WHICH REINSURANCE DISPUTES ARE COVERED
BY ARBITRATION CLAUSES?
By
Robert M. Hall
[Robert M. Hall is
of counsel in the Washington D.C. office of Piper Marbury Rudnick &
Wolfe. He is former insurance and
reinsurance company executive and acts as an insurance consultant as well as an
arbitrator and mediator of insurance and reinsurance disputes. The views expressed in this article are
those of the author and do not represent those of Piper Marbury Rudnick &
Wolfe or its clients. Copyright 2000 by
the author. Questions or comments about
this article may be addressed to the author at robertmhall@erols.com.]
Introduction
While arbitration clauses are often considered standard or
“boilerplate” provisions in reinsurance contracts, there are many variations
used in the marketplace. For instance,
the Contract Wording Reference Book compiled by the Brokers & Reinsurers
Market Association contains eighteen different arbitration clauses. The variety in scope of the many arbitration
clauses used in the industry may produce unexpected gaps in the types of
disputes which are subject to arbitration.
The purpose of this article is explore reinsurance case law in disputes
between solvent companies[1]
to determine the arbitrability of specific disputes under specific contractual
language.
Presumption in
Favor of Arbitration
The Federal Arbitration Act[2]
(“FAA”) evinces a strong policy position in favor of arbitrations. For instance, the Seventh Circuit observed
in Houston General Ins. Co. v. Realex Group,[3]
that the FAA:
[E]stablishes
a strong national policy favoring arbitration whenever the parties opt for that
method of dispute resolution. . . . The
Supreme Court has directed that all doubts about arbitrability of a given
dispute are to be construed in favor of arbitration [citation omitted]. . . .
We have consistently adhered to that position, insisting that arbitration
should not be denied “unless it can be said with positive assurance that an
arbitration clause is not susceptible of an interpretation which would cover
the dispute at issue . . . .”[citation omitted].[4]
Notwithstanding this
policy, a number of reinsurance disputes have been found to be outside the
scope of arbitration clauses.
Non-Arbitrable
Disputes
Arbitrability of alleged violations of the Racketeer Influenced and
Corrupt Organizations (“RICO”) Act was the issue in Washburn v. Societe
Commercial de Reassurance.[5] The arbitration clause stated: “Should any
difference of opinion arise between the Reinsurer and [Reserve] which cannot be
resolved in the normal course of business with respect to the interpretation of
this Agreement or the performance of the respective obligations of the parties
under this Agreement, the difference shall be submitted . . . .” The receiver of Reserve, who opposed
arbitration, alleged a broad conspiracy by which the Reserve ceded profitable
business to the reinsurer which retroceded it to an affiliate of Reserve. The affiliate then paid the premiums to a
corporation owned by the officers and directors of Reserve which paid the
premiums to the officers and directors as dividends and loans.
The Washburn court ruled that the alleged RICO violations were
not arbitrable:
The
litigation does not involve a controversy arising under the [reinsurance]
agreement itself, but rather a conspiracy in which the conspirators used the
reinsurance agreement, a retrocession agreement, a guaranty agreement and
several other devices involving [many parties], to drive Reserve further into
insolvency . . . . In short, the central allegation of this litigation does not
involve an issue “with respect to the interpretation of this Agreement or the
performance of the respective obligations of the parties under this Agreement”
as the arbitration agreement requires.[6]
First National Life Ins. Co. v. California Pacific Life Ins. Co.,[7]
involved a transfer of a book of business pursuant to an assumption and
reinsurance agreement which required “arbitration of all disputes arising out
of the coverage under these transferred policies.”[8] The court found that the dispute was not
arbitrable since the party seeking arbitration did not demonstrate that the
policy in question was a transferred policy.
The arbitration clause in Phoenix Mutual Life Ins. Co. v. North
American Co. for Life and Heath Ins.[9]
stated that “[a]ll disputes and differences upon which an amicable understanding
cannot be reached are to be decided by arbitration.”[10] The issue was whether one of the law firms
involved in the controversy was disqualified from representing a party due to a
conflict of interest. The court found
that this dispute was not contemplated by the arbitration clause: “Not all
‘disputes’ and ‘differences’ in the world can fairly be viewed as arbitrable
because of the treaties’ mandate, but only those relating to the parties’
duties to each other under the reinsurance treaties themselves.”[11]
The court confirmed this through other language in the arbitration clause that
has no relation to a conflict of interest by counsel e.g. interpretation based on custom and practice
of the industry and executive officers of life insurance companies as
arbitrators.
