Continental Cas. Co. v. Certain
Underwriters at Lloyd's London,
2004 WL 515532 (S.D.N.Y. 2004)
United States District Court,
S.D. New York.
CONTINENTAL CASUALTY COMPANY, Petitioner,
v.
CERTAIN UNDERWRITERS AT LLOYD'S LONDON,
Respondents.
No. 02 Civ.960 (TPG).
March 15, 2004.
OPINION
GRIESA, J.
*1
Petitioner Continental Casualty Company seeks an order to compel certain
Lloyd's of London Syndicates to arbitrate a dispute pursuant to the Federal
Arbitration Act, 9 U.S.C. ¤¤ 1-16. The petition is granted.
Facts
In 1998 certain
Lloyd's of London Syndicates agreed to enter into a reinsurance contract with
The Legion Insurance Company. Syndicates agreed to underwrite "excess of
loss" reinsurance for Legion according to the following percentages:
Lloyd's Underwriter Syndicate No. 0376(JHV) 27.48 %
Lloyd's Underwriter Syndicate No. 2376(JHV) 32.52 %
Lloyd's Underwriter Syndicates 1207(AST) 40.00 %
This agreement was embodied in a Placement Slip, dated
April 23, 1998. The Slip provided that the Syndicates would "indemnify the
Reinsured" for certain specified losses. The Slip defined the
"Reinsured" as follows:
REINSURED: THE LEGION INSURANCE COMPANY, PA., NAIC; 24422
AND/OR LEGION INDEMNITY COMPANY AND/OR ALL
OTHER COMPANIES, WHICH ARE NOW OR HEREAFTER
BECOME PART OF MUTUAL RISK MANAGEMENT, LTD
GROUP AND/OR THEIR QUOTA SHARE REINSURERS.
The Slip subsequently underwent a series of revisions. On
July 10, 1998 the Slip was amended to read:
REINSURED: THE LEGION INSURANCE COMPANY, PA., NAIC; 24422
AND/OR LEGION INDEMNITY COMPANY AND/OR ALL
OTHER COMPANIES, WHICH ARE NOW OR HEREAFTER
BECOME PART OF MUTUAL RISK MANAGEMENT, LTD
GROUP AND/OR THEIR QUOTA SHARE REINSURERS
AND/OR EAGLE STAR REINSURANCE COMPANY
LIMITED IN RESPECT OF THEIR PARTICIPATION IN ANY
FRONTING ARRANGEMENTS FOR GLOBAL MANAGERS,
INC. ACCEPTANCES.
Both of these clauses include "Quota Share
Reinsurers" in their definitions of "Reinsured." As discussed
below, Continental became such a quota share reinsurer.
One of the conditions of insurance listed in the Placement Slip
was labeled "Arbitration Clause." The parties concede that this had
the effect of incorporating by reference a standard clause providing for
arbitration of all disputes arising from the Placement Slip.
On January 1, 1998 Continental entered into an agreement with
Legion to act as a quota share reinsurer to Legion. There were other quota
share reinsurers. A quota share reinsurer is a reinsurer to whom the primary
insurer cedes a percentage of the premiums and risks in a given class of
business. In this case, Legion ceded 100% of its risk and premiums to a group
of quota share insurers. Continental underwrote 20 % of that risk. Any claim
that was filed under the primary insurance contracts underwritten by Legion was
thus paid by the quota share insurers in proportion to the share of risk they
underwrote.
It appears that Eagle Star Reinsurance Company, named in the July
10, 1998 definition of Reinsured, acted as a fronting company for Legion and
took a quota share participation.
The excess of loss reinsurance written by the Syndicates applied
over a certain threshold level of loss. The details of the excess of loss
coverage are somewhat complex and need not be described here.
*2 On
March 26, 2001 the Syndicates notified Legion that it was rescinding their
excess of loss reinsurance contract and tendered Legion's premium. The
Syndicates claimed they had a right to rescission because of fraudulent
misrepresentations on the part of Legion regarding the types of risk that Legion
was underwriting. The Syndicates gave notice of rescission before any claims
were made against the Syndicates. Legion refused to accept the check for the
refunded premium, but has, nonetheless, never sought to enforce the excess of
loss reinsurance contract or asserted any claims under it.
Legion provided coverage to parties taking out insurance with
Legion. Claims were made under this coverage and such claims were paid by
Continental and other quota share reinsurers. It appears that payments made by the
quota share reinsurers were high enough so that the excess of loss reinsurance
coverage applied to the extent of $16.5 million.
At some point Legion came under the administration of a liquidator
in Pennsylvania. The exact date when this occurred is not in the record, but
the administration was in effect at least by August of 2003. The issue arose as
to how the quota share reinsurers could obtain reimbursement from the
Syndicates under the excess of loss reinsurance. Legion and its liquidators
took no steps to pursue any claims against the excess of loss reinsurers.
