A federal appellate court recently held, under Georgia law, that a credit life insurer could not compel arbitration based upon an arbitration provision in a loan agreement to which it was not a party. The majority opinion in Lawson v. Life of the South Ins. Co., 648 F.3d 1166 (11th Cir. 2011), held the facts did not support the insurer's attempt to compel arbitration under the loan agreement as a third-party beneficiary or based upon equitable estoppel. Of particular note is the concurring opinion by Judge Pryor which endorsed dicta from the Georgia Supreme Court's opinion in Love v. Money Tree, Inc., 614 S.E.2d 47 (Ga. 2004), over an express reading of O.C.G.A. § 9-9-2(c)(3), to declare all "insurance disputes" off limits for arbitration.
The Lawsons financed the purchase of a vehicle through a loan from the dealership. The loan agreement between the Lawsons and the dealership ("Loan Agreement") contained an arbitration provision which stated, in part, "[i]f any Dispute arises, either you or we may choose to have the Dispute resolved by binding arbitration."
The Loan Agreement gave the Lawsons the option to purchase credit life insurance through a one-time, up-front payment included in the total amount financed under the Loan Agreement. The Lawsons checked a box on the Loan Agreement to purchase the optional credit life insurance and obtained a separate credit life insurance policy with Life of the South Insurance Company ("Policy"). The Policy did not contain an arbitration provision.
The Policy stated that if the Lawsons paid off the loan early, they would be eligible for a refund of any remaining unearned premium paid for the credit life insurance. The Lawsons paid off the loan two-and-a-half years early, but Life of the South failed to refund the unearned amount of the premium paid by the Lawsons.
As a result of Life of the South's failure to pay the Lawsons the unearned premium, the Lawsons filed a nationwide class action against Life of the South, seeking contract and tort damages and injunctive relief. In response, Life of the South moved to compel arbitration based upon the arbitration provision in the Loan Agreement. The U.S. District Court for the Middle District of Georgia denied Life of the South's motion to compel arbitration on the ground that Georgia law prohibits arbitration of "insurance disputes." Lawson v. Life of the South Ins. Co., 2010 WL 1416551, at *4-6 (M.D. Ga. Mar. 31, 2010) (citing O.C.G.A. § 9-9-2(c)(3)).
The U.S. Court of Appeals for the Eleventh Circuit affirmed the order denying arbitration but for a different reason than the district court. The majority opinion concluded that Life of the South, as a non-signatory to the Loan Agreement, could not enforce the arbitration provision under any of the exceptions to the "rule of contract law . . . that one who is not a party to an agreement cannot enforce its terms against one who is a party." In a concurring opinion, Judge Pryor expressed his "doubt" over the majority's conclusion and stated he would deny arbitration based upon the same ground as the district court. The majority opinion can be reconciled with the facts of the case, but Judge Pryor's concurring opinion, and the reasoning of the district court, is flawed.
The Eleventh Circuit held that Life of the South was not a third-party beneficiary of the arbitration provision, which expressly limited the right to enforce it to "you" (the Lawsons) and "we" (the car dealership and assignees of its rights under the Loan Agreement). The court remarked, "Life of the South is neither a 'you' or a 'we.' Instead, in pronoun terms, Life of the South is an unmentioned 'it,' and the face of the arbitration clause does not show an intent to give 'it' the right to compel arbitration."
Life of the South argued in the alternative that equitable estoppel permitted it to enforce the arbitration provision in the Loan Agreement because the "Lawsons' claims arising from their credit life insurance policy agreement with it 'make reference to' and 'presume the existence of' the loan agreement containing the arbitration clause." The court recognized the Lawsons' complaint referred to the Loan Agreement several times and their claims depended on the existence of the Loan Agreement "because without it, and the Lawsons' obligation under it to pay off the loan, there would be no credit life insurance policy with Life of the South and no premium refund due because the loan was paid off early."
The Eleventh Circuit held that Life of the South's equitable estoppel argument was "not a bad argument, but . . . not a good enough one to prevail" because the Loan Agreement was "not the legal basis for the Lawsons' claims against Life of the South." Rather, the Lawsons' claims were based upon the provision in the Policy that required Life of the South to refund the unearned premium amount. As the court concluded, "the fact that the Lawsons' complaint makes reference to and presumes the existence of the loan agreement does not mean that the Lawsons' loan agreement with the dealership, or their obligations under that agreement, are the legal basis for their claims." Accordingly, the court held Life of the South could not enforce the arbitration provision in the Loan Agreement based upon equitable estoppel.
The majority opinion is in accord with the precedent on which it relies. In each of the cases cited by the majority, the legal basis for the plaintiffs' claims were the documents containing the arbitration provision. For instance, in AutoNation Fin. Svcs. Corp. v. Arain, 592 S.E.2d 96, 101 (Ga. App. 2003) (physical precedent only), a car buyer and the dealership entered into an installment contract containing an arbitration clause, through which the buyer financed a theft protection program with defendant AutoNation. Subsequently, the car buyer sued the dealership and AutoNation seeking to recover the finance charges paid under the installment contract for the theft protection program. The court granted the defendants' motion to compel arbitration based upon the arbitration provision in the installment contract because the "legal basis" for the buyer's claims was the installment agreement. In contrast, the "legal basis" for the Lawsons' claims were their rights under the Policy.
In his concurring opinion, Judge Pryor stated he would have denied arbitration based on the reasoning of the district court, which was that Georgia law precludes the arbitration of "disputes involving insurance." Georgia Code § 9-9-2(c)(3) states that an arbitration provision in "any contract of insurance" is unenforceable. In Love, 614 S.E.2d at 49-50, the Supreme Court of Georgia held that § 9-9-2(c)(3) was not preempted by the Federal Arbitration Act due to the McCarran-Ferguson Act. Although § 9-9-2(c)(3) precludes arbitration of "any contract of insurance," not "disputes involving insurance," the Court stated the McCarran-Ferguson Act "precludes the FAA from requiring the arbitration of disputes involving insurance."
Love, like Lawson, involved an insurer seeking to compel arbitration based upon an arbitration provision in a loan agreement executed as part of a transaction involving a separate insurance policy. But the decision in Love did not examine whether the arbitration provision in the loan agreement constituted an arbitration provision in a "contract of insurance." Instead, without any explanation, the Court ignored the express language of § 9-9-2(c)(3) and stated "disputes involving insurance" are not subject to arbitration. Thus, the statement that Georgia law precludes "arbitration of disputes involving insurance" is dicta. Judge Pryor and the district court improperly endorsed the dicta of Love over the express language of § 9-9-2(c)(3).
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