Liquidator Compelled to Arbitrate Hurricane Reinsurance Disputes

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The federal policy favoring arbitration sometimes bumps up against state-based receivers where the receiver would rather the receivership court address reinsurance disputes than have the matter arbitrated.  In the aftermath of Hurricanes Irma and Maria, which devastated Puerto Rico, reinsurance disputes arose over a cedent’s allocation between the hurricanes and other aspects of the many claims ceded to reinsurers.  In an anticipated ruling, the question of whether these disputes will be arbitrated or resolved in the receivership court has been answered.

In Integrand Assurance Co. v. Everest Reinsurance Co., No. 19-1111 (DRD) (D. P.R. Dec. 4, 2019), an insolvent cedent sought to invalidate the arbitration clause in several reinsurance agreements with several reinsurers and force the reinsurance disputes over Hurricane Irma and Maria claims into the state court governing the cedent’s liquidation proceedings.  The reinsurers, who all had the same or similar arbitration clauses, moved to dismiss the insolvent cedent’s claims and compel arbitration.  The district court granted the reinsurers’ motions in full and compelled arbitration of all claims, including antitrust and state insurance law claims.

In granting the reinsurers’ motions, the court noted that in several of the cases, the cedent had demanded arbitration and a dispute arose over whether the cedent’s arbitrator was qualified under the arbitration clause.  In a footnote, the court rebuked the insolvent cedent: “The Court is surprised that [the cedent] questions the validity of the arbitration provision considering [the cedent] acknowledged the applicability of the provision to the instant litigation when the company itself commenced arbitration proceedings against [two reinsurers] to claim payment under the reinsurance agreements. . . The Court will not authorize [the cedent] to play ‘fast and loose’ with the Court.” (citation omitted).

The court rejected the cedent’s argument that the arbitration clause was ambiguous because it did not set forth a mechanism to resolve the objections to the designation of the cedent’s arbitrator.  The court pointed out that the Federal Arbitration Act (“FAA”), specifically FAA § 5, provides a gap filling provision to resolve an impasse and select an arbitrator.   The court also rejected arguments that the arbitration clause was contrary to morals and public order or should be set aside under the rebus sic stantibus doctrine.  The decision goes into detail on both of these arguments.  Basically, the court held that the FAA trumped any state law that undermines the liberal federal policy favoring arbitration and the cedent’s objection to the validity of the “honorable engagement provision” in the arbitration clause was unavailing.  The court rejected the rebus sic stantibus doctrine argument on the basis that the doctrine was an extraordinary remedy to be used only in exceptional circumstances and that because hurricanes may be reasonably anticipated in Puerto Rico the doctrine did not apply.  The court concluded that each reinsurance contract contained a valid arbitration clause.

On the antitrust and other claims that the cedent argued were not arbitrable, the court held that nothing in federal law showed a congressional intent to prelude a waiver of judicial remedies and that the arbitration clause was broad and applied to all claims arising out of the alleged delay in payments by the reinsurers, including antitrust and state law claims.

The court granted the reinsurers’ motions to dismiss and to compel arbitration.  Additionally, in a separate short ruling the parties were directed in specific cases to follow the arbitration selection procedures in the reinsurance agreements one more time and if the parties failed to agree on the arbitrator, to come back to the court to select the arbitrator.

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