(Article from Insurance Law Alert, May 2025)
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Holding
A New Jersey federal court adopted a Magistrate Judge’s Report and Recommendation granting a motion to remand to state court a dispute involving international reinsurers, finding that an arbitration clause in the reinsurance contracts was not necessarily binding on the non-party plaintiff, and therefore that federal jurisdiction under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “Convention”) had not been established. Austin v. CPA Mutual Insurance Co. of America, No. 24-7942 (D.N.J. Mar. 19, 2025).
Background
Plaintiffs sued Kinzel, an accounting firm, for malpractice in state court. The complaint was later amended to include claims against CPA Mutual, Kinzel’s professional liability insurer. Plaintiffs and Kinzel ultimately reached a settlement wherein Kinzel assigned to Plaintiffs any insurance claims it might have against CPA Mutual. Thereafter, Plaintiffs filed another amended complaint, adding claims against CPA Mutual’s reinsurers. Plaintiffs argued that the reinsurers were jointly and severally liable for the claims against CPA Mutual and sought a declaration as to benefits recoverable under certain reinsurance policies.
The reinsurers moved to compel arbitration pursuant to an arbitration clause in the reinsurance contracts, which the state court dismissed. Several international reinsurers then removed the action to federal court pursuant to the Federal Arbitration Act (“FAA”), arguing that the reinsurance contracts were governed by the Convention, which provides for federal jurisdiction over any action that “relates to” an agreement to arbitrate. Plaintiffs filed a motion to remand, which the court granted.
Decision
The Report and Recommendation, adopted by the district court, ruled that the international reinsurers failed to establish the existence of an applicable arbitration provision under the FAA. The court explained that removal under the FAA requires that the action “relate to” an arbitration agreement. No such showing was made here, the court held, because the reinsurance contracts containing the arbitration clause were between CPA Mutual and the reinsurers, not Plaintiffs.
The court noted that while non-signatories may be bound to arbitration agreements under certain limited circumstances, none of those scenarios was present here. More specifically, the court held that Plaintiffs were not third-party beneficiaries of the reinsurance policies notwithstanding the causes of action asserted against the reinsurers. The court reasoned that, although Plaintiffs alleged that the reinsurers were jointly and severally liable for Plaintiffs’ claims against CPA Mutual, Plaintiffs’ direct-action claim against the reinsurers did “not seek to ‘reap the benefits of the Reinsurance Contracts” but rather sought “to hold the Reinsurers responsible … based on the Reinsurers’ conduct’”—specifically, the reinsurers’ alleged control and management of Plaintiffs’ defense. The court therefore concluded that the arbitration provision in the reinsurance contract did not apply to such a direct claim.
The court rejected the reinsurers’ argument that the declaratory judgment claim against the reinsurers “related to” the arbitration agreement in the reinsurance policies because the Plaintiffs were seeking to directly benefit from the reinsurance policies. The court stated that “the record at hand is insufficient to prove that Plaintiffs are bound by the Reinsurance Contracts or that any arbitration provisions therein can be enforced on them.” Finding the question of arbitration to be “premature” on the factual record presented, the court held that the parties should conduct discovery as to the question of arbitrability.
Comments
The court drew a distinction between questions relating to the scope of an arbitration clause, which should be resolved in favor of arbitration, and the “threshold question” of whether an agreement to arbitrate exists between the two parties. The court emphasized that the “presumption in favor of arbitration” does not apply to the latter question, which requires a determination of whether a valid agreement to arbitrate between the parties exists in the first place.
Additionally, the decision reaffirms the well-established principle that a policyholder does not typically have a right of direct action against its insurer’s reinsurer. However, as the court noted, exceptions to this general rule may exist based the conduct of the parties, such as the reinsurer’s control or management of the original insured’s defense.