This case discusses the power of an industry-wide arbitrator to change the terms of the agreement by which its members handle claims.

In this consolidated appeal two insurance companies had paid claims under homeowners’ policies for damage caused to their insureds’ homes by Defendant’s plumbing products. They filed subrogation cases against it. The parties were all signatories to the property subrogation agreement of Arbitration Forums, an outfit that arbitrates property claims. But after they signed it AF changed the agreement to exclude products-liability claims. Defendant moved to compel arbitration in both cases, lost both motions, and appeals.

The Court of Appeals reverses. The insurers relied on language in the agreement allowing AF to make rules and regulations covering arbitrations. But the court inteprets that, based on its reading of the structure of the agreement, as procedural. Exclusions of products actions was “a significant, substantive change,” not a mere procedural change. AF didn’t have the power to make a substantive change. The court rejects an Indiana case (also involving this defendant, which has been fighting this battle around the country for a few years now) that read the agreement differently.

The court also relies on 12-3006, making agreements to arbitrate future claims “enforceable and irrevocable,” which it says happens “upon the arising of the controversy, unless the parties agree otherwise.”

AF is an insurance-industry entity with insurance-industry attitudes, which explains why it figured to change a contract unilaterally by sending out a notice.  But these plaintiffs have that same attitude and as far as we know never objected to the change; they continue to be among the most frequent users of the agreement’s arbitration procedures. It would be interesting to know what discussions, if any, they had with AF about the change at the time.

(Opinion: Allstate v. Watts)