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Continental Casualty Co. v. Commercial Risk Re-Insurance Co.

April 16, 2009

CONTINENTAL CASUALTY COMPANY AND CONTINENTAL INSURANCE COMPANY, PLAINTIFFS,
v.
COMMERCIAL RISK RE-INSURANCE COMPANY, COMMERCIAL RISK REINSURANCE COMPANY LIMITED, GENERAL SECURITY INDEMNITY COMPANY OF ARIZONA, GENERAL SECURITY NATIONAL INSURANCE COMPANY, GIE COLUMBUS, SCOR, AND SCOR REINSURANCE COMPANY, DEFENDANTS.



The opinion of the court was delivered by: Hon. Harry D. Leinenweber

MEMORANDUM OPINION AND ORDER

Presently before the Court are Defendants' Application for Partial Stay Pending Arbitration and Application to Appoint Umpire Pursuant to 9 U.S.C. § 5. For the reasons stated herein, both Applications are denied.

I. BACKGROUND

Plaintiffs Continental Casualty Company and Continental Insurance Company (collectively, "CNA") and Defendants Commercial Risk Re-Insurance Company, Commercial Risk Reinsurance Company Limited, General Security Indemnity Company of Arizona, General Security National Insurance Company, GIE Columbus, SCOR, and SCOR Reinsurance Company (collectively, "SCOR") were parties to several reinsurance agreements. Under a typical reinsurance arrangement, an insurance company transfers ("cedes") its risk on ceded policies to a reinsurer. See Continental Cas. Co. v. American Nat. Ins. Co., 417 F.3d 727, 728 n.1 (7th Cir., 2005). In insurance parlance, a "commutation" is an agreement whereby existing reinsurance contracts are bought back by the insurance company and terminated, such that the reinsurer has no further liability to the insurance company under those contracts. See id.

On December 28, 2006, CNA and SCOR executed a Commutation & Release Agreement (the "Commutation Agreement") and thereby agreed to terminate certain reinsurance contracts between CNA and the "Reinsurer," which was defined to include various SCOR entities. See Commutation Agreement (Compl. Ex. 1), Art. 1(h). The parties agreed that the Commutation Agreement was to "be interpreted, construed, enforced and otherwise governed by and in accordance with the laws of the State of Illinois" and that they would "submit to the exclusive jurisdiction of the state and federal courts in the State of Illinois." See id., at Art. 7 ¶ 8. The Commutation Agreement did not contain an arbitration provision. See id.

The underlying dispute between CNA and SCOR in this litigation concerns disagreement regarding whether the Commutation Agreement covers certain reinsurance contracts purchased by CNA from Allstate Insurance Company (the "Allstate Contracts") and from Unity Fire and General Insurance Company (n/k/a Unitrin Preferred Insurance Company) (the "Unity Fire Contracts"). On December 7, 2007, CNA filed a Complaint against SCOR, seeking a declaration concerning the scope of the Commutation Agreement pursuant to the Declaratory Judgment Act, 28 U.S.C. § 2201. See Compl. ¶¶ 37-40. CNA alleges that the Commutation Agreement does not apply to the Unity Fire Contracts or the Allstate Contracts and that this Court has jurisdiction to issue such declaration pursuant to the Commutation Agreement's forum selection clause. See id. at ¶¶ 28-36. SCOR, on the other hand, argues that the Commutation Agreement settled and terminated the Unity Fire Contracts and Allstate Contracts and that this very dispute (specifically the Unity Fire Contracts) is the subject of pending arbitration between the parties.

On December 28, 2007, counsel for CNA demanded arbitration with Unity Fire regarding indemnification for certain claims pursuant to arbitration provisions in two Unity Fire Contracts. See Defs.' Appl. for Partial Stay, Ex. 1 (Dec. 28, 2007 Letter from T. Cunningham to Unitrin Preferred Insurance Company). On February 26, 2008, SCOR's counsel, representing the interests of Unity Fire and SCOR, responded, appointing a party-arbitrator and advising that an award would be sought based on "release and commutation." See Defs.' Appl. for Partial Stay, Ex. 2 (Feb. 26, 2008 Letter from M. Kasdin to T. Cunningham). SCOR's counsel stated that SCOR "believes that an irreconcilable difference of opinion has arisen in respect to the enforceability" of the Unity Fire Contracts. Id. These arbitration proceedings, however, have not commenced, and an umpire has not been selected.

