Reinsurance and Insurance Arbitrator and Umpire Ronald S. Gass
ARIAS-U.S. Certified Arbitrator and Umpire
AAA Roster of Neutrals
Reinsurance and Insurance Dispute Resolution Services Consultant

Second Circuit Holds That Reinsurers' Rescission Action Is Not Subject to Fac Certs' "Narrow" Arbitration Clause

In a case involving two facultative certificates with arbitration clauses, the U.S. Court of Appeals for the Second Circuit held that a reinsurer's rescission action was not arbitrable because the clause's wording was “narrow” and applied only to “irreconcilable differences of opinion” that concern “the interpretation” of the certificates.

The reinsurer, Gerling Global Reinsurance Co., issued two fac certs in 1982 reinsuring insurance policies written by the cedent, ACE Property & Casualty Insurance Co., to A.P. Green Refractories Co. upon the underwriting representation that the insured had had no losses over $10,000 in the past five years. Both certs included an arbitration clause which provided:

“Should an irreconcilable difference of opinion arise as to the interpretation of this Certificate . . . as a condition precedent of any right of action hereunder, such difference shall be submitted to arbitration.”

Four months after issuing the certs, Gerling discovered that the insured had been named as a defendant in numerous lawsuits seeking asbestos exposure damages. Gerling canceled, instead of rescinding, the certs two months later because it believed that ACE was unaware of the litigation at the time it solicited the reinsurance.

In the mid-1990s, ACE paid certain liabilities on behalf of A.P. Green and sought indemnification from Gerling. Gerling agreed to make a provisional payment of $326,894 contingent on its review of ACE's underwriting files. During the course of that review, it discovered a letter predating ACE's reinsurance solicitation by a month from the insured's broker disclosing that A.P. Green was a defendant in numerous asbestosis lawsuits. Gerling demanded rescission and a refund of its indemnity payment because of ACE's failure to disclose a material fact in violation of its duty of utmost good faith. ACE countered with an arbitration demand claiming that an “interpretation” of the certs' “follow the fortunes” and “following form” clauses required Gerling to indemnify it for the asbestos litigation liability.

Citing the principle of utmost good faith, both the trial court and Second Circuit rejected ACE's arbitration demand because the parties' dispute concerned the certs' formation and not their interpretation, thereby falling outside the narrow ambit of the arbitration clause wording. In the absence of the “all-encompassing language requisite to a broad arbitration clause,” the court concluded that Gerling's rescission claim raised doubt as to the certs' very formation and did not hinge on an interpretation of their “follow the fortunes,” “following form,” or any other clause.

Gerling Global Reinsurance Co. v. ACE Property & Casualty Insurance Co., No. 01-9353, 2002 U.S. App. LEXIS 15571 (2d Cir. Aug. 1, 2002).

THE GASS COMPANY, INC.
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