Tort Trial & Insurance Practice Law Journal
Fall, 2002

EQUITAS UNDER ENGLISH LAW

John B. Haarlow, Hugh C. Griffin [FNa1]

Copyright © 2002 by American Bar Association; John B. Haarlow, Hugh C. Griffin

I. INTRODUCTION

  As complex environmental and mass tort liability litigation has risen, the corresponding disputes over insurance coverage for such liabilities have risen in tandem. Certain underwriters at Lloyd's, London, [FN1] like other insurers, are involved in many of these coverage disputes. But in the last few years some policyholders, in a misguided effort to gain what they perceive to be an advantage, have attempted to name one or more of the Equitas companies as additional defendants in cases filed against those underwriters. The issue in these cases is whether Equitas, by agreeing to reinsure certain liabilities of Lloyd's Underwriters and to undertake certain claims-handling duties as runoff agent of Lloyd's Underwriters, is a proper party to such lawsuits. As to Equitas, these cases have focused on two issues: privity of contract and jurisdiction. On the privity issue, insureds have claimed that by reason of the Reinsurance Contract, [FN2] Equitas has stepped into the shoes of Lloyd's Underwriters and is therefore liable on insurance contracts to which Equitas is not a party. On the jurisdictional issue, insureds have claimed that Equitas is bound by the service-of-suit clause typically found in the Lloyd's policies. [FN3] For good reasons, [FN4] a majority of the decisions from American courts addressing these issues have held in favor of Equitas, finding either that Equitas was not subject to personal jurisdiction or that the policyholders failed to state a claim against Equitas, or both: [FN5]

  . In Millennium Petrochemicals, Inc. v. C.G. Jago, [FN6] a federal district court in Kentucky dismissed a policyholder action against Equitas for lack of jurisdiction and failure to state a claim because "the agreement is one of reinsurance and plaintiffs have no contractual right to sue Equitas directly." [FN7]

  . In Long Island Lighting Co. v. Aetna Casualty & Surety Co., [FN8] a federal district court in New York held that the Names [FN9] and not Equitas were the real party to the controversy because "[i]t is the Names--and not Equitas--who are severally liable to the insured" and "an insured has no direct right of action against a reinsurer." [FN10]

  . In Union Pacific Railroad v. Equitas Ltd., [FN11] a Colorado appellate court held that the Reinsurance Contract between Equitas and the Names "did not bind Equitas to the terms of the [insured's] insurance contract." [FN12]

  . In Malone v. Equitas Reinsurance Ltd., [FN13] a California appellate court upheld the grant of Equitas's motion to quash service for lack of personal jurisdiction, relying on the rationale used in Union Pacific that "the mere fact that [the] Names entered into an agreement with Equitas Limited, does not in any way suggest that Equitas Limited has affirmatively taken advantage of doing business in [the state]." [FN14]

  . In Truck Insurance Exchange v. Equitas Ltd., [FN15] a California court granted Equitas's motion to quash service for lack of personal jurisdiction, citing both Union Pacific and Malone. [FN16] The court held that the Reinsurance Contract "only affect[s] the rights of the parties thereto" (Underwriters and Equitas) and, thus, the policyholder had no rights against Equitas. [FN17]

  . In Idaho Power Co. v. Underwriters at Lloyd's, London, [FN18] an Idaho court held that Equitas was not a proper party to a lawsuit by an insured because the insured "lacks the right to directly sue Equitas." [FN19]

  . In First State Insurance Co. v. Minnesota Mining & Manufacturing Co.,  [FN20] a Minnesota court held that Equitas could not be joined to a policyholder's action by virtue of the Reinsurance Contract because "the parties to th[e] agreement intended to create a contract of reinsurance and ... they plainly, clearly and repeatedly so stated." [FN21]

  . In B.F. Goodrich Co. v. Commercial Union Insurance Co., [FN22] an Ohio court held that it had no jurisdiction over Equitas and rejected the plaintiff's argument that the Reinsurance Contract created a "nexus of interest" sufficient to confer jurisdiction over Equitas. [FN23] The court found that the relationship between Equitas and the Names "remains fundamentally one of an indemnitor for claims against primary insurers and reinsurers." [FN24]

  . In Norfolk Southern Corp. v. Admiral Insurance Co., [FN25] an Ohio court, relying in large part on Millennium and B.F. Goodrich, dismissed the policyholders' complaint against Equitas for lack of jurisdiction and failure to state a claim. The court held that Equitas was not bound by the service-of- suit clause in the underlying policies and found it "remarkable" that the policyholders contended that their "rights cannot be defeated by the terms of the [Reinsurance Contract] to which they were not parties when the [Reinsurance Contract] appears to be the whole basis for their claim against Equitas as plead [sic] in their complaint." [FN26]

  . In ZRZ Realty Co. v. Certain Underwriters at Lloyd's of London,  [FN27] an Oregon court held that it did not have jurisdiction over Equitas. The court found that "[t]he contract between Lloyd's of London and Equitas is clear, it is a contract of reinsurance. The reinsurance contract states explicitly that it does not create any rights in any of the Names' policyholders." [FN28]

  . In Employers Insurance of Wausau v. Tektronix, Inc., [FN29] an Oregon court dismissed a policyholder's complaint against Equitas for lack of jurisdiction and failure to state a claim.

