Limitation of Arbitration Clauses to Policyholder–Insurer Disputes in Insurance Contracts

Introduction

In the summary order In Re: Orion HealthCorp, Inc., decided on April 15, 2025, the United States Court of Appeals for the Second Circuit confronted the question whether an excess‐layer insurer could compel arbitration of coverage disputes brought by the assignee of insured directors and officers, when the policy’s arbitration clause applied only to disputes between “insurer and policyholder.” The parties include Allied World National Assurance Company (“Allied World”), the excess insurer; Orion HealthCorp and its parent Constellation Healthcare Technologies, Inc. (“CHT”), the debtors; and Howard M. Ehrenberg, the liquidating trustee and assignee of the insured directors’ and officers’ rights. The key issue was whether the arbitration provision could be invoked by or against parties other than the defined “policyholder.”

Summary of the Judgment

The Second Circuit affirmed the district court’s and bankruptcy court’s denial of Allied World’s motion to compel arbitration. The court held that:

The arbitration clause applied only to disputes “between the insurer and the policyholder” (defined as CHT), not to insureds or their assignees.
The liquidating trustee, as assignee of the directors and officers, stood in their shoes and was not the policyholder under the contract.
Absent a clear contractual provision binding insureds (or their assignees) to arbitrate, the court could not compel arbitration under New York law.

Analysis

1. Precedents Cited

Nicosia v. Amazon.com, Inc. 834 F.3d 220 (2d Cir. 2016): Established that questions of arbitrability are governed by state contract law and emphasized the court’s role in determining whether parties agreed to arbitrate.
Schnabel v. Trilegiant Corp. 697 F.3d 110 (2d Cir. 2012): Clarified that courts must decide threshold issues of contract formation and scope before enforcing arbitration clauses.
Fund Liquidation Holdings LLC v. Bank of Am. Corp. 991 F.3d 370 (2d Cir. 2021): Confirmed that an assignee stands in the shoes of its assignor for purposes of coverage rights, but does not gain new contractual capacities beyond those held by the assignor.
Belzberg v. Verus Invs. Holdings Inc. 21 N.Y.3d 626 (2013): Discussed the “direct benefits estoppel” doctrine, under which nonsignatories may be compelled to arbitrate if they knowingly seek benefits under an agreement containing an arbitration clause.
Oxbow Calcining USA Inc. v. American Industries Partners 948 N.Y.S.2d 24 (1st Dep’t 2012): Emphasized that arbitration agreements are creatures of contract and may be tailored to include only specific parties or issues.
Stolt‐Nielsen S.A. v. AnimalFeeds Int’l Corp. 559 U.S. 662 (2010): Recognized that arbitration clauses can limit both the subject matter and the parties subject to arbitration.
Revis v. Schwartz 140 N.Y.S.3d 68 (2d Dep’t 2020): Underlined the two‐step inquiry—(1) agreement to arbitrate; (2) scope of that agreement—under New York law.

2. Legal Reasoning

The core of the court’s reasoning was:

Contractual Scope: The arbitration provision applies expressly only to disputes between “insurer and policyholder.” The defined term “policyholder” refers solely to CHT, not to directors, officers or their assignees.
Assignee’s Status: Under Fund Liquidation Holdings, an assignee is the functional equivalent of its assignor (the insureds) but does not acquire the status of “policyholder” simply by assignment.
Third‐Party Boundaries: Because the directors and officers were defined as “insureds,” not policyholders, and the trustee stood in their place, the dispute was between an insurer and its insureds/assignee, not the policyholder.
No Direct Benefits Estoppel: Allied World could not invoke “direct benefits estoppel” from Belzberg because the insureds/assignee did not step into the policyholder’s shoes or assume the policyholder’s obligations under the contract.

3. Impact on Future Cases

This decision clarifies several important points for future insurance and arbitration disputes:

Arbitration clauses that specify particular parties (e.g., policyholder vs. insurer) will not be broadened by courts to include related parties or assignees absent explicit language.
Assignees of insureds cannot be forced into arbitration when the original contract ties arbitration only to the policyholder.
Insurers seeking to compel arbitration against third parties should draft arbitration provisions to cover not only “policyholder” but also “insureds,” “additional insureds,” or “assignees,” as appropriate.
The decision reinforces the principle that arbitration is purely contractual: courts will enforce arbitration only as agreed by the contracting parties.

Complex Concepts Simplified

Policyholder vs. Insured: The “policyholder” is the entity that buys the insurance policy (here, CHT). “Insureds” are persons covered under the policy (here, the directors and officers).
Assignee: A party who receives rights by assignment. Under contract law, an assignee stands in the assignor’s shoes but does not gain new rights beyond those assigned.
Direct Benefits Estoppel: A legal doctrine allowing a nonsignatory to arbitration to be compelled to arbitrate if it knowingly seeks benefits under a contract containing an arbitration clause.
Arbitration Provision Scope: Arbitration clauses can (and often do) limit the parties and issues subject to arbitration. Courts will enforce the clause as written.

Conclusion

In In Re: Orion HealthCorp, Inc., the Second Circuit reaffirmed that arbitration agreements are strictly contractual. By construing the arbitration clause to apply only to disputes between the insurer and the defined policyholder, the court refused to compel arbitration of coverage claims by insureds or their assignee. This ruling underscores the importance of precise drafting in insurance contracts and confirms that arbitrability depends on the parties’ clear and mutual agreement. Insurers and insureds alike must pay close attention to definitions and scope when negotiating arbitration clauses, especially in layered insurance programs and assignment scenarios.