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
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
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
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.
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
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
On February 6, 2002 Continental filed this petition to compel
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.
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 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
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.
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
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
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.
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
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.
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
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.
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