Guarantee Trust Life Ins. Co. v. First Student Programs, LLC. et. al.
(United States District Court, Northern District Illinois, Eastern Division, September 8, 2009)
At issue in this reinsurance action is the res judicata effect of a prior arbitration award on the pending suit and whether insured’s compliant is barred by the arbitration award that resolved the dispute between reinsurer and the primary insurer. Specifically, Guarantee Trust Life Insurance Company (GTL), which provides health insurance to college students, brought this lawsuit for reinsurance benefits from defendant/third-party plaintiff First Student Programs, LLC (FSP). Under an agreement between GTL and FSP, FSP was obligated to obtain excess reinsurance from another provider, American Untied Life Insurance Company (AUL). FSP claims it met this obligation by contracting with AUL, therefore, when GTL sued FSP for failure to obtain reinsurance, FSP filed a third-party complaint against AUL alleging the AUL had breached it contract with FSP.
Thereafter, AUL moved to dismiss the third-party action contending that FSP’s claim is barred by the arbitrator’s determination made in a prior proceeding brought by GTL that AUL had not, in fact, agreed to provide excess reinsurance as alleged. In granting reinsurer’s, AUL’s, motion to dismiss the court first examined the issue of whether federal law or state law applied, and then which state law was controlling in determining the res judicata issue. The court concluded that while the jurisdiction for confirming the arbitration award was based on diversity, federal common law incorporates state law to determine the preclusive effect of the confirmation. Thereafter, the court concluded that under US Supreme Court precedent in Semtek Intl Inc. v. Lockheed Martin Corp., 531 U.S. 497 (2001), Illinois law would apply because that is where the court confirming the award sat. See, Semtek, supra (holding, that “to determine the preclusive effect of a diversity judgment, federal common law incorporates “the law that would be applied by state courts in the State in which the federal diversity court sits”).
Under Illinois’ res judicata doctrine, the court determined that the only requirement at issue was whether AUL and FSP were in privity, noting that a nonparty is in privity with a litigating party and can be bound by a judgment against that party when the two parties interests as so closely aligned that the litigating party is the “virtual representative of the nonparty.” The court rejected FSP’s argument that it was not in privity with AUL because it was not formally involved in the arbitration and because the two parties’ interests were not aligned. Rather, the court held that involvement in the prior action is not required because, by definition, “a privity relationship binds parties to judgments in actions to which they are merely connected.” Moreover, the Court found that the parties were likewise aligned because AUL’s position in the arbitration was identical to the position that FSP took in this case. Thus, as the court found privity between FSP and AUL, it held that FSP’s claim against GTL is precluded by the arbitration award against AUL.
For a copy of the decision, click here
By Paul C. Steck and Daniel W. Gerber