Nat’l Cas. Co. v. Cont’l Ins. Co., No. 23 CV 3143, 2023 WL 7668793 (N.D. Ill. Nov. 15, 2023)

Issue Discussed: Preclusive Effect of Prior Arbitral Awards

Submitted by Robert W. DiUbaldo, Oliver M. Phillipson

Date Promulgated: November 15, 2023

Case Summary: National Casualty Company and Nationwide Mutual Insurance Company (collectively, the “Reinsurers”) entered into three reinsurance agreements (the “Reinsurance Agreements”) with Continental Insurance Company (“CNA”) in effect between 1969 and 1975. Each of the Reinsurance Agreements contained an arbitration clause providing that any dispute pertaining to the interpretation of the Reinsurance Agreements shall be submitted to final and binding arbitration.

In 2017 CNA initiated arbitration proceedings, pursuant to the arbitration clause in the Reinsurance Agreements, to adjudicate a dispute that had arisen with its Reinsurers over CNA’s billing and allocation methodology and whether it was permissible under the “Loss Occurrence” definition set forth in the Reinsurance Agreements. CNA received two separate arbitration awards, each resolved in favor of the Reinsurers respectively, and each confirmed by a federal court order.

Thereafter, the CNA submitted certain additional billings to the Reinsurers, who, citing the same “Loss Occurrence” definition in the Reinsurance Agreements, refused to pay. The Reinsurers commenced a federal court action seeking declaratory judgment and injunctive relief, seeking to preclude CNA from compelling a second round of arbitration proceedings to once again litigate the interpretation of the “Loss Occurrence” definition. CNA moved to dismiss the Reinsurers’ federal court action and compel arbitration of the parties’ dispute.

The court considered the issue of whether the preclusive effect of a prior arbitration award is, itself, arbitrable. In doing so, the court noted that procedural questions that grow out of a dispute between parties and bear on the final disposition of such dispute are matters for an arbitrator to decide. The court found that the preclusive effect of a prior arbitration is not among the limited circumstances where contracting parties would have expected a court to decide the gateway matter of arbitrability; rather, the court found that the preclusive effect of a prior arbitral award is a defense subject itself to arbitration. The court noted that deciding on the preclusive effect of the prior arbitral awards would impermissibly require the court to delve into the merits of the claims. As such, the court granted CNA’s motion to compel arbitration.

Further, the court considered whether to dismiss the declaratory judgment action or to stay that action pending the outcome of arbitration. Noting that all of the claims are subject to arbitration, the court held that it would not decide any matter unless and until a party were to seek confirmation of an arbitral award. The court therefore granted CNA’s motion to dismiss.