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CONTINENTAL CASUALTY v. CERTAIN UWTR. AT LLOYD'S LONDON

United States District Court, S.D. New York


March 15, 2004.

CONTINENTAL CASUALTY COMPANY, Petitioner, -against- CERTAIN UNDERWRITERS AT LLOYD'S LONDON, Respondents

The opinion of the court was delivered by: THOMAS GRIESA, Senior District Judge

OPINION

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% Page 2

  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 Page 3 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. Page 4

  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. Page 5 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 Page 6 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.

  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 Page 7 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 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. Page 8

  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.

  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 Page 9 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. Page 10

  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 Mother 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. Page 11

 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.

  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 Page 12 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 Page 13

  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.

  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 Page 14 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 Page 15 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 Page 16 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.

  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 Page 17

  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 Page 18 by the arbitration panel.

  SO ORDERED.

20040315

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