Application of General
Security Assur. Corp. of N.Y.,[12]
involved a reinsurance contract with an arbitration clause which stated:
“Should an irreconcilable difference of opinion arise as to the interpretation
of this agreement, it is hereby mutually agreed that such difference shall be
submitted to arbitration.”[13]
The issue was performance by the cedent of its contractual obligation to
properly investigate claims and report them to the reinsurer. Taking a very literal view of the
arbitration clause language, the court ruled that the dispute was not arbitrable:
“The controversy here related deals only with the subject of performance or
non-performance of the agreement and not the interpretation of the language of
the agreement.”[14]
Mixed Results
A case producing mixed results on the arbitrability question is Mutual
Benefit Life Ins. Co. v. Zimmerman.[15] This is factually complicated case involving
the consolidation of four actions and multiple parties, some of which were
parties to a reinsurance pool management agreement (“Management
Agreement”). The Management Agreement
contained an arbitration clause stating that “any dispute or difference
hereafter arising with reference to the interpretation, application or other
effect of this Agreement or any part hereof, . . . shall be referred to a Board
of Arbitration. . . .”[16]
Initially, the Mutual Benefit court found the arbitration clause
to be a narrow one since it does not apply to any dispute but only those which
arise under the Management Agreement.[17]
Second, the court found that alleged RICO violations were not within the
arbitration clause but rather involved a complex scheme of which the Management
Agreement was a peripheral part. Next, the court ruled that fraud and
conspiracy claims against certain defendants were not arbitrable since these
defendants were not signatories to the Management Agreement.
Nonetheless, the court found that a charge of breach of common law
fiduciary duties against the principal of the pool manager was arbitrable:
“Although the Management Agreement does not identify Zimmerman’s fiduciary
duties as managing agent of the 1988 Pool, without the Management Agreement
Zimmerman would not have a fiduciary relationship. . . . [T]he allegations have
reference to the interpretation, application or effect of [the Management
Agreement].”[18] However, a charge of tortious interference
with fiduciary duties was not arbitrable since this charge focused on
individuals who were not parties to the Management Agreement.
The Mutual Benefit court found non-arbitrable a series of breach
of contract and breach of duty of fair dealing and good faith claims as being
based on a separate contract without an arbitration clause. The court rejected the argument that defenses
related to the Management Agreement were sufficient to encompass these claims
noting that the arbitration clause applies to causes of action under the
Management Agreement, not defenses.
Finally, the court rejected the arbitrability of certain counterclaims
by defendants who were not parties to the Management Agreement and which did
not involve interpretation or performance of such agreement.
The court in Universal Marine Ins. Co. v. Beacon Ins. Co.[19]
addressed a dispute involving two arbitration clauses, one of which provided
for arbitration “[i]n the event of any irreconcilable dispute between the
Company and the Reinsurer in connection with the Agreement.” The other stated that “[s]hould an irreconcilable
difference of opinion or dispute arise between the parties to this Agreement as
to the interpretation of this Agreement, or transactions with respect to this
agreement, such difference or dispute” shall be submitted to arbitration.[20] The court held the arbitration clauses
sufficiently broad to cover fraud in the inducement to contract generally but
that RICO claims are not arbitrable. As
to the argument that this holding would result in piecemeal litigation, the
court replied: “It is correct that arbitration will result in piecemeal
adjudication of the litigation, as all of the claims are not arbitrable. That untoward result, however, is the result
of the parties’ agreement to arbitrate.”[21]
Arbitrable
Disputes
Life of America Ins. Co. v. Aetna Life Ins. Co.[22] involved an arbitration clause which stated:
“[I]n the event that any dispute arises by the parties hereto as to the rights
or liabilities incident to this Agreement, the same shall be settled by
arbitration . . . .”[23] The reinsurer sought to avoid arbitration on
the basis that an arbitration panel was unable to grant treble damages pursuant
to the Texas Deceptive Trade Practices Act.
The court ruled that the dispute was arbitrable stating:
Were
we to deny arbitration on the assumption that an arbitrator was unable to award
treble damages, we would be deciding prematurely the propriety of Texas treble
damages and their availability in this arbitration. We refuse at this juncture to predict whether actual damages
should be awarded in this case.
