this issue or whether a hearing will be necessary.

ENTER:

DATED: June 16, 2003

13



Il. Does the Inclusion of the Term “Arbitration” in the Reinsurance Cover Note’s “‘General
Conditions” Section Constitute a Binding Agreement to Arbitrate?

The court is aware of three decisions addressing the question of whether, in the context of
the reinsurance industry, a placement slip or cover note containing the term “arbitration clause”
binds the parties who accept the slip or note to arbitrate their disputes. All three decisions agree
that including the words “arbitration clause” in a placement slip or cover note, despite their
brevity and failure to specify terms, constitutes an enforceable agreement to arbitrate. CNA
Reins. Co. Ltd. v. Trustmark Ins. Co., No. 01 C 1652, 2001 WL 648948, at *6 n.4 (NLD. Ill. June
5, 2001) (dicta); Allianz Life Ins. Co., 2000 U.S. Dist. LEXIS 7216, at *12; N.C. League of
Municipalities v. Clarendon Nat'l Ins. Co., 773 F. Supp. 1009, 1011 (E.D.N.C. 1990). The
theory of these decisions is, as stated in the Allianz decision, that an “arbitration clause’ is,

99 66

standing alone, common language in reinsurance placement slips,” “that such slips are often the
only formal manifestation of the agreement between the parties to ongoing transactions,” and that
the words “have a distinct meaning within the industry.” Allianz, 2000 U.S. Dist. LEXIS 7216,
at *12. The court finds that the term “arbitration” in the Reinsurance Cover Note in the instant
case is no more vague than the term “arbitration clause” considered by the courts in the decisions
cited above. Nor need a cover note or placement slip contain the text of the arbitration clause, as
long as the court can identify wording of an arbitration clause typically used in the reinsurance
industry when the words “arbitration clause” appear in the cover note. If it can be determined
that there was a course of dealing in the reinsurance industry at the relevant time that gave the

words “arbitration clause” some reasonably specific meaning, the clause can be enforced as the

agreement of the parties. As the cases cited above make clear, the court can fill in unspecified



bound by Cebic’s agreement to arbitrate.

As to Cebcor, the court concludes that it is bound through principles of agency and
equitable estoppel.’ The Trust was established as a mechanism for reimbursing Zurich for its
expenditures in providing workman’s compensation insurance to Cebcor. As the Reinsurance
Cover Note plainly states, while Cebic, by its agreement was obligated to maintain the Trust and
reimburse Zurich from the Trust, Cebcor was to fund the Trust. Because the purpose of the Trust
was to facilitate Cebcor’s obligations under the parties’ Program Agreement and Cebcor was to
fund the Trust, and because Cebic’s only obligation was to maintain the Trust to carry out
Cebcor’s obligations to Zurich, it is clear that in entering into the Reinsurance Cover Note (and
Reinsurance Trust Agreement), Cebic was acting as Cebcor’s agent. Cebic was manifestly acting
on behalf of Cebcor, to assist in implementation of a Cebcor obligation by which Cebcor would
obtain its workman’s compensation insurance, and the cause of action in this case arises from
those two parties’ relationship. The Trust was set up to implement Cebcor’s obligations to
Zurich under the Program Agreement, The doctrine of equitable estoppel also establishes that
Cebcor is bound by the arbitration agreement. “[W]hen allegations against a parent [Cebcor] and
subsidiary [Cebic] are based on the same facts and are inherently inseparable, a court may refer
claims against the parent to arbitration even though the parent is not formally a party to the
arbitration agreement.” Int’! Paper Co., 206 F.3d at 417 (internal quotation marks omitted).

However, Zurich’s argument that RMG and Proto are bound by the arbitration reference

in the Reinsurance Cover Note fails. That they were, in Zurich’s words, “key players” in the

3Having found Cebcor bound to arbitration under principles of agency and equitable
estoppel, the court declines to address the other arguments Zurich raised regarding Cebcor.

