Dick’s Sporting Goods (“DSG”) sued a Chinese insurer, PICC Property and Casualty Company Limited Suzhou Branch (“PICC”), seeking coverage under a products liability insurance policy for personal injury claims arising out of a burst exercise ball. In Dick’s Sporting Goods, Inc. v. PICC Prop. & Cas. Co. Ltd. Suzhou Branch, No. 2:16-cv-01635-DSC-RCM (W.D. Pa. July 28, 2017), a federal magistrate judge in Pennsylvania found that an insurance policy’s forum-selection clause required DSG to assert its claims in a Chinese court and, accordingly, recommended that DSG’s coverage claims be dismissed.
Vendor agreements and similar contracts often require vendors to procure insurance to protect the buyer from product liability. This opinion highlights the importance for U.S. companies to ensure that any such vendors, manufacturers, suppliers, or other business partners in the supply chain procure insurance issued in the U.S. and governed by U.S. law, and that there is no foreign forum-selection clause.
In this case, a customer bought a stability ball manufactured by Dalps & Leisure Products Supply Corporation (“Dalps”) from a DSG retail store in the U.S. While the customer was using the stability ball, it burst, allegedly causing the customer to hit his head and lose consciousness. The customer sued DSG for negligence, strict liability, and breach of warranty, among other claims in Pennsylvania state court (the “underlying suit”).
PICC had issued an insurance policy listing Dalps as the named insured and identifying DSG as an additional insured. The policy covered claims arising from “bodily injury” caused by Dalps’ stability balls. PICC failed to respond to DSG’s request for coverage for the underlying suit. DSG sued PICC in federal court in Pennsylvania, seeking a declaration that PICC had a duty to defend and a duty indemnify DSG in the underlying suit and asserting that PICC breached such obligations. PICC moved to dismiss, contending that a valid forum-selection clause in the insurance policy required DSG to bring the underlying suit in China.
DSG advanced three arguments in response to PICC’s motion. First, DSG argued that the forum-selection clause did not apply to DSG because the clause only applied to the “the insured”, and the policy denoted DSG as an “additional insured” rather than “the insured.” Second, the forum-selection clause was invalid and unenforceable against DSG because DSG did not negotiate the clause’s contents and was unaware of the clause prior to the lawsuit, and because PICC’s conduct violated unfair insurance practice laws. Third, in any event, PICC waived the forum-selection clause by failing to negotiate with DSG, which DSG argued PICC was required to do under the policy.
The magistrate judge rejected DSG’s arguments. While the judge accepted that DSG was an “additional insured” under the policy, as an additional insured, DSG was a third-party beneficiary as a matter of law and all of the provisions in the insurance contract applied to DSG, including the forum-selection clause. In addition, because DSG’s claims against PICC depended on the policy’s provisions, the fact that DSG did not negotiate or know about the forum-selection clause did not affect the clause’s enforceability. Further, applying Pennsylvania law on insurance policy construction, the judge found that there was no requirement that negotiations occur for the forum-selection clause to apply.
The court elaborated that, under federal law, forum-selection clauses are presumed valid unless the resisting party carries its burden to show that enforcing the clause is unreasonable because the clause: (1) was procured through fraud or overreaching; (2) would contravene a strong public policy of the forum where the suit is brought; and (3) prescribes a forum that is seriously inconvenient for trial. The court found that DSG did not proffer any evidence suggesting that the forum-selection clause was the product of fraud or overreaching or that it violated a strong public policy, and that DSG failed to meet its burden to show that China would be seriously inconvenient for trial.
This result shows that to protect U.S. retailers from having to litigate a potential lawsuit in a foreign jurisdiction, they should require any insurance procured by their vendors, manufacturers, supplier, or other business partners to be issued in the U.S. and be governed by U.S. law, and to ensure that it does not contain a foreign forum-selection clause.
In the event that a cross-border insurance coverage dispute arises under a policy containing a foreign forum-selection clause, a U.S.-based insured may still be able to avoid being subject to suit in a foreign country. For instance, if a policyholder establishes personal jurisdiction in a U.S. court, it may have various arguments at its disposal to show that the forum-selection clause is invalid or unenforceable by sufficiently proffering evidence that the clause was procured through overreaching, contravenes a strong public policy of the forum where the action is brought, and prescribes a forum that is seriously inconvenient for trial. Other arguments may be available based on the particular facts of the case and the provisions of the insurance policy.
Retaining experienced coverage counsel to assist in drafting insurance and indemnification requirements in agreements with vendors, suppliers, manufacturers and business partners can help avoid some of the pitfalls DSG faced in this case. In addition, experienced insurance coverage litigation counsel should be consulted to assist in navigating cross-border insurance coverage claims brought by insureds, their indemnitees, additional insureds, or under a company’s business partners’ insurance to put the policyholder is the best position to maximize its insurance assets.