Sphere Drake Insurance v. All American Insurance

• Court: U.S. Court of Appeals — Seventh Circuit
• Writing for the Court: Before Bauer, Coffey, and Easterbrook; Easterbrook
• Citation: Sphere Drake Insurance v. All American Insurance, 256 F.3d 587 (7th Cir. 2001)
• Decision Date: 03 July 2001
• Docket Number: No. 00-2102,00-2102
• Parties: (7th Cir. 2001) Sphere Drake Insurance Limited, formerly known as Odyssey Re (London) Limited, Plaintiff-Appellee, v. All American Insurance Company, Defendant-Appellant

Page 587

256 F.3d 587 (7th Cir. 2001)

Sphere Drake Insurance Limited, formerly known as Odyssey Re (London) Limited, Plaintiff-Appellee, v. All American Insurance Company, Defendant-Appellant.

No. 00-2102

In the United States Court of Appeals For the Seventh Circuit

Argued November 7, 2000

Decided July 3, 2001

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 99 C 4573--William T. Hart, Judge.

Before Bauer, Coffey, and Easterbrook, Circuit Judges.

Easterbrook, Circuit Judge.

Who pays losses incurred on seven insurance policies is a subject of dispute. All American Insurance underwrote the policies. Contracts apparently representing the agreement of Sphere Drake Insurance to reinsure these risks are in All American's files--but Sphere Drake denies that it has agreed to any such reinsurance. A broker called Euro International Underwriting ("eiu") wrote the reinsurance on Sphere Drake's behalf. eiu had actual authority to represent Sphere Drake, but only up to an annual limit of risks. According to Sphere Drake, eiu exceeded this limit when agreeing to reinsure All American's policies. Moreover, Sphere Drake contends, All American knew that eiu had gone over the top, so that eiu had neither actual nor apparent authority. The parties appear to agree that if this defense prevails then Sphere Drake need not pay; they also agree on the extent of Sphere Drake's liability if eiu had power to bind it. What they do not agree on is which tribunal has the authority to decide the extent of eiu's authority as Sphere Drake's agent.

Sphere Drake wants the dispute resolved in court--federal court in particular, because the parties are of diverse nationalities. See 28 U.S.C. sec.1332(a)(2). All American contends that the parties have agreed to arbitrate. It relies on the language in the short form agreements (called slip policies) that eiu signed. The parties concentrate on one particular slip policy, which agrees to reinsure workers' compensation risks. We reproduce the bulk of the slip policy:

CLASS:

To indemnify the Reinsured in respect of their participation on the Unicare Insurance Company, Workers Compensation Excess of Loss Reinsurance contract.

EXCLUSIONS: Employers Liability (Section B of Workers' Compensation Act). In all other respects to follow the original contract in every respect. . . .

GENERAL CONDITIONS:

This Reinsurance is to pay as may be paid, and to follow all terms clauses and conditions on the original contract as detailed under the CLASS section of this Reinsurance.

Several Liability Notice (Reinsurance) LSW 1001.

This contract of Reinsurance shall be governed by and construed in accordance with the law of the state of Illinois, U.S.A. under the jurisdiction of the courts of the state of Illinois, U.S.A. The Arbitration contract shall also be governed by the law and jurisdiction of the state of Illinois, U.S.A.

WORDING:

Agree to sign slip policy.

This acceptance slip constitutes the Policy for all purposes; however, a formal Policy, in substitution for this Slip Policy or any declaration hereunder, will be issued at any time at the request of the (Re-) Insured or any other Underwriters hereon.

All American contends that this policy contains two arbitration clauses. First, the last paragraph of the "General Conditions" section says that "[t]he Arbitration contract shall also be governed by the law and jurisdiction of the state of Illinois, U.S.A." This use of the definite article, All American insists, establishes that Sphere Drake has agreed to arbitrate. Second, the initial paragraph of "General Conditions" says that the reinsurance follows "all terms clauses and conditions on the original contract"; because the Unicare policy has an arbitration clause, this follow-form slip policy also requires arbitration. Sphere Drake disputes both of these contentions and adds a defense: even if eiu plastered the papers with arbitration clauses that can't kick Sphere Drake out of court on the question whether eiu was its agent. To arbitrate the agency issue Sphere Drake insists, would be circular, for arbitration is proper if and only if eiu indeed could bind Sphere Drake.