9



Reinsurance Cover Note. It is established beyond dispute that a party who fails to take note of
provisions in a written agreement he signs is not thereby excused from those provisions. See,
e.g., Madero v. Refco, Inc., 934 F. Supp. 282, 285 (N.D. Ill. 1996); Ry. Express Agency, Inc. v.
Greenberg, No. 92 C 6383, 1995 WL 753908, at *5 (N.D. Ill. Dec. 8, 1995); see also CNA Reins.
Co., 2001 WL 648948, at *2 (arbitration clause binding even where “the parties agree that there
was no negotiation, nor for that matter the barest mention, of the arbitration provision in the
parties’ communications”.) Nor is it significant that in Mr. Stevenson’s opinion, “reinsurance
cover notes illustrate the financial aspects of the relationship between the ceding insurers . . . and
the reinsurer . . . .” (Stevenson Aff. § 10.) The Reinsurance Cover Note contained provisions
other than “financial aspects.” “Arbitration” is not in small print. The issue is not Mr.
Stevenson’s personal experience but whether the term “arbitration” in a cover note has a
generally accepted meaning in the reinsurance industry.

Respondents have also provided the affidavit of expert witness Richard S. Bakka who
avers that he “disagree[s] that Cebic’s signature on the Reinsurance Cover Note indicates an
agreement by anyone, including Cebic, to arbitrate anything.” (Bakka Aff., {5(5).) Mr. Bakka

ae

explains that the term “‘arbitration’ provides no insight as to the scope of the subjects to be
arbitrated, the parties to whom arbitration applies, when, where and how any arbitration would
take place.” (/d.) With all due respect to Mr. Bakka, his opinion, which is an opinion on the law

rather than the practice of the reinsurance industry and thus beyond any expertise he professes to

have, is contrary to uniform case law and to the policies of the FAA. His opinion that the

cover note, not his recollection that the matter of arbitration was specifically deferred, a
recollection that would seem inconsistent with his averment that arbitration was never discussed.

6



terms concerning the implementation of the agreement to arbitrate based on custom and practice
in the reinsurance industry. See Schulze & Burch Biscuit Co. v. Tree Top, Inc., 831 F.2d 709,
715-16 (7" Cir. 1987) (rejecting argument that the clause “All disputes under this transaction
shall be arbitrated in the usual manner” was too vague to be enforced because the details the
clause failed to provide— such as who the arbitrator would be, where arbitration would take
place and what procedures would govern—could be supplied by the district court).

Petitioner has provided the court with the affidavit of James Norman averring that the
Reinsurance Cover Note’s brief reference to “arbitration” is consistent with industry practice and
that it is the practice in the reinsurance industry to arbitrate all disputes unless the parties agree
otherwise, Petitioner has also provided the affidavit of Clement S. Dwyer which avers that the
inclusion of the word “arbitration” in the Reinsurance Cover Note’s General Conditions is
“consistent with industry custom and practice” of referring to “an operative word to define the
clause and its purpose.” Mr. Dwyer concurs that “[iJn the insurance and reinsurance industry, it is
customary in nearly ali reinsurance contracts to include a clause providing for arbitration as a
method of dispute resolution for all disputes arising under the agreement.” (Dwyer Aff. 74.)

It does not aid respondents that Charles Stevenson, who signed the Reinsurance Cover
Note on behalf of Cebic, and Anthony Proto, a principal of RMG and Cebcor, aver that the issue

of arbitration was never discussed. (Stevenson Aff. 7; Proto Aff. 48, 9.)! Stevenson signed the

‘Respondents additionally offer the affidavit of Jeffry Crumrine, a principal of an
insurance brokerage firm, Lockton, working in connection with the Cebcor matter. Mr.
Crumrine avers, as do respondents’ other affiants, that he recalls no discussion of the issue of
arbitration in connection with this matter. He proceeds to aver, “Many of the terms secondary to
the arrangement, such as arbitration, were left to be considered for inclusion in a contract of
reinsurance, which it was anticipated would follow the January 18 Reinsurance Cover Note.”
The court assumes that this last sentence is Mr. Crumrine’s opinion as to the proper scope of a

5



Quantum Group, Inc., 293 F.3d 1023, 1029 (7th Cir. 2002) (non-signatory may be bound
through, e.g., doctrines of assumption, agency, equitable estoppel, veil piercing and incorporation
by reference); see, e.g., Thomson-CSF, S.A. v. Am. Arbitration Assoc. , 64 F.3d 773, 776 (2d Cir.
1995).