Continental addressed a claim to the Syndicates, which the
Syndicates refused to honor. In October 2001 Continental issued a demand for
arbitration against the Syndicates on the question of whether the Syndicates
had a right to rescind their excess of loss reinsurance contract with Legion.
Continental made the demand "on its own behalf, and, as a lead reinsurer,
on behalf of the other Reinsureds under the Risk Excess of Loss Reinsurance
Agreement." The Syndicates refused the demand.
On February 6, 2002 Continental filed this petition to compel
arbitration.
Continental takes the position that it was one of the reinsured
parties under the contract between Legion and the excess of loss reinsurers,
pursuant to the definition of "REINSURED," which includes "QUOTA
SHARE REINSURERS." Continental contends that, as a reinsured party, it is
entitled to enforce the insurance contract with the Syndicates, including the
arbitration clause.
The Syndicates oppose the request for arbitration, asserting that
only Legion was a party to the excess of loss reinsurance contract and only
Legion was a "Reinsured" under that contract. Thus, according to the
Syndicates, Continental was not a party to the reinsurance contract with the
Syndicates and has no right to enforce the arbitration clause in that contract.
The Syndicates urge that the inclusion of quota share reinsurers in the
definition of "Reinsured" did not actually make them reinsured parties, and that such inclusion
was for "informational purposes" only. The Syndicates contend that
this is in accord with the custom and practice in the London reinsurance
market.
*3
Written submissions were presented to the court. Continental relied on the
language of the excess of loss contract, defining "Reinsured" to
include quota share reinsurers. Continental also submitted an affidavit on
behalf of the Rehabilitator of Legion Insurance Company in proceedings in
Pennsylvania, asserting that the Syndicates' position was contrary to the plain
language of the Excess of Loss Reinsurance Agreement, and further stating that,
with respect to Continental's interest in that reinsurance agreement, Legion
agrees to be bound by the outcome of Continental's action against the Syndicates.
The Syndicates submitted declarations from persons familiar with
the London reinsurance market, who stated that the only purpose of mentioning
quota share reinsurers in the Excess of Loss Reinsurance Agreement was to
convey the information that Legion was spreading its risk to such quota share
reinsurers. According to these declarations, the quota share reinsurers are not
Reinsured parties. Only Legion has a right to enforce the reinsurance
agreement, and any demand for arbitration should be made by Legion, and Legion
only.
The court handed down an opinion on April 17, 2003. The court
noted that it had received conflicting declarations, and that a hearing would
be necessary, at which the court could hear testimony.
A hearing was held on August 10-12 and 22, 2003. M.C.B. Whyte, a
London insurance brokerage employee who helped draft the Slip, testified in
favor of Continental and stated that the purpose of the excess of loss
reinsurance was to protect the quota share reinsurers, that the quota share
reinsurers paid the premiums for the excess of loss reinsurance, and thus the
quota share reinsurers were in fact Reinsured parties under the Excess of Loss
Reinsurance Agreement. As to the theory that the reference to quota share
reinsurers was for informational purposes only, Continental pointed out that
the agreement had an Information section where the reference to quota share
reinsurers could have been placed if such reference was merely to convey
information.
The evidence offered by the Syndicates ended up being contrary to
the theory originally advanced by the Syndicates. The idea that Legion was the
only Reinsured was quickly negated. It was admitted that at least the insurance
company specifically identified in the Reinsured definition was in fact a Reinsured
party. This was Eagle Star Reinsurance Company.
The Syndicates called Robin Jackson, who basically agreed with
Continental's witness, Whyte. Jackson testified that the excess of loss
reinsurance gave the same protection to the quota share reinsurers as to Legion
and that even if it was Legion who made the claim against excess of loss
reinsurers, Legion would be doing it on behalf of the quota share reinsurers.
He said this was particularly true in this case where the quota share insurers
bore 100% of Legion's risks.
At the conclusion of the hearing, the court reserved decision on
whether the quota share reinsurers were Reinsured parties as contended by
Continental.
*4
However, the court found that the Syndicates had legitimate concerns regarding
the finality of an arbitration and the risk of multiple arbitrations with
Legion and the other quota share reinsurers. The court stated that it would not
require the Syndicates to arbitrate unless it received reasonable assurance
regarding the Syndicates' concerns. The court also asked Continental to provide
information on what claims had been paid by quota share reinsurers and the
extent of further liabilities by these reinsurers.
On October 23, 2003 Continental submitted powers of attorney
executed by the Legion entities (Legion Insurance Company and Legion Indemnity
Company), and G.E. Frankona Reinsurance Ltd. (formerly known as Eagle Star
Reinsurance Company).
