Transatlantic Reinsurance Co. v. Nat’l Indem. Co.
Issue Discussed: Arbitrability/Scope of Arbitration
Submitted by Elizabeth V. Kniffen
Date Promulgated: June 24, 2014
Issues Decided: Under what circumstances may non-signatories to a reinsurance agreement containing an agreement to arbitrate be compelled to arbitrate?
In Transatlantic Reinsurance Co. v. National Indemnity Co., the United States District Court for the Northern District of Illinois denied Transatlantic Reinsurance Company’s (“TRC”) motion to compel National Indemnity Company (“NICO”) to join in an ongoing arbitration between Continental Insurance Company (“Continental”) and TRC.
Continental entered into a blanket casualty excess of loss reinsurance agreement with TRC, under which TRC indemnified Continental with respect to net excess liability accrued by Continental in a variety of classes of general and specialty casualty insurance business, effective January 1, 1985 (the “Reinsurance Agreement”). The Reinsurance Agreement between Continental and TRC contained an arbitration agreement providing that “if any dispute shall arise between the COMPANY [Continental] and the REINSURERS [TRC] with reference to the interpretation of this AGREEMENT or their rights with respect to any transaction involved,” the dispute would be submitted to arbitration.
In 2010, Continental purchased reinsurance from NICO for asbestos and environmental risks pursuant to a Loss Portfolio Transfer agreement (“LPT Agreement”) with NICO. Continental also entered into an Administrative Services Agreement (“ASA Agreement”) with NICO, providing for the administration of “Third Party Reinsurance Agreements” whereby NICO acts as Continental’s agent and is responsible for collecting reinsurance proceeds on behalf of Continental and pursuing reinsurance recoveries on behalf of and in the name of Continental.
After TRC stopped making payments to Continental in 2012, Continental commenced arbitration against TRC in March 2013. TRC first demanded that NICO join the arbitration as a Petitioner and later filed suit seeking to compel NICO to arbitrate in the Continental-TRC arbitration.
The court held that a party may not be compelled to arbitrate a dispute absent an agreement to do so. Citing Zurich American Insurance Co. v. Watts Industries, Inc., 417 F.3d 682, 687 (7th Cir. 2005), the court held that the Seventh Circuit recognized five doctrines through which a non-signatory can be bound by an arbitration agreement entered into by others: (1) assumption; (2) agency; (3) estoppel; (4) veil piercing; and (5) incorporation by reference.
The court rejected each of TRC’s arguments that NICO should be compelled to arbitrate. First, the court held that the arbitration clause in the Reinsurance Agreement included narrow language specifying that the dispute must “arise between the COMPANY and the REINSURERS” and therefore could not be construed broadly to include disputes with non-signatories. Second, the court rejected TRC’s argument that by entering into the Loss Portfolio Transfer, NICO assumed the Reinsurance Agreement. To be bound under the theory of assumption, the non-signatory must “manifest a clear intent to arbitrate the dispute.” The court found that NICO entered into a separate transaction with Continental and did not assume the obligation to arbitrate under the Reinsurance Agreement. Third, the court held that the Reinsurance Agreement had not been incorporated by reference into the LPT Agreements. The court reasoned that the language in the LPT and ASA Agreements was not sufficiently explicit and specific to incorporate by reference the arbitration provision of the Reinsurance Agreement. Finally, the court held that because NICO’s benefit under the LPT and ASA Agreements only indirectly related to the Reinsurance Agreement, NICO could not be estopped from refusing to arbitrate under the theory of estoppel.