United States District Court, N.D. Illinois
February 10, 2004.
CONTINENTAL CASUALTY CORP., Plaintiff,
AMERICAN NATIONAL INS. CO., Defendant
The opinion of the court was delivered by: CHARLES NORGLE, District Judge
OPINION AND ORDER
Before the court is Defendant's Motion to Dismiss, or in the
Alternative, to Stay Proceedings [4-1]. For the following reasons, the
Motion to Dismiss is granted.
Plaintiff Continental Casualty Corp. ("CCC") and Defendant American
National Insurance Co. ("ANICO") were members of a reinsurance pool,
collectively referred to as Associated Accident and Health Reinsurance
Underwriters ("AAHRU"). AAHRU was managed by IOA Re, Inc. ("IOA Re"),
pursuant to separate contracts (the "Participation Agreement[s]") entered
into between IOA Re and each individual AAHRU member. Each individual
AAHRU member's Participation Agreement was identical or substantially
identical to those of other AAHRU members. Under the Participation
Agreements, IOA Re was authorized to enter into reinsurance contracts on
behalf of members of the AAHRU pool.
On July 5, 2000, CCC sent a letter to IOA Re indicating that CCC was
terminating its Participation Agreement effective December 31, 2000.
Subsequent letters to the same effect were
also sent on July 21 and November 29, 2000. By another letter dated
August 22, 2000, CCC informed IOA Re that it was revoking the authority
of IOA Re to enter into multiple-year contracts, to extend policy
periods, or to back-date effective dates of reinsurance policies.
It is not disputed that there was a sophisticated and long-standing
relationship between the parties in the reinsurance pool, and that there
was routine commercial communication, CCC does not claim that it also
notified other members of the AAHRU pool of the attempted revocation of
IOA Re's authority. CCC does not allege that IOA Re acknowledged receipt
of such notice or that any other members of the AAHRU pool communicated
in any way about the revocation of an agency relationship.
On April 20, 2001, IOA Re and ANICO executed a Quota Share Accident
Retrocession Contract ("Quota Share Contract") pursuant to which AAHRU
members indemnified ANICO, according to varying shares per member, on
certain of ANICO's reinsurance business. ANICO's reinsurance concerned
certain risks covered in the World Trade Center attacks of September 11,
2001. CCC alleges that it learned of the Quota Share Contract in
mid-September 2001, in the wake of the September 11th terrorist
On September 17, 2002, CCC filed suit against ANICO. CCC's Complaint
seeks a declaratory judgment that it is not bound by, and owes no duty
under, the Quota Share Contract, based on the fact that IOA Re lacked
authority to enter into the Quota Share Contract on CCC's behalf.
ANICO has filed the instant Motion to Dismiss, or in the Alternative,
to Stay Proceedings. In that Motion, ANICO makes the following arguments:
(1) the Quota Share Contract contains an arbitration clause, thus
arbitration is required under the Federal Arbitration Act ("FAA"), and
Complaint should be dismissed; (2) the case should be dismissed pursuant
to Federal Rule of Civil Procedure 12(b)(3) based on improper venue; and
(3) the case should be dismissed pursuant to Federal Rule of Civil
Procedure 12(b)(7) based on failure to join IOA Re, an indispensable
CCC has responded arguing that under Sphere-Drake Ins. Ltd, v. All
Amer. Ins. Co., 256 F.3d 587 (7th Cir. 2001), the issue of whether an
agreement to arbitrate was formed whether IOA Re had authority to bind
CCC to the Quota Share Contract must be preliminarily determined by the
From this point ANICO's briefs take on a discordant quality, and have
resulted in a total of six briefs having been filed between the parties.
In order to simplify the confusion created by these pleadings, the court
will not address any arguments other than the issue of whether this
matter should be arbitrated.
ANICO filed a reply arguing that arbitration is required based on the
Participation Agreement executed by IOA Re and CCC, and has attached a
copy of that Participation Agreement to its Reply.*fn1 As an additional
argument, relying on Reinsurance Co. of Amer. v. Amer. Cent, Ins.
Co., 621 F. Supp. 516, 518 (C.D. Ill 1985), ANICO argues that IOA Re
had apparent authority to bind CCC to the Quota Share Contract, and thus
arbitration is required.
