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The Fifth Circuit Court of Appeals construed an arbitration clause in an insurance policy as applying only to disputes involving the insurer and not to disputes between the insureds over allocation of insurance proceeds.
In Tittle v. Enron Corp., No. 05-20380, 2006 WL 2522444 (5th Cir. Sep. 1, 2006), former Enron employees brought a class action against Enron and its board of directors, alleging breach of fiduciary duties in violation of ERISA.
When some of the defendants agreed to settle, the insurance company who issued fiduciary liability policies to Enron intervened and paid the $85 million policy limit into court. The defendants made competing claims to those proceeds.
Two of the non-settling defendants, Kenneth Lay and Jeffrey Skilling, moved to compel arbitration of the defendants’ dispute over allocation of the insurance proceeds. They based their motion on an arbitration clause in the primary insurance policy. The clause required arbitration of any dispute “arising out of or relating to” the policy and set forth a procedure whereby the insurer would select one member of a tripartite arbitration panel.
The district court denied the motion to compel arbitration, finding that the insurer’s agreement to pay the policy limits meant there was no dispute “arising out of or relating to” the policy.
On appeal, the Fifth Circuit construed the scope of the arbitration clause as limited to disputes involving the insurer. While acknowledging the breadth of the phrase “arising out of or relating to,” the Court found that language elsewhere in the clause limited its scope. Specifically, the insurer’s right to select one of the arbitrators indicated that the parties intended the clause apply only to disputes involving the insurer.
Since the dispute did not involve the insurer, the arbitration clause did not apply. Accordingly, the Court affirmed the order denying the motion to compel arbitration.
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