In their powers of attorney the Legion entities (1) appoint
Continental as their attorney-in-fact in connection with the prosecution of the
arbitration against the Syndicates; (2) assert that both the Legion entities
and the quota share reinsurers are Reinsureds under the Excess of Loss
Reinsurance Agreement; (3) agree that Continental may pursue any claims
belonging to the Legion entities and/or their quota share reinsurers in a
representative capacity; (4) agree to be bound by the arbitration award; and
(5) agree that any amounts awarded in the arbitration that are due the Legion
entities and/or their quota share reinsurers, other than Continental and G.E.
Frankona, shall be held in trust by Continental to be paid to the Legion
entities net of their pro rata share of the costs of recovery.
In its power of attorney, G.E. Frankona (1) appoints Continental
as its attorney-in-fact in connection with the arbitration proceeding; (2)
asserts that G.E. Frankona is a Reinsured under the Excess of Loss Reinsurance
Agreement; (3) agrees that Continental may pursue any claims belonging to G.E.
Frankona as a Reinsured under the Excess of Loss Reinsurance Agreement in a
representative capacity; (4) agrees to be bound by the arbitration award; and
(5) agrees that any amounts awarded in the arbitration that are due to G.E.
Frankona shall be held in trust by Continental on behalf of G.E. Frankona.
Continental has not responded to the request for information about
claims paid and the extent of further liabilities.
Discussion
Section 4 of the
Federal Arbitration Act provides:
A party aggrieved by the alleged failure, neglect, or refusal of
another to arbitrate under a written agreement for arbitration may petition any
United States district court .... which shall hear the parties, and upon being
satisfied that the making of the agreement for arbitration or the failure to
comply therewith is not in issue, the court shall make an order directing the
parties to proceed to arbitration in accordance with the terms of the
agreement.
9 U.S.C. ¤ 4.
At times a petition for arbitration can involve questions of fact
requiring submission to a jury if there has been a jury demand. However, no
such demand has been made in the present case. Therefore all issues on this
petition are for the court to decide.
*5 It is
not disputed that the Excess of Loss Reinsurance Agreement contains an
arbitration clause, nor is it disputed that the issue of whether the Syndicates
had a right to rescind their agreement with Legion is subject to arbitration.
The matter which is
disputed is whether Continental and the other quota share reinsurers are
Reinsured parties under the Excess of Loss Reinsurance Agreement and whether
Continental has a right to bring the arbitration proceeding on behalf of itself
and the other quota share reinsurers.
Before reaching this question, a threshold issue raised by the
Syndicates needs to be addressed.
The Syndicates claim that they have rightfully rescinded the
contract, based on fraudulent misrepresentations by Legion, and that therefore,
they should not be required to arbitrate. This involves a misunderstanding of
the role of the court in deciding a petition to compel arbitration under ¤ 4 of
the FAA. The court must determine whether an agreement to arbitrate exists. If
there is a claim of illegality in the inducement regarding the arbitration
clause, then the court
will deal with this issue in determining whether there is a valid agreement to
arbitrate. But questions regarding the validity of the overall contract, as
opposed to the arbitration clause, are for resolution by the arbitrator. Todd
v. Oppenheimer & Co., Inc., 78 F.R.D. 415 (S.D.N.Y.1978); Sleeper Farms v. Agway, Inc., 211 F.Supp.2d 197 (D.Me.2002). In the
present case there is no contention of any fraud specifically involving the
arbitration clause. The claim of the Syndicates is directed to the overall
contract, and is thus subject to arbitration at the behest of a party who has
the right to enforce the arbitration agreement.
This leads to the main issue before the court, which involves the
definition of "Reinsured" in the Excess of Loss Reinsurance Agreement.
The court believes that the meaning of the language is plain. As occurs with
numerous insurance contracts, the agreement in the present case provides that
there are other insured (or reinsured) parties besides the one making the
agreement. These other reinsured parties are appropriately designated under the
definition of "Reinsured." They include Legion itself, another
specifically identified company (Eagle Star Reinsurance Company), and the quota
share reinsurers. Eagle Star and the quota share reinsurers are just as much
Reinsured parties as Legion. There is nothing to indicate that the quota share
reinsurers are included for informational purposes only. If that had in fact
been the purpose, there was an Information section of the contract which could
have been used.
Although, in the court's view, there is no ambiguity requiring
additional evidence, the court has allowed the Syndicates to introduce
declarations and testimony regarding what the Syndicates claim to be the
understanding, custom and usage in the London reinsurance market. However, it
turned out that the testimony introduced by the Syndicates at the hearing
supported Continental's position. In the first place, it was quickly admitted
that Legion is not in fact the only Reinsured party and that Eagle Star
Reinsurance Company is another. Then it was admitted that the excess of loss
reinsurance gives the same protection to the quota share reinsurers as to
Legion. This means, of course, that the quota share reinsurers, including
Continental, are in fact Reinsured parties.
