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Connecticut Court Upholds Right of Assuming Party To Compel Arbitration

by ~ Michael F. Aylward (Email) (Web Site)

A federal district court in Connecticut has ruled that a party to a reinsurance assumption agreement has the right to compel arbitration of its dispute pursuant to a cut through clause with the reinsurer even though the assumption agreement itself did not contain an arbitration clause. In Trenwick American Reinsurance Corp. v. Unionamerica Ins. Co., 2013 U.S. Dist. LEXIS 97518 (D. Conn. July 12, 2013), Judge Arterton emphasized the fact that the assumption agreements were physically attached to and referenced within the terms of the facultative reinsurance agreements. Further, the court held that a signatory to an agreement containing an arbitration clause is estopped from avoiding arbitration with the non-signatory when the issues the non-signatory is seeking to resolve in arbitration are intertwined with the agreement that the estopped party has signed. Finally, the court refused to allow the reinsurer to carve out a statute of limitations defense independently of the arbitration proceedings.

This dispute arose out of a Casualty Excess of Loss Reinsurance Agreement that was entered into in 1998 between Chartwell and the Commercial Casualty Insurance Company of Georgia (“CCIC”) whereby Chartwell agreed to reinsure certain policies issued by CCIC. These agreements were renewed in 1999 and again in 2000 by which time Trenwick had entered the picture as Chartwell’s successor. Each of these agreements contained a clause stating that, “Any dispute between the Company and any Reinsurer arising out of or in connection with this Agreement, including its formation or actual validity, will be submitted to the decision of a board of arbitration.”

Appended to each of these reinsurance agreements was a Reinsurance Assumption Agreement. This Reinsurance Assumption Agreement resulted from a fronting reinsurance relationship between CCIC and Unionamerica whereby CCIC wrote General and Professional Liability insurance on behalf of Unionamerica. CCIC, in turn, reinsured these policies through various carriers, including Trenwick. This Assumption Agreement was supported by a cut through clause in the reinsurance agreements between Trenwick/Chartwell and CCIC which stated that, “In the event the Company [CCIC], due to its insolvency or financial impairment, fails to pay an obligation under the Quota Share, the Reinsurers agree to pay Unionamerica the excess liability amount due under the reinsurance Agreement subject to all terms and conditions of said Agreement.”

After Trenwick allegedly failed to make payments due to Unionamerica under the terms of the Reinsurance Assumption Agreement, Unionamerica demanded arbitration. In response, Trenwick filed suit in the U.S. District Court in Connecticut seeking to enjoin Unionamerica from this “illegal arbitration.” The District Court granted a Temporary Restraining Order to Trenwick and proceeded to consider the merits of the parties’ positions. Unionamerica moved to dismiss Trenwick’s case and to compel arbitration.

In arguing that it should be allowed to go forward with this litigation, Trenwick focused on the fact that there was no provision for arbitration in the Reinsurance Assumptions Agreements and that Unionamerica was not a signatory to the reinsurance certificates that Trenwick/Chartwell had issued to CCIC. Alternatively, Trenwick argued that the court should at least consider its threshold argument that the time for pursuing such claims had expired under Georgia law before compelling arbitration.

As a preliminary matter, Judge Arterton concluded that the issue of arbitrability could be decided by her and not by the arbitration panel as there was not “clear and unmistakable evidence” of an intent that such question should be decided by the arbitration panel itself. The court distinguished a similar dispute in Contec Corp. v. Remote Solution Company, Ltd., 398 F.3d 205 (2nd Cir. 2005) as involving an arbitration clause that incorporated by reference the commercial arbitration rules of the American Arbitration Association, which specifically contemplate the authority of arbitrators to rule on their own jurisdiction.

Judge Arterton next rejected Trenwick’s suggestion that because Unionamerica was not a party to the Reinsurance Agreements it could not take advantage of the arbitration clause in the Agreements. The District Court focused on the fact that the Assumption Agreements were attached to and made a part of the Agreements and were actually referenced in Article I of the Reinsurance Agreements, which contained the arbitration clause. The court observed that Article I stated that “[n]othing herein will in any manner create any obligation or establish any rights against the reinsurers in favor of any third parties or any persons not parties to this agreement except as provided” in the schedule (emphasis added).

The court also took note of the fact that the Second Circuit had ruled in Choctaw Generation Ltd Partnership v. American Home Assurance Co., 271 F.3d 403, 404 (2nd Cir. 2001) that a signatory to an agreement containing an arbitration clause is “estopped from avoiding arbitration with the non-signatory” when the issues the non-signatory is seeking to resolve in arbitration are intertwined with the agreement that the estopped party has signed. Judge Arterton found that Trenwick’s interpretation of the Agreements ran contrary to the plain language set forth therein. Further, the district court determined that the parties’ dispute fell within the scope of its arbitration clause as it sought to collect reinsurance balances.

Finally, Judge Arterton declined to entertain Trenwick’s proposal that it resolve the statute of limitations defense that it had raised with respect to Unionamerica’s claims notwithstanding Section 9-9-5 of Georgia’s Arbitration Code which states that, “If a claim sought to be arbitrated would be barred by limitation of time had the claim sought to be arbitrated been asserted in court, a party may apply to the court to stay arbitration or vacate the award. . .” Judge Arterton held that the U.S. Supreme Court has already decided that a choice of law provision contained in an arbitration agreement, without more, cannot impute a specific intent to exclude certain disputes from arbitration. Further, the court noted Second Circuit authority that limitations defenses are properly addressed by arbitrators. As a result, the court declined to carve out the issue of the statute of limitations from the rest of the case to be arbitrated.

Trenwick has sought to appeal Judge Arterton’s judgment to the Second Circuit. Meanwhile, a dispute is on-going in the District Court with respect to Trenwick’s efforts to stay the effect of the court’s order and avoid going to arbitration until its appeal is decided.

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