The district court ruled in Sphere Drake's favor by interpreting the text of the slip policy not to provide for arbitration. The last subparagraph is a choice-of-law clause and not an arbitration clause, the judge held; any requirement to arbitrate must be found elsewhere. And the initial subparagraph does not incorporate the Unicare policy's arbitration provision, according to the judge, because it follows only the "clauses and conditions on the original contract as detailed under the CLASS section of this Reinsurance." No arbitration language appears in the "Class" section, so Sphere Drake cannot be required to arbitrate. The court not only denied All American's motion to require arbitration but also enjoined All American from proceeding with arbitration. All American appeals, as 9 U.S.C. sec.16(a)(1)(B) and (a)(2) permit.

The district court read the first subparagraph of the "General Conditions" section as if it said that the reinsurance will "follow all terms clauses and conditions . . . detailed under the CLASS section of this Reinsurance." If this redacted version, deleting "on the original contract as," is the best understanding, then the district court's conclusion follows. The competing way to read this clause is that the reinsurance will "follow all terms clauses and conditions on (the original contract as detailed under the CLASS section of this Reinsurance)." We have added parentheses to show the grouping All American prefers: the reinsurance follows the terms and conditions of the contract referenced in the "Class" section, not just the terms referenced in the "Class" section.

All American's reading is more plausible, and not just on the technical ground that it avoids the effective deletion of five words from the contract. It is more plausible because the "Exclusions" section provides that the slip policy follows the underlying contract "in every respect" except the one mentioned specifically. This is essential to any follow-form policy. The "Class" section cannot be the source of all terms of the agreement; it does not mention any terms. Thus if the "General Conditions" section requires the reinsurance to follow only the terms specified in the "Class" section, the whole reinsurance arrangement is uprooted. A follow-form policy must have a form, which is to say that form's terms, to follow; yet the district court read this slip policy to be term-and- condition free. What then does it reinsure? What risks are covered? When must claims be filed? Who defends the suits? These questions can be answered only if the slip policy adopts the underlying policy's terms. Here, as in Progressive Casualty Insurance Co. v. C.A. Reaseguradora Nacional De Venezuela, 991 F.2d 42 (2d Cir. 1993), a follow-form reinsurance agreement logically includes an arbitration agreement in the underlying contract. This understanding could be overridden, but this slip policy's "Exclusions" section does not displace the arbitration clause.

Having concluded that the "General Conditions" section incorporates the arbitration agreement in the Unicare pol icy, we can bypass other disputes and cut straight to the question whether eiu's authority is arbitrable. Recall that Sphere Drake and All American would not ask the arbitrator to resolve anything except whether they have a reinsurance agreement in the first place--a question that depends entirely on eiu's authority to bind Sphere Drake. This dispute seems to us covered by the principle that courts, rather than arbitrators, usually determine whether the parties have agreed to arbitrate. See First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995); AT&T Technologies, Inc. v. Communications Workers, 475 U.S. 643 (1986). This is why four federal judges have parsed the "General Conditions" section to determine whether the slip policy agrees to private dispute resolution; likewise judges must determine whether Sphere Drake agreed to the slip policy. It is a shortcut to say that "the slip policy agrees" to something; pieces of paper don't "agree" to do things. eiu agreed to the slip policy, but whether eiu spoke for Sphere Drake is debated. If All American produced a policy purportedly signed by Sphere Drake's CEO, but evidence showed that a clerk at All American had forged the signature, then Sphere Drake would not have to arbitrate (or pay), see Chastain v. Robinson-Humphrey Co., 957 F.2d 851 (11th Cir. 1992); why would it be different if eiu lacked authority to speak for Sphere Drake? Section 2 of the Federal Arbitration Act, 9 U.S.C. sec.2, says that an arbitration agreement "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." An agent's lack of authority is a ground that prevents the enforcement "of any contract"; does it not follow that judges must determine whether the agent had authority?

According to All American, Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967), supplies a negative...