Hunton Insurance Recovery Blog

On December 20, 2016, a New York federal district court granted a petition to compel arbitration, filed by Zurich Insurance Co.’s (“Zurich”), as a subrogee of Adidas Group (“Adidas”), against Crowley Latin America Services LLC (“Crowley”), a transportation and logistics company. The underlying dispute involves losses from a fire-damaged shipment of Adidas clothing.  The Court allowed Zurich to compel arbitration based on its service contract with Adidas.

In October 2011, Crowley shipped 574 boxes of Adidas clothing from Honduras to Indiana, via a port in Mississippi. The shipment caught fire and was damaged while in transit with CW Enterprises, Inc. (“CW”), a trucking company hired by Crowley.  Crowley was an additional insured under CW’s policy.

Zurich covered Adidas’ losses, and then, as an equitable subrogee, sought to recover the payments from Crowley based on its alleged negligence. Zurich moved to compel arbitration with Crowley based on an arbitration provision in Crowley’s service contract with Adidas, which required arbitration of all disputes in New York and pursuant to the FAA.  While the dispute was pending, CW’s insurer became insolvent and the Mississippi Insurance Guaranty Association assumed its liabilities.

Crowley argued that Mississippi law barring subrogation claims against the insured of an insolvent insurance carrier precluded enforcement of the arbitration clause under the FAA. The Court disagreed, finding the FAA is only barred when its application would be contrary to state law.  The Court further found that Mississippi law applies only if a company is insured by a single insolvent carrier. In Crowley’s case, the company had at least one other solvent insurer – its direct insurer.  Consequently, the Court found that the FAA does not contravene state law, which rendered the arbitration clause enforceable.

The Court also rejected Crowley’s attempt to avoid Zurich’s suit based on language from its service contract with Adidas, which purported to bar enforcement of the contract by third parties. The Court held that the limitation on third-party claims did not affect Zurich’s equitable rights to subrogation, which exist independent of any contract.

This decision underscores the power and limitations of language in business contracts to affect insurance disputes. For example, as was the case here, an insurance dispute may become intertwined with the enforcement of a service contract. This is especially so where the insurer acts as a subrogee.  Likewise, contractual efforts to limit subrogation rights may be unsuccessful where such rights also exist at common law.  The case is Zurich Ins. Co. v. Crowley Latin Am. Serv., No. 16-CV-1861 (JPO) (S.D.N.Y. Dec. 20, 2016).