A close-up of the word bond with a yellow tintA number of states, New York included, have provisions in their insurance law that require an unauthorized foreign or alien insurer to post a bond or procure a license before filing any pleading in any proceeding against it in a court in that state.  The reason for this provision is to make sure that an insurance company that is not licensed in the state, but provides an insurance policy to a policyholder in the state, has sufficient financial accountability in the state to satisfy any potential judgment against it from any legal proceeding brought against it in the state.  One question that periodically arises in disputes over whether a bond must be posted in a proceeding is whether the filling by the unlicensed insurer is a “pleading.”  This issue was recently addressed by a New York Bankruptcy Court in the context of a motion to compel arbitration.

In the latest in a long line of opinions in the MF Global Holdings Ltd. v. Allied World Assurance Co. Ltd. case before the United States Bankruptcy Court for the Southern District of New York, the court was faced with resolving a Bermuda insurer’s motion to compel arbitration of its dispute with its now bankrupt policyholder and the estate’s motion seeking to require the insurer to file a bond under New York Insurance Law section 1213(c).  The court held that before it could consider the insurer’s motion to compel arbitration, the Bermuda insurer must first provide prejudgment security under Section 1213(c)(1).

The court held that the requirements of Section 1213(c)(1) were met in this case. The court rejected the Bermuda insurer’s argument that it did not issue a policy to a New York policyholder because it used a Bermuda intermediary to deliver the policy. In so finding the court stated that based on the narrow reading by the Bermuda insurer of the term delivered it would mean that no policy would ever be delivered to policyholders by any insurers if they were not directly delivered to the policyholders. In this case, the policy was delivered through the broker to the policyholder’s New York address as stated on the policy.

The court also rejected the argument that the Bermuda insurer’s motion to compel arbitration was not a pleading. As the court explained, a number of courts have interpreted “pleading” broadly and have included motions to dismiss based on arbitration provisions and motions to compel arbitration.  Essentially, a motion to compel arbitration is a response to the complaint as seen by this court. The court determined that a broad reading of “pleading” was required to afford New York insureds the protection of the statute.

Finally, the court rejected the claim that Section 1213 was preempted by the New York Convention.  The court pointed out that other courts have found that the bond requirement is not an impediment to arbitration as it merely secures that funds will be available to satisfy any potential judgment.

The Bermuda insurer was ordered to post a bond in order to have its motion to compel arbitration heard.