Just one final note as to the concept of uberrimae fidae,

whose true significance is not of course in its verbiage but
rather in the duties that the doctrine connotes--indeed, that is
the reason that this opinion has focused and will continue to
focus on the existence or nonexistence of fiduciary
responsibilities on the part of Lumbermens. Just last month
District Judge Barbara Crabb of the Western District of Wisconsin
had the occasion to speak to the uberrimae fidae doctrine in the
marine insurance context, where the doctrine originated, in

Progressive N. Ins. Co. v. Bachmann, No. 03-C-0566-C, 2004 WL

835726 (W.D. Wis. Apr. 19). Judge Crabb's analysis led her to
this conclusion (id. at *6):

However, as states began to take over regulation of the
insurance industry, most abandoned the strict uberrimae
fidei articulation in favor of standards more favorable
to the insured. “Today, the sole remaining substantial
vestige of the doctrine is in maritime insurance law.”
Albany Insurance Co. v. Anh Thi Kieu, 927 F.2d 882, 888
(5 Cir. 1991) (citations omitted).

Effect of the Parties' Agreement

As the Order pointed out in identifying the second question
that PXRE had to answer, Art. 11A of the parties’ April 10, 2000
Aggregate Excess of Loss Retrocessional Reinsurance Agreement
(“Agreement”) states (emphasis added):

This Stop Loss Cover and the exhibits and schedules
attached hereto constitute the entire agreement between
the parties hereto relating to the subject matter
hereof and supersede all prior and contemporaneous
agreements, understandings, negotiations, and
discussions, whether oral or written, of the parties,


its due diligence review, Lumbermens will not be required to cull
through the files at this time--after all, PXRE had the full
opportunity, and it chose how and to what extent, to carry out
its due diligence review.

Conclusion

This Court reconfirms its always-held view, reiterated
earlier in this opinion, that a claim of fraud in the inducement
may perhaps be viable and may carry with it an entitlement to
appropriate discovery. But no notions of uberrimae fidae or
fiduciary relationship are in play as between PXRE and
Lumbermens, so that PXRE's effort to invoke special duties of
disclosure on Lumbermens' part is ill-conceived. Hence PXRE is
simply not entitled to the sweeping scope of discovery that it
has requested.

Just as importantly, PXRE has failed to identify an
appropriately limited range of discovery in substitution for the
impermissibly broad one it has sought. It is not for this Court
to reshape PXRE's claim to appropriate size and scope. Its
motion to compel is therefore denied. Finally, this case is set
for a status hearing at 8:45 a.m. May 28, 2003 to discuss the

procedures and timing for proceeding with Lumbermens' pending

Milton I. Shadur
Senior United States District Judge

issue-narrowing motion.

Date: May 21, 2004


citing Sunstream Jet _Exp., Inc. v. Int'l] Air Serv. Co., 734 F.2d

1258, 1265 (7 Cir. 1984). But even a brief look at the
discussion in that case (id. at 1265-66) demonstrates its
irrelevance: It dealt with the availability of extrinsic
evidence to explain any ambiguous provisions even in the face of
an integration clause, while here there is no issue of assertedly
ambiguous language in the Agreement--and more importantly, here
the parties went well beyond the ordinary integration clause to
preclude precisely what PXRE is attempting here by seeking to
import implied representations found nowhere in the Agreement.

This Court of course recognizes, as it has consistently said
during the course of this proceeding to this point, that proof of
fraud in the inducement of the parties' contract would
necessarily prevail as against Lumbermens' reliance on one of the
provisions of what would then have been shown to be a
fraudulently-induced contract. But the establishment of such a
claim calls into play a much narrower scope of discovery than
that sought to be invoked by PXRE. And that in turn leads to the
third question posed by the Order.

Scope of Discovery

It is worth noting at the outset that the Agreement is

different from the open-ended treaty that this Court was called

on to deal with in Mutuelle Generale Francaise, where this Court

found a fiduciary duty based on (1) the “highest faith” language


and there are no general or specific warranties,
representations or other agreements by or among the
parties in connection with the entering into this Stop
Loss Cover or the subject matter of any of the
foregoing except as specifically set forth or
contemplated herein.

In principal part (but not exclusively) because it has failed to
heed the decisive thrust of the underlined provision, PXRE's
attempted response to that question is basically flawed.

