A federal court in California held that the severability rule enunciated in Buckeye applies to a fraudulent inducement claim if the allegations of fraud directed at the transaction as a whole are identical to those directed against the arbitration agreement when an arbitration agreement is incorporated into the whole contract.

In Santana Row Hotel Partners, LP v. Zurich America Insurance Co., No. C 05-00198 JW, 2007 WL 4754772 (N.D. Cal., Sep. 13, 2007), Santana built and operated the Hotel Valencia. Santana enlisted the services of Gallagher to prepare an insurance proposal. Zurich was ultimately selected to provide the building insurance.

Subsequent to a fire which caused considerable damage to the hotel and delayed its opening, the parties became embroiled in a dispute over the damages. Some damages were paid, but Zurich disputed that Santana was entirely covered by the policy.

As a result, Santana filed suit against Zurich and Gallagher. Zurich filed cross claims against Gallagher, who in turn, moved to compel arbitration of Zurich's cross claims.

The Court had previously denied Gallagher's motion to compel arbitration, based on Zurich's inadequate allegation that the agreement was fraudulently induced. The Court gave Zurich leave to file an amended cross claim to sufficiently plead its claim.

Upon review of Zurich's renewed motion, the Court determined that the fraud claim must be arbitrated.

First, the substance of Zurich's fraudulent inducement claim indicated to the Court that the issue of severability presented by Buckeye "ha[d] not been avoided." See Buckeye Check Cashing v. Cardegna, 546 U.S. 440 (2006). The arbitration agreement here was not an entirely separate contract, but part of the whole agreement between the parties. Second, the fraud claim as to the arbitration agreement was "identical to the underlying fraud dispute that the parties agreed would be subject to arbitration."

Accordingly, the Court held that Zurich's entire fraud claim was subject to arbitration.