In a recent state court appellate decision on a reinsurance collections dispute, the court affirmed a lower court order denying a motion to compel arbitration based on the collateral estoppel or issue preclusion effect of a prior decision. Collateral estoppel or issue preclusion may be used offensively or defensively. It is a civil procedure doctrine that precludes a bound party from re-litigating an issue that a court has already decided. It doesn’t come up that much in public reinsurance cases because most reinsurance disputes are governed by arbitration clauses and it is up to the arbitrators, in private, confidential arbitrations, to determine the collateral estoppel effect, if any, of a prior ruling. Here, the issue arose to preclude arbitration in the first place because of the unique circumstances of the case.
The reinsurance dispute arises out of the reinsurance collection efforts of an insolvent insurance company in Illinois. The liquidator sold the insolvent’s account receivables to an entity formed solely for the purpose of accepting and collecting receivables. What that entity did not purchase, according to more than one court, were the rights and liabilities under the reinsurance contracts. The assignment by the liquidator conveyed only the right to collect the debt and not to enforce the arbitration provision of the reinsurance contract, including the ability to demand arbitration. See Pine Top Receivables of Ill., LLC v. Banco De Seguras Del Estado (N.D. Ill., 2013).
In the earlier case cited above, the court concluded that the assignment did not include the right to demand arbitration. That decision was affirmed by the Seventh Circuit Court of Appeals. In this case, Pine Top Receivables of Ill., LLC v. Transfercom, Ltd., 2017 IL App (1st) 161781 (Ill. App., 2017), the assignee sought to compel a different reinsurer to arbitrate under a different reinsurance contract. In affirming the lower court’s order denying the motion to compel arbitration on collateral estoppel grounds, the court rejected the argument that the 7th Circuit’s decision was not final for purposes of collateral estoppel.
The court found that the 7th Circuit resolved the merits of the issue of whether the assignee was entitled to demand arbitration of claims assigned to it by the liquidator and concluded that it was not. The interlocutory appeal, which was mandated by the Federal Arbitration Act in order to challenge the determination, resolved the arbitration issue. As the court noted, once the 7th Circuit made its decision, there would have been no occasion for either the district court or the 7th Circuit to revisit the arbitration issue. Thus, the issue was final on the merits.
The assignee here argued fairness, but the court rejected the fairness argument stating that what was really going on was the assignee attempting to seek a second bite at the apple. The assignee also complained that this ruling would preclude other, non-US reinsurers from invoking the arbitration provisions in the reinsurance agreements. The court noted that if any of the reinsurers in the future demand arbitration against the assignee, the assignee could merely consent to arbitration given that is what it has been seeking all along.
In the normal reinsurance situation, this issue might not arise because both are parties to the reinsurance contract and must comply with the arbitration provision (assuming it exists). But where, in insolvency or in runoff, a party purchases reinsurance recoverables, it is critical to determine what contractual rights and liabilities have been purchased. If, as in this case, only the debts, i.e., the reinsurance recoverables, have been purchased and not the reinsurance contracts, then the right to enforce the arbitration clause in the underlying reinsurance contract will not exist.