  . In Peco Energy Co. v. Insurance Co. of North America, [FN30] a Pennsylvania court dismissed a complaint by a policyholder against Equitas, holding that it had no jurisdiction over Equitas.

  . In Browning-Ferris Industries, Inc. v. Certain Underwriters at Lloyd's London, [FN31] a Texas court granted summary judgment in favor of Equitas on claims for breach of contract and breach of the duty of good faith and fair dealing.

  . In Boeing Co. v. Underwriters at Lloyd's, [FN32] a Washington court dismissed a policyholder's complaint on both jurisdictional grounds and for failure to state a cause of action. The court found that "the Equitas Companies are not parties to the contracts of insurance between Boeing and the Lloyd's Names. That being the case, there can be no cause of action on the underlying insurance policies." [FN33]

  . In Archdiocese of Milwaukee v. Certain Underwriters at Lloyd's London, [FN34] a Wisconsin court dismissed a policyholder's complaint for lack of jurisdiction because "Equitas is not an insurance company for the [insured], it is a reinsurer for Underwriters [and therefore], Equitas is not subject to personal jurisdiction in this court." [FN35]

  A minority of cases (most of them from New Jersey) have allowed actions to proceed against Equitas. [FN36]

  The Reinsurance Contract that forms the basis of the relationship between Lloyd's Underwriters and Equitas is governed by English law. [FN37] The purpose of this article is to demonstrate that the majority view of American courts is entirely consistent with general principles of English law, including cases that have considered the Equitas reinsurance arrangement.

II. THE CREATION AND BACKGROUND OF EQUITAS

  Many Lloyd's Underwriters or "Names" experienced large losses in connection with their underwriting of policies in 1992 and prior years. [FN38] In an effort to address the Names' liabilities with respect to 1992 and prior years' business, and the litigation attendant thereto, Lloyd's developed a Reconstruction & Renewal Plan. [FN39] A central part of R&R was the Reinsurance and Run-Off Contract. [FN40]

  Under that contract, Equitas Reinsurance Limited on September 3, 1996, reinsured the Names with respect to claims arising in connection with insurance business underwritten by the Names and allocated to 1992 or prior years of account, [FN41] other than life insurance and business previously reinsured by Lioncover Insurance Company Limited. [FN42] The Reinsurance Contract also provided that Equitas Reinsurance Limited, as agent of the Names, would exercise various claims-handling responsibilities, including settlement and adjustment of all future and outstanding claims for which Equitas Reinsurance Limited reinsured the Names. [FN43]

  Equitas Reinsurance Limited ceded all of the business it reinsured to its wholly owned subsidiary, Equitas Limited. Pursuant to an express power conferred by the Reinsurance Contract, Equitas Reinsurance Limited also delegated to Equitas Limited the responsibility for conducting the runoff of the reinsured business as agent for the Names. Both Equitas Reinsurance Limited and Equitas Limited are parties to the Reinsurance Contract. The other three members of the Equitas group are Equitas Policyholders Trustee Limited (a dormant trust company), Equitas Holdings Limited (a holding company), and Equitas Management Services Limited (a provider of intragroup services). Equitas Policyholders Trustee Limited is a party to the Reinsurance Contract, but Equitas Holdings Limited and Equitas Management Services Limited are not. Only Equitas Reinsurance Limited and Equitas Limited conduct insurance business and in each case that is confined to carrying out the Reinsurance Contract and the Lioncover contract. Equitas Limited is the main operating company of the Equitas group. Equitas Reinsurance Limited has no ongoing day-to-day operational role. Unless otherwise stated, references to "Equitas" hereinafter refer to Equitas Reinsurance Limited and to Equitas Limited.

III. ENGLISH LAW ON THE NATURE OF EQUITAS'S RELATIONSHIP WITH THE NAMES
AND POLICYHOLDERS

  The English cases that have examined R&R and the Reinsurance Contract have clearly recognized the same principles that the majority of American courts have considered in holding that none of the Equitas entities is a proper party to U.S. coverage litigation. These English cases firmly support the conclusions reached by those American courts that Equitas is a reinsurer; that Equitas is not a party to the original insurance contracts between the policyholders and Lloyd's Underwriters; that Equitas has no contractual privity with the policyholders of the Lloyd's Underwriters; that Equitas is not bound by the terms of the insurance contracts between the policyholders and Lloyd's Underwriters; and that Equitas is not subject to a breach-of-contract action by the policyholders.