II. ANALYSIS

A. Application for Partial Stay Pending Arbitration

SCOR now moves for a stay pending arbitration proceedings. SCOR alleges that, in the 1990s, SCOR succeeded to the liabilities and contracts of Unity Fire and Allstate and thereby assumed the arbitration rights as a successor-in-interest on these contracts. See Defs.' Mem. of Law in Support of Appl. to Stay, at 4-6. According to SCOR, the Commutation Agreement terminated the Unity Fire Contracts and the Allstate Contracts. SCOR further contends that the arbitration, initiated by CNA before CNA's Complaint was filed, relates to the same Unity Fire business alleged in the Complaint and that an arbitrator, not the Court, should decide whether the Unity Contracts are still enforceable. Id. at 6-7. SCOR requests that the Court stay this case pending resolution of the arbitration pursuant to 9 U.S.C. § 3 or, alternatively, pursuant to the Court's inherent authority in the interests of judicial economy. Id. at 7-10.

In response, CNA asks that the Court deny both of SCOR's motions. CNA contends that the dispute in this case involves only the scope of the Commutation Agreement and is not subject to arbitration because parties to the Commutation Agreement never agreed to arbitrate. See Pls.' Resp. to Appl. to Stay, at 8-13. CNA argues that it demanded arbitration with Unity Fire under the narrow arbitration provision in the Unity Fire Contracts regarding the interpretation of those contracts, and its demand did not address agreements with third parties, such as the Commutation Agreement with SCOR. See id. at 7-11. Moreover, CNA contends that SCOR is merely a reinsurer (retrocessionaire), not a successor-in-interest to Unity Fire and thus lacks contractual rights to arbitrate under the Unity Fire Contracts. See id. at 6-7, 11-12.

The Federal Arbitration Act (the "FAA") requires courts presented with an issue that is arbitrable under the terms of a written arbitration agreement to stay legal proceedings of that dispute, pursuant to a party's request, while arbitration is conducted. See 9 U.S.C. § 3; see also Volkswagen of America, Inc. v. Sud's of Peoria, Inc., 474 F.3d 966, 970-71 (7th Cir., 2007). The FAA thereby "establishes a national policy favoring arbitration when the parties contract for that mode of dispute resolution." Preston v. Ferrer, 128 S.Ct. 978, 981 (2008). Before granting a stay, however, a district court must determine whether the parties have agreed to arbitration. See Sims v. Montell Chrysler, Inc., 317 F.Supp.2d 838, 840 (N.D.Ill., 2004). Specifically, two conditions must be satisfied: "(1) the issue is one which is referable to arbitration under an agreement in writing for such arbitration, and (2) the party applying for the stay is not in default in proceeding with such arbitration." Id. (citing C. Itoh & Co. (America) Inc. v. Jordan Intern. Co., 552 F.2d 1228, 1231 (7th Cir., 1977)). The Court must resolve any doubts about the scope of arbitrable issues in favor of arbitration. See Moses H. Cone Memorial Hosp. v. Mercury Const. Corp., 460 U.S. 1 (1983).

Although the FAA enunciates a liberal policy in favor of arbitration, the duty to arbitrate is limited by the scope of the specific arbitration agreement between the parties. See Grundstad v. Ritt, 106 F.3d 201, 205 n.5 (7th Cir., 1997) (noting that the policy "does not serve to extend the reach of an arbitration provision to parties who never agreed to arbitrate in the first place"). Whether the parties entered into a valid arbitration agreement and the issues that must be arbitrated are matters of contract for the Court to decide. See R.J. O'Brien & Associates, Inc. v. Pipkin, 64 F.3d 257, 260 (7th Cir., 1995) (citing AT & T Technologies, Inc. v. Communications Workers of America, 475 U.S. 643, 649 (1986)). According to the Supreme Court, "arbitration is simply a matter of contract between the parties; it is a way to resolve the disputes - but only those disputes - that the parties have agreed to submit to arbitration." First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943 (1995). Consequently, a court may not expand the application of an arbitration agreement beyond its intended scope. Pivoris v. TCF Financial Corp., No. 07 C 2673, 2007 WL 4355040, *3 (N.D.Ill., Dec. 7, 2007).

Accordingly, the Court must determine whether the dispute here falls within the scope of an agreement to arbitrate, thereby warranting a stay in this litigation. The threshold question is whether the parties contractually agreed to submit this issue to arbitration. SCOR argues that it assumed the right to arbitrate under the Unity Fire Contracts as a successor-in-interest to Unity Fire and that arbitration proceedings on this very issue were initiated by CNA before CNA filed its Complaint. CNA, on the other hand, contends that the dispute at issue here concerns the scope of the Commutation Agreement, namely whether the Unity Fire Contracts and the Allstate Contacts were terminated, and that the parties to the Commutation Agreement never agreed ...


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