Railroad switchWhen an insurance company pays a loss on a claim, the insurance company often exercises its equitable right of subrogation to stand in the shoes of the insured and seek compensation from a third-party alleged to have caused the loss. In the property context, there may be an underlying contract that requires arbitration between the insured and its counterparty, which may provide the vehicle for the subrogation claim.

In a recent case, a New York federal court addressed a petition by an insurer to compel arbitration against a third-party under a transportation service agreement between the insured and that third party relevant to goods that were destroyed by a fire. Complicating the case was the insolvency of one of the third-party’s insurance carriers and state insurance law that precludes recovery from the insured of an insolvent insurer.

In Zurich Ins. Co. v. Crowley Latin America Serv., LLC, No. 16-cv-1861 (JPO) (S.D.N.Y. Dec. 20, 2016), the insurer was subrogated to the the rights of its insured and sought to recover its loss payment from its insured’s counterparty under a transportation services agreement. The agreement had an arbitration clause.

The insured had consigned goods to a third-party and the third-party engaged a trucking company to transport the goods. The trucking company was insured by two insurers for the goods and the consignee was named as an additional insured under those policies. One of the trucking company’s insurers became insolvent and the state insurance guaranty association stepped in.

After paying the loss, the insurer, standing in the shoes of the consignor/insured, sought to arbitrate its claim against the third-party consignee for negligence in causing the loss of the goods. The consignee argued, among other things, that it could not be compelled to arbitrate because state law, under the McCarran-Ferguson Act, preempted the Federal Arbitration Act. State insolvency laws concerning insurance guaranty associations generally contain a provision that precludes a recovery against the insured of an insolvent insurer. Here, one of the carriers that insured the consignee was insolvent.

The court rejected this argument because there was a second insurer that was solvent. The court noted that the terms of the guaranty fund statute prevent recovery only where there is a single, insolvent insurer and does not bar a recovery where there are other, solvent insurers. This is consistent with the statute’s requirement that a party exhaust all rights under policies with solvent insurers before the guaranty association has any responsibility for a loss. Accordingly, the court held that because state law does not preclude recovery, application of the Federal Arbitration Act does not contravene state law under the language of the McCarran-Ferguson Act. Thus, held the court, the arbitration clause in the transportation services agreement was enforceable under the Federal Arbitration Act. The court granted the petition to compel arbitration and denied the motion to dismiss the petition.