JANUARY 2008 BAD FAITH CASES 3RD PARTY BENEFICIARIES MUST SUBMIT BAD FAITH CLAIMS AGAINST REINSURER TO ARBITRATION, WHERE THE CONTRACT HAS ARBITRATION PROVISION (Philadelphia Federal)
The insured, a licensed psychiatrist, purchased malpractice insurance from an insurance company. The insurance was placed with a reinsurer. To comply with insurance regulations, the insurance was then placed with a fronting insurance carrier. The insured was sued in state court for professional liability claims within the policy period.
The fronting insurance carrier withdrew its defense during litigation. A judgment was later entered against insured. Following the trial, the fronting insurance carrier was declared insolvent. At the same time, the insureds of the fronting insurance carrier were found to be third-party beneficiaries of the agreement between the reinsurer and the fronting insurance carrier (“agreement”) and could bring actions against the reinsurer.
The insured then brought an action in state court against the reinsurer for the fronting insurance carrier’s breach of contract, breach of covenant of good faith and fair dealing, and insurance bad faith, and an insurance bad faith cause of action based upon the reinsurer’s own conduct.
The reinsurer removed the case to federal court and moved to compel arbitration based on an arbitration provision contained in the agreement. The court agreed with the reinsurer. The court noted that the insured, who brought claims directly against the reinsurer pursuant to the agreement, was bound by the terms of the agreement so long as the claims arise from the agreement.
The court found that the agreement controls any duty the reinsurer owed the insured, and consequently, any cause of action brought by the insured against the reinsurer. As a result, the court held that the insured must submit his claims against the reinsurer to arbitration.
Date of decision: December 13, 2007
Doeff v. Transatlantic Reinsurance Co., United States District Court for the Eastern District of Pennsylvania, Civil Action No. 07-2110, 2007 U.S. Dist. LEXIS 91879, (E.D. Pa. 2007) (Savage, J.).