DISCUSSION

Defendant has moved to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) for “failure to state a
claim upon which relief can be granted.” A complaint should not be dismissed for failure to state
a claim unless there is no doubt that the plaintiff cannot prove a set of facts that would entitle him
to relief based on his claim. Pressalite Corp. v. Matsushita Electric Corp. of Am., 2003 WL
1811530 at *2 (N.D.IIl Apr. 4, 2003). When a motion to dismiss is considered, the court accepts the
allegations of the complaint as true and views the facts in the light most favorable to the plaintiff.
Travel All Over the World Inc. v. Kingdom of Saudi Arabia, 73 F.3d 1423, 1428 (7th Cir. 1996).

When a court interprets a contract, it must first decide if the contract is ambiguous. ABT v.
Mazda American Credit, 25 F.Supp.2d 860, 862 (N.D.IIl. 1998). In Illinois, “a contract is ambiguous
only if the language used is reasonably or fairly susceptible to having more than one meaning, but
is not ambiguous if a court can discover its meaning simply through knowledge of those facts which
give it meaning as gleaned from the general language of the contract.” Bourke v. Dun & Bradstreet
Corp., 159 F.3d 1032, 1036 (7th Cir. 1998). Additionally, a contract is not construed as ambiguous
simply because the parties do not agree on the meaning of the terms. Jd. If there are questions,
however, that cannot be answered by reading the contract, extrinsic evidence is necessary to
determine the intent of the parties, and a motion to dismiss cannot be granted. Great Oak, LLC. V.
Begley Co., 2003 WL 880994 *3 (N.D.III. Mar. 5, 2003).

The Commutation Agreement states that CCC and its affiliates and defendant are no longer
bound to the treaty reinsurance agreements listed under Schedule A of the agreement. The first issue
that is disputed is whether plaintiffs are affiliates and are both bound by the Commutation

Agreement, or if only CCC is bound.



CONCLUSION
For the reasons stated herein, the court concludes that the Commutation and Release
Agreement on its face is ambiguous and cannot be interpreted without further evidence. Plaintiff

has stated a claim upon which relief could be granted. Defendant’s motion to dismiss is denied.

Robert W. Gettleman
United States District Judge

ENTER: July 30, 2003



Recently, Judge Hibbler addressed the issue in Chillmark Partners, LLC v. MTS Inc., 2003
WL 1964408 (N.D.IH. Apr. 25 2003), a case more closely related to the instant case than Allendale.
Chillmark and MTS entered into a contract, interpreted under Illinois law, that was to be between
Chillmark and MTS, “together with any subsidiaries and affiliates.” The agreement did not name
any affiliates or subsidiaries, nor did it define those terms. Chillmark argued that various defendants
were parties to the contract because they were subsidiaries or affiliates of MTS. Jd. Judge Hibbler
concluded that the terms were not ambiguous and applied the common definition found in Black’s
Law Dictionary 59 (7th ed. 1999), which states, “an affiliate is a corporation that is related to another
corporation by shareholdings or other means of control; a subsidiary, parent, or sibling corporation.”
Id. at 3. Although the various defendants in Chillmark were related to MTS as shareholders, the
court held they were not affiliates because they were not corporations. Jd. at 4.

The instant case is comparable to Chillmark because it also involves a contract between two
companies (as opposed to a contract for insurance between an insurer and insured) that is interpreted
under Illinois law. Moreover, the Commutation Agreement, like the contract in Chillmark, does not
define the term “affiliate.” Based on the definition used in Chillmark, CIC and CCC are affiliates
because they are sibling corporations related to another corporation, CNA. Thus, using either the
Allendale or Chillmark definition, under Illinois law, CIC and CCC were affiliates at the time the
Commutation Agreement was executed.

Plaintiffs attempt to rely on Travelers Indem. Co. v. U.S., 543 F.2d 71 (9th Cir. 1976), for
a narrower definition of affiliate. The court in Travelers defined affiliated companies as having an
intimate business relationship consisting of an integration of financial and managerial control, and

that common ownership alone is not enough. Jd. at 76. The relationship between the alleged



Defendant asserts that the Commutation Agreement binds both CCC and CIC, because the
Commutation Agreement states it is between defendant on the one hand, and CCC and its “affiliates”
on the other hand. The question is whether CIC was an affiliate of CCC at the time the
Commutation Agreement was executed because, as alleged in the complaint, CCC and CIC’s parent
were both owned by CNA Financial Corporation. To establish that they were affiliates, defendant
relies on the definition of affiliate set forth in Allendale Mutual Insurance Company v. Bull Data
Systems, Inc., 1994 WL 710771 (N.D.Il. Dec. 16, 1994). Allendale discussed how the term affiliate,
using Illinois law, should be interpreted in an insurance policy. /d. at 7.

