Service of Suit Clauses – More Than You Bargained For?

In a case of first impression, the Southern District of New York has ruled that the presence of a Service of Suit clause in one facultative certificate effected a wholesale waiver of the reinsurer’s right to remove any of the claims that the cedent had joined in a single collection action, including claims under certificates not containing a Service of Suit clause.  The Insurance Company of the State of Pennsylvania v. TIG Insurance Company, Case No. 12-CV 6651(VM)(March 11, 2013).  Under this ruling, cedents may avoid removal by bundling claims under reinsurance contracts containing Service of Suit clauses with claims under contracts not containing the clause into a single state court action.

The case involved a number of claims against TIG Insurance Company under six facultative certificates issued by TIG’s predecessor, International Surplus Lines Insurance Company, to the Insurance Company of Pennsylvania (ICSOP) that reinsured a portion of excess insurance policies issued by ICSOP to two separate insureds:  C.F. Braun & Company (Braun) and Kaiser Cement Corporation (Kaiser).  Five of the facultative certificates at issue reinsured the Braun excess policies and the remaining certificate reinsured the Kaiser policy.  ICSOP’s complaint asserted that Braun and Kaiser had alleged exhaustion of their respective policies by numerous asbestos claims, each insured had filed a separate declaratory judgment action against ICSOP seeking coverage, and ICSOP had entered into settlement agreements with the insureds and then billed TIG for its alleged share of the settlement payments.

ICSOP filed its suit against TIG in the New York Supreme Court, seeking balances of $400,000  in connection with the Braun certificates and $2.6 million under the single Kaiser certificate.  TIG removed the case to federal court and ISLIC moved to remand it to the state court.

The Service of Suit clauses at issue all stated as follows:

“It is agreed that in the event of the failure of [TIG] to pay any amount claimed to be due hereunder, [TIG], at the request of [ICSOP], will submit to the jurisdiction of any Court of competent jurisdiction within the United States and will comply with all requirements necessary to give such Court jurisdiction and all matters arising hereunder shall be determined in accordance with the law and practice of such Court.”

ICSOP argued that the Service of Suit clause in certain of the certificates rendered the entire case non-removable, notwithstanding the fact that at least three of the certificates (including the Kaiser certificate, which accounted for the lion’s share of the claim) did not contain Service of Suit clauses.  Specifically, ICSOP contended that the Service of Suit clause was broad in scope and did not make exception for cases involving disputes under other contracts between the same parties without Service of Suit clauses.  In response, TIG argued that the Service of Suit clauses were narrow in scope and could be applied only to disputes under the contracts in which they appear due to language in the clause stating that it applies to “any amount claimed to be due hereunder.”  TIG also emphasized the different terms, effective periods and, in the case of the Kaiser certificate, insureds, in the various certificates.   It further argued it would be unreasonable and inequitable to enforce the Service of Suit clause where the certificates containing the clause collectively accounted for less than 1/7 of the amount in dispute.

The court recognized that TIG had the burden to demonstrate the propriety of removal and that it must resolve any doubt against removability.  It cited Dinallo v Dunav Ins. Co., 672 F.  Supp. 2d 368 (S.D.N.Y. 2009), aff’d, 402 F. App’x 595 (2d Cir. 2010) as controlling Second Circuit precedent for the proposition that “a valid service of suit clause operates as a waiver of the defendant’s right to remove a state court action to federal court. “  It also adopted the reasoning of an Eleventh Circuit case, Russell Corp. v American Home Assur. Co., 264 F.3d 1040 (11th Cir. 2001), which the Second Circuit had cited favorably in Dinallo.  In Russell, an insured brought an action against 23 insurers seeking coverage determinations under 79 policies; one of the three policies was issued by a single defendant, First State.  That court found that by executing the Service of Suit clause (which was identical to the clause at issue in the ICSOP case), First State had waived the right to seek removal from a court of competent jurisdiction.  After reviewing the “unanimity requirement” under the federal removal statute, the court ruled that it had to be strictly interpreted and enforced because of the significant federalism concerns arising in the context of removal jurisdiction.  The Southern District of New York stated that this rationale was even more compelling in the ICSOP case because only a single party (TIG) was affected, and ordered that the case be remanded to state court.

Efforts to bundle truly disparate claims may be moderated at the extremes by rules relating to the severance of claims, although complex removal issues may remain.  Notably, by the late 1990s most Service of Suit clauses had been significantly changed to address the removal issue, as illustrated by a revised 1998 Lloyd’s market clause which removed the second part of the clause at issue here and went on to state that:  “Nothing in this clause constitutes or should be understood to constitute a waiver of Underwriters’ rights to commence an action in any Court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another Court as permitted by the laws of the United States or of any State in the United States.”  Nonetheless, in a case involving certificates with a combination of clauses, i.e., including one expressly stating that there will not be a waiver of the right to remove, the “unanimity requirement” articulated here would appear to require a finding of waiver despite express contractual language to the contrary.

It appears to be largely settled law that the language of the Service of Suit clause at issue here waives removal rights, but at least with respect to the original intent of the parties to reinsurance contracts containing such language, that seems to be a doubtful proposition.  Service of Suit clauses are contained in reinsurance contracts because regulators require them under state credit for reinsurance laws and regulations if the reinsurer is unlicensed or unauthorized in the cedent’s domicile state.  Indeed, many contracts containing the clause also contain a parenthetical stating that the clause applies only to foreign or unauthorized reinsurers.  In any event, the clauses were arguably intended to provide for personal jurisdiction for foreign reinsurers.  It could also be argued that the portion of the clause indicating that the reinsurer would comply with “all requirements necessary to give such Court jurisdiction and [that] all matters arising hereunder shall be determined in accordance with the law and practice of such Court,” expressly refers to and incorporates the right to remove to federal court, instead of a waiver of such right.  For further commentary concerning the origins and interpretation of Service of Suit clauses, click here.

Many of the cases finding that the clause waives removal rights, including the Russell case, involve claims by insureds against their insurers.  Others, such as Dinallo, involve liquidators and insurers or reinsurers.  To the extent the clause is in fact ambiguous, rules of construction in those cases may support an interpretation in favor of an insured or perhaps a liquidator.  But if the dispute is between a sophisticated insurer and its reinsurers, an ambiguous clause should lead to an inquiry into the parties’ actual intent.  The original underwriters would probably be quite surprised to find that the reference in the clause to disputes arising from “the failure to pay any amount claimed to be due hereunder,” could refer to anything beyond that particular certificate.

Mitchell S. King
Mitchell S. King

If you have any questions about this post or a related matter, please contact Mitchell S. King, a partner in Prince Lobel’s  Insurance and Reinsurance group and the author of this post. You can reach Mitchell at 617 456 8000 or at mking@PrinceLobel.com.

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