June 17, 2009
Written By Attorneys: Michael J. Kurtis and Melanie E. Bork
Note: This article is an interpretation of current law and is offered for informational purposes only. This material is not legal advice and should not be construed or used as a substitute for the advice of an attorney.
On March 26, 2009, a federal court in New York compelled arbitration between an insolvent reinsurer's assignee and its retrocessionare. B.D. Cooke & Partners, Ltd. v Certain Underwriters at Lloyd's, London, No. 08 civ. 3435, 2009 WL 792826 (S.D.N.Y. Mar. 26, 2009).
Citizens Casualty Insurance Company ("Citizens") was declared insolvent and placed into liquidation by the New York Supreme Court in 1971 as a result of reinsuring asbestos exposure in the U.S. market. Citizens had, in turn, laid off some of the risk to retrocessionares, including Certain Underwriters at Lloyd's ("Underwriters"). While Citizens' assumed reinsurance treaties were terminated by the liquidation, the reinsurer remained liable for any injuries occurring prior to the liquidation but discovered later. As a result, Citizens' cedents were still submitting claims related to asbestos exposure well into the 1990's.
In order to close out the liquidation, the New York Superintendent of Insurance assigned Citizens' remaining claims against Underwriters to the plaintiff, B.D. Cooke, who represented Citizens' largest group of creditors. B.D. Cooke then filed an action in New York state court to collect amounts allegedly owed under a retrocessional excess of loss treaty between Citizens and Underwriters.
Underwriters removed the action to federal court and moved to compel arbitration. B.D. Cooke fought the removal arguing that the "Service of Suit" provisions in the retrocessional agreement operated as a waiver of Underwriters' right to remove the case to federal court for review of the arbitrability issues. The court rejected the argument, citing the strong federal policy that federal courts should decide issues of arbitrability under the New York Convention, which was applicable in light of Underwriters' status as a non-U.S. reinsurer.
B.D. Cooke also argued that the dispute was not subject to arbitration for several reasons. First, B.D. Cooke claimed that the dispute concerned the scope of the assignment rather than the retrocessional treaty. In addition, B.D. Cooke asked the court to find it exempt from arbitration, arguing that the operation of the arbitration clause ceased upon entry of the liquidation order, or, in the alternative, that the Superintendent assigned his statutory exemption from arbitration to the plaintiff.
The Court succinctly rejected the first argument, noting that breach of the retrocessional treaty was the gravamen of the plaintiff's lawsuit, clearly implicating the treaty itself. The court likewise rejected the second argument, finding that because B.D. Cooke's claims accrued under the treaty, the treaty's arbitration clause continued to apply.
The court accepted the premise that the arbitration clause could not be enforced against the Superintendent, based on the state court's statutory mandate of exclusive jurisdiction over liquidations. But the court distinguished the role of the Superintendent, who stands as a fiduciary to protect the interest of policyholders and the public, from that of private parties. Based on its private party status, the court refused to interpret the assignment to grant B.D. Cooke the extraordinary right of exemption from arbitration when it was not acting in a fiduciary capacity. Accordingly, the court stayed all court proceedings and directed the parties to arbitration.
This is yet another opinion demonstrating the courts' preference for arbitration and willingness to enforce arbitration provisions even when the status of the underlying treaties has been altered by judicial action or operation of law.