CCC was granted leave to file a sur-reply, and argues that the
Participation Agreement has nothing to do with its Complaint in this
matter. CCC gives short shrift to ANICO's apparent authority argument,
stating only that IOA Re's apparent authority is a fact issue requiring
and a trial according to Sphere-Drake.
ANICO filed a rejoinder, reiterating the arguments raised in its
Reply. CCC filed a surrejoinder, pointing out that ANICO has avoided
discussing Sphere-Drake throughout its pleadings. The court will now
decide the issue.
Discussion of Retrocessional Agreements
Reinsurance is a contract pursuant to which one insurer transfers or
"cedes" to another insurer all or a portion of the risk it has assumed
under one or more separate insurance policies. See Couch on Insurance 3d
§ 9:1 at 9-3 (2003). Conceptually, reinsurance is insurance for
insurers, thereby allowing insurers to spread their risks. See id. § 9:1
at 9-4. The original insurer that is transferring its risks is known as
the "reinsured," and the insurer that is accepting those risks is known
as the "reinsurer." See id. § 9:2 at 9-6. In turn, a reinsurer may
transfer its reinsured risks to yet another insurer by what are referred
to as "retrocessional agreements." Id. The reinsurer transferring its
risks is known as a "retrocedent," and the reinsurer assuming those risks
is known as the "retrocessionaire." Id.
The Participation Agreements and the disputed Quota Share Contract at
issue in this matter involve retrocessional agreements.
Arbitration Clause in Quota Share Contract
It is well-established that "arbitration is a matter of contract and a
party cannot be required to submit to arbitration any dispute that he has
not agreed to submit." United Steel workers v. Warrior & Gulf Navigation
Co., 363 U.S. 574, 582-83 (1960). Thus, the issue of whether parties have
agreed to arbitrate a dispute is a matter for courts to decide. See
Sphere-Drake Ins. Ltd. v. All
Amer. Ins. Co., 256 F.3d 587, 589-90 (7th Cir. 2001) (citing First
Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943-45 (1995)). Whether
an agreement to arbitrate exists is determined under principles of state
law. See Tinder v. Pinkerton Security, 305 F.3d 728, 733 (7th Cir. 2002);
see also 9 U.S.C. § 2. Even in the absence of a party's express agreement
to arbitrate, a party may be deemed to have agreed to arbitrate where his
agent acted with the apparent authority to do so. See Reinsurance Co. of
Amer. v. Amer. Cent. Ins. Co., 621 F. Supp. 516, 518 (C.D. Ill. 1985).
Under Illinois law, it is a well-established precept of agency law that
a principal will be bound by the authority he appears to give to
another, as well as that authority which he actually gives. State Sec.
Ins. Co. v. Burgos, 145 Ill.2d 423, 431; 583 N.E.2d 547, 551 (Ill. 1991).
Apparent authority arises where a principal creates, through words or
conduct, the reasonable impression that the putative agent has been
granted authority to perform certain acts. Id. Apparent authority is that
authority which a reasonably prudent person, in view of the principal's
conduct, would naturally suppose the agent to possess. Id. The
principal, having created the appearance of authority, is estopped to deny
it to the detriment of a third party. Id.
According to ANICO, all members of the AAHRU pool allowed IOA Re to
manage their affairs relating to reinsurance contracts. ANICO argues that
it never received notice that CCC attempted to revoke IOA Re's authority
to enter contracts on CCC's behalf. ANICO also argues that, assuming the
attempted revocation of authority was permissible under the Participation
Agreement, the Participation Agreements required CCC to give notice to
other AAHRU pool members, and no such notice was ever given. Thus, by
entering the Quota Share Contract with IOA Re, ANICO reasonably relied
upon IOA Re's apparent authority to do so.
Under the Participation Agreement, CCC gave IOA Re authority to enter
contracts on its
behalf. The Participation Agreement executed between CCC and IOA Re was
identical or substantially identical to other such agreements executed by
all other members of the AAHRU pool. Without notice to the contrary,
ANICO reasonably relied on the fact that IOA Re was simply carrying out
its authority among members of the AAHRU pool. See Burgos, 145 Ill.2d at
431; 583 N.E.2d at 551; Reinsurance Co., 621 F. Supp. at 520.
