Reinsurance Focus

Homestead Insurance Company (“Homestead”) entered into a reinsurance contract with Interstate Guaranty Insurance Company (“Interstate”). Under applicable Georgia insurance regulations, Interstate was required to place funds in a trust for Homestead’s benefit to protect Homestead in case Interstate became insolvent. Thereafter, Homestead, Interstate and Wachovia Bank entered into a trust agreement, with Wachovia serving as Trustee. The trust agreement contained provisions incorporating it into the reinsurance contract. The reinsurance contract contained an arbitration clause mandating arbitration as a condition precedent to a lawsuit where disputes arose concerning either “the interpretation of [the reinsurance] Agreement” or the “rights of either party” thereunder.

After dispute arose between Homestead and Wachovia pertaining to Wachovia’s conduct as Trustee, Homestead filed an action in New Jersey state court (which was ultimately removed and transferred to Georgia federal court) to compel Wachovia to arbitration as required under the reinsurance contract. Wachovia argued that it was not a party to the reinsurance contract, and thus was not bound by the provision mandating arbitration. However, the court agreed with Homestead, citing terms of the trust agreement that indicated the parties’ intent to incorporate it in its entirety into the reinsurance contract, and finding that the Trust Agreement incorporated by reference the arbitration clause of the Reinsurance Agreement. The court found that the interpretation of the Trust Agreement came within the scope of arbitrable issues. After the court denied Wachovia’s motion to reconsider, Homestead dismissed the case with prejudice. Homestead Insurance Company v. Wachovia Bank, N.A., Case No. 07-2821 (USDC N.D. Ga. 2008).

This post written by John Pitblado.