Patton Boggs Reinsurance Newsletter- March 2013: Minnesota Federal Court Stays Litigation Pending Arbitration

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Security Life Ins. Co. of Am. v. Southwest Reinsure, Inc., No. 11-1358 (MJD/JJK), 2013 WL 500362 (D. Minn. Feb. 11, 2013).

A Minnesota federal court granted motions by the successor to a group of off-shore producer-owned reinsurance companies and their owners to stay an action brought by a cedent pending arbitration of the cedent's claims against the reinsurers and their owners. This case involves a complex interwoven reinsurance relationship between the cedent and its reinsurers and whether a dispute about what happened to trust funds deposited as security for reinsurance should be heard in arbitration or by the court.

The cedent reinsured a portion of its life insurance policies with off-shore producer-owned reinsurers through three reinsurance agreements, each of which had an arbitration clause. The 1994 reinsurance contract provided for arbitration of any disputes arising out of the reinsurance agreement. The 1997 agreements provided for arbitration for any disputes or differences arising under, out of, or in connection with, or in any manner relating to the reinsurance agreements. The cedent also entered into an administration agreement with a subsidiary of the owner of the reinsurers. The cedent considered all of these relationships part of one unified program.

Under the reinsurance agreements and for credit for reinsurance purposes, the reinsurers were required to provide security. Originally letters of credit were provided, but in 2005, a trust agreement was entered into. The defendant trustee held the funds for cedent as the beneficiary. The cedent contends that the trust funds were transferred out to another trustee without its knowledge under a new trust agreement to which the cedent was not a party. Eventually, the owner of the reinsurers and the administrator withdrew the trust funds for other purposes.

The cedent sued the reinsurers, the administrator, the principal and the original trustee. One of the defendants, the administrator, filed a motion to dismiss, which was denied, but did not assert any arbitration rights. After an amended complaint was filed and some discovery was taken, the successor reinsurer, after it was finally served, asked whether the cedent would arbitrate. When the cedent refused to arbitrate, the reinsurer filed a motion to dismiss or in the alternative a motion to stay pending arbitration.

In granting the motion to stay pending arbitration, the court discussed the standards for determining arbitrability and the principle that nonsignatories can compel arbitration under certain circumstances. Here, the successor reinsurer was being asked to respond to claims under the reinsurance agreements that contained arbitration clauses. The court agreed that at minimum, equitable estoppel applied to allow the successor reinsurer to enforce the arbitration clause in the agreements. The court found that the arbitration clauses were broad and covered the cedent's claims against the successor reinsurer. The court rejected the claim that the successor reinsurer waived its right to arbitration and that the cedent was prejudiced by the successor reinsurer's actions.

As to the administrator, there was no arbitration clause in the administration agreement, but because the claims were interrelated and intertwined, and the core of the dispute concerned compliance with the provisions of the reinsurance agreements, the court concluded that the claims against the administrator were subject to arbitration as well. The court also concluded that even though the administrator participated in discovery and did not move to stay pending arbitration until the successor reinsurer was served and made the motion, the administrator had not waived its right to seek arbitration.

Finally, the court stayed the action against the trustee because the result of the arbitration had the potential to resolve or narrow the claims against the trustee. The stay was granted to all parties, but the case was not dismissed because of the various non-arbitrable claims alleged in the amended complaint.