February 25, 2020

February 25, 2020

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February 24, 2020

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SDNY Compels Arbitration of Payment Obligation Dispute Under General Liability “Fronting” Policies

A New York district court has granted a motion to compel arbitration of matters arising out of general liability “fronting” policies issued by member companies of AIG. The policies were issued to Building Materials Holding Corporation (“BMHC”) and obligated AIG to “front” litigation costs incurred by BMHC’s additional insureds to defend third-party claims. BMHC was then required to reimburse AIG for such costs. The parties’ duties were further defined in a separate Payment Agreement (“Agreement”). AIG was to provide insurance under the policies, and BMHC agreed to pay its “Payment Obligation” to AIG, defined essentially as amounts AIG was required to front for claims covered under the polices. Pursuant to the Agreement, disputes as to the amount of any claim to be reimbursed by BMHC “must immediately be submitted to arbitration.” For any “other unresolved dispute arising out of this Agreement,” such dispute “must be submitted to arbitration.” The arbitrators were to “have exclusive jurisdiction over the entire matter in dispute, including any question as to its arbitrability.”

BMHC disputed whether certain costs paid by AIG were in fact covered under the policies. It refused to reimburse AIG for such amounts and sought declaratory relief in a California action. AIG filed a petition in the Southern District of New York to compel arbitration of the matters in the California action. BMHC argued that the disputed issues were not subject to arbitration. The SDNY identified two issues: (1) did the parties “clearly and unmistakably” reserve arbitrability issues for the arbitrators; and if not (2) is the California action subject to arbitration?

On the first issue, the court held that, under these facts, the “exclusive jurisdiction” language in the Agreement did not unequivocally reserve arbitrability issues for the arbitrators. Because a subsequent addendum to the Agreement contemplated that a court might in certain instances decide such issues, and the Agreement provided no guidance as to which arbitrability issues were reserved for arbitrators, the court found it had jurisdiction to decide whether the matters in the California action fall within the scope of the arbitration.

As to this second issue, however, the court found it “readily apparent” that the California action was subject to arbitration because the complaint was “clearly” predicated on a dispute over BMHC’s “Payment Obligation.” The court rejected BMHC’s attempt to recast the dispute as one involving insurance coverage issues to be determined before triggering any obligations under the Agreement. Even if there were coverage issues to be decided, the court found nothing in the Policies foreclosing arbitration of coverage issues necessary to resolve payment obligations. The court also declined to follow factually similar decisions by the Sixth and Ninth Circuits, finding the arbitration clauses in those cases to be materially different.

National Union Fire Insurance Company of Pittsburgh, PA v. BMC Stock Holdings, Inc., No. 18-CV-5777 (USDC S.D.N.Y. Dec. 3, 2018)

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About this Author

Alex Silverman, Insurance lawyer, Carlton Fields

Alex Silverman represents U.S. and international insurers and reinsurers in complex commercial litigation and arbitration, including complex insurance coverage disputes and reinsurance matters. He regularly litigates and counsels insurers in connection with multimillion-dollar first-party and third-party claims in state and federal courts across the country, and has also litigated large-scale commercial health care and insurance fraud actions on behalf of insurers, including False Claims Act and RICO actions. 

In addition, Alex has experience representing corporations in shareholder...