A. Requirement of Privity Under English Law

  Privity of contract is a fundamental principle of English common law. Under this principle, only a person who is a party to a contract is able to sue on it. [FN44] This principle is set forth in the English case of Dunlop Pneumatic Tyre Co. v. Selfridge & Co. [FN45] as follows: 
    [I]n the law of England certain principles are fundamental. One is that only a person who is a party to a contract can sue on it. Our law knows nothing of a jus quaesitum tertio arising by way of contract. Such a right may be conferred by way of property, as, for example, under a trust, but it cannot be conferred on a stranger to a contract as a right to enforce the contract in personam. [FN46]

  Stemming from this basic principle is the equally fundamental English law principle that a policyholder has no rights against a reinsurer because there is no contractual privity between such parties. This principle was set forth in Meadows Indemnity Co. v. Insurance Corp. of Ireland PLC, [FN47] in which a reinsurer sought a declaratory judgment interpreting an underlying policy issued by its reinsured. [FN48] The court held that a reinsurer could not bring such an action because the reinsurer had no contractual relationship with the policyholder and they therefore "have no rights or obligations against or to each other." [FN49] The court opined: 
    These two parties [policyholder and reinsurer] have no rights or obligations against or to each other; they are not in a contractual relationship. Although there is of course a connection between the contract of insurance on the one hand and of reinsurance on the other, [the reinsurer's] rights are in no way involved in the existing dispute between [the insurer] and [the insured]. Whether [the insurer] has to pay [the insured] depends upon the terms and circumstances of the insurance contract between them and, if relevant, any non-disclosure or misrepresentation that occurred between them. In so far as [the reinsurer] is concerned, any liability on their part will depend upon the contract of reinsurance and the factual situation which existed between them when this was entered into. [FN50]

  Charter Reinsurance Co. v. Fagan [FN51] similarly held that where a creditor has a claim that the debtor has reinsured, the creditor has no privity with the reinsurer. [FN52]

B. Equitas as a Reinsurer Under English Law

  The Reinsurance Contract is an indemnity reinsurance agreement that constitutes Equitas as reinsurer of the Lloyd's Underwriters with respect to the relevant business. The contract is labeled a "Reinsurance and Run-Off Contract." Specifically, it says "[this] agreement is to take effect as a contract of reinsurance and shall have no effect on the liability of any Name or Closed Year Name under any original contract of insurance entered into by such Name or Closed Year Name," and that Equitas's obligation is "to reinsure and indemnify each and every Syndicate and each Closed Year Syndicate." [FN53]

  English cases dealing with Equitas have repeatedly confirmed that the Reinsurance Contract takes effect according to its terms in this regard, and that Equitas is a reinsurer. For example, in Society of Lloyd's v. Fraser, [FN54] the court described R&R as follows: 
    The R&R scheme ... effectively introduced a compulsory reinsurance and run- off scheme .... Those who signified their assent to and willingness to cooperate with the proposals had the advantage of various financial arrangements which, whilst not affecting their ultimate liability, facilitated their discharge of it. Those who did not accept the proposal ... were nevertheless required to run-off their outstanding liabilities in accordance with the reconstruction scheme and reinsure them as provided for in the Equitas reinsurance contract which was an essential part of the scheme .... Part of this reinsurance scheme ... required the individual Names to pay a reinsurance premium to Equitas. [FN55]

  Similarly, in Price & Price v. Society of Lloyd's, [FN56] the court described R&R as a plan under which the Underwriters' risks "were to be reinsured" by Equitas. [FN57] Other English cases have likewise consistently referred to Equitas as a reinsurer that has "reinsured [the Names'] liabilities ..." [FN58] and for which the Names are obligated to pay a reinsurance premium. [FN59]

  Consistent with the provisions of the Reinsurance Contract, the English cases have also confirmed that the Reinsurance Contract has not affected the liability of the Names to the policyholders on the underlying insurance contracts: the Names retain full liability to the policyholders. One such case is Re Yorke (deceased) Stone v. Chataway, [FN60] in which the court considered the liability of executors of a deceased Name who subscribed to policies that were reinsured by Equitas. [FN61] Although the court permitted the executors to make a distribution to the deceased Name's heirs, the Yorke court recognized that if Equitas did not meet its reinsurance obligations to the Names, the Names (including the deceased Name's estate) would still be liable to the policyholders on the underlying insurance policies and that the policyholder would therefore "need to go directly after the particular names." [FN62] The Yorke case clearly demonstrates that Equitas has not taken over the liabilities of the Names; rather, the Names still have several liability on all policies written by them, to the extent of their individual syndicate participations. As stated in one of the leading American cases dismissing an action against Equitas, Lloyd's Underwriters retain "the ultimate responsibility" to pay policyholders' claims "down to their last cufflinks." [FN63]

  Another key English case describing the nature of Equitas is Society of Lloyd's v. Leighs, [FN64] in which certain Names who did not accept the Lloyd's proposed settlement offer challenged R&R and the reinsurance premiums owed by them to Equitas. In its decision ultimately upholding R&R, the court undertook an analysis of the Reinsurance Contract, describing its function as follows: "The foundation of the R&R settlement offer was the Equitas Group. The function of Equitas was to reinsure the non-life liabilities of all Names in respect of the 1992 and prior years of account." [FN65]

