(Article from Insurance Law Alert, December 2024)
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Seventh Circuit Ruling
Holding
The Seventh Circuit ruled that the question of whether a previous arbitration award had preclusive effect over a current reinsurance dispute was itself subject to arbitration. National Casualty Co. v. Continental Ins. Co., 2024 U.S. App. LEXIS 29826 (7th Cir. Nov. 22, 2024).
Background
National Casualty Co. and Nationwide Mutual Insurance Company (collectively, “National”) reinsured Continental Insurance under three agreements, all of which contained arbitration clauses. In 2017, a dispute arose as to whether Continental’s billing methodology complied with a “Loss Occurrence” clause in the agreements. In ensuing arbitration, final awards were issued in National’s favor. The awards were later confirmed by federal district courts.
In 2023, another billing dispute arose involving the same issue. National argued that the prior arbitral awards resolved the dispute, whereas Continental sought a new arbitration. National then initiated an action in Illinois federal court, seeking declaratory and injunctive relief. In turn, Continental moved to dismiss the action and compel arbitration. The court granted Continental’s motion, and the Seventh Circuit affirmed.
Decision
The Seventh Circuit ruled that the claim preclusion issue (i.e., whether the previous arbitration barred a second arbitration) was itself an issue subject to arbitration. The court stated:
Our case law establishes that the preclusive effect of an arbitral award is an issue for the arbitrator to decide, not a federal court. In no uncertain terms, we have held that “[a]rbitrators are entitled to decide for themselves those procedural questions that arise on the way to a final disposition, including the preclusive effect (if any) of an earlier award.”
The Seventh Circuit rejected National’s contention that Section 13 of the Federal Arbitration Act, which states that a district court’s order confirming an arbitral award “shall have the same force and effect” as a judgment in an action, casts doubt on the aforementioned rule of law. The court noted that no other court has interpreted that provision to require a federal court to decide the preclusive effect of a prior arbitral award.
Comments
Courts in several other jurisdictions, including Massachusetts and Illinois, have similarly concluded that the preclusive effect of a prior arbitration is a decision for an arbitration panel rather than a court. These decisions and others that assign procedural issues to arbitration panels align with U.S. Supreme Court precedent relating to the expansive reach of arbitration provisions under the Federal Arbitration Act, including to procedural issues that bear on the ultimate disposition of the dispute.
California District Court Ruling
Holding
A California district court granted a reinsurer’s motion to compel arbitration, rejecting the ceding insurer’s assertion that the dispute related to a separate agreement between the parties that did not contain an arbitration clause. Truck Ins. Exchange v. Certain Underwriters at Lloyd’s London, No. 2:24-cv-08157 (C.D. Cal. Nov. 15, 2024).
Background
Truck Insurance entered into a reinsurance agreement with Lloyd’s London that reinsured certain liability policies issued by Truck Insurance to Kaiser Cement & Gypsum Company. The reinsurance agreement contained an arbitration clause that applied to “any dispute” between the parties “with reference to the interpretation of this Contract or the rights with respect to any transaction involved.”
In the 1980s, a dispute arose as to certain asbestos-related claims that Truck Insurance had paid to Kaiser and for which it sought reinsurance coverage. In 1984, the parties reached an agreement as to how to handle the disputed claims, which was memorialized in a written Memorandum of Understanding (“MOU”). Thereafter, Truck Insurance continued to submit claims to Lloyd’s London until 1999.
In 2023, Truck Insurance notified Lloyd’s London that it would resume billing and submitted claims for reimbursement in 2024. Lloyd’s London demanded that Truck Insurance withdraw its claims or initiate arbitration. Truck Insurance then sued Lloyd’s London in California court, seeking a declaration that the MOU did not prevent Truck Insurance from billing the underlying claims to Lloyd’s London and that Lloyd’s London could not rely on the MOU to reject the reinsurance billings. The amended complaint did not allege breach of contract and did not reference the reinsurance contract.
Invoking the arbitration clause in the reinsurance agreement, Lloyd’s London removed the case to federal court and moved to dismiss or stay the action and to compel arbitration.
Decision
The court granted the motion to stay pending arbitration, finding that the dispute as to reinsurance billings fell squarely within the arbitration clause of the reinsurance agreement. The court rejected Truck Insurance’s attempt to portray the MOU as “a wholly separate agreement” not subject to arbitration, explaining that the MOU “by its terms sets forth the parties’ understanding of the application of the reinsurance contract to the asbestos-related claims at issue here.” In other words, “there is no right to payment under the MOU independent of the reinsurance contract.”
While Truck Insurance attempted to cast the dispute as centered only on interpretation of a specific clause in the MOU related to the billing of asbestos bodily injury claims, the court held that to “have a court separately decide the impact of one sentence of the MOU that does not expressly reference the reinsurance contract is not tenable; it relies on an artificial distinction that ignores the fact that the MOU itself interprets the terms of the reinsurance contract.”
Comments
The court expressly distinguished this case from decisions involving “wholly separate transactions, with language in the arbitration agreement that did not extend to the subsequent dispute.” In contrast, and as the court noted, this case implicated two contracts that were interrelated and interdependent, such that the arbitration clause in one applied to disputes relating to the other.