District Court Enforces International Arbitration Provision against “Follow Form” Excess Carrier, Clarifies Standard of Review under Federal Arbitration Act

October 11, 2013

In Ill. Union Ins. Co. v. Teva Pharms. United States, No. 13-3869, 2013 U.S. Dist. LEXIS 147247 (E.D. Pa. Oct. 11, 2013), the U.S. District Court for the Eastern District of Pennsylvania was called upon to decide whether an excess insurer who had issued a “follow form” policy was bound by the international arbitration provision in the primary policies issued by another insurer. Over the excess insurer’s objection, the court held that the arbitration provision was binding and enforceable.

The primary policy at issue, which provided coverage for patent infringement claims in the United States and Canada, contained the following condition of coverage: “Any controversy arising out of or relating to this Policy or its breach shall be settled by final and binding arbitration … [under] the United Kingdom Arbitration Act 1996 … in London, England ….” The excess policy issued by the excess insurer identified the primary policy containing this condition as “the Followed Policy.” Under the insuring clause of the excess policy, the excess insurer “agreed to provide insurance coverage to the Insureds in accordance with the terms, definitions, conditions, exclusions and limitations of the Followed Policy, except as otherwise provided [in the excess policy].” Similarly, the “Underlying Insurance” provision stated that coverage under the excess policy followed “the same terms, definitions, conditions, exclusions and limitations (except as regards the premium, the limits of liability, the policy period and except as otherwise provided [in the excess policy]) as are contained in or as may be added to the Followed Policy ….,” and that coverage under the excess policy in no event would be “broader than coverage under the underlying policies.” The excess policy made no mention of the arbitration provision in the primary policy. It did, however, contain a “Service of Suit Endorsement,” which provided that the excess insurer would “submit to the jurisdiction of any court of competent jurisdiction.”

The excess policy was continued through yearly endorsements until there eventually was a change in the primary policy. Like the previous primary policy, the new primary policy contained the arbitration provision and, in all other material respects, was the same as the previous primary policy. A new excess policy following the new primary policy was issued by the excess insurer. Thereafter, another primary policy, which incorporated the language of the preceding primary policy, issued. As it had previously, the excess insurer issued a “follow form” policy, though the “Followed Policy” remained the preceding policy that had been incorporated into the latest primary policy by reference. This policy was later continued.

Subsequently, the insured sought coverage under the excess policy for patent infringement suits that it had litigated and settled. In response, the excess insurer sought a declaratory judgment from the district court as to coverage in the district court. While that suit was pending, the insured initiated arbitration in London in accordance with the terms of the primary policy. The insured then moved to compel arbitration in the district court, prompting the excess insurer, in turn, to initiate suit in the English Commercial Court under the United Kingdom Arbitration Act 1996.

In deciding the arbitration question, the court began its analysis by discussing the Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1-307. Specifically, the court discussed the framework of the FAA, particularly in regard to international arbitration agreements. Essentially, the court noted that Chapter 2 of the FAA implements the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“CREFAA”), which generally governs international commercial arbitration agreements. Further, the court noted that Chapter 1 of the FAA, which pertains to domestic arbitration agreements, applied to international commercial arbitration agreements to the extent that it was not inconsistent with CREFAA and, by extension, Chapter 2 of the FAA. Of the four factors that must be considered in deciding whether to enforce an international commercial arbitration agreement under CREFAA, only one was in dispute in the case before the court-i.e., whether an agreement to arbitrate the dispute existed between the insured and the excess insurer. Accordingly, the court turned its attention to whether the excess policy incorporated the arbitration provision from the primary policy, as well as the standard of review that it should employ in resolving this issue.

Concerning the latter, the court explained that, under the law of the Third Circuit, the summary judgment standard (i.e., evidence of an “express” and “unequivocal” agreement to arbitrate) only applies to issues of contract interpretation under the FAA to the extent that the parties’ intent or authority to enter into an arbitration agreement are in dispute. Conversely, if the issue presented is purely one of interpreting contract language, the court applies the motion to dismiss standard (which, incidentally, the court noted overlaps with the motion for summary judgment standard to the extent that there are no disputed issues of fact). As such, because the dispute between the insured and the excess insurer turned entirely on the interpretation of the language of the excess policy, the court refused to adopt the “express” and “unequivocal” evidentiary standard. Indeed, the court held that to conclude otherwise would impose a higher evidentiary burden on proving arbitration agreements than other contracts, even though arbitration agreements were to be on “equal footing” with other contracts under the FAA.

Upon deciding the standard to employ, the court then turned its attention to the excess policy. In order for the dispute to be arbitrable under the FAA, the court held that there must be an agreement to arbitrate under the policy, and the existing dispute between the parties must fall within the scope of that agreement to arbitrate.

Turning to the first of these issues, the court began by focusing its attention on which jurisdiction’s law should govern the interpretation of the excess policy, which, like the primary policy, did not contain a choice-of-law provision. According to the court, even though federal law governs the enforceability of international arbitration agreements, the contract interpretation issues underlying that inquiry (e.g., whether the excess policy incorporated the “arbitration” condition from the primary policy) present a choice-of-law issue. Although the court noted that the parties were equivocal in their positions on this issue due to their disagreement over its effect on future litigation, the court effectively concluded that, because there was no conflict between the three states’ laws that could potentially apply (i.e., Pennsylvania, New York, and Illinois), it did not actually have to decide which jurisdiction’s law applied.

Turning to the excess policy, the court found that it clearly incorporated the condition containing the arbitration provision from the primary policy. In so concluding, the court followed the Third Circuit’s decision in Century Indemnity Co. v. Certain Underwriters at Lloyd’s, London, 584 F.3d 513 (3d Cir. 2009).  In particular, the court focused on the broad nature of the policy’s language and rejected the insurer’s attempt to argue that the underlying insurance provision evidenced that only the “substantive” (i.e., coverage) provisions of the primary policy were incorporated into the excess policy. Moreover, the court stated that, because the “condition” containing the arbitration provision was actually a condition of coverage, it in any event would be inconsistent to interpret the excess policy, which made express reference to the “conditions” of the primary policy, as not incorporating the arbitration provision. Finally, the court rejected the insurer’s argument that the separate notice provision in the excess policy would be rendered superfluous if the insuring clause and underlying insurance provision were interpreted to include the “procedural” provisions of the primary policy, such as the arbitration provision. Specifically, the court concluded that the notice provision was “perhaps reiterative,” but that did not render the provision superfluous, especially since the absence of a separate notice provision in the excess policy would lead to absurd results-i.e., notice under the excess policy being provided to the primary insurer in accordance with the terms of the notice provision of the primary policy.

Moving on to the issue of the scope of the parties’ arbitration agreement, the court noted that the parties did not seriously contest the scope of the arbitration provision if the court found it to be enforceable.  Nonetheless, the court proceeded to conclude that the language of the arbitration provision was sufficiently broad to include the claims raised in the excess insurer’s complaint against the insured. Accordingly, having decided that the excess insurer was bound by the arbitration provision, the only remaining issue for the court to address was whether it should defer ruling on the issue since the issue was separately pending before the English Commercial Court.  The court declined to do so, essentially holding that there was no legal basis for permitting the excess insurer to try to obtain a favorable ruling from the English Commercial Court under English law when it had filed the action in the district court first.  Despite ruling against the excess insurer on this issue and the issue of arbitrability, the court declined to award the insured its attorneys’ fees and costs associated with compelling arbitration.

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