In certain relationships, a non-signatory to a contract with an arbitration clause may be compelled to arbitrate because of the benefits the non-signatory gains from the contract. But compelling a non-signatory to arbitrate is not an easy task. In a recent case, a reinsurer sought to compel insured school districts to arbitrate their claims, which the school districts brought against both the cedent risk management cooperative and the reinsurer when certain claims were not paid.
In Travelers Indemnity Co. v. Alto Independent School District, No. 3:21CV00909(SALM) (D. Ct, Jul. 28, 2022), several school districts were insured by an educational risk management cooperative. The cooperative was reinsured, in part, by the reinsurer through a facultative certificate. The facultative certificate contained an arbitration clause. It also allowed the reinsurer to assume the duty to investigate and defend claims after claims exceeded the retentions set forth in the declarations.
The insured school districts sued both the risk management cooperative and the reinsurer when property claims were allegedly not paid in full. In response to the lawsuit, the reinsurer moved to compel arbitration (if you read the decision, you will find a complicated procedural situation, with multiple motions in Texas where the lawsuits were and this action in Connecticut federal court).
Although the insured school districts were not signatories to the facultative certificate, the cedent nonetheless argued that the insureds were bound to arbitrate because they directly benefited from the facultative certificate, i.e., direct benefits estoppel. The court analyzed the theory of direct benefits estoppel in great detail and ultimately rejected the argument.
In dismissing the cedent’s complaint, the court relied on a Texas appellate court decision in the related Texas actions that held one of the school districts was not bound by the facultative certificate’s arbitration provision. But the court went further and explained why direct benefits estoppel did not apply.
The court conceded that the reinsurer’s claims handling obligations arose from the facultative certificate, but pointed out that “the mere fact that [the reinsurer’s] duty to perform such obligations only came to be because of the Facultative Certificate is insufficient to invoke direct-benefits estoppel.” Moreover, the court found that the reinsurer’s alleged liability did not arise solely from the facultative certificate. The reinsurer’s liability was instead “premised on insurance code, tort, and DTPA duties that are general, noncontract obligations.” The court concluded that “[i]n sum, [the reinsurer] has failed to establish that direct-benefits estoppel applies because it has not shown that [the insureds’] claims ‘arise solely from the contract or must be determined by reference to it[.]'”