A typical reinsurance contract has one arbitration clause. But sometimes, the contract is endorsed and a second and different arbitration clause may appear. Which controls? That was the question faced recently in a Hurricane Sandy reinsurance dispute when a facultative certificate of reinsurance had an arbitration clause in its body at Section U, but had an endorsement (No. 2), which had a different arbitration clause. Infrassure, Ltd. v. First Mut. Transp. Assur. Co., No. 15-cv-08230 (GBD) (S.D.N.Y. Jan. 22, 2016).
Section U of the facultative certificate provided for arbitration in New York. Endorsement No. 2 provided for arbitration in London. The endorsement, however, expressly stated that it only governed disputes between the cedent and “UK and Bermuda Insurers.” The reinsurer in this dispute is a Swiss company. It brought a declaratory judgment action in New York federal court to declare that Section U was the applicable section of the facultative certificate that governed arbitration, not Endorsement No. 2. Not to be outdone, the cedent sought a declaration that Endorsement No. 2 applied and that the arbitration had to be in London.
The court resolved the case by holding that Section U was the applicable provision concerning disputes between the cedent and this Swiss reinsurer and that Endorsement No. 2 was inapplicable because it was limited to only those insurers domiciled in the UK or Bermuda. The court granted the declaration and directed arbitration to take place in New York pursuant to the requirements of Section U.
Two interesting notes. First, this was not a petition to compel arbitration under the Federal Arbitration Act or the New York Convention. It was a declaratory judgment action. Second, why were there competing arbitration clauses in a fac cert? We don’t know the answer to the second question, but it may be that there was no actual competition. Endorsement No. 2 may have been the quid pro quo for the Bermuda and London markets to participate facultatively on the program written by the captive of New York’s Metropolitan Transportation Authority. This reinsurer was not part of that market so the endorsement did not apply.
The cedent has appealed so this story may not yet be over.