AXA Verischerung AG v. New Hampshire Ins. Co.
(S.D.N.Y. Apr. 29, 2010)
A federal court recently ruled that a reinsurer’s fraudulent inducement claim against three AIG subsidiaries was not subject to an arbitration clause in the reinsurance facilities and that, even if it was, AIG had waived it arbitral rights.
In 1996, AIG, acting through its brokers, solicited AXA’s predecessor, Albignia’s, participation in a reinsurance facility that was intended to cover a “primary layer” of $10 million with respect to certain energy risks in the South Pacific Rim region that were insured by AIG. Albignia agreed. The reinsurance facility contained an arbitration clause providing that “all disputes or differences arising out of the interpretation of this Agreement shall be submitted to the decision of two arbitrators, one to be chosen by each party.”
AXA, as successor in interest to Albignia, filed suit against AIG and alleged that AIG’s brokers negotiating the facilities, acting with knowledge that Albignia was not in a position to undertake the kind of review necessary to enter into purely facultative reinsurance contracts, induced Albignia to agree to the “slips” that formed the facilities by falsely representing that the facilities would be facultative obligatory. AXA claimed that it was AIG’s intent from the outset to treat the facilities as facultative and thereby transfer AIG’s inferior policies to AXA. Ultimately, the matter was tried before a jury, which resulted in a $34 million verdict in AXA’s favor. AIG appealed on the ground that the matter should have been arbitrated pursuant to the facilities’ arbitration clause. The Second Circuit remanded the case and directed the district court to develop facts related to whether AXA’s claims should have been sent to arbitration and, if so, whether AIG waived its right to arbitration.
The district court found that AXA’s fraudulent inducement claim was not duplicative of a hypothetical contract claim. Indeed, the court held that the gist of AXA’s single claim for fraudulent inducement was that in the course of the rapid exchanges typical of entering into “slips,” AIG misrepresented numerous facts about the nature and value of the non-contractual arrangements they were offering to Albingia to induce Albingia to enter into the facilities. Nevertheless, the court noted that even if New York law treated AXA’s allegations as duplicative of a hypothetical contract claim, it would still find that the claim was not within the scope of the arbitration clause, because it did not “aris[e] out of the interpretation” of the contracts. AXA’s claim alleged misrepresentations independent of the provisions of the contracts, and AIG failed to point to any interpretive dispute with respect to any contractual term that formed the bases of the allegations that constituted AXA’s fraudulent inducement claim.
Finally, the court held that AIG waived its right to arbitration by litigating the matter.
For a copy of the decision, click here
Carrie Appler and Jeffrey Kingsley