To determine which parties are bound by the arbitration agreement, the court’s analysis
begins with the signatories to the relevant agreement, Zurich and Cebic. Those parties are clearly
bound. Zurich argues, however, that non-signatories Cebcor, RMG and Anthony Proto, are also
bound. Zurich argues first that “the reinsurance program required the active participation of each
Respondent, and the circumstances surrounding the Cover Note and its execution reflect a clear
intention to bind all Respondents to its terms.” (Pls.’ Br. Supp. Mot. to Compel Arbitration
(“Pls.’ Br.”) at 2.) Second, Zurich contends, “Cebcor, RMG and Proto are third-party
beneficiaries of the Cover Note and are thus bound by its terms.” (/d.) Third, Zurich argues that
Cebcor, RMG and Proto knowingly accepted the benefits of the Cover Note and thus are
estopped from claiming that the arbitration provision does not apply to them. (/d.) Fourth,
“Cebic acted as Cebcor’s agent and subsidiary when it signed the Cover Note, thereby binding
Cebcor.” (Id.) Fifth, Zurich maintains that “because the Respondents have virtually abandoned
any semblance of separateness, this Court should pierce the corporate veil and find that all four
Respondents are bound to arbitrate in accordance with the Cover Note.” (/d.) The court rejects
this last contention without discussion as there is nothing in the materials filed by Zurich which
even approaches the Seventh Circuit’s standards for piercing the corporate veil. See, e.g., Sea-
Land Servs., Inc. v. The Pepper Source, 941 F.2d 519, 520-21 (7th Cir. 1991). Beyond this, the

court concludes that Zurich has adequately established that Cebcor, but not Proto or RMG, is



Minute Order Form (06/97)

United States District Court, Northern District of Illinois

? f Assigned Jud; Sitting Judge if Other

ving Magistrate Judge Joan B. Gottschall than Awigned Judge

CASE NUMBER 02 C 2283 DATE 6/16/2003
CASE Zurich American Insurance Company, et al. vs. Cebcor Service Corporation, et al.
TITLE

[In the following box (a) indicate the party filing the motion, e.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature
of the motion being presented.}

MOTION:

DOCKET ENTRY:

(1) Oo Filed motion of [ use listing in “Motion” box above.]

(2) o Brief in support of motion due

(3) QO Answer brief to motion due___. Reply to answer briefdue___

(4) a Ruling/Hearingon__setfor__——sat__—

(5) | Status hearing set for 6/26/2003 at 9:30 A.M..

(6) Qo Pretrial conference[held/continued to] [set for/re-set for]on___setfor__—s—sat_—

(7) Qo Trial{set for/re-set for]on___at

(8) Oo (Bench/Jury trial] [Hearing] held/continued to____at

(9) o This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]
CFRCP4(m) OLocal Rule 41.1 CFRCP41(a)(1) [ FRCP41(a\(2).

(ao) oi [Other docket entry] | Enter Memorandum Opinion and Order. Plaintiffs’ petition to compel

arbitration [1-1] is granted in part, subject to conditions set forth herein, and denied in part. The case is
set for status on June 26, 2003 at 9:30 a.m., at which time the parties should inform the court whether
additional briefing or a hearing will be necessary.

(65d) | [For further detail see order attached to the original minute order.]

No notices required, advised in open court.

