Reversing the trial court's grant of a stay in favor of arbitration, the Appellate Division of the Supreme Court of New York ruled that the "narrow" arbitration clause in a reinsurer's facultative certificates was limited to disputes involving contract interpretation and was not triggered when the reinsurer merely sought restitution of certain claims payments because the cedent had incorrectly applied its own environmental pollution allocation methodology.
The cedent issued three successive excess insurance policies providing liability coverage for environmental pollution claims between 1962 and 1971 to an insured. The reinsurer issued two facultative certificates covering the cedent's second and third excess policies. When the cedent settled three separate environmental claims against its insured, it misapplied its allocation formula in each instance resulting in about $3.1 million of loss billings to the reinsurer under the certificates when, in fact, it had no liability.
When the reinsurer's refund demand was rejected by the cedent, it commenced this restitution action in New York state court. The cedent responded with the affirmative defense that the parties must arbitrate this refund dispute pursuant to the certificates' identical arbitration clauses, which provided: "Should an irreconcilable difference of opinion arise as to the interpretation of this contract, it is hereby mutually agreed that, as a condition precedent to any right of action hereunder, such difference shall be submitted to arbitration." The trial court agreed and issued a stay of the restitution action in favor of arbitration.
On appeal to the Appellate Division, the Supreme Court reversed and held that the cedent had failed to meet its burden to demonstrate a "clear and unequivocal" agreement to arbitrate this dispute, which, according to the court, did not require the interpretation of any reinsurance agreement provision. Adopting the Second Circuit's distinction between "narrow" and "broad" arbitration clauses in Louis Dreyfus Negoce S.A. v. Blystad Shipping & Trading Inc., 252 F.3d 218 (2d Cir.), cert. denied sub nom. Negoce v. Blystad Shipping & Trading, Inc. 534 U.S. 1020 (2001), it ruled that under a "narrow" arbitration clause the court must determine whether the dispute is over an issue that is on its face within the purview of the clause or over a collateral issue that is somehow connected to the main agreement that contains the arbitration clause. If the latter, then such collateral matters will be ruled beyond the clause's purview. Because the cedent's billing errors did not involve differences over contract interpretation (i.e., the reinsurer was only challenging the cedent's billing calculations and not the merits of its underlying claims settlements or environmental pollution allocation formulas), they fell within the realm of a non-arbitrable collateral issue and, therefore, were beyond the purview of the certificates' "narrow" arbitration clause.
Gerling Global Reinsurance Corp. v. The Home Insurance Co., No. 2125N, 2002 N.Y. App. Div. LEXIS 12519 (N.Y. App. Div. Dec. 17, 2002)