It is not the usual case where a reinsurer seeks to compel a policyholder to resolve a dispute in arbitration based on the reinsurance contract’s arbitration provision, but sometimes that makes the most sense. Whether a court will allow it depends on the facts. In a case decided earlier this year, a state intermediate appellate court affirmed the motion court’s denial of the reinsurer’s motion to dismiss or stay in favor of arbitration.
In The Travelers Indemnity Co. v. Grapeland Independent School District, No. 12-22-00311-CV (Tex. Ct of App. 12th Dist., May 11, 2023), the insured school district obtained insurance from a municipal risk pool that in turn entered into a reinsurance contract with the reinsurer. A coverage dispute arose after windstorm damage and the policyholder sued several entities, including the risk pool and the reinsurer for breach of contract and other violations under Texas statutory provisions. The reinsurer move to dismiss the complaint to stay the litigation in favor of arbitration under its reinsurance contract. The motion court denied the motion and the reinsurer appealed.
In affirming the motion court, the appeals court rejected the argument that the dispute was subject to the terms of the reinsurance contract because the concept of direct benefit estoppel applied and the claims arose out of or relate to the reinsurance contract. The court explained the rules concerning compelling a non-signatory to arbitrate and also the law in Texas on equitable estoppel concepts like direct benefit estoppel.
Direct benefits estoppel applies to parties who seek to derive a direct benefit from a contract with an arbitration agreement. Thus, a non-signatory may be compelled to arbitrate if it (1) seeks to derive a direct benefit from the contract through the lawsuit or (2) deliberately seeks and obtains substantial direct benefits from the contract itself.
Unfortunately for the reinsurer, the court noted that it had recently decided a similar case involving the reinsurer and rejected nearly identical arguments. See Travelers Indemn. Co. v. Alto ISD, No. 12-21-00143-CV, 2022 WL 1668859 (Tex. App.-Tyler May 25, 2022, pet. denied) (mem. op., not designated for publication). The court declined the reinsurer’s invitation for the court to disavow its holding in the prior case.
The court’s analysis was summed up by this statement:
Here, as in Alto, we disagree that the petition excerpts constitute “allegations seeking additional insurance funds from [the reinsurer], which, if owed, would necessarily arise from a payment obligation under the Reinsurance Contract.” Instead, the excerpts, especially when considered in context of the petition as a whole, show that [the insured] alleges it was damaged by receiving an inappropriate settlement for its claims under the Policy—not the Reinsurance Contract, and that [the reinsurer’s] liability, if any, is premised on insurance code, tort, and DTPA duties that are general, noncontract obligations arising from its role as the adjuster of the claims under the Policy—not the reinsurer of [the cedent’s] liability under the Reinsurance Contract.
Because the reinsurer did not show that the arbitration provision in the reinsurance contract was valid and enforceable against the policyholder either of its theories, the court concluded that the motion court did not abuse its discretion by denying the reinsurer’s motion to dismiss or stay the litigation.
