Skip to main content
Untitled design (8)

Foreign Arbitration Clauses in Insurance Policies: Oregon Federal Court Enforces Clause—A Cautionary Tale for Domestic Businesses

A A A

Article

Retailers and product designers in the U.S. commonly require that product manufacturers add the retailer as an “additional insured” on the manufacturer’s liability policies. A major benefit for a retailer of being an “additional insured” is having a direct legal basis to compel the insurer to provide a defense, without having to litigate that issue, in the event of a lawsuit by an injured customer. But if the manufacturer is overseas, and uses a non-U.S. insurer, the retailer may not end up with anything like the benefit that they thought they bargained for, as demonstrated in a recent Oregon decision.

Summary of the Case
On April 9, 2021, United States District Court Judge Karen Immergut of the District of Oregon dismissed a U.S. designer’s suit against a manufacturer’s insurer, holding that a clause in the insurance policy requiring all disputes to be arbitrated before a particular arbitral body in China was enforceable, despite Oregon state regulatory policy to the contrary. JPaulJones L.P. v. Zurich General Insurance Company (China) Limited, 2021 WL 1341358 (D. Or. April 9, 2021).

Plaintiff JPaulJones (“JPJ”), a product design firm based in Texas, contracted with a manufacturer in China to build JPJ’s products. The manufacturer also agreed to include JPJ as an additional insured under its liability insurance policy, which was issued by Zurich General Insurance Company (China) (“Zurich China”). JPJ filed suit after Zurich China denied coverage for claims made against JPJ in several states, including Oregon. Judge Immergut granted Zurich China’s motion to dismiss based on the policy’s forum selection clause, that is, a clause requiring that the exclusive forum for dispute resolution was the specified Chinese arbitral institution.

Foreign Forum Selection Clauses Generally Enforced
Foreign forum selection clauses have long been enforceable, with a few exceptions, after the U.S. Supreme Court decisions in The Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972) and Carnival Cruise Lines v. Shute, 499 U.S. 585 (1991). Under the 2013 U.S. Supreme Court decision in Atlantic Marine Const. Co. v. U.S. Dist. Ct. for W. Dist. Of Texas, 571 U.S. 49, when a party seeks to enforce a foreign forum clause, courts analyze the clause under the doctrine of forum non conveniens. In application, the “practical result is that forum-selection clauses should control except in unusual cases.” Those unusual cases include instances where: (1) a clause’s inclusion in a contract was the product of fraud or overreaching, (2) enforcement would contravene a strong public policy of the forum in which suit is brought, or (3) trial in the contractual forum will be so gravely difficult and inconvenient that the litigant will for all practical purposes be deprived of his day in court.

Arguments Against Foreign Forum Clause in Insurance Policies
JPJ argued that the court should not enforce the forum selection clause here for two reasons: (1) the Oregon Supreme Court has found that these clauses, when in an insurance contract, violate the right to trial by jury, and are therefore against public policy; and (2) the ambiguity of the clause permitted resolution in Oregon state court. Notably, JPJ did not raise other potential defenses to an arbitration clause, such as fraud, duress, or unconsicionability.

JPJ’s assertion that a foreign arbitration clause was unenforceable in Oregon relied on the Oregon Supreme Court’s decision in Molodyh v. Truck Ins. Exch., 304 Or. 290 (1987), which held that a statutorily-mandatory venue provision in an insurance policy violated the Oregon Constitution’s guarantee to a trial by jury. Judge Immergut, however, was unpersuaded, noting that Molodyh applies only to statutory provisions that deprive a party of a right to a trial by jury. Because JPJ did not allege that any legislature mandated the inclusion of the forum selection-clause, the court found that JPJ and Zurich had voluntarily agreed to forgo a jury trial – despite the fact that JPJ had not bargained for the policy, at all!

JPJ also argued that Oregon has a strong public policy against mandatory arbitration provisions and foreign forum selection clauses in insurance contracts, pointing to a January 14, 2020 bulletin from the Oregon Department of Financial Regulation (“DFR”) stating DFR’s views that such provisions were forbidden under Molodyh, that DFR would not approve any policy forms containing such provisions, and that foreign forum selection clauses were an unfair trade practice under ORS 746.240. The court brushed this bulletin aside, noting that a plaintiff must point to a “statute or judicial decision” that clearly states the forum’s strong public policy, and that an agency bulletin did not meet this standard.

The court took a similarly dim view of JPJ’s argument that arbitration in Shanghai would be so difficult and inconvenient that JPJ would be effectively deprived of its day in court, noting that JPJ’s claims of difficulty were all conclusory. Finally, the court found that, although JPJ had identified some local interest in resolving the dispute in Oregon, this interest alone was not enough to outweigh Zurich’s interest in having the dispute resolved in China, especially because Zurich was a Chinese company that entered into the insurance policy with another Chinese company—JPJ was just an additional insured.

Why This Case Is Somewhat Unique
Although the result in this case may be surprising to some, it does not announce a new rule of law for policyholders in Oregon, and its impact will be limited by its factual context. Most importantly, ORS 742.018, which prohibits insurance contracts from requiring the contract to be construed under foreign law, was not in play, because the policy was not issued in Oregon. The insurance policy here was executed in China, and a Texas company was added as an additional insured. Beacause this case does not involve an insurance policy that was “delivered or issued for delivery” in Oregon as required under ORS Chapter 742, ORS 742.018 does not apply.

Implications for Policyholders
The more interesting aspect of the decision for Oregon policyholders is the short shrift the federal court gave to the DFR’s policy bulletin. Setting aside the question of whether the court was correct to do so, this decision shows that Oregon policyholders should not rely on anything short of an amendment to Oregon’s insurance code to protect them from being forced to arbitrate in a foreign forum.

It is also worth noting that the bulletin states, “The Oregon Supreme Court has found the use of pre-dispute mandatory arbitration clauses in insurance policies to be unconstitutional,” citing Molodyh. The federal court decision here, following other post-Molodyh rulings, rejected this broad reading of that case and found that it applies only to statutory provisions and not to private contracts.

Lessons for Companies Relying on Additional Insured Protection
The overall lesson from this decision for Oregon companies (and companies everywhere) is to continue to be vigilant when drafting and enforcing contracts with overseas vendors and partners. This is particularly true if the company’s risk management strategy relies on being an additional insured on other people’s insurance policies. Being added as an additional insured on a policy that was issued by a foreign insurer may lead to a similar result as in this case – eliminating the key benefits of being an additional insured. A better approach would be to include a provision in the contract with the manufacturer requiring that the manufacturer procure an insurance policy from a domestic insurer that provides the additional insured benefit.