No notices required.

number of notices
Notices mailed by judge’s staff.
- JUN
Notified counsel by telephone. . JUN I 2003

W | Docketing to mail notices.
Mail AO 450 form. YANG LOMESIa’S'A
yA37a

Copy to judge/magistrate judge }

courtroom HHee WY BL NAP 0

| deputy’s en
thy inviate gtg3-g2 4
Date/time received in

central Clerk's Office

ailing deputy initials



program” under which RMG’s role (and presumably Proto’s)* was to market and issue Zurich’s
workman’s compensation insurance, RMG and Proto were third-party beneficiaries of the
Reinsurance Cover Note. The problems with this argument are innumerable. As defendants
correctly point out, whether a party is a third-party beneficiary to a contract depends on the intent
of the contracting parties. Quinn v. The McGraw-Hill Cos., Inc., 168 F.3d 331, 334 (7th Cir.
1999) (applying Illinois taw).° Third-party beneficiary status is difficult to prove, at least under
Illinois law, because there is a strong presumption that the parties intend their contract only to
them, not to third parties. Jd. Zurich fails to suggest any viable theory by which the facts
presented would tum RMG or Proto into third-party beneficiaries. For example, Zurich argues
that their contractual duties and benefits would not have been required absent the agreement
memorialized in the Reinsurance Cover Note. This hardly makes them third-party beneficiaries.
Zurich also claims that the parties clearly intended RMG to be bound by the Reinsurance Cover
Note because Cebcor needed RMG—a licensed insurance agency and Cebcor’s marketing and
distribution arm—to offer Zurich’s policies to its customers. The court is not convinced. The
Reinsurance Cover Note addresses only the reinsurance component of the program—it says
nothing about RMG’s (or Proto’s) role in marketing and issuing the policies. Rather, the

marketing/policy-issuing roles were addressed in the overall Program Agreement and the Broker-

‘Illinois allows registered firms to transact business as an insurance agency. 215 ILCS
5/499.1. A company can qualify as a registered firm only after appointing an officer or director
who is a licensed insurance producer to ensure the firm’s compliance with Illinois insurance
regulations. Jd. Zurich sued both RMG, a registered firm, and Proto, its president, for failure to
remit premiums they collected on the Zurich policies they issued. Evidently Proto was sued
individually because he was the officer who held an Illinois insurance producer’s license.

5For purposes of this discussion, the court relies on Illinois contract law because neither
party suggests the applicability of any other forum’s law.

11



agreement referenced by the Reinsurance Cover Note is meaningless. Cf Grundstad v. Ritt, 106
F.3d 201, 205 (7" Cir. 1997) (guarantor—i.e., a key player— not bound by arbitration clause
unless unambiguously expressed consent to be bound). The relevant issue is whether they agreed
to arbitrate and of that, there is no evidence.

As for Zurich’s theory that the parties’ interlocking obligations demonstrate that all
intended to be bound by the arbitration agreement, that contention makes no sense as a matter of
fact and is inconsistent with Seventh Circuit authority. It is plain from the parties’ submissions
that the parties’ obligations were set forth in a number of separate agreements, none of
which—save the Reinsurance Cover Note governing the reinsurance agreement—contained an
arbitration provision. For example, that RMG entered into an agreement with Zurich to play
some role in the insurance/reinsurance arrangement says nothing about whether it intended to be
bound by the arbitration provision set forth in the Reinsurance Cover Note. Indeed, the fact that
the agreement RMG signed did not have an arbitration clause argues strongly against Zurich’s
position. “A dispute that arises under one agreement may be litigated notwithstanding a
mandatory arbitration clause in a second agreement, even where the two agreements are closely
intertwined. Indus. Elecs. Corp. of Wis. v. iPower Distrib. Group, Inc., 215 F.3d 677, 681 (7"
Cir. 2000).

Zurich also argues that RMG and Proto are bound to arbitrate under the Reinsurance
Cover Note because they are third-party beneficiaries of the program reflected therein. It appears

to be Zurich’s theory that because all the parties were involved in a “comprehensive reinsurance

10



Reinsurance Cover Note suffers from “indeterminacy” by noting that the wording is to be
“agreed” by Cebic and Zurich, to the extent he means to suggest that the Reinsurance Cover Note
is nothing more than an agreement to agree, is also rejected as contrary to practices in the
insurance industry that are so well-known as to be probably subject to judicial notice and
contrary to all the court decisions of which the court is aware dealing with the effect of an
accepted cover note.” See, e.g., Allianz, 2000 U.S. Dist. LEXIS 7216, at *8 (recognizing that
although cover notes are sometimes replaced with more formal, extensive contracts, parties do
not always do so).