Furthermore, we expressly pretermit any ruling on the propriety of
awarding treble damages in this arbitration.[24]
Whether the reinsurance agreement had terminated prior to the loss was
the issue in Houston General Ins. Co. v. Realex Group, N.V.[25] The arbitration clause required arbitration
“if any dispute shall arise between the Company and the Underwriter(s) with reference
to the interpretation of this Agreement or their rights with respect to any
transaction involved, . . .”[26]
The court ruled in favor of arbitration stating: “The disagreement is whether, under the terms and the operative
facts, [the reinsurance] agreement has run its course and expired. That is an arbitrable issue.”[27]
The arbitration clause in Schacht v. Beacon Ins. Co.[28]
required arbitration “[s]hould any difference of opinion arise between the
Reinsurer and the Company which cannot be resolved in the normal course of
business with respect to the interpretation of this Agreement or the
performance of the respective obligations of the parties under this Agreement .
. . .”[29] The reinsurer alleged that the cedent agreed
to pay certain premium as a condition precedent to coverage and that it was
fraudulently induced to enter the reinsurance contract. The court stated that it was for a court to
decide if a party was fraudulently induced to enter into the arbitration clause
itself, but in this case the allegation ran to the entire contract and, thus,
was arbitrable. The court likewise
rejected the claim that the arbitration clause was not sufficiently broad to
cover enforceability of the contract.
Finally, the court rejected the argument that the payment of premium as
a condition precedent was not “in the normal course of business” under the
arbitration clause.
NECA v. National Union Fire Ins. Co.[30] involved an arbitration clause which stated
that “[a]ll disputes or differences arising out of the interpretation of this
Agreement shall be submitted to” arbitration.[31] The reinsurer sought: (1) to recover against
the cedent for negligence, bad faith and breach of contract in not settling and
ultimately paying a claim pursuant to a judgement; (2) to avoid paying a fine
based on delayed claim payment; (3) to recover sums drawn down on a letter of
credit; and (4) to recover for breach of duty in attempting to establish a
competing reinsurance program. The court found that all of these claims were
encompassed within the arbitration clause since the reinsurance agreement had
to be interpreted in order to determine the viability of the reinsurer’s
allegations.
The arbitration clause in Ohio Reinsurance Corp. v. British National
Ins. Co.[32]
called for arbitration “[i]n the event of any dispute at any time arising out
of or in any way connected with or relating to the Agreement.”[33]
The American cedent sought to reform the reinsurance contract concerning the
amount of casualty business to be ceded.
The reinsurer resisted arbitration since the contract was governed by
English law which did not allow arbitrators to reform contracts. The court ruled the dispute arbitrable since
the FAA requires courts to enforce agreements to arbitrate.
In Schacht v. Hartford Ins. Co.[34]
arbitration was required for “any dispute arising out of this contract.”[35]
A reinsurer charged that other members of the pool and their parent, Hartford,
fraudulently concealed and misrepresented material facts about the transaction
and committed RICO violations. In an
earlier decision, the court compelled arbitration and the reinsurer moved for
reconsideration on the basis that Hartford was not a party to the
contract. The court confirmed its earlier
ruling stating that arbitration can be compelled with respect to a
non-signatory when the non-signatory is the parent of the signatory, the claims
against the parent and subsidiaries are identical and the dispute is otherwise
arbitrable.
Claims of fraudulent inducement and lack of timely reporting were
involved in St. Paul Fire & Marine Ins. Co. v. Employers Reinsurance
Corp.[36] The reinsurance contract required that “any
dispute arising out of this Agreement shall be submitted to the decision of a
board of arbitration . . . .”[37] The cedent conceded that the lack of timely
notice allegation was arbitrable but contended that fraudulent inducement did
not arise out of the reinsurance contract.
The court found that the arbitration clause did cover fraudulent
inducement as long as the inducement applied to the contract as a whole, rather
than to the arbitration clause in particular.
Certain Underwriters at
Lloyd’s London v. Colonial Penn Ins. Co.[38]
was a motion to compel arbitration by the primary company against a
retrocessionaire. Colonial Penn ceded
to Mutual Fire, Marine which retroceded to Certain Underwriters. Mutual Fire, Marine assigned its rights
under the retrocessional agreement to Colonial Penn which sought arbitration
under a clause of the retrocessional agreement which called for arbitration “if
any dispute shall arise between the parties to this agreement, either before or
after its termination, with reference to the interpretation of this agreement
or the rights of either party with respect to any transactions under this
agreement . . . .”[39] The court compelled arbitration rejecting
the retrocessionaires’ arguments that Colonial Penn was not a party to the
retrocessional agreement and that the assignment of rights by Mutual Fire,
Marine did not encompass the right to arbitrate with the retrocessionaires.