The Allendale court examined several sources for the definition of “affiliate”: (1) Black’s
Law Dictionary: “a company effectively controlled by another company;” (2) The Oxford English
Dictionary: “united in a dependent relation as branches of a society to the central organization;” and
(3) Random House Dictionary of the English Language: “a business concern owned or controlled
in whole or in part by another concern.” Jd. at 7-8. The Illinois Insurance Code, 215 ILCS
5/131.1(a), cited by both Allendale and defendant, states, “an ‘affiliate’ of or person ‘affiliated’ with,
aspecific person, is a person that directly, or indirectly through one or more intermediaries, controls,
or is controlled by, or is under common control with, the person specified.” The Allendale court
concluded that there were two possible interpretations of affiliate. Jd. Consistent with Illinois law,
which requires construction of ambiguous terms of insurance agreements to be construed in favor
of the insured, the Al/endale court construed the term affiliates to mean common ownership. Jd.
Under this definition, CIC and CCC were affiliates at the time the Commutation Agreement was
entered. In the instant case, however, neither party is the “insured” and, therefore, acceptance of the

Allendale definition is not necessarily required.



The problem with defendant’s interpretation is that these pages of Exhibit A can be read to
“list” only the treaty insurance programs, which both parties agree refer to the entire line or se gment
of the cedent’s (plaintiff's) business. Thus, only the treaty agreements appear to be listed by number,
program, layer, and effective date. The second part of the first two pages of Schedule A, “Through
Facultatively Placed,” identifies only the reinsurance company by name (Bellefonte) and company
number (0709). Because, as discussed above, facultatively place reinsurance is broken down policy
by policy, the reinsurance agreements covered by the facultatively placed reinsurance through
Bellefonte ReInsurance Company do not appear to be “listed” in Schedule A.

On the face of the complaint, therefore, plaintiff has stated a claim upon which relief can be
granted if the court adopts the interpretation discussed above. It is quite possible, however, with the
benefit of extrinsic evidence to explain this apparent ambiguity in Schedule A that a different
interpretation of the first two pages of that schedule could ultimately be adopted by the court. Thus,
the existence of this ambiguity compels denial of defendant’s Rule 12(b)(6) motion to dismiss on
the face of the complaint.

Defendant additionally asserts that it is entitled to reasonable costs based on plaintiffs’
alleged breach of paragraph 5 of the Commutation Agreement by filing this suit. Paragraph 5 states
that upon payment of the sum due, neither party will file suit against the other “in respect of any
matters relating to or arising out of the Reinsurance Agreements.” Because the instant case arises
from the Commutation Agreement rather than the Reinsurance Agreements, however, paragraph 5

does not apply.



+ 77> Minute Order Form (06/97)

United States District Court, Northern District of Illinois

(il) @

Name of Assigned Judge Sitting Judge if Other
ror Magistrate Judge | __ Robert W. Gettleman than Assigned Judge
CASE NUMBER 03 C 1455 DATE July 30, 2003
CASE Continental Casualty Co. v Northwestern National Ins.
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
MOTION: of the motion being presented.]
DOCKET ENTRY: ‘
qd) qo Filed motion of [ use listing in “Motion” box above.]
(2) Qo Brief in support of motion due
3) Oo Answer brief to motion due . Reply to answer brief due.
(4) Oo Hearing
(5) i) Status hearing
(6) oO Pretrial conference[held/continued to] [set for/re-set for] on set for at .
(7) a Trial[set for/re-set for] on at
(8) o [Bench/Jury trial] [Hearing] held/continued t to at
(9) oO This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]
QFRCP4(m) O General Rule 21 OFRCP41(a)(1) UO FRCP41{a)(2).
(10) Ml (Other docket entry] Memorandum opinion and order.

Defendant’s motion to dismiss is denied.

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

No notices required, advised in open court.
No notices required.

X | Notices mailed by judge’s staff.

Notified counsel by telephone.

Docketing to mail notices.

Mail AO 450 form.

Copy to judge/magistrate judge.

number of notices

q yoruisia sn
yunos dygas

GDS

date mailed notice
courtroom

deputy’s
initials

22:2 Wd 1 OnW €0
Oppricsnaaaiwd TIS

Central Clerk's fice

mailing deputy initials



woe Oo? VYE 5

Schedula A - Part 1 .
REINSURER: BELLEFONTE RE INSURANCE COMPANY

COMPANY #: 0709

TREATY PROGRAM TAYER EFF.

THROUGH DIRECT PLACEMENT WITH INTERMEDIARY

1886 CASUALTY UNDERLYING SECOND EXCESS 10/1/75
1941 COLUMBIA CASUALTY THIRD EXCESS . WITT
1951 CASUALTY UNDERLYING SECOND EXCESS WN?
1954 GLOBAL THIRD EXCESS W177
2024 GLOBAL THIRD EXCESS 14178
2040 REINS DEPT-CASUALTY FAC FIRST EXCESS INI7TB
2040 REINS DEPT-CASUALTY FAC FIRST EXCESS 11/80
2040 REINS DEPT-CASUALTY FAC FIRST EXCESS 1/1/81
2067 GLOBAL , THIRD EXCESS W793
2127 GLOBAL THIRD EXCESS 1/1/80
2127 GLOBAL THIRD EXCESS 1/1/81
2134 COLUMBIA CASUALTY THIRD EXCESS 1/1/80
2199 COLUMBIA CASUALTY THIRD EXCESS 1/1181

THROUGH FACULTATIVELY PLACED

0709 BELLEFONTE REINS

Contracts commuted include all underwriting periods
whether specifically listed or not,



-. vie?

Schedule A - Part 1
REINSURER: BELLEFONTE RE INSURANCE COMPANY
COMPANY #: 0709

— —
