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October 17, 1984


The opinion of the court was delivered by: SWEET


In this diversity action, plaintiff NIL Insurance Ltd. ("NIL"), a reinsurance company, seeks a recovery against defendant National Union Fire Insurance Co. ("National Union"), an insurance company, and Buchanan Management Company ("Buchanan"), a program administrator, for moneys paid in connection with the settlement of a personal injury action by National Union and for punitive damages. National Union and Buchanan have moved to compel arbitration of claims brought by NIL and to stay this action pending arbitration. National Union's motion to compel arbitration is granted, and the action is dismissed without prejudice subject to restoration to the calendar upon the completion of the arbitration.

 Prior Proceedings

 National Union entered into a reinsurance agreement with NIL in which NIL agreed to reinsure 100% of National Union's ultimate net loss under all policies covered by the agreement entered into by National Union or on behalf of National Union by co-defendant Buchanan. National Union thereafter paid $500,000 in settlement of a personal injury action brought by Martha Abbott (the "Abbott action") against defendant insured under a policy issued by National Union and reinsured by NIL. National Union unsuccessfully sought repayment from NIL, under the reinsurance agreement. Subsequently, certain funds were paid by a third party to National Union which also drew upon a NIL letter of credit to cover the cost of settling the Abbott action. National Union also served a demand for arbitration on NIL on July 11, 1984. NIL, on July 26, 1984, initiated this action and alleges eight causes of action in its complaint.

 The first cause asserts negligence, bad faith, and breach of contract in National Union's alleged failure to notify NIL of settlement discussions and in the payment of the settlement and related costs. The second cause of action alleges bad faith and negligence on National Union's part in entering into the $500,000 settlement.The third and fourth causes of action allege negligence and breach of contract on National Union's part in not accepting various settlement offers and assert that NIL's liability to National Union, if not totally eliminated by the initial causes of action, should be limited to the amount of these settlement offers. The fifth cause of action seeks a determination of NIL's liability to National Union as a consequence of the events surrounding the settlement. The sixth cause of action alleges that a fine resulting from delayed payment of the settlement was negligently incurred by National Union and therefore cannot be attributed to NIL.

 The seventh cause seeks to determine the status of an $875,000 letter of credit issued by NIL to national Union. Finally, in its eighth cause of action, NIL alleges that both National Union and Buchanan improperly sought to begin their own reinsurance program in violation of obligations owed NIL under the reinsurance contract and demanded a letter of credit in excess of that needed to cover insurance claims, while a previous letter of credit had not been exhausted.

 NIL also sought a stay of arbitration in New York State Supreme Court. National Union removed the state court action to this court where it was joined with this action pursuant to Fed.R.Civ.P. 42(a). National Union and Buchanan have now moved to compel arbitration of all disputed issues.


 Article XVII of the reinsurance agreement between National Union and NIL provides that:

 All disputes or differences arising out of the interpretation of this Agreement shall be submitted to the decision of two Arbitrators, one to be chosen by each party and in the event of the arbitrators failing to agree, to the decision of an Umpire to be chosen by the Arbitrators. . . . they shall settle any dispute under this Agreement according to an equitable rather than a strictly legal interpretation of its terms . . .

 Article XV states that:

 The true intent of the Agreement is that the Reinsurers shall, in every case to which this Agreement applies and in the proportions specified herein, follow the fortunes of the Company.

 This Article shall not apply insofar as it can be shown during a duly held Arbitration in accordance with Article XVII of this Agreement that the Company has been tortious, willful, wanton, or reckless in handling ...

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