*6 In
view of the clear language of the Excess of Loss Reinsurance Agreement, as
confirmed by the extrinsic evidence, the court holds that Continental and the
other quota share reinsurers are Reinsured parties under that agreement. As
Reinsured parties they are third-party beneficiaries, and are entitled to
enforce the Excess of Loss Reinsurance Agreement. Travelers Indemnity Co. v.
The Lasco Group. Inc.,
150 F.Supp.2d 556, 561-62 (S.D.N.Y.2001); Stainless, Inc. v. The Employers
Fire Ins. Co., 69 A.D.2d
27, 33, 418 N.Y.S.2d 76, 80 (App.Div.1979). A third-party beneficiary may
enforce an arbitration clause Cargill International S.A. v. MIT Pavel
Dybenko, 991 F.2d 1012,
1019-20 (2d Cir.1993).
The court now returns to the issue discussed at the hearing
regarding the finality of the arbitration award and the possibility that an
arbitration with Continental might leave the Syndicates open to arbitrating the
same issues with other quota share reinsurers, with Legion, and perhaps with
Eagle Star or Eagle Star's successor in interest.
In dealing with this matter, it is necessary to start with the
fact that the demand for arbitration is made by Continental on its own behalf
and on behalf of all the other Reinsured parties, which would include Legion,
Eagle and the other quota share reinsurers. Continental is the only company
identified in the caption of the arbitration demand, but Continental and the
others are referred to collectively in the caption and elsewhere in the
arbitration demand as "Claimants." The three claims in the
arbitration demand are made on behalf of all Claimants. The essence of the
claims is that Claimants have paid losses on the insurance written by Legion
and that the Syndicates are required to indemnify Claimants pursuant to the
Excess of Loss Reinsurance Agreement. It is alleged in the demand for
arbitration that the Syndicates have improperly sought to avoid their
reinsurance agreement and are liable to the Claimants in the amount of at least
$21 million. There is no itemization as to what is said to be owed to any
particular quota share reinsurer.
Prior to the time of the hearing an affidavit had been submitted
on behalf of Legion's Rehabilitator, supporting Continental's position as being
entitled to arbitrate, and stating that with respect to Continental's interest
in the Excess of Loss Reinsurance Agreement, Legion agrees to be bound by the
outcome of Continental's action against the Syndicates. Following the hearing,
Continental obtained the powers of attorney, described earlier in this
opinion--i.e., from
the Legion entities and from G.E. Frankona Reinsurance Ltd. (formerly known as
Eagle Star Reinsurance Company). Both the Legion entities and Frankona appoint
Continental as their attorney-in-fact in connection with the prosecution of the
arbitration against the Syndicates, and agree to be bound by the arbitration
award.
The court reaches the following conclusions from what has been set
forth. In the first place, it is probably true that Continental would have a
right, as a Reinsured party, to pursue an arbitration solely in its own behalf
in order to assert its claim for the reimbursement owed by the Syndicates to
Continental, and to deal with any issue relating to its entitlement to such
reimbursement, including the issue about whether the Syndicates had a right to
rescind their Excess of Loss Reinsurance Agreement with Legion.
*7
However, the issue of Continental's ability to proceed solely in its own behalf
is not before the court. Continental is seeking arbitration on behalf of the
Reinsured parties, including the other quota share reinsurers as well as Legion
and Eagle. Legion has a particular significance because the Excess of Loss
Reinsurance Agreement was with Legion and the Syndicates and the Syndicates'
notice of rescission was to Legion. The Syndicates have always taken the
position that Legion is entitled to demand arbitration. The Legion entities
have now made Continental their attorney-in-fact, have authorized Continental
to pursue the arbitration on behalf of the Legion entities, and have agreed to
be bound by whatever award is issued in the arbitration brought by Continental.
Now it is the clear that the arbitration is being sought on behalf of Legion,
even though the demand has been initiated by Continental.
Conclusion
For the foregoing
reasons, the court grants Continental's petition to compel arbitration. The
principal issue for arbitration will obviously be whether the Syndicates did or
did not have a right to rescind their Excess of Loss Reinsurance Agreement.
Continental will claim that the Syndicates had no such right, and that the
Syndicates owe a certain amount of reimbursement to Continental. Although
Legion is not seeking any reimbursement, the opposition of Legion to the
purported rescission by the Syndicates will be presented by Continental
pursuant to its being appointed attorney-in-fact by Legion. Any claim of G.E.
Frankona will be presented by Continental under Frankona's appointment of
Continental as Frankona's attorney-in-fact. Of course, Continental asserts that
it is bringing the arbitration on behalf of all Reinsureds, which would include the
other quota share reinsurers. The question of whether claims of the other quota
share reinsurers should be presented in this arbitration proceeding will be
dealt with by the arbitration panel.
SO ORDERED.