Thirty four reinsurance treaties were involved in Meadows Indemnity
Co. Ltd. v. Baccala & Shoop Ins. Ser.[40]
Thirty-two of the contracts stated that “any dispute arising out of this
contract shall be submitted to the decision of a board of arbitration . . . .”
and the remainder provided that “[i]f any dispute shall arise between the
reinsured and the reinsurer, . . . with reference to the interpretation of this
contact, or the rights of either party with respect to any transactions under
this contract, the dispute shall be referred . . . .”[41]
A reinsurer made various allegations against the members of a reinsurance pool
and its manager and took the position that certain of its allegations (fraud,
RICO and civil conspiracy) were not within the scope of the arbitration clause. Furthermore, the reinsurer argued that fraud
was not arbitrable under the Convention on the Recognition and Enforcement of
Foreign Arbitral Awards (“Convention”) since fraud was not arbitrable in
Guernsy, the reinsurer’s domicile. The
court ruled that fraud claims were arbitrable under the Convention which used
an international standard for arbitrability of issues rather than the standard
of one signatory. In any case, any
ruling on the fraud claim would be enforced in the United States where the
cedednts were located. Noting that any
ambiguity in the language of the arbitration clause should be resolved in favor
of arbitration, the court ruled that the reinsurer’s claims were encompassed by
the arbitration clauses.
Reinsurance coverage for a malicious prosecution suit against the
cedent was the issue in Security Mutual Cas. Co. v. Harbor Ins. Co.[42]
The reinsurer contended that the cause of action arose after the reinsurance
terminated. The reinsurance contract
provided: “In the event of any dispute between the Company and the Reinsurer in
connection with this Agreement, such dispute shall be submitted to
arbitration.”[43] The
court held the dispute arbitrable:
Simply
stated, the argument is that the arbitration clause cannot exceed the scope of
the reinsurance agreement, and before it can be determined whether the dispute
was arbitrable, it must be determined whether the agreement was in force and
effect when [the claimant’s] cause of action arose. We do not agree.
Acceptance of [the reinsurer’s] contention would require resolution of
the merits of the cause prior to reaching the threshold question and the sole
question presented by this appeal [is] whether under the agreement between the
parties the dispute was subject to arbitration. Whether [the cedent’s] claim is
meritorious is not the issue; if under the language of the agreement the claim
is arbitrable, it is arbitrable whether valid or invalid.[44]
The cedent had purchased excess of loss reinsurance with a retention of
$50,000 in Nationwide General Ins. Co. v. Investors Ins. Co.[45]
The cedent resisted paying a liability claim on a policy with limits of $50,000
and was required to pay its limits plus a judgement in excess of policy
limits. The reinsurer argued that the
dispute was not arbitrable since the reinsurance contract only covered policies
with limits in excess of $50,000. The
reinsurance contract provided: “In case of any question or dispute between the
Company on the one hand and the Reinsurer on the other touching the
construction, meaning or effect of this Agreement or any article therein
contained or any fact or matter connected with the carrying out of these presents
or the rights or the liabilities of either or the said parties hereto, the same
shall be submitted . . . .”[46]
The court held that
“[t]his is a dispute ‘touching the construction meaning or effect of the
agreement’ and the courts may not stay arbitration by deciding the merits of
whether or not the claim is tenable.”[47] The court went on to explain its role in the
inquiry:
Once
it appears that there is, or is not a reasonable relationship between the subject
matter of the dispute and the general subject matter of the underlying
contract, the court’s inquiry is ended.
Penetrating definitive analysis of the scope of the agreement must be
left to the arbitrators whenever the parties have broadly agreed that any
dispute involving the interpretation and meaning of the agreement should be
submitted to arbitration [citation omitted].[48]
Cologne Reinsurance Co. v. Southern Underwriters, Inc.[49] was a suit by a reinsurer for rescission
based fraudulent inducement in the form of misrepresentations with respect to
geographic concentration of risk in an area devastated by hurricane
Andrew. The reinsurance contract stated
that “any dispute arising out of or related to the interpretation of this
Agreement or the rights of either party with respect to any transaction
involved, . . . shall be submitted . . . .”[50] The court ruled that the language of the
arbitration clause was sufficiently broad to cover allegations of fraudulent
inducement to enter the contract itself.