  In explaining the Names' position under Equitas, the court found that the Names retained their several liability to policyholders: 
    It cannot even be said that the names have by means of the scheme somehow ceased to be severally liable to their assureds. On the contrary, they remain severally liable on every risk written on their behalf, a liability which could theoretically be enforced if Equitas were ever to go into liquidation before concluding the run-off. The argument of the defendants ... that the scheme is inconsistent with the several liability of the names is, in my judgment, misconceived. The reinsurance of the run-off by Equitas has simply been on market-wide, uniform terms which have involved the names transferring their assets and paying premium to a reinsurance company in exchange for (i) cover and (ii) claims handling. [FN66]

  Likewise, in the English case of Society of Lloyd's v. Fraser, [FN67] another case involving the refusal of dissenting Names to pay reinsurance premiums to Equitas, the court reviewed R&R and the nature of the Reinsurance Contract between the Names and Equitas and concluded that the agreement did "not affec[t] [the Names'] ultimate liability." [FN68]

  The clear distinction between the Reinsurance Contract involving Equitas and the Names on the one hand and the underlying insurance contracts involving the Names and their policyholders on the other is further illustrated in Amerada Hess v. CW Rome. [FN69] In Amerada, the claimants sued certain underwriters on policies that had been reinsured into Equitas. [FN70] The claimants delivered writs for service to Equitas instead of to the Lloyd's syndicates. [FN71] However, Equitas refused to accept service on behalf of the underwriters. [FN72] The court held that service on Equitas would not effect service on the relevant reinsured Lloyd's syndicates. [FN73] The claimants argued that serving Equitas was effective service on the syndicates because Equitas reinsured the Names that made up the syndicates. [FN74] The court summarily rejected this argument, noting that "[the claimants] embarked on a course--the attempt to effect service on the syndicates by serving Equitas-- which a few minutes' investigation of the Equitas reinsurance contract would have shown to be completely hopeless." [FN75] Amerada makes clear that policyholders under English law have no direct cause of action against Equitas by reason of the Reinsurance Contract.

C. Names' Liabilities to Equitas Not Transferred or Assigned Under English Law

  American policyholders that attempt to sue Equitas directly often argue that the Names' liability on the underlying insurance contracts has somehow been assigned to or assumed by Equitas. However, American courts have rejected this contention repeatedly:

  . In Millennium Petrochemicals, Inc. v. C.G. Jago, [FN76] the court rejected the policyholder's assumption-of-liability argument, finding that "Equitas was created solely for the purpose of indemnifying the Names, not 'for the express purpose of assuming the insurance contracts of the Names ...' as Plaintiff contends." [FN77]

  . In USX Corp. v. Adriatic Insurance Co., [FN78] the court noted that  "[t]he reinsurance contract expressly provides that Equitas has not assumed the liabilities of the Names in the underlying policies of insurance and that the Names through the Syndicates remain severally liable on the insured policies." [FN79]

  . In Union Pacific Railroad v. Equitas Ltd., [FN80] the court held that "Equitas Limited has not assumed the position of the Names." [FN81]

  . In Truck Insurance Exchange v. Equitas Ltd., [FN82] the court held that the policyholder's allegation that Equitas "has assumed the liabilities and responsibilities of Lloyd's under the subject policies ... is contradicted by the express terms of the Reinsurance and Runoff Contract." [FN83]

  . In Idaho Power Co. v. Underwriters at Lloyd's, London, [FN84] the court rejected a policyholder's argument that "Equitas contracted with the [N]ames to assume the liability of all [N]ames that subscribed to certain contracts of insurance issued by Lloyd's Underwriters." [FN85]

  . In First State Insurance Co. v. Minnesota Mining & Manufacturing Co.,  [FN86] the court held that "[t]o conclude that the contract is in fact an assumption agreement would require the court to ignore the parties' express language in favor of an assumed secret intent." [FN87]

  . In Norfolk Southern Corp. v. Admiral Insurance Co., [FN88] the court held that the Reinsurance Contract "is one of reinsurance and indemnification and not one of a successor-in-intent [and] [t]herefore, plaintiff-policyholders do not have contractual privity to sue Equitas directly." [FN89]

  . In Browning-Ferris Industries, Inc. v. Certain Underwriters at Lloyd's London, [FN90] the court held that "the Equitas Defendants have not substituted themselves for the obligations of Underwriters at Lloyd's, London under the insurance policies issued by Underwriters." [FN91]

  . In Boeing Co. v. Underwriters at Lloyd's, [FN92] the court rejected the policyholder's argument that the Reinsurance Contract created "a form of assumption of obligations," noting that "[a]s parties to a reinsurance agreement, the Equitas Companies are potentially liable to the Lloyd's Names, and not to plaintiff." [FN93]

