A Pennsylvania appellate court recently reversed a trial court’s ruling that denied a cedent’s motion to compel arbitration, finding that the existence of a service of suit clause in the reinsurance agreement did not render the arbitration clause meaningless. See Gaffer Ins. Co. v. Discover Reinsurance Co., 2007 Pa. Super. 339 (Pa. Super. Ct., Nov. 16, 2007).

Gaffer Insurance Company ("Gaffer") reinsured policies issued by Discover Reinsurance Company ("Discover Re"). A dispute arose between the parties concerning provisions of the reinsurance agreement that required Discover Re to release $3.8 million in security previously posted by Gaffer to secure its obligations under the agreement. Gaffer brought a lawsuit against Discover Re in the Pennsylvania Court of Common Pleas alleging breach of contract and unjust enrichment to recover the previously-posted security.

Discover Re then moved to compel arbitration pursuant to the reinsurance agreement’s arbitration clause, which provided that “any dispute between the parties…will be submitted for decision of a board of arbitration…unless otherwise agreed to by [the parties].” Gaffer opposed Discover Re’s motion to compel on the grounds that the parties were not required to submit their dispute to arbitration because of a service of suit/consent to jurisdiction provision in the reinsurance agreement, which provided Gaffer with the right to “commence an action in any court of competent jurisdiction in the United States” in the event of a dispute between the parties. Gaffer contended that the service of suit provision prevailed over the arbitration clause because the latter contained the qualifying phrase “unless otherwise agreed.”

The lower court denied Discover Re’s motion, finding that the service of suit clause prevailed over the arbitration provision because of the “unless otherwise agreed” language in the latter. In reversing the lower court's decision, the Pennsylvania Superior Court rejected Gaffer's argument that the parties "otherwise agreed" not to arbitrate their dispute by incorporating a "service of suit" provision in the reinsurance agreement. The appellate court held that under basic rules of contract interpretation and Pennsylvania courts’ general policy towards favoring arbitration, the parties were bound to arbitrate their dispute. Further, the court found that there was no inherent conflict or inconsistency between the existence of a service of suit provision and arbitration clause in a reinsurance contract, as the former provides a party with certain procedural options even if the latter is enforced. Click here to review a copy of the court’s decision.