Allied World Surplus Lines Insurance Company v. Blue Cross and Blue Shield of South Carolina

Addressing a contractual requirement to exhaust Alternative Dispute Resolution (ADR) prior to commencing litigation, the United States District Court for the District of South Carolina chose to forge its own path, rejecting reasoning adopted by other courts in this Circuit relative to a Rule 12(b)(1)motion.

In Allied World Surplus Lines Insurance Company v. Blue Cross and Blue Shield of South Carolina (August 3, 2017), Allied sought a declaratory judgment determining its obligations pursuant to an errors and omissions policy as well as a directors and officers policy sold to BCBS. The policies included ADR provisions requiring the parties to mediate or arbitrate disputes before commencing litigation. Arguing the mediation requirement had not been fulfilled and therefore the underlying claims were not ripe for judicial determination, BCBS challenged the court’s jurisdiction, moving for dismissal of the action pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure. Alternatively, BCBS moved the court to dismiss or stay the action pursuant to the court’s discretionary authority.

The parties engaged in mediation, but had differing positions as to whether the ADR provisions of the policies had been satisfied. While the parties waived strict compliance with the policy requirements that AAA administer the mediation, because they agreed to AAA rules in the insurance agreements, the court applied those rules to determine whether mediation had concluded. AAA rules provide mediation terminates by the execution of a settlement agreement, a written or verbal declaration of the mediator that additional efforts would not be helpful, a written or verbal declaration by all parties that mediation has terminated or the lack of communication between the mediator and any party for a period of 21 days following the end of the mediation conference.

The parties agreed the mediator did not declare the mediation to be at an impasse. They disputed, however, whether the mediator had communicated with any party within 21 days of the last mediation. Because the mediator had not declared mediation to be terminated, the Court found any ambiguity regarding communication with the parties should be resolved in favor of finding mediation had not ended. The court applied a broad interpretation of the AAA rules relative to communication with the mediator; the communication need not be between the mediator and all parties nor must the communication be substantively related to the precise issues mediated. Rejecting Allied’s various arguments in support of its position that the mediation requirement had been met, the court determined otherwise and turned to the question of whether BCBS’s motion to dismiss should be considered under Rule 12(b)(1).

Ripeness is a question of subject matter jurisdiction; a case is proper for consideration when the issues are legal and the controversy is not dependent on future uncertainties. Where mediation is a condition precedent to the commencement of litigation and it has not been completed, the underlying controversy remains dependent on such uncertainties as whether the required mediation will occur and, if so, whether it will resolve all or some of the underlying claims.

Applying the balance of fitness of the issues for judicial determination against hardship to the parties if judicial review is withheld, the court concluded where a condition precedent for mediation remains unsatisfied, but may be satisfied in the future, the merits of the underlying case are not ripe for judicial review. If a dispute is not ripe, dismissal is appropriate under Rule 12(b)(1). Therefore, the court granted BCBS’s motion to dismiss.

Notably, some courts in this Circuit have found a Rule 12(b)(1) challenge based upon the failure to comply with a contractual requirement of mediation conflates the concepts of subject matter jurisdiction and condition precedent to litigation. Those courts have consequently determined that dismissal is properly considered pursuant to Rule 12(b)(6), rather than 12(b)(1). This court rejects such reasoning, choosing instead to adhere to precedent establishing ripeness as a question of subject matter jurisdiction, and if a dispute is not ripe, it must be dismissed for lack of jurisdiction. Because the court found it lacked subject matter jurisdiction in this case, it did not consider BCBS’s alternative arguments seeking a stay of the pending action or abstention from hearing it. Rather, finding a lack of subject matter jurisdiction, dismissal was the only appropriate remedy.