Federal appeals court affirms ruling against Travelers seeking arbitration

A Travelers Cos. Inc. unit lost an attempt to have a dispute with a Texas school board arbitrated on Monday, with a federal appeals court ruling that affirmed a lower court.

The Grapeland, Texas-based Grapeland Independent School District obtained an insurance policy from the Austin, Texas-based Texas Rural Education Association Risk Management Cooperative, which in turn had a reinsurance contract with Travelers unit Travelers Indemnity Co., according to the ruling by the 2nd U.S. Circuit Court of Appeals in New York in Travelers Indemnity Co. v. Grapeland Independent School District.

The Travelers unit provides the risk association with reinsurance for claims of more than $500,000 per occurrence and is the designated adjuster for these claims.

The school district sued the risk association and Travelers in Texas state court because of an alleged variation between its losses and the insurance payments it received in connection with a destructive 2019 story, the ruling said.

Travelers sought to compel arbitration over the school district’s claim under a theory of “direct benefits estoppel,” which precludes a nonsignatory who seeks or obtains benefits from a contract from avoiding the contract’s arbitration contact. A Texas state court rejected Travelers benefit estoppel theory in this case, the ruling said.

Travelers also filed a petition to compel arbitration in U.S. District Court in Bridgeport, Connecticut. The district court ruled against the insurer, and was affirmed by a three-judge appeals court panel.

“We agree with the District Court that Travelers has failed to show that it may avail itself of the direct benefits estoppel theory under Texas law,” the ruling said.

“The uniform holdings of the Texas courts on a matter of Texas law” on this issue “persuades us that the matter is settled, and that we can reliably and confidently predict that the Texas Supreme Court, in agreement with the District Court, would conclude that direct benefits estoppel” does not compel the school district to arbitrate its underlying claims, it said, in affirming the lower court.

Attorneys in the case did not respond to requests for comment.