As PXRE would have it, “uberrimae fidae is not merely
‘custom and practice,' but is the legal standard that governs the
cedent-reinsurer relationship” (Mem. 8). But it is simply not
true that a contract freely entered into by parties such as PXRE
and Lumbermens is trumped by a doctrine that, like other
statements of legal rules, is a default rule. No case suggests
that the Agreement's provision quoted in the preceding paragraph,
with its express negation of any warranties, representations or
other agreements that are not in the document itself, is somehow
contrary to public policy so as to be overridden by uberrimae
fidae or any other doctrine. There is no question that the
Agreement was thoroughly negotiated between the two major
corporate players--in its final form it occupies fully 16 single-
spaced printed pages (with PXRE having been represented by the
well-established New York law firm of Morgan, Lewis & Bockius
LLP) .

PXRE attempts to get out of that vise by labeling the quoted

provision as (presumably merely) an “incorporation clause,”


rescission of the Agreement by pointing to its asserted recent
discovery of a claimed smoking gun that it has variously labeled
with such pejorative adjectives as “shocking”--a document that
referred to the agreement of Equus Re to underwrite certain
unfavorable risks based on a promise of future more favorable
business. According to PXRE, that discovery of a document
between Lumbermens and Lexington Insurance Company, relating to
business produced by Thor Underwriting, Ltd., took place by
chance during a recent periodic audit by one of PXRE's people.
And PXRE seeks to use that discovery as the springboard for an
extraordinarily wide range of discovery, on the premise that one
assertedly bad apple spoils the entire truckload--or at least
calls for every other apple in the truckload to be turned over
for microscopic examination.*

It sounds from PXRE's description of the suspect
document--which it labels the Lexington Side Deal--that it was
part of the files made available to PXRE's due diligence review
when the parties made their deal. If so, responsibility for any
nondiscovery until PXRE's more recent follow-up audit can hardly
be placed at Lumbermens' doorstep. And if, as PXRE says it
fears, there is documentation of other so-called side deals, and

if those documents are also in files made available to PXRE for

> This metaphor is of course inapt, for compliance with

PXRE's blunderbuss document request would be infinitely more
complex and expensive than any delivery of a truckload of apples.

8



5

Minute Drder Form (0697)

soe United States District Court, Northern District of [linois
N of Assigned Jud; i i ot ii r
ior Magistrate Judge Milton I. Shadur “than Assigned Judge
CASE NUMBER 03 C 5155 DATE 5/21/2004
CASE PXRE Reinsurance Co. vs. Lumbermens Mutual Casualty Co.
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.)

cen)

MOTION:

DOCKET ENTRY:

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

(2) Oo Brief in support of motion due

(3) o Answer brief to motion due____. Reply to answer briefdue__.

(4) im Ruling/Hearing on__set for___at.

(5) Oo Status hearing[held/continued to] [set for/re-set for]on___setfor___att

(6) oO Pretrial conference[held/continued to] [set for/re-set for]on__setfor__—at__.

7) qo Trial[set for/re-set for] on__ at

(8) im} [Bench/Jury trial] [Hearing] held/continuedto at

(9) Oo This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]
OOFRCP4(m) CO Local Rule 41.1 OOFRCP41(a)(1) [1 FRCP41(a)(2).

do) «olf {Other docket entry] Enter Memorandum Opinion and Order. PXRE’s motion to compel is denied.

This action is set for a status hearing at 8:45 on May 28, 2003 to discuss the procedures and timing for

proceeding with Lumbermens’ pending issue-narrowing motion. (34-1)

a [For further detail see order attached to the original minute order.]

No notices required, advised in open court. Document

. Number
No notices required. N
umber of notices

Notices mailed by judge’s staff.

MAY 2 4 2004

C\ date docketed

Notified counsel by telephone,
Dogketing to mail notices.
Mail AO 450 form.

uy

Copy to judge/magistrate judge.

courtroom date ited notin
SN deputy’s om
initials :
Date/time received in 7 7
a central Clerk's Office smailing deputy initials



in the agreement between the litigants there and (2) the
continued responsibility of the reinsured in conjunction with
future policies that came within the designated classes. By
contrast, the reinsured coverage in this instance was limited to
an existing book of business.

In that respect it is highly relevant--and is relevant as
well to the application and effect of the Article 11.A language
quoted in the preceding section--that PXRE's people were given,
and that they exercised, the full opportunity to audit the entire
book of business that then became the subject of the Agreement.
That audit occupied the period from February 10 through
February 15, 2000 (with no indication having been given to this
Court that PXRE's representatives were limited to that time
frame), and Lumbermens' LR 56.1 Statement Ex. J (pages PXRE
005708-12) sets out the detailed analysis that stemmed from that
onsite underwriting audit. Thus the situation between the
parties was that PKRE (1) was given the full opportunity to
conduct whatever due diligence study it wished to carry on,

(2) reached its own conclusions as to the evaluation of the risks
in taking on the retrocession and (3) having done so, agreed to
the contractual provision that barred it from claiming any
representations or warranties other than those specified in the
written Agreement.