Having reviewed the parties’ evidentiary submissions, the court is satisfied that the term
“arbitration” in the General Conditions section of the Reinsurance Cover Note establishes a
binding agreement to arbitrate.

Who is Bound by the Agreement to Arbitrate?

Because arbitration is a matter of contract, a party cannot be required to submit to
arbitration if it has not agreed to do so. AT & T Techs., Inc. v. Communications Workers of Am.,
475 U.S. 643, 648 (1986). It does not follow, however, that a party is bound to arbitrate only if it
actually signed the contract containing the arbitration provision. Int’l Paper Co. v.
Schwabedissen Maschinen & Anlagen GMBH, 206 F.3d 411, 416-17 (4" Cir. 2000). As the
Seventh Circuit has recognized, non-signatories can be bound by an arbitration clause under

traditional common law principles of contract and agency law. Fyrnetics (Hong Kong) Ltd. v.

Obviously, if a cover note leaves certain matters to be negotiated, then to the extent the
parties have not agreed on a provision, acceptance of the cover note does not bind them on that
subject.



Corporation” with $375,000 to be paid monthly for a total of $4.5 million.

A dispute has arisen because Cebic and Cebcor have allegedly not reimbursed Zurich for
its losses and RMG and Proto have not remitted all premiums to Zurich. Zurich has filed suit
seeking an order compelling the defendants to arbitrate.

In opposition to Zurich’s Motion to Compel Arbitration, respondents Cebcor, Cebic,
RMG and Proto’s papers raise the following issues:

1. Is a cover note a binding agreement between its signatories?

2. If the Reinsurance Cover Note is a binding agreement, does the inclusion in its
“General Conditions” of the term “Arbitration” bind the signatories to arbitrate
disputes arising under the Reinsurance Cover Note?

3. If there was an enforceable agreement to arbitrate evidenced by the Reinsurance
Cover Note, who is bound by it?

4. If there was an enforceable agreement to arbitrate, what is its scope? Specifically,
does it cover the dispute before the court?

I. Is a Reinsurance Cover Note a Binding Agreement Between its Signatories?

To the extent respondents argue that a cover note is not at least to some extent
contractually binding, their argument is rejected. Caselaw, not to speak of the court’s own
experience in insurance coverage disputes, make clear that a cover note is understood in the
insurance industry to manifest both the outline of an agreement and the intention of its
signatories to be bound. See Allianz Life Ins. Co. of N. Am. v. Am. Phoenix Life & Reassurance
Co., Civil No. 99-802, 2000 U.S. Dist. LEXIS 7216, at *11-12 (D. Minn. Mar. 28, 2000). The

Reinsurance Cover Note is binding to the extent it manifests the parties’ agreement.



carrier to provide workman’s compensation insurance. In or around January 1999, Zurich
entered into an oral Program Agreement (with parties the complaint does not specifically
identify) by which Cebcor was to receive workman’s compensation insurance from Zurich, RMG
was to distribute the insurance policies to Cebcor’s customers, and Cebcor was to assume
liability for the risks associated with those policies by funding the reinsurance of Zurich’s losses.
Cebcor was to reimburse Zurich directly for all losses paid by Zurich during the first year of the
Program and to reimburse Zurich by means of a reinsurance trust (“Trust”) for losses paid after
the first year. To cover these post-first year losses, Cebcor agreed to establish and to fund,
through monthly deposits, the Trust. The beneficiary of the Trust was Zurich. The grantor of the
Trust was Cebic, a Bermuda company owned principally by Cebcor. Cebic and Zurich executed
a Trust Agreement establishing Cebic’s obligations to maintain the Cebcor-funded Trust. Zurich
was to be reimbursed from the Trust for losses on a monthly basis. As alleged in Zurich’s
underlying complaint, although many parts of the arrangement were captured in writing, the
overarching Program Agreement was oral.

