In its recent decision in S Development Co. v. Commercial Indus. Bldg. Owners Alliance, 2014 U.S. Dist. LEXIS 26028 (D. Ariz. Feb. 27, 2014) the United States District Court for the District of Arizona addressed whether an arbitration clause in a commercial property policy was enforceable.  The commercial property policy at issue was issued by Ironshore Insurance Ltd and covered residential property located in Phoenix, Arizona.  During the Ironshore policy period, termite damage was discovered at the subject insured locations and a claim was timely tendered to Ironshore.  After the matter was removed to federal court, Ironshore moved to stay the proceedings and compel arbitration under the arbitration clause in the Ironshore Policy.   In response, S Development argued that the arbitration clause should not be enforced on several grounds including a lack of notice of the clause and because the clause was unenforceable and unconscionable under Arizona law. 

The coverage at issue was procured through the insured’s joining of a California-based insurance purchasing group known as Commercial Industrial Building Owners Alliance (“CIBA”).  CIBA procures insurance for the members of the purchasing group and procured coverage for the subject location under policies issued by, among others, Ironshore.   CIBA is the named insured on the Ironshore Policy along with any associate entity to whom CIBA has issued an Evidence of Property Insurance.  On March 4, 2008, CIBA issued Evidences of Property Insurance to S Development for coverage effective March 31, 2008 – March 31, 2009. 

S Development argued that the arbitration clause should not be enforced as they did not receive notice of the clause and, therefore, did not agree to be bound by it.  S Development pointed to the fact that, among other things, the Evidences of Insurance issued by CIBA did not mention the arbitration clause nor did it mention Ironshore.  S Development likewise claimed that they did not realize that CIBA insurance included a number of policies instead of a single plan.  The court disposed of this arguement by holding that S Development could not claim unfamiliarity with the nuance of each policy to avoid application of the arbitration clause and yet be entitled to the coverage afforded by the various policies.

In addressing whether enforcement of the arbitration clause was barred under Arizona law, S Development argued, among other things, that the New York choice of law provision in the Ironshore Policy was void under Ariz. Rev. Stat. §20-115 which provides that no policy delivered or issued for delivery in this state and covering a subject located in the state shall be subject to a condition requiring the application of the law of any other state. Ariz. Rev. Stat. § 20-115(A).  As the policy in question was issued to CIBA in California, the court quickly disposed of this argument.   Moreover, the court alternatively noted that even if the statute did void the provision, it would not impact the validity of the arbitration clause.  The court likewise found unavailing the arguments advanced by S Development that enforcement of the arbitration clause would violate their reasonable expectations as none of the limited set of circumstances where the reasonable expectations doctrine might apply existed.

Lastly, the court addressed the argument that the arbitration clause was unconscionable because the clause required that arbitration take place in London, England.  In support of its position, S Development argued that arbitrating in England would cause severe financial harm and be unduly oppressive.  The court began by noting that the party seeking to invalidate an arbitration agreement as being prohibitively expensive bears the burden of showing the likelihood of incurring excessive costs.  As S Development provided no such evidence, but only conclusory statements, the court held that such statements were insufficient to bar enforcement of the arbitration clause.  Consequently, the court granted Ironshore’s Motion to Compel Arbitration and Stay Proceedings.