AIG wins dispute with building company over arbitration

An American International Group Inc. unit has prevailed in litigation with a building materials company, with a federal appeals court affirming a lower court ruling that a dispute over claims stemming from fronting policies the insurer had issued must be arbitrated.

AIG unit National Union Fire Insurance Co. of Pittsburgh issued fronting policies to Building Materials Holding Corp., the predecessor company to Raleigh, North Carolina-based BMC Stock Holdings, Inc., from November 2003 to November 2005, according to the underlying ruling in National Fire Insurance Co. of Pittsburgh PA, et al. v. BMC Stock Holdings Inc.

Under these fronting policies, National Union extended coverage to BMHC and to certain additional entities that held contracts with the firm, while BMHC was responsible for reimbursing National Union for coverage costs, according to the ruling.

National Union’s obligations under the policies included coverage for litigation costs additional insureds might incur in defending against certain legal claims brought by third parties, so long as those claims related to products or services provided by BMHC, according to the ruling.

The parties also executed a payment agreement that included a dispute resolution mechanism providing for arbitration over disputes.

A dispute arose over coverage claims totaling over $1 million paid by National Union to additional insureds when BMC declined to reimburse the insurer, stating it had failed to provide adequate documentation to establish the claims fell within the policies’ scope.

BMC filed suit in California over the issue, and National Union requested BMC withdraw its complaint and submit its claim to arbitration as provided for under the payment agreement. 

After BMC contended the claims in its complaint were not subject to arbitration, National Union filed a petition to compel arbitration in U.S. District Court in New York.

The court ruled in National Union’s favor, which was upheld by a unanimous three-judge appeals court panel of the 2nd U.S. Circuit Court of Appeals in New York in Friday’s ruling.

BMC argues the claims asserted in the California litigation fall outside the arbitration provision’s scope, said the appeals court ruling. “This argument, however, ignores the Payment Agreement’s language, which clearly incorporates the terms of the Policies by reference,” it said.

“By referencing the Policies in its terms, the Payment Agreement provides that even payment disputes premised on an underlying coverage dispute fall within the arbitration provision’s reach,” said the ruling in affirming the lower court’s ruling.

Attorneys in the case could not be reached or had no comment.

Earlier this month, a federal court vacated a lower court’s order and said a trial must be held on the issue of whether a dispute between Hub International Ltd. and a South Carolina school district over a “massive” multiyear kickback scheme is subject to arbitration.