Recently, I wrote about a Texas intermediate appellate court’s affirmation of the denial of a reinsurer’s motion to dismiss a claim brought by an insured school district. Travelers Indem. Co. v. Grapeland Indep. Sch. Dist., No. 12-22-00311-CV, 2023 WL 3371072, at *3 (Tex. App. May 10, 2023). The main legal issue in the case was whether the concept of direct benefit estoppel applied. Well, the reinsurer tried again in Connecticut federal court.
In Travelers Indemnity Co. v. Grapeland Independent School District, No. 22-1760-cv (2d Cir. Dec. 11, 2023) (Not for Publication), the Second Circuit affirmed the district court’s petition to compel arbitration and, just like the Texas court, rejected application of the direct benefit estoppel theory. For those who don’t want to click back to the original blog post, 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 tried to stay the Texas action unsuccessfully using the direct benefit estoppel theory. It then sought to compel arbitration in Connecticut federal court using the same theory. The district court denied the petition and the Second Circuit affirmed.
In affirming, the Second Circuit held that:
[The reinsurer] has failed to show that it may avail itself of the direct benefits estoppel theory under Texas law. Every Texas court to consider the issue has held that the theory does not apply to the suit between [the reinsurer] and the [insured school district] or to suits between [the reinsurer] and other [insured school districts) involved as insureds in this and similar cases.
The court concluded that the uniform holdings of the Texas courts on a matter of Texas law persuaded the court that the matter was settled and that the court could reliably and confidently predict that the Texas Supreme Court, in agreement with the district court, would conclude that direct benefits estoppel does not apply to compel the insured school district to arbitrate the underlying claims.
