2nd Circuit Refuses to Enforce Insurance Policy’s Arbitration Provision

A Second Circuit U.S. Court of Appeals decision refused an attempt to expand the scope of an insurance policy’s arbitration provision, creating the need for extra caution when interpreting policies.

In Ehrenberg v. Allied World National Assurance Co. (In Re: Orion HealthCorp, Inc.), 24-2511 (2d. Cir. April 15, 2025), the Second Circuit affirmed the judgment of the U.S. District Court for the Eastern District of New York, which had upheld the U.S. Bankruptcy Court for the Eastern District of New York’s denial of a motion to compel arbitration.[1]

A liquidating trust was created as a result of 2018 Chapter 11 bankruptcy cases filed by debtors Constellation Healthcare Technology, Inc. (CHT) and Orion HealthCorp, Inc. The trust’s trustee eventually asserted claims against the debtors’ directors and officers (D&O) in an adversary proceeding. Ultimately, as part of a settlement of the D&O adversary proceeding, the directors and officers assigned to the trustee their rights to seek coverage under one of the debtors’ insurance policies with Allied World National Assurance Company.

The trustee ultimately brought an adversary proceeding against Allied World seeking defense costs and indemnification that he alleged were owed to the directors and officers from the D&O adversary proceeding. Allied World filed a motion in the Bankruptcy Court to compel arbitration under an arbitration provision in the debtors’ underlying insurance policy with Allied World, which was denied by the Bankruptcy Court and which decision was affirmed by the District Court.

On appeal, the Second Circuit Court of Appeals began by analyzing the arbitration clause in the underlying insurance policy, which read in relevant part that a “dispute between the insurer and the policyholder regarding any aspect of this policy” that could not be resolved would ultimately be heard in arbitration. The term “policyholder” was expressly defined by the policy as meaning CHT.

The Court next determined that the Allied World adversary proceeding related solely to Allied World’s duty to defend and indemnify the directors and officers in the D&O adversary proceeding. Accordingly, the dispute was between Allied World and the directors and officers (who had assigned their claims to the trustee), not Allied World and the policyholder (CHT). Since the Arbitration Clause expressly stated it was applicable to a dispute between “the insurer and the policyholder”, and since the directors and officers were neither the insurer nor the policyholder, the arbitration provision was not applicable to them. In fact, the directors and officers were defined not as “policyholder” or “insurer”, but rather expressly defined as “insured[s]”, which were not subject to the express terms of the Arbitration Clause.

The Court also noted that while it is true that a trustee may step into the shoes of a debtor-policyholder in asserting rights under an insurance policy, here the trustee was acting in his capacity as assignee of the directors and officers, not as the policyholder.

Parties to insurance contracts need to carefully assess who is subject to arbitration provisions in the policy. Just because a policy contains an arbitration provision, it does not necessarily mean that any party that may be able to bring a claim related to that policy will necessarily be subject to the arbitration provision.

[1] The Second Circuit’s ruling was made by summary order, which does not have precedential effect but may be cited.