Compelling resolution: arbitration clauses are becoming standard provision in reinsurance contracts. (Loss/Risk Management Insight: Property/Casualty).

Arbitration is fast becoming the preferred method of dispute resolution as it presents a relatively quick and economical alternative to swollen court dockets. This is particularly true in reinsurance disputes because of the added benefit of having issues resolved by industry professionals familiar with the intricacies of the business, rather than decided solely upon legal strictures. Thus, arbitration clauses are becoming standard provisions in reinsurance contracts, and even in certain insurance contracts.

But is arbitration still an option in disputes that involve contracts or slips that have no such provision but simply follow the form of other contracts? And what about disputes that involve third parties that have not signed the reinsurance agreement containing the arbitration clause? A burgeoning collection of federal precedent suggests that arbitration may provide a solution in these cases.

The Federal Arbitration Act represents a codification of a strong federal policy in favor of arbitration as a faster and less expensive means of dispute resolution. Despite this liberal federal policy, the right to arbitration is contractual in nature, in that a party generally could not be required to submit to arbitration unless it has agreed to do so. However, a well-developed body of case law now has emerged under the act, identifying several situations where a nonsignatory to an arbitration agreement still may be bound to arbitrate. These include incorporation by reference, assumption, agency, veil piercing/alter ego and estoppel, all of which are explained below.

Incorporation by reference: A nonsignatory to an agreement to arbitrate can be compelled to arbitrate, where it has entered into a separate contractual relationship with the signatory to the arbitration agreement that incorporates the existing arbitration clause. The language of the arbitration clause, however, must be sufficiently broad to include the dispute with the nonsignatory.

Assumption: Any actions by the nonsignatory that manifest a clear intention to participate in the arbitration process may render the nonsignatory unable later to avoid further participation.

Agency: Traditional agency law principles may also bind a nonsignatory to an agreement to arbitrate. In certain circumstances, where a principal is bound under a valid arbitration clause, its agents, employees and representatives also have been held to be covered under the terms of such an agreement. The execution of an arbitration agreement as an agent for a disclosed principal is, however, generally insufficient to render the agent a party to that agreement.

Veil piercing: The relationship between a parent corporation and its subsidiary may be deemed so close as to render both entities subject to an arbitration agreement that only one has executed. The corporate veil generally will be pierced either to prevent a fraud or to intervene in those circumstances where one entity so dominates the operations of the other that the two no longer can be viewed as functioning separately.

Estoppel: Where the nonsignatory has availed itself of the benefits of the agreement containing the arbitration clause, it generally will be required to arbitrate under that agreement. But a nonsignatory can estop a signatory from avoiding arbitration when the issues that the nonsignatory is seeking to resolve are based upon and intertwined with the agreement containing the arbitration clause.

Of the five exceptions discussed, the situation most likely to arise in the reinsurance context would involve a reinsurance agreement that incorporates by reference another contract containing an arbitration clause. A reinsurer that prefers dispute resolution through arbitration should include in its contracts a broadly worded arbitration clause that encompasses all disputes arising out of the contract. Where a retrocessional agreement simply follows the form of the underlying contract of reinsurance, the underwriter must scrutinize the language of the arbitration clause in that underlying agreement to verify that it is not too restrictive.

Given the number of situations where arbitration can be had with a nonsignatory, a reinsurer should be mindful of any potential scenario that might provide an opportunity to avoid costly and time-consuming litigation. Conversely, a reinsurer must monitor its own conduct, particularly in its dealings with agents and subsidiaries, or it may find itself a more frequent participant in the arbitration process than it intended.

Lloyd Gura left, is a partner and Mitchell Otto is an associate with the law firm of Mound, Cotton, Wollan & Greengrass. They can be reached at [e-mail].