LA Schools’ $200 Million Claim on Insurers Will Go to Court

LOS ANGELES (CN) — The $200 million lawsuit filed by Los Angeles Unified School District may go to trial, rather than arbitration, against at least one of 27 insurance companies the district accused of not paying claims from the Miramonte sex-abuse scandal, a state appeals court ruled.

Because the district’s policy with excess insurer Safety National Casualty Corp. did not specifically call for following the Federal Arbitration Act’s procedural rules, California procedure applies, the Second District Court of Appeal ruled Wednesday.

Those procedures include allowing a judge to refuse arbitration when there is “a possibility of conflicting rulings on a common issue of law or fact,” as would be likely in 27 separate arbitrations, the appeals court said.

“Consequently, where, as here, the parties do not ‘expressly designate that any arbitration proceeding should move forward under the FAA’s procedural provisions rather than under state procedural law,’ California procedures necessarily apply,” Justice Elizabeth A. Grimes wrote, citing the 2005 California Supreme Court ruling in Cronus Investments Inc. v. Concierge Services.

The tangled litigation arose out of the discovery in 2012 that former third-grade teacher Mark Berndt had sexually abused 23 children, ages 7 to 10, at Miramonte Elementary School. Parents sued the district, claiming that Berndt, who is serving 25 years in prison, and another teacher actually molested “hundreds of students … for decades,” according to the ruling in Los Angeles Unified School District v. Safety National Casualty Corp.

The school district paid more than $200 million in damages and defense costs. But when its many insurers refused to cover the claims, it sued them in 2015, for refusing coverage under more than 100 policies spanning the years 1975 to 2012.

In April this year, it brought a similar suit seeking $40 million from seven insurers that refused to cover claims involving third-grade teacher Paul Chapel. He molested 13 students at Telfair Elementary School, where he taught from 1998 until he was fired in April 2011; he also is serving a 25-year sentence.

The issue on appeal in the Miramonte case concerned the application of the powerful Federal Arbitration Act, which requires courts to order arbitration when a contract calls for it, and which the U.S. Supreme Court has often ruled trumps many state laws and rulings.

But as Grimes pointed out in her ruling Wednesday, while the federal act’s substantive support for arbitration supersedes state laws, its procedural rules on how arbitration should be carried out apply only to federal courts.

Unless a contract, such as an insurance policy, specifically requires using Federal Arbitration Act procedures, state laws apply.

The federal act applies to the Safety National Casualty policy with the school district because the two are in different states, and the policy does not say anything about which arbitration laws to use.

“In this case, however, there is no agreement to abide by state rules, and no agreement to abide by FAA procedural rules. Instead the agreement is completely silent, with no terms mentioning or alluding to the FAA, California law, or any other state law or rules of procedure,” Grimes wrote for the unanimous three-judge panel.

They found that the trial court judge was correct to apply California Code of Civil Procedure 1281.2(c). That law “allows a court to refuse to enforce an agreement to arbitrate,” if it decides that a party to the agreement also is involved in a related court proceeding “and there is a possibility of conflicting rulings on a common issue of law or fact.”

In this case, that possibility is great. The district’s lawsuit “arises out of each insurer’s refusal to defend or indemnify against the very same underlying claims, and further arises in the context of plaintiff’s claim, against all the insurers, that the Miramonte litigation constituted a single occurrence under the policies.”

The complexity and potential confusion in the case may be reflected in the fact that of all the 27 insurers, only Safety National sought arbitration.

The district’s attorney Sean Andrade, with Andrade Gonzalez, said in an email: “Safety National was the only insurer that tried to avoid our lawsuit by compelling arbitration. We are pleased that the Court of Appeal affirmed the trial court’s ruling so we can move forward in the school district’s recovery efforts against all insurers.”

The appellate attorney for Safety National, Paul Killion with Duane Morris in San Francisco, did not respond to an email and phone call about the case.

Grimes was joined on the panel of Division Eight of the Second Appellate District by Presiding Justice Patricia Bigelow and LA Superior Court Judge Douglas Sortino, sitting by designation.

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