When an insurance policy relates to particular contractual obligations of an insured, having the policy specifically identify the underlying contract can help define the insurer’s obligations with precision. But the reference needs to be precise, too. In a recent Fourth Circuit case, an insurer’s performance bond recited the fact that the principal had entered into a construction subcontract, and it stated that the “subcontract is by reference made a part hereof.” After the principal defaulted under the subcontract, the issuer of the bond brought a declaratory judgment action against the general contractor, asserting that it was excused from performance, because the subcontractor had violated the terms of the bond. The general contractor, relying on the arbitration agreement in the underlying subcontract, moved to dismiss or stay the action pending arbitration, and the Fourth Circuit held that the motion should be granted.
In Great American Ins. Co. v. Hinkle Contracting Corp., No. 12-1014 (4th Cir. Nov. 28, 2012), the surety argued that the arbitration agreement was not intended to cover the surety’s dispute over coverage, because (among other reasons) that dispute was based on the terms of the performance bond, not the subcontract. The subcontract provided that “[a]ll claims, disputes, [and] controversies . . . relating to, this [subcontract]” would be subject to arbitration, but the surety argued that its claims—which it characterized as “unique surety defenses”—had only a “general, rather than a significant, relation to the subcontract.”
The Fourth Circuit disagreed, noting that courts have typically construed similar arbitration clauses as having an expansive reach, and finding that contracts between sophisticated parties create a presumption in favor of arbitration.