Scope of Arbitration Clauses in Excess Insurance Policies: Insurer-Policyholder Limitation
Introduction
In the summary order issued on April 15, 2025, the United States Court of Appeals for the Second Circuit resolved a critical coverage dispute arising out of the Chapter 11 bankruptcies of Orion HealthCorp, Inc. (“Orion”) and its parent Constellation Healthcare Technologies, Inc. (“CHT”). Orion and CHT had jointly adopted a Plan of Liquidation that assigned to a liquidating trustee—Howard M. Ehrenberg—the right to pursue insurance claims formerly held by CHT’s and Orion’s directors and officers. Allied World National Assurance Company (“Allied World”) insured certain director-and-officer liabilities under an excess policy that incorporated by reference an arbitration clause in CHT’s primary insurance policy. When the Trustee sued Allied World for defense and indemnity coverage on behalf of the directors and officers, Allied World moved to compel arbitration in London under the adopted clause. The Bankruptcy Court denied that motion, and the District Court affirmed. On appeal, the Second Circuit unanimously affirmed, holding that the arbitration provision applied only to disputes between the insurer and the named “policyholder” (CHT), not to disputes with the directors and officers (or the Trustee as their assignee).
Summary of the Judgment
The Court of Appeals affirmed the denial of Allied World’s motion to compel arbitration for three principal reasons:
- Definition of “Policyholder”: The arbitration clause in the excess policy expressly covers “any dispute between the insurer and the policyholder”—a term defined to include only CHT. Directors and officers are “insureds,” not “policyholders,” under both the primary and excess policies.
- Assignment Does Not Create a Policyholder: Although the Trustee stands in the shoes of the directors and officers by assignment, neither the Trustee nor the assignors assumed the status of CHT as policyholder. Thus, they cannot invoke the clause covering CHT’s disputes.
- Limits on Third-Party Arbitration: Under New York law, nonsignatories may be estopped to avoid arbitration only when they have directly assumed contractual obligations. The directors and officers (through their assignee) sought coverage benefits but did not assume the policyholder’s duties; direct-benefits estoppel therefore does not apply.
The decision reinforces that arbitration clauses are creatures of contract and will be interpreted according to their plain terms and agreed-to definitions.
Analysis
Precedents Cited
The Second Circuit’s analysis drew on several leading authorities in federal and New York contract and arbitration law:
- In re Tingling, 990 F.3d 304 (2d Cir. 2021): Confirms plenary review of a bankruptcy court’s legal determinations, setting the standard for appellate scrutiny.
- Nicosia v. Amazon.com, Inc., 834 F.3d 220 (2d Cir. 2016): Establishes that courts look first to state contract-law principles to determine whether parties agreed to arbitrate.
- Revis v. Schwartz, 140 N.Y.S.3d 68 (2d Dep’t 2020): Under New York law, courts determine (1) whether the parties agreed to arbitrate and (2) whether the dispute falls within the scope of the arbitration agreement.
- Schnabel v. Trilegiant Corp., 697 F.3d 110 (2d Cir. 2012): Highlights that arbitration is a matter of contract and that doubts are resolved in favor of arbitrability only where the contract so provides.
- Fund Liquidation Holdings LLC v. Bank of Am. Corp., 991 F.3d 370 (2d Cir. 2021): Clarifies that an assignee is “the functional equivalent” of its assignor, but does not change the assignor’s contractual status.
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Oxbow Calcining USA Inc. v. American Industrial Partners
- Belzberg v. Verus Investments Holdings Inc.
- Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp.
- Belzberg v. Verus Investments Holdings Inc.
Legal Reasoning
The Court applied a two-step New York arbitration analysis:
- Agreement to Arbitrate: The Court examined the excess policy’s Arbitration Provision, which adopts Section 5.16 of the primary policy. That section states that any dispute “between the insurer and the policyholder” is subject to mandatory mediation and, if unresolved, arbitration in London. Since “policyholder” is defined to include only CHT, no agreement to arbitrate exists as to disputes with the director-and-officer insureds.
- Scope of the Clause: Having concluded that the clause applies only to insurer–policyholder disputes, the Court considered whether the directors and officers (through their assignee) could be compelled under direct-benefits estoppel. Under New York law, a nonsignatory may be estopped to avoid arbitration only if it has assumed the obligations of a signatory or if it materially relies on the contract containing the arbitration clause to claim benefits. Here, the directors and officers sought coverage benefits but did not step into the policyholder’s shoes, nor did they assume any obligations—such as premium payments or notice duties—under the Allied World Policy.
Accordingly, the Trustee’s claims, as assignee of the insureds, fall outside the agreed scope, and arbitration cannot be compelled.
Impact
This ruling clarifies important principles for insurance-coverage litigation and arbitration practice:
- Contractual Precision: Insurers drafting arbitration clauses must clearly define the classes of parties they intend to bind—policyholders, additional insureds, third-party beneficiaries, etc.
- Assignment Effects: An assignee stands in the assignor’s position but does not gain new statuses under the contract; thus, assignments will not enlarge the pool of parties subject to arbitration clauses.
- Limits on Direct-Benefits Estoppel: Insureds cannot be forced into arbitration unless they demonstrably assume or accept the contract’s obligations. Coverage litigants should not assume that arbitration clauses follow claims through assignments.
- Bankruptcy Context: Liquidating trustees must carefully review arbitration provisions in insurance policies before pursuing coverage claims; they cannot rely on arbitration to shift forum or procedural regimes unless the trustee occupies the specified contract role.
Complex Concepts Simplified
“Policyholder” vs. “Insured”: In insurance contracts, the “policyholder” is the entity that purchases and controls the policy (pays premiums, holds renewal rights). “Insureds” can include additional persons or entities protected by the policy (directors, officers, subsidiaries).
Assignment: When a party transfers its rights under a contract to an assignee (here, the liquidating trustee), the assignee acquires the benefits but does not automatically acquire the assignor’s role or status—unless the contract so provides.
Direct-Benefits Estoppel: A legal doctrine that sometimes forces nonsignatories to arbitrate if they seek benefits under a contract containing an arbitration clause and have sufficiently relied on or are intertwined with the contract’s performance.
Summary Order: A decision by an appellate court that resolves the case without full precedential opinion. While it affirms legal principles, it does not carry binding precedential effect within the circuit.
Conclusion
The Second Circuit’s decision in In Re: Orion HealthCorp, Inc. underscores the fundamental contract principle that arbitration agreements bind only those parties who have expressly agreed to be bound. By limiting the arbitration clause to an insurer–policyholder dispute, the court protected directors and officers (and their assignee) from being forced into arbitration in London absent a clear contractual commitment. The ruling will guide insurers, policyholders, and coverage claimants in precisely drafting and interpreting arbitration provisions, especially in the complex setting of bankruptcy and liquidating trusts.
Key takeaways:
- Arbitration clauses are strictly construed according to their wording and defined terms.
- Assignments transfer rights but not status; an assignee cannot occupy a contract role reserved by definition for another party.
- Direct-benefits estoppel cannot be stretched to compel arbitration absent a clear assumption of the contractual obligations tied to arbitration.
- Parties seeking to broaden arbitration obligations should expressly include all intended counterparts in the arbitration agreement.
In the broader legal context, this decision reaffirms the principle that arbitration is a matter of consent and contract, not compulsion, and it delineates the limits of nonsignatory arbitration under New York law.
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