  . In Archdiocese of Milwaukee v. Certain Underwriters at Lloyd's London,  [FN94] the court held that "Equitas never substituted itself for Underwriters as a party to the insurance policies." [FN95]

  These American cases are consistent with English law, which clearly "does not permit the assignment of liabilities." [FN96]

  The transfer of contractual liabilities under English law requires a novation with the affirmative consent of all parties [FN97] or, in the case of liabilities under contracts of insurance, a statutory assignment satisfying the requirements of the Financial Services and Markets Act 2000 (UK). [FN98] The statutory mechanism was not used in R&R, and was in fact expressly rejected as a viable option. [FN99] This requirement of novation to effect any transfer of contractual liabilities was recognized in Tolhurst v. Associated Portland Cement Manufacturers: [FN100] 
    It is, I think, quite clear that neither at law nor in equity could the burden of a contract be shifted off the shoulders of a contractor on to those of another without the consent of the contractee. A debtor cannot relieve himself of his liability to his creditor by assigning the burden of the obligation to someone else; this can only be brought about by the consent of all three, and involves the release of the original debtor. [FN101]

  This same principle has been recognized under English law in the context of reinsurance. In L'Alsacienne Premièr Sociéte Alsacienne v. Unistorebrand International Insurance A.S., [FN102] a reinsurer (Kansa) agreed to reinsure policies (also for reinsurance) written by another insurance company (Dovre), and the two reinsurers entered into an agreement to that effect. [FN103] The court held that the underlying insurers that had been reinsured through Dovre could not enforce the agreement between Kansa and Dovre because "there has been no novation." [FN104] The court stated that "[t]he cedants certainly cannot enforce such an undertaking, for the original contracts of reinsurance were made with Dovre, not Kansa, and there has been no novation since involving both the cedants and Kansa." [FN105]

  Policyholders have also attempted to premise their transfer-of-liability arguments against Equitas on the claims-handling activities undertaken by Equitas as runoff agent of the Names. However, the Names historically have never handled their own claims and have always operated through professional managing agents. [FN106] Under this system, "[e]very Name is required to appoint an underwriting agent or agents to whom there must be a complete delegation of all underwriting business and who will therefore have complete control over it and absolute discretion as to the acceptance of risks on behalf of the Name." [FN107] A Name also delegates to his or her managing agent the negotiation and settlement of claims made on policies and the management and control of the Name's expenses. [FN108] No English case has ever suggested that such managing agents can be held directly liable to policyholders due to their claims-handling activities. In fact, English cases describing the role of such managing agents note the unlimited several liability of the Names, but never suggest that a managing agent has any personal liability on the policies that it is managing due to its claims-handling activities. [FN109] Such a conclusion would transform the managing agents into insurers, for which U.K. governmental authorization is required. Managing agents have not been authorized as such. Equitas required governmental authorization because of the reinsurance aspect of the Reinsurance Contract, not the runoff features.

D. Lloyd's Practice of "Reinsurance to Close"

  Some policyholders argue that Equitas is directly liable to them because the Reinsurance Contract between the Names and Equitas is like the Lloyd's practice of "reinsurance to close." That argument misses the mark. The Equitas reinsurance was indeed specified by Lloyd's as being reinsurance to close; otherwise, the Names could not resign their membership. The fundamental point, however, is that neither Lloyd's reinsurance to close nor the Equitas transaction transfers to the reinsurer any of the reinsured insurer's liability to the policyholders. The majority of American courts have rejected policyholders' arguments that Equitas is directly liable to them by comparing the Reinsurance Contract and the practice of reinsurance to close, noting that there is no "authority to support [the policyholders'] assertion that this characterization [as reinsurance to close] is significant and relevant to [the court's] analysis." [FN110]

  English law holds the same. Reinsurance to close is a process through which a Lloyd's syndicate reinsures its entire business for a particular year of account, usually by an agreement with the Names who are members of the syndicate in a later year. [FN111] The Reinsurance Contract defines reinsurance to close in line with the relevant Lloyd's bylaw as follows: 
    [A] syndicate run-off reinsurance contract between members of a syndicate for a year of account and Centrewrite Limited, Lioncover Insurance Company Limited, Equitas Reinsurance Limited, or any other authorized insurance company that is designated by the Council for the purposes of this definition whereby that insurance company agrees to indemnify the members of the syndicate for that year of account ... against all known and unknown liabilities arising out of insurance business underwritten through the syndicate and allocated to that year of account. [FN112]

  Reinsurance to close is described similarly under English law as follows: 
    "Reinsurance to close" (RITC) means an agreement under which underwriting members who are members of a syndicate for a year of account agree with underwriting members who comprise that or another syndicate for a later year of account that the reinsuring members will indemnify the reinsured members against all known and unknown liabilities of the reinsured members arising out of insurance business underwritten through that syndicate and allocated to the closed year, in consideration of a premium and the assignment to the reinsuring members of all the rights of the reinsured members arising out of or in connection with that insurance business. [FN113]

  Notably, both definitions refer to the process as one of indemnity reinsurance; neither refers to a novation or any transfer of liability.