CCC offers no evidence to the contrary. CCC simply argues that IOA Re's
apparent authority is a fact issue requiring discovery and a trial
according to Sphere-Drake. However, Sphere-Drake is inapplicable to the
issue of whether IOA Re had apparent authority to bind CCC to the Quota
Share Contract, as that case specifically stated that the plaintiff
therein contended that the defendant knew that the plaintiff's agent had
exceeded its authority. Thus, this matter is governed by the analysis in
Reinsurance Co. of Amer. v. Amer. Cent. Ins. Co., and as indicated, the
court finds that, as a matter or law, IOA Re had the apparent authority
to bind CCC to the Quota Share Contract.
Arbitration Clause in Participation Agreement
Additionally, ANICO argues that arbitration is required pursuant to the
Participation Agreement that CCC, as a member of AAHRU, and IOA Re
The Federal Arbitration Act embodies a clear federal policy favoring
arbitration agreements. "[Q]uestions of arbitrability must be addressed
with a healthy regard for the federal policy favoring arbitration." Moses
H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983).
Generally, "the parties' intentions control, but those intentions are
generously construed as to issues of arbitrability." Mitsubishi Motors
Corp. v. Soler Chrysler-Plymouth. Inc., 473 U.S. 614, 626 (1985).
The breadth of the arbitration clause in the Participation Agreement
encompasses the parties'
current dispute. The clause provides that "any dispute arising out of
this Agreement shall be submitted to the decision of a board of
arbitration composed of two arbitrators and an umpire. . . . " Def.'s
Reply, Ex. A (Participation Agreement, Article XIII, ¶ 1). The clause
also contemplates situations where arbitration may occur between multiple
members of the AAHRU pool. See Def.'s Reply, Ex. A (Participation
Agreement, Article XIII, ¶ 7).
The disputed Quota Share Contract finds its genesis in the
Participation Agreement executed between CCC, as a member of AAHRU, and
IOA Re. The arbitration clause in the Participation Agreement is
identical or substantially similar to the Participation Agreement
executed by all members of the AAHRU pool. Thus, neither CCC nor ANICO is
a stranger to the arbitration clauses in the Participation Agreements.
While ANICO is arguably not a signed party to the Participation Agreement
executed by CCC and IOA Re, ANICO is a fellow AAHRU member and at the
very least a third-party beneficiary to the Participation Agreement, and
may enforce the arbitration clause contained therein. See Ross Bros.
Constr. Co. v. Int'l. Steel Services, Inc., 283 F.3d 867, 876 (7th Cir.
So, while CCC attempts to limit its dispute to the discreet issue of
the Quota Share Contract, that dispute arises out of the Participation
Agreement and is subject to arbitration according to its terms. In
seeking an equitable remedy, CCC cannot artfully plead a complaint in an
attempt to have the court and the parties put on blinders to the reality
of the relationship contemplated by the AAHRU pool, and defeat the
expectations of the AAHRU members as indicated in their respective, and
identical or substantially identical, Participation Agreements.
If the AAHRU members had wished to limit the scope of the arbitration
clauses of the Participation Agreements they could have done so. However,
CCC shows no limitations or
exceptions to the broad language covering "any dispute" in the
arbitration clause that would delimit the breadth of issues required to
be arbitrated. Those arbitration clauses are broad, and applying the
policy of the FAA, the court is to give such clauses their effect
especially in light of the strong policies favoring arbitration created
by Congress, the Supreme Court and the Seventh Circuit.
For the foregoing reasons, under either the Quota Share Contract or the
Participation Agreement, a valid arbitration agreement exists; however, in
either case, the forum for arbitration is not in the Northern District of
Illinois. As such, this court cannot enter an order compelling
arbitration in another forum, and may only dismiss or stay the matter.
See Snyder v. Smith, 736 F.2d 409, 420 (7th Cir. 1984) overruled on other
grounds by Felzen v. Andreas, 134 F.3d 873 (7th Cir. 1998); Merrill
Lynch, Pierce, Fenner & Smith v. Lauer, 49 F.3d 323.328 (7th Cir.
1995). Therefore, ANICO's Motion to Dismiss is granted and this action is
IT IS SO ORDERED.