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Ganders Beware! Policy ADR Clauses Will Be Enforced Against Insureds and Insurers by Dismissal of Litigation

Businesses have been warned before about mandatory arbitration provisions proliferating in insurance policies, which require referral of coverage disputes to an arbitrator or arbitral panel and bar commencing civil lawsuits to resolve insurance coverage disputes. Other policies require the exhaustion of alternative dispute resolution (ADR) procedures, such as mediation, before a coverage action may commence. On July 17, a federal judge in the Northern District of California enforced such an ADR provision against an insurer that sued its policyholder for a declaratory judgment on coverage.

In the case Columbia Casualty Co. v. Cottage Health System, the insurer sued to recover more than $4 million spent settling claims related to a data breach involving the disclosure of patient information. The insured, Cottage Health, moved to dismiss the insurer’s complaint because the insurer failed to exhaust the policy’s ADR provision, which specified that “[a]ll disputes and differences between the Insured and the Insurer … shall be submitted to the alternative dispute resolution (ADR) process” and that if mediation is the chosen ADR procedure, “no … judicial proceeding shall be commenced until the mediation shall have been terminated and at least 60 days shall have elapsed from the date of termination …” (Emphasis added in court opinion.) The insurer argued that the insured’s conduct established that further mediation would be unavailing, and at any rate, that the suit should not be dismissed, but merely stayed, to allow the mediation process to conclude.

The court observed that the insurer made no argument that the ADR clause was unconscionable or unenforceable. (Indeed, as the drafter of the provision, the insurer would have been hard-pressed to pursue such an argument.) In a footnote, the court added that the insurer made no argument that it would suffer prejudice if its action were dismissed rather than stayed, such as by the running of the statute of limitations. Given the mandatory language of the ADR provision, the court concluded that the insurer’s action must be dismissed.

We are accustomed to seeing insurers invoke ADR provisions as grounds for the dismissal of policyholder-initiated coverage suits. Seldom to we see a plaintiff insurer thwarted by its own ADR clause. Cottage Health is a useful reminder that what’s good for the goose is also good for the gander.