  Under English law the process of reinsurance to close is still reinsurance whereby "reinsuring members agree to indemnify the reinsured members against all known and unknown liabilities of the reinsured members arising out of insurance business underwritten through the managed syndicate and allocated to the earlier year." [FN114] Even under reinsurance to close, the Names subscribing to the original policies of insurance remain liable to the policyholders on those policies because under English law "no such agreement can relieve those original Names of their liability to policyholders." [FN115] The current U.K. regulator for insurance companies, the Financial Services Authority, agrees: 
    In the opinion of the FSA, where an insurer agrees to meet the liabilities (this may include undertaking the administration of the policies) of another insurer by means of a reinsurance contract, including Lloyd's reinsurance to close, this would not constitute an insurance business transfer because the contractual liability remains with the original insurer. [FN116]

  Thus, English law supports the decisions of the majority of American courts that labeling the Reinsurance Contract as "reinsurance to close" does not render Equitas liable to the policyholders on their underlying insurance contracts with Lloyd's Underwriters.

IV. CONCLUSION

  The existing English authorities clearly support the view of the majority of American courts that (1) policyholders have no rights against Equitas arising out of the underlying insurance contracts that are solely between the policyholders and Lloyd's Underwriters; and (2) Equitas has not assumed the Names' liabilities or become bound by the provisions in the underlying insurance contracts (including the service-of-suit clause) between the policyholders and Lloyd's Underwriters.

[FNa1]. John B. Haarlow and Hugh C. Griffin are partners with Lord, Bissell & Brook in Chicago. They thank Sarah H. Dearing for her invaluable assistance. The authors are counsel to Equitas in several of the cases cited in this article.

[FN1]. Hereinafter Lloyd's Underwriters.

[FN2]. See Part II infra.

[FN3]. The Lloyd's policies typically contain a service-of-suit clause whereby Lloyd's Underwriters agree to "submit to the jurisdiction of any Court of competent jurisdiction within the United States and [to] comply with all requirements necessary to give such Court jurisdiction" and further agree that "all matters arising hereunder shall be determined in accordance with the law and practice of such Court."

[FN4]. See John B. Haarlow & Martin R. Baach, Equitas: Setting the Record Straight, 13 MEALEY'S LITIG. REP.: INS. 21 (Apr. 13, 1999).

[FN5]. These cases represent twelve jurisdictions: California, Colorado, Idaho, Kentucky, Minnesota, New York, Ohio, Oregon, Pennsylvania, Texas, Washington, and Wisconsin.

[FN6]. 50 F. Supp. 2d 654 (W.D. Ky. 1999).

[FN7]. Id. at 660 (quoting USX Corp. v. Adriatic Ins. Co., 64 F. Supp. 2d 469 (W.D. Pa. Sept. 30, 1998).

[FN8]. No. 96 Civ. 9664(MBM), 1997 WL 567342, at *3 (S.D.N.Y. Sept. 11, 1997).

[FN9]. As the Millennium Petrochemicals court explained, "[a] 'Name' is basically an investor who buys and sells insurance risks. In order to secure their obligations to each policyholder, such as Plaintiff, the Names pledge their own personal assets. A group of Names then form a Syndicate and underwrite the policies." Millennium Petrochemicals, 50 F. Supp. 2d at 656 n.2.

[FN10]. Long Island Lighting, 1997 WL 567342, at *3.

[FN11]. 987 P.2d 954 (Colo. Ct. App. 1999).

[FN12]. Id. at 956.

[FN13]. 101 Cal. Rptr. 2d 524 (Cal. Ct. App. 2000).

[FN14]. Id. at 531-32 (quoting Union Pacific, 987 P.2d at 957).

[FN15]. No. BC 260738 (Cal. Super. Ct., Los Angeles Cty. July 2, 2002).

[FN16]. Id., Transcript of Proceedings, June 4, 2002, at 29-32, 35.

[FN17]. Id. at 28-29.

[FN18]. No. 97-0203-S-BLW (D. Idaho Mar. 31, 1999).

[FN19]. Id., slip op. at 7.

[FN20]. No. C3-94-12780 (Minn. Dist. Ct., Ramsey Cty. May 1, 1997).

[FN21]. Id., slip op. at 6.

[FN22]. No. CV 99 02 0410 (Ohio Ct. Common Pleas, Summit Cty. Oct. 14, 1999).

[FN23]. Id., slip op. at 2.

[FN24]. Id.

[FN25]. No. CI 01-3729 (Ohio Ct. Common Pleas, Lucas Cty. Aug. 20, 2002).

[FN26]. Id., slip op. at 14, 15.

[FN27]. No. 0007-07403 (Or. Cir. Ct., Multnomah Cty. Apr. 23, 2001).

[FN28]. Id., slip op. at 3.