PXRE has explained the late filing of this action seeking


occasion in Mutuelle Generale Francaise Vie v. Life Assurance Co.

of Pa., 688 F.Supp. 386 (N.D. Ill. 1988) to consider whether the
reinsurer-reinsured relationship was instinct with the type of
fiduciary relationship that the uberrimae fidae doctrine has been
held to connote, and counsel in that case cited Judge Siegan's
American Re-Ins. opinion to this Court. After stating in

Mutuelle Generale Francaise, id. at 397, just as it has done in

this opinion, “that a single trial level decision, which under
Illinois law has no real precedential force, is similarly without
meaningful value in this diversity case,” this Court went on to
say (id. at 398 n.16, emphasis in original):
Except for American Re-Insurance, no Illinois court has
ever called a reinsured the fiduciary of its reinsurer

(and American Re-Insurance itself did not purport to
find any prior authority to that effect) .+

PXRE has identified nothing the intervening decade and a half

that alters the continuing accuracy of that statement.’

1 [Footnote by this Court] It is worth noting in passing
that the reinsurance treaty in Mutuelle Generale Francaise
expressly said that the reinsurer there “was entitled to place
its ‘highest faith' in the reinsured”--a provision conspicuously
absent from the contract between the parties to this litigation.

2? In the year following this Court's issuance of its

Mutuelle Generale Francaise opinion, its colleague Judge (now
Chief Judge) Charles Kocoras expressly “concluded that Illinois
law does not recognize the existence of a fiduciary relationship
between an insurer and its insured,” so that “as a matter of
Illinois law, no fiduciary obligations could attach” to the
reinsurer-reinsured relationship (Int'l Surplus Lines Ins. Co. v.
Fireman's Fund Ins. Co., No. 88 C 320, 1989 WL 165045, at *1
(N.D. Ill. Dec. 29)).



this opinion), when PXRE does return at Mem. 5-8 to the uberrimae
fidae subject it does not deliver as advertised.
In that respect PXRE's counsel first points to Sun Mut. Ins.

Co. v. Ocean Ins. Co., 107 U.S. 485 (1883) as having established

the Latin principle on which it seeks to rely. But even though
this Court must confess to retaining the stubborn view that Swift
vw. Tyson, 41 U.S. 1 (1842) was right and Erie v. Tompkins, 304
U.S. 64 (1938) was wrong, that battle is over. And under Erie
principles the Sun Mutual opinion does not--despite the august
authority that issued it--establish Illinois law.

When the remainder of PXRE's underbrush is then cleared away
to focus properly on Illinois law, its counsel can identify only
a single opinion by an Illinois trial judge, the late Harold

Siegan, back in 1987 (American Re-Ins. Co. v. MGIC Inv. Corp.,

No. 77 CH 1457, slip op. (Cir. Ct. Cook Co. Ch. Div. Oct. 20,
1987)) that treats with the doctrine in the reinsurance context.
This Court intends no disrespect to the late Judge Siegan, whom
this Court knew well personally and for whom it had a high
regard. But it cannot be gainsaid that the chancellors in the
Cook County Circuit Court do not issue precedential opinions on
Illinois state law, any more than (as our Court of Appeals
repeats periodically) District Courts have the power to declare
precedential law for the federal court system.

As sheer chance would have it, this Court itself had


IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION BOCKETED

PXRE REINSURANCE COMPANY, MAY 2 4 2004

Plaintiff,
v. No. 03 C 5155

LUMBERMENS MUTUAL CASUALTY
COMPANY,

Defendant.

MEMORANDUM OPINION AND ORDER

Following the completion of the parties' briefing on the
motion by PXRE Insurance Company (“PXRE”) to compel the
production by Lumbermens Mutual Casualty Company (“Lumbermens”)
of a wide range of documents, this Court issued a brief April 27
memorandum order (“Order”) that identified three unresolved
issues as to which “PXRE must cross (as it has not to this point)
an initial threshold.” This follow-up opinion speaks to the
contentions advanced in PXRE's responsive memorandum, which is
regrettably longer on rhetoric than on analysis.

Uberrimae Fidae - Fiduciary Duty

PXRE Mem. 2 begins its discussion of the first question
posed by the Order this way:

The first threshold issue raised by the Court is
whether Illinois law applies the uberrimae fidae
standard to the reinsurance context at issue here.
Mem. Order at 2. As we discuss below, the uberrimae
fidae standard does indeed apply.

Although PXRE Mem. 2-5 then diverts attention to a different

question (which is essentially covered in the second section of

u)