Sometimes seemingly subtle policy wording differences can significantly affect the court’s analysis of key policy clauses. The significance of the wording subtleties sometimes is best seen by comparing the wording to equivalent provisions in different policies. That was the case in recent proceedings in which an excess insurer sought to compel arbitration of an underlying coverage dispute. As discussed below, the court found that the language of the specific arbitration provision in dispute did not apply either to the parties or the dispute involved in the underlying coverage lawsuit. The ruling, in which the court applied New York law, can be found here.

Background

In 2018, two related entities, Orion HealthCare and Constellation Healthcare Technologies, declared bankruptcy. The two bankrupt estates were jointly administered. Several adversary proceedings were filed in connection with the bankruptcies. Among other actions, the bankruptcy trustee filed an adversary proceeding against Constellation’s directors and officers alleging various breaches of their fiduciary duties.

At the relevant time, Constellation maintained a program of D&O insurance that consisted of a layer of primary insurance and a layer of follow-form excess insurance. The Constellation directors and officers tendered the trustee’s adversary proceeding against them to the D&O insurers. The excess insurer denied coverage for the action in reliance on its contention that the adversary complaint alleged only wrongful acts alleged to have taken place prior to the past acts date.

In March 2021, the parties in the adversary proceeding participated in court-ordered mediation. The insurers participated in the mediation sessions. As a result of the mediation, the trustee, the primary D&O insurer, and the directors and officers entered into a settlement. While the excess insurer was not a party to this settlement, the settlement did include a provision whereby the directors and officers assigned their rights under the excess policy to the trustee.

In December 2021, the trustee filed an adversary proceeding against the excess insurer, essentially alleging that the Constellation directors and officers were entitled to insurance under the excess policy. The excess insurer filed a motion to stay the proceeding and to compel arbitration. In seeking arbitration, the trustee relied on the arbitration provision in the primary policy. (The excess insurer’s policy had its own arbitration provision, but the policy as issued deleted the excess policy’s arbitration provision and instead adopted the arbitration provision in the primary policy.)

The bankruptcy court judge denied the excess insurer’s motion to compel arbitration, finding that the arbitration provision does not apply to the parties or disputes involved in the trustee’s action against the excess insurer. The excess insurer appealed the bankruptcy judge’s ruling to the district court.

The Relevant Policy Language

The arbitration provision in the primary policy, on which the excess insurer relied in seeking to compel arbitration, provides that “A dispute between the insurer and the policyholder regarding any aspect of this policy which cannot be resolved by agreement between them in six months, shall be referred to a mutually agreed mediator. If the dispute remains unresolved after mediation, it shall be resolved by arbitration in the London Court of International Arbitration (LCIA).”  

The September 5, 2024, Opinion

In a detailed September 5, 2024, opinion, Eastern District of New York Judge Gary Brown affirmed the bankruptcy court’s ruling, holding that the arbitration provision on which the excess insurer sought to rely did not apply to the parties or disputes involved in the trustee’s action against the excess insurer.

In reviewing the bankruptcy court’s ruling, the district court first found that the excess insurer had expressly deleted the arbitration provision in its own base policy form and had expressly adopted the primary policy’s more restrictive arbitration provision.

The district court then reviewed the primary policy’s provision and observed that the provision “plainly indicated an intention that the provision is limited to disputes between the ‘insurer’ and the ‘policyholder’,” noting further that terms insurer and policyholder are expressly defined in the policies. The terms, the court said, can be construed to mean, respectively, the excess insurer and Constellation Healthcare. The provision, the court said, is expressly limited to disputes between the excess insurer and Constellation.

The coverage dispute here was between the trustee, as assignee of the directors and officers, and the excess insurer. The dispute, the court found, is one between the insurer and the insureds, not between the insurer and the policyholder (Constellation), and therefore the dispute falls “outside the scope of the Arbitration Provision.” Because the provision, which the court said was “clear and unambiguous,” does not compel arbitration between the insurer and the insureds, “there is no valid agreement between the parties to arbitrate the claims at issue.”

Discussion

At a minimum, the court’s ruling here underscores the fact that small wording difference can be very significant. It is critically important here that the arbitration provision required arbitration of disputes between the insurer and the policyholder, rather than disputes between the insurer and the insureds.

The significance of the specific wording involved is also highlighted by comparing the wording differences between the arbitration provision in the primary policy and the arbitration provision in the excess policy base form. (As noted above, the excess insurer had expressly deleted the arbitration provision in its base form, and expressly adopted the wording of primary policy.)

The primary policy’s arbitration provision referred to disputes between the insurer and the policyholder. The arbitration provision in the excess insurer’s base form, by contrast, provided that “Any and all disputes or differences which may arise under this Policy, whether arising before or after the termination of this Policy, including any determination of the amount of the Loss or the formation or validity of the Policy shall be subject to the alternative dispute resolution process (‘ADR’) set forth in this clause.”

The unrestricted language of the excess policy’s provision (“Any and all disputes”) contrasts significantly from the more restrictive language of the primary policy’s arbitration provision, which refers only to disputes “between the insurer and the policyholder.” This difference was outcome determinative in connection with the excess insurer’s motion to compel arbitration.

This case represents something of a practice advisory to insurers committed to trying to have all coverage disputes submitted to arbitration. Unless the insurer wants to draw a distinction between coverage disputes that involve insured persons and coverage disputes that involve policyholders, the insurer seeking to have all disputes arbitrated will want to incorporate language the mirrors the excess insurer’s base form, rather than the more restrictive language found the primary policy.

I will say that I have never really liked mandatory arbitration provisions that require all coverage disputes to be arbitrated. I have always thought the better approach would be to provide for arbitration at the sole choice of the insureds under the policy. My view is that insureds should not have to arbitrate if they don’t want to, for the simple reason is that sometimes a lawsuit is the only tool that can effectively reach an insurer that has gotten hung up on a dumb coverage position. On the other hand, arbitration can be more efficient, so giving the insureds the option to seek to arbitrate is appropriate.

Special thanks to a loyal reader for sending me a copy of the district court’s opinion.