[FN29]. No. CCV 9908-032 (Or. Cir. Ct., Clackamas Cty. Jan. 18, 2001).

[FN30]. No. 99-07386 (Pa. Ct. Common Pleas, Chester Cty. Aug. 17, 2001).

[FN31]. Nos. 98-56362-A, 98-56362 (80th Dist. Harris Cty., Tex. Nov. 8, 2001).

[FN32]. No. 99-03873-8 SEA (Wash. Super. Ct., King Cty. Dec. 16, 1999).

[FN33]. Id., slip op. at 4.

[FN34]. No. 96-CV-006626 (Wis. Cir. Ct., Milwaukee Cty. July 12, 1999).

[FN35]. Id., slip op. at 3.

[FN36]. These cases represent four jurisdictions: Maine, New Jersey, Texas, and Vermont. See Cent. Me. Power Co. v. Moore, No. CV-93-489 (Me. Super. Ct., Kennebec Cty. Jan. 10, 2000); GAF Corp. v. Hartford Accident & Indem. Co., No. L-980-97 (N.J. Super. Ct., Somerset Cty. Mar. 31, 2000); Uniroyal v. Am. Re-Insurance, No. SOM-L-8172-94 (N.J. Super. Ct., Middlesex Cty. Dec. 17, 1999); Unisys v. Ins. Co. of N. Am., No. L-1434-94 (N.J. Super. Ct., Middlesex Cty. Dec. 17, 1999); Employers Mut. Cas. Co. v. Owens Ins., Ltd., No. MRS-C-51-96 (N.J. Super. Ct., Morris Cty. Nov. 10, 1999); Equitas Reinsurance Ltd. v. Browning-Ferris Indus., No. 14-99-01084-CV (Tex. App. Houston [14th Dist.] Apr. 26, 2001) (unpublished opinion) (finding Equitas subject to personal jurisdiction in a statutory cause of action based on a particular provision of the Texas Insurance Code); Cent. Vt. Pub. Serv. Corp. v. Adriatic Ins. Co., No. 1:96-CV-252 (D. Vt. Feb. 11, 1998). A federal court decision in Wisconsin, Employers Insurance of Wausau v. Certain London Market Companies, No. 97-C-0409-C, 1997 U.S. Dist. LEXIS 22027 (W.D. Wis. Oct. 27, 1997), was not followed by the state court in Archdiocese of Milwaukee, slip op. at 3.

[FN37]. Reinsurance Contract ß  25.1 provides: 
    All rights and obligations, of whatever sort, of any person, arising out of, or in any way related to or connected with, this Agreement and all the terms and provisions hereof and all questions of construction, validity and performance hereunder and all appointments and authorities granted pursuant hereto shall be governed by and construed in accordance with the laws of England. 
Id. (emphasis added).

[FN38]. See Soc'y of Lloyd's v. Fraser, [1999] Lloyd's Rep. 156, 161 (C.A.).

[FN39]. Hereinafter R&R.

[FN40]. See id. [hereinafter Reinsurance Contract].

[FN41]. See id.

[FN42]. Lioncover was also reinsured by Equitas Reinsurance Limited in December 1997 on terms similar to those contained in the Reinsurance Contract.

[FN43]. Reinsurance Contract ß  9.2.

[FN44]. 1 CHITTY ON CONTRACTS ß  1370 (1989) ("The general rule is that a contract binds only the parties to it. This rule is regarded as an aspect of the doctrine of privity."). The Contracts (Rights of Third Parties) Act 1999 (UK) permits contracting parties to confer benefits on, and give enforceable rights to, third-party beneficiaries. That Act is not retrospective and does not apply to the Reinsurance Contract or any aspect of R&R. Accordingly, common law principles apply.

[FN45]. [1915] A.C. 847 (H.L.).

[FN46]. Id. at 853 (emphasis added).

[FN47]. [1989] 2 Lloyd's Rep. 298 (C.A.).

[FN48]. Id. at 300.

[FN49]. Id. at 309.

[FN50]. Id. (emphasis added).

[FN51]. 28 June 1995 (Q.B.).

[FN52]. Id.

[FN53]. Reinsurance Contract at Recital (J); ß  3.1.

[FN54]. [1999] Lloyd's Rep. 156 (C.A.).

[FN55]. Id. at 161 (emphasis added).

[FN56]. [2000] Lloyd's Rep. 453 (Q.B.).

[FN57]. Id. at 456.

[FN58]. Soc'y of Lloyd's v. Wilkinson, 23 April 1997, LEXIS at 12 (Q.B.); Soc'y of Lloyd's v. Burningham, 4 March 1998, LEXIS at 3 (Q.B.).

[FN59]. Re a debtor, [2000] 1 BCLC 103, 106 (C.A.).

[FN60]. [1997] 4 All ER 907, 913 (Ch.).

[FN61]. Id. at 914.

[FN62]. Id. at 913.

