such a manner should take extra precaution to make the intention to include non-signatories clear, such as including explicit language in agency agreements that the arbitration clause applies to all third-party beneficiaries of the agreement and informing the insureds that any claims they have related to their policies may be subject to arbitration pursuant to an agency agreement.