In the past 10 years or so, several ceding companies began adding run-off reinsurer clauses to their reinsurance contracts to mitigate disputes that might arise with reinsurers no longer actively in business. In a recent case, a Georgia federal court had to address whether it or an arbitration panel should determine whether the reinsurer was, in fact, a run-off reinsurer.
In Builders Insurance v. Maiden Reinsurance North America, Inc., No. 1:19-cv-02762-SDG, 2020 U.S. Dist. LEXIS 34722 (N.D. Ga. Feb. 26, 2020), a dispute arose between a cedent and its reinsurer over a series of reinsurance contracts reinsuring underlying commercial general liability policies issued to a home builder. Underlying lawsuits arose allegedly because of construction defects. The cedent settled the underlying lawsuits and sought recovery from the reinsurer.
Before the cedent settled the underlying litigation, it notified the reinsurer about the litigation and provided information. Shortly after, the reinsurer was acquired by a large international group that is known for its runoff operations. The cedent demanded payment from the reinsurer, but no payment was forthcoming for some time (well after 30 days). Approximately five months after demand was made for payment, and after the cedent commenced this law suit, the reinsurer paid the principal amount of the breach of contract claim. Nevertheless, the case continued on bad faith grounds.
After the case was removed from state to federal court, the reinsurer moved to compel arbitration. The cedent opposed the motion claiming that arbitration was no longer available to the reinsurer because it was a Run-off Reinsurer as defined in the reinsurance contracts.
The reinsurance contracts had two relevant provisions. First, Article 27, which was the Run-off Reinsurer article. This provision provided that if the reinsurer met the criteria of a Run-off Reinsurer the provisions of the arbitration article no longer applied. A Run-off reinsurer was defined as a reinsurer that “has ceased reinsurance underwriting operations; or has transferred its claims-paying authority to an unaffiliated party; or . . . in any other way has assigned its interests or delegated its obligations under this Contract to an unaffiliated entity.”
The second relevant provision was the arbitration article, which except for the first year, stated: “Except as provided in the Special Termination, Commutation and Run-Off Reinsurer Articles, any dispute arising out of the interpretation, performance or breach of this Contract, including the formation or validity thereof, shall be submitted for decision to a panel of three arbitrators . . . .”
As the court noted, whether the reinsurer was a Run-off Reinsurer mattered because, if the answer was yes, the parties must litigate their dispute in court. The parties also disagreed about whether the reinsurance contracts delegated this issue to the arbitrators to decide.
The court first determined that it and not the arbitrators would decide whether the reinsurer was a Run-off reinsurer. The evidence, found the court, indicated that the parties did not intend to delegate arbitrability questions concerning the Run-off Reinsurer article. Delegation requires clear and unmistakable evidence that the parties intended to submit to the arbitrators disputes about Article 27. The court pointed to the arbitration article that, except for the first year, explicitly excluded the possibility that arbitrators should decide whether the reinsurer was a Run-off Reinsurer. Thus, held the court, the exception language in the arbitration provision specifically removed matters related to the interpretation of Article 27 from arbitration. Article 27, itself, also supports this analysis when providing that the arbitration article did not apply to any reinsurer that became a Run-off Reinsurer. At the very least, said the court, these provisions prevent the court from concluding that there was clear and unmistakable evidence of the parties’ intent to delegate this question to the arbitrators.
After concluding that the parties did not delegate to the arbitrators the issue of whether the reinsurer became a Run-off Reinsurer, the court held that the reinsurer was not a Run-off Reinsurer. The court accepted evidence from the reinsurer that it had not ceased underwriting operations, had not transferred its claim-paying authority to an unaffiliated entity, and had not assigned its interests or delegated its obligations to an unaffiliated entity. The court found that the reinsurance contracts did not void the arbitration provisions when a reinsurer is in run-off in the ordinary sense. The court concluded that whether the reinsurer continued to accept new risks was beside the point. The reinsurer had not ceased reinsurance underwriting operations according to the evidence accepted by the court. The court also addressed the unaffiliated arguments and rejected their applicability.
Accordingly, the court granted the motion to compel arbitration on the remaining claims, including whether those claims were arbitrable.