Patton Boggs Reinsurance Newsletter - December 2012: Illinois State Court Dismisses Cedent’s Post-Arbitration Complaint Seeking Attorney Fees for Reinsurer’s Alleged Unreasonable Failure to Settle Claim

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Amerisure Mut. Ins. Co. v. Global Reinsurance Corp. of Am., No. 10 L 012665 (Ill. Cir. Ct. Nov. 7, 2012).

An Illinois state court dismissed a cedent’s complaint seeking attorney fees for a reinsurer’s alleged unreasonable failure to settle a claim. The cedent submitted a claim to the reinsurer, but the reinsurer disputed the claim. Under an arbitration clause in the reinsurance contract, the parties commenced arbitration in Illinois and applied Illinois law. Following the arbitration, the cedent filed suit seeking attorney fees under state law after an appeals court ruled that the arbitration panel exceeded its authority in awarding attorney fees and the lower court erred in confirming that award.

The court dismissed the cedent’s complaint because under a choice of law analysis, New York law, not Illinois law, applied, and New York law does not provide for attorney fees when an insurer fails to settle a claim. The reinsurance contract did not have a choice-of-law clause applicable to litigation. The only choice-of-law clause in the reinsurance contract governed the applicable law in arbitration. As a result, the court had to apply a two-step choice of law analysis. First, the outcomes would differ if New York or Illinois law applied because only the Illinois Insurance Code, and not New York law, provides for attorney fees when a reinsurer unreasonably fails to settle a claim. Second, New York had more significant contacts because the reinsurer was a New York company, and the place of performance and last act under the reinsurance contract was either in New York or Michigan. The court found that the Illinois contacts were that the cedent had an Illinois attorney and the arbitration took place in Illinois. Despite Illinois’ interest in discouraging alleged unreasonable conduct by insurers, the court held that New York had the most significant contacts and that New York law applied. As such, under New York law, the cedent could not recover attorney fees from the reinsurer.

What makes this case interesting is that it is post-arbitration litigation over an alleged state law right to attorney fees after the appeals court held that the arbitrators lacked the authority to award attorney fees. This only becomes an issue in states where statute provides a remedy to parties that cannot be granted by an arbitration panel.