The court dismissed as conclusory and insufficient the reinsurer’s
arguments that the cedent’s actions were part of a grand scheme which was
beyond the scope of arbitration clause.
Conclusion
The FAA created a presumption in favor of arbitration for disputes
arising out of contracts in which the parties chose to insert an arbitration
clause. Notwithstanding a few
aberrations, case law applying the FAA to reinsurance contracts, generally, has
compelled arbitration for those disputes reasonably within the scope of
arbitration clauses. This case law
suggests that for the garden variety disputes between cedent and reinsurer, the
following description of the scope of the clause is sufficient: Any dispute
between the Company and the Reinsurer relating to the negotiation,
interpretation or performance of this Agreement, including but not limited to
its terms and conditions, shall be submitted to arbitration, regardless of when
such dispute arises.
Disputes which are not of the garden variety type are more difficult to
address with standard clauses. Case law
suggests that problems with the scope of an arbitration clause arise most often
when there are multiple parties to the transactions (i.e. pool managers,
managing agents and their sub-agents and intermediaries) who may be dominant
players but who are not signatories to the reinsurance contract and, therefore,
are not subject to the arbitration clause.
Making these additional entities parties to the reinsurance contract is
inherently troublesome both from a technical and a substantive standpoint. In
an appropriate situation, however, an insurer should consider: (1) entering
into agreements to arbitrate disputes with these additional entities; and (2)
having the option to consolidate such an arbitration with the arbitration
between the cedent and the reinsurer.
This would provide an expert forum for a consolidated and more efficient
adjudication of the entire dispute.
Endnotes
[1].
When one of the parties to the reinsurance contract is insolvent,
arbitratability is often complicated by issues of jurisdiction of the
receivership court, abstention and the McCarran-Ferguson Act which are beyond
the scope of this article. As a result,
this article will include arbitration cases involving an insurer in
receivership only to the extent they do not involve these complicating factors.
[2]. 9
U.S.C. sections 1 - 14.
[3].
776 F.2d 514 (7thCir.1985).
[4]. Id.
at 516.
[5].
831 F2d 149 (7thCir.1987).
[6]. Id.
at 151.
[7].
876 F.2d 1345 (11th Cir.1989).
[8]. Id.
at 878.
[9].
661 F.Supp. 751 (N.D.Ill.1987)
[10]. Id.
at 752.
[11]. Id.
at 753.
[13]. Id.
at 125.
[14]. Id.
at 126.
[15]. 783
F.Supp. 853 (D.N.J.1992).
[16]. Id.
at 858.
[17]. Id.
at 872.
[18]. Id.
at 873.
[19]. 588
F.Supp. 735 (W.D.N.C.1984).
[20]. Id.
at 737 - 8.
[21]. Id.
at 738.
[23]. Id.
at 410.
[24]. Id.
at 412.
[25]. 776
F.2d 514 (5thCir.1985).
[26]. Id.
at 515.
[27]. Id.
at 516.
[28]. 742
F2d 386 (7thCir.1984).
[29]. Id.
at 388.
[30]. 595
F.Supp. 955 (S.D.N.Y.1984).
[31]. Id.
at 957.
[32]. 587
F.Supp 710 (S.D.N.Y. 1984).
[33]. Id.
at 711.
[34].
1991 WL 247644 (N.D.Ill.).
[35]. Id.
at *1.
[36]. 919
F.Supp. 133 (S.D.N.Y.1996).
[37]. Id.
at 134.
[38]. 1997 WL 316459 (S.D.N.Y.).
[39]. Id.
at *2.
[40]. 760
F.Supp. 1036 (E.D.N.Y.1991).
[41]. Id.
at 1039.
[42]. 397
N.E.2d 839 (Ill.1979).
[43]. Id.
at 841.
[44]. Id.
[45]. 332
N.E.333 (N.Y.1975).
[47]. Id.
at 336.
[48]. Id.
at 335.
[49]. 630
N.Y.S.2d 548 (S.C.App.Div.1995).
[50]. Id.
at 549.