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Castlewood (US) Inc. v. Nat. Indem. Ins. Co.

Issue Discussed: Arbitrability/Scope of Arbitration

Submitted by John R. Cashin

Date Promulgated: October 24, 2006

Issues Addressed: May a reinsurer compel a run-off administrator to arbitration proceeding when administrator is not a signatory to the reinsurance contract?

District Court Judge Kenneth Karas recently ruled that a claims handler could not be forced to participate as a party to an arbitration proceeding pursuant to a reinsurance agreement to which it was neither a signatory nor a direct beneficiary. Castlewood (US) Inc. (“Castlewood”), together with Seaton Insurance Company (“Seaton”) and Stonewall Insurance Company (“Stonewall”) brought an action in the Southern District of New York seeking declaratory and preliminary injunctive relief against National Indemnity Insurance Company (“NICO”) claiming that Castlewood should not be joined as a party to arbitration proceedings as it was not a signatory to the two underlying reinsurance agreements between NICO and Seaton and Stonewall.

Seaton and Stonewall ceased writing new business and were placed into run-off. In 1998 and 2000 NICO entered into two separate Reinsurance Agreements respectively, with Seaton and Stonewall. The Reinsurance Agreements contained virtually identical arbitration provisions. Under the Reinsurance Agreements NICO agreed to reinsure Seaton for up to $350 million and Stonewall for up to $240 million. Castlewood was not a signatory to either Reinsurance Agreement. The Reinsurance Agreements also contained certain restrictions on any entity that is allowed to become the “claims servicer”. Seaton and Stonewall could only appoint a new claims servicer with the consent of NICO.

In 2006 Castlewood entered into separate Administration Agreements with Seaton and Stonewall to provide certain administrative services with respect to their run-off business. These Administration Agreements each included a clause affirming that Castlewood had reviewed the Reinsurance Agreements with NICO and agreed to act consistently with those Reinsurance Agreements.

In January 2006 shortly before Castlewood entered into the Administrative Agreements with Seaton and Stonewall, a dispute arose and NICO issued separate arbitration demands to Seaton and Stonewall. In May 2006 NICO amended its demands to add Castlewood as a respondent and asked the arbitration panel to find that Castlewood is not authorized to act as claims servicer under the Reinsurance Agreements nor should it be permitted to otherwise manage any claims for which Seaton and Stonewall seek coverage under those agreements. Castlewood together with Seaton and Stonewall brought this action seeking to enjoin NICO from joining Castlewood to the pending arbitrations. NICO opposes the preliminary injunction principally on the grounds that Castlewood has either assumed the obligation to arbitrate by its actions, or that Castlewood should otherwise be estopped from avoiding the arbitration.

NICO based its assumption argument on the clauses in the Administrative Agreement stating that Castlewood had reviewed the Reinsurance Agreement and agreed to provide its services consistent with the rights and obligations of Seaton and Stonewall under the Reinsurance Agreements. The court found that such a clause did not constitute an “unambiguous assignment” of the right or obligation to arbitrate to the non-signatory, Castlewood. Seaton and Stonewall merely contracted to ensure that Castlewood would not do anything that would cause Seaton or Stonewall to break the Reinsurance Agreement. The court found nothing in these clauses that obligated Castlewood to face NICO before an arbitration panel. Quoting from a prior Second Circuit opinion, Judge Karas stated, “In the absence of a signature, a party may be bound by an arbitration clause if its subsequent conduct indicates that it is assuming the obligation to arbitrate. (Thompson-CSF, S. A. v. Am. Arbitration Ass’n, 64 F. 3d 773, 777 (2d Cir, 1995) citing Gvozdenovic v. United Airlines, Inc., 933 F.2d 1100 at 1105 (2d Cir. 1991)). To be bound under this theory, a nonsignatory must manifest a clear intent to arbitrate the dispute.” (Gvozdenovic, 933 F.2d at 1105). The court found no evidence of any attempt by Castlewood to participate in the arbitration proceedings and absent such a manifestation the assumption argument fails.

NICO based its estoppel argument on the theory that Castlewood was receiving substantial benefits from the Reinsurance Agreements as the claims servicer for Seaton and Stonewall. The court recognized previous decisions upholding the estoppel exception. “When a nonsignatory to an agreement with an arbitration clause `knowingly exploits the agreement… it is estopped from avoiding arbitration despite having never signed the agreement`” Thompson-CSF, 62 F.d3 at 778. This exception only applies, however, where the benefits that the nonsignatory receives from the agreement are direct – which is to say flowing directly from the agreement.” MAG Portfolio Consult, GMBH v. Merlin Biomed Group LLC, 268 F.3d 58, 61 (2d Cir. 2001). The court rejected NICO’s estoppel argument stating that Castlewood was only an indirect beneficiary of the Reinsurance Agreements and its direct benefit is derived from the Administrative Agreements to which NICO is not a party.

The ruling in this case reinforces the reluctance of the Southern District of New York to impose arbitration on non-parties to arbitration agreements.

* John R. Cashin is General Counsel – International Businesses at Zurich Financial Services, Zurich, Switzerland. He is an ARIAS Certified Arbitrator. At Zurich his responsibilities include oversight of the legal and compliance functions for the company’s operations in Asia, Australia, Southern Africa and Latin America. He joined Zurich in 2004 from the law firm of Stroock & Stroock & Lavan LLP in New York City. Prior to his law firm practice he served as Deputy Superintendent of the New York State Insurance Department and spent twenty years in the reinsurance brokerage business.