[FN63]. USX Corp. v. Adriatic Ins. Co., 64 F. Supp. 2d 469, 471 (W.D. Pa. 1998).

[FN64]. [1997] CLC 759 (Q.B.).

[FN65]. Id. at 762.

[FN66]. Id. at 781 (emphasis added).

[FN67]. [1999] Lloyd's Rep. 156 (C.A.).

[FN68]. Id. at 161.

[FN69]. [2000] 144 SJ LB 126 (Q.B.). The position advocated in Amerada Hess was affirmed as legally correct in National Bank of Greece SA v. RM Outhwaite, 16 January 2001 (Q.B.).

[FN70]. Amerada, [2000] 144 SJ LB, LEXIS at 1.

[FN71]. Id., LEXIS at 4.

[FN72]. Id.

[FN73]. Id.

[FN74]. Id., LEXIS at 5.

[FN75]. Id., LEXIS at 8.

[FN76]. 50 F. Supp. 2d 654 (W.D. Ky. 1999).

[FN77]. Id. at 659.

[FN78]. 64 F. Supp. 2d 469 (W.D. Pa. 1998).

[FN79]. Id. at 479.

[FN80]. 987 P.2d 954 (Colo. Ct. App. 1999).

[FN81]. Id., slip op. at 6.

[FN82]. No. BC 260738 (Cal. Super. Ct., Los Angeles Cty. July 2, 2002).

[FN83]. Id., Transcript of Proceedings, June 4, 2002, at 25.

[FN84]. No. 97-0203-S-BLW (D. Idaho Mar. 31, 1999).

[FN85]. Id., slip op. at 6.

[FN86]. No. C3-94-12780 (Minn. Dist. Ct., Ramsey Cty. May 1, 1997).

[FN87]. Id., slip op. at 6.

[FN88]. No. CI 01-3729 (Ohio Ct. Common Pleas, Lucas Cty. Aug. 20, 2002).

[FN89]. Id., slip op. at 16.

[FN90]. No. 98-56362-A (80th Dist. Harris Cty., Tex. Nov. 8, 2001).

[FN91]. Id., slip op. at 1.

[FN92]. No. 99-03873-8 SEA (Wash. Super. Ct., King Cty. Dec. 16, 1999).

[FN93]. Id., slip op. at 2.

[FN94]. No. 96-CV-006626 (Wis. Cir. Ct., Milwaukee Cty. July 12, 1999).

[FN95]. Id., slip op. at 3.

[FN96]. Baker v. Black Sea, [1996] Lloyd's Rep. 353, 361 (C.A.).

[FN97]. The concept of novation is described in CHITTY, supra note 44, at ß  1436 ("Novation takes place where the two contracting parties agree that a third shall stand in the relation of either of them to the other. There is a new contract and it is therefore essential that the consent of all parties shall be obtained.").

[FN98]. At the time of R&R, the relevant law was the Insurance Companies Act 1982 (UK).

[FN99]. Reconstruction and Renewal Settlement Offer, July 1996, at 115.

[FN100]. [1902] C.A. 660 (K.B.).

[FN101]. Id. at 668.

[FN102]. [1995] LRLR 333 (Q.B.).

[FN103]. Id.

[FN104]. Id. at 344.

[FN105]. Id.

[FN106]. Ashmore v. Corp. of Lloyd's, [1992] 2 Lloyd's Rep., LEXIS at 9  (Q.B.).

[FN107]. Id.

[FN108]. Soc'y of Lloyd's v. Clementson, [1997] LRLR 175, 188 (Q.B.).

[FN109]. See, e.g., Ashmore, [1992] 2 Lloyd's Rep., LEXIS at 9.

[FN110]. Union Pac. R.R. v. Equitas Ltd., 987 P.2d 954, 956 (Colo. Ct. App. 1999). See also Malone v. Equitas Reinsurance Ltd., 101 Cal. Rptr. 2d 524, 532 n.6 (Cal. Ct. App. 2000) (agreeing with Union Pacific court that labeling the Reinsurance Contract as a "reinsurance to close" is not relevant to the court's analysis).

[FN111]. Clementson, [1997] LRLR at 216.

[FN112]. Syndicate Accounting Bylaw, No. 18 of 1994, Schedule 1, ß  1  (emphasis added) (cited by Reinsurance Contract, Schedule 2, at 64).

[FN113]. Henderson v. Merrett Syndicate Ltd., [1997] LRLR 247, 277 (Q.B.).

[FN114]. Clementson, [1997] LRLR at 216 (emphasis added).

[FN115]. Hayter v. Nelson, 14 Sept. 1989, LEXIS at 6 (Q.B.); see also Clementson, [1997] LRLR at 201 (also recognizing that the Names who underwrote the original policy are still liable after reinsurance to close).

[FN116]. FINANCIAL SERVICES AUTHORITY, INSURANCE BUSINESS AND FRIENDLY SOCIETY TRANSFERS ß  18.1.5 (2001).

END OF DOCUMENT