In seeking to compel arbitration, petitioners rely on the cover note executed by Zurich and
by Charles Stevenson, chairman of Cebic and president of Cebcor (“Reinsurance Cover Note”).
Stevenson signed on behalf of Cebic. The Reinsurance Cover Note, on its face, does not address
all aspects of the overall Program Agreement. Rather, the Reinsurance Cover Note memorializes
the reinsurance agreement and memorializes an agreement by Cebic to accept the first $500,000
“of all losses, claims, suits, actions, or other proceedings with respect to all coverages.” The
Reinsurance Cover Note specifies when payments are due and the method of payment. It

indicates that collateral for Cebic “will be handled as a trust established by Cebcor Service



UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION
ZURICH AMERICAN INSURANCE )
COMPANY, et al., )
) Case No. 02 C 2283
Plaintiff, )
v. )
) MP ay rays
CEBCOR SERVICE CORPORATION, et al., ) Judge Joan B. Gottschall D u ON ETED
) JUN
Defendants. ) 18 2003

MEMORANDUM OPINION & ORDER

This matter is before the court on the petition to compel arbitration filed by
plaintiffs/petitioners Zurich American Insurance Company, American Zurich Insurance
Company, American Guarantee and Liability Insurance Company, and Zurich American
Insurance Company of Illinois (collectively “Zurich”) against defendants/respondents Cebcor
Services Corporation (“Cebcor”), Cebic, Ltd. (“Cebic”), Risk Marketing Group, Inc. (““RMG”),
and Anthony Proto. For the reasons set forth herein, the motion is granted in part, subject to
conditions set forth herein, and denied in part.

The relevant facts, as they emerge from the parties’ papers, are as follows. Cebcor, an
Illinois corporation located in Chicago, provides employee benefits and workers’ compensation
insurance to various companies nationwide. Cebcor does not actually issue the insurance
coverage—it is neither an insurance company nor an insurance agency. Rather, for some of its
customers, Cebcor functions as the technical employer of its customers’ employees (through an
employee leasing arrangement) for a fee. Other customers purchase traditional workers’

compensation through Cebcor. At some point, Cebcor approached Zurich seeking an insurance

70



Company Agreement between Zurich and RMG. Neither RMG nor Proto were intended third-
party beneficiaries of the Reinsurance Cover Note.

The court also rejects Zurich’s argument that RMG and Proto should be equitably
estopped from avoiding the arbitration clause. “A party is estopped from denying its obligation
to arbitrate when it receives a ‘direct benefit’ from a contract containing an arbitration clause.”
Am. Bureau of Shipping v. Tencara Shipyard, $.P.A,, 170 F.3d 349, 353 (2d Cir. 1999); Fyrnetics
(Hong Kong) Ltd. v. Quantum Group, Inc., No. 99 C 4704, 2003 WL 164220, at *4 (NLD. Ill.
Jan, 23, 2003) (quoting id.). The only direct benefits under the Reinsurance Cover Note were
Cebcor’s provision of reinsurance to Zurich, through its subsidiary Cebic, and (arguably)
Zurich’s provision of insurance to Cebcor’s customers. The reinsurance component, provided
for by the Reinsurance Cover Note, was undoubtedly a requirement before Zurich would agree to
issue policies. Without the reinsurance component, there would have been no need for the
Broker-Company Agreement between Zurich and RMG because Zurich would not have issued
policies at all. Nevertheless, the fact that RMG (or Proto) was given the role of marketing and
issuing the Zurich insurance policies was a direct benefit not of the Reinsurance Cover Note, but
of the Broker-Company Agreement between Zurich and RMG and the overarching Program
Agreement. Any benefits that RMG or Proto received as a result of the Reinsurance Cover Note
were indirect.

Neither RMG nor Proto are bound by the arbitration clause, but Zurich, Cebic and Cebcor
are bound. It remains to be determined what, if any, portion of those parties’ dispute is subject to
the Reinsurance Cover Note’s arbitration clause. The case is therefore set for status on June 26,

2003 at 9:30 a.m., at which time the parties should inform the court whether they wish to brief

12