Corporate policyholders frequently will sign so-called “program agreements” with their insurers – separate from the insurance policies themselves. Program agreements can govern aspects of billing/responsibility for defense fees within a deductible or self-insured retention (so-called ALAE), collateral on workers comp programs and similar arrangements. Usually, the insurance policies themselves do not require that disputes be arbitrated, but the program agreements routinely call for arbitration. And, the program agreements often contain choice of law or choice of forum clauses, while the insurance policies typically are silent on those questions. A risk management department may or may not have run the “program agreement” by the legal department.
So, where a significant insurance dispute arises, especially one involving defense fees and costs or the number of deductibles/retentions applicable (aspects of which may be discussed in the program agreements), the policyholder’s legal department may face an insurer contending that the entire dispute must be arbitrated — under the law selected in the program agreement, and in a remote jurisdiction no less. For example, a California-based corporation’s legal department, facing a major insurance dispute, may be confronted with arbitration in New York under New York law – even where the dispute arose in California, and California law and the prospect (or fact) of litigation might provide for a much more favorable outcome.
While a few Courts of Appeal across the country have confronted arbitrability questions under program agreements, with differing outcomes, a recent decision in the Northern District of California provides a cautionary tale. In that case, Judge Edward Chen found that the arbitration clause in an agreement Swinerton Builders had entered with AIG regarding the payment of deductibles on five claims under a contractor-controlled insurance program was open-ended enough to require that deductible/defense disputes regarding other claims also had to be arbitrated(https://ecf.cand.uscourts.gov/doc1/035110572568). One can expect insurers to argue more aggressively for arbitration given the current judicial trend towards broader construction and stricter enforcement of arbitration clauses. Happily, however,corporate policyholders can take fairly simple action to reduce or eliminate the distraction, expense and/or consequences of program agreement arbitration clauses — primarily by reviewing program agreements before they are entered, and ensuring they contain clear limits, consistent with litigation/forum rights under the policies. As insurance program renewal time approaches, risk management and legal departments can quickly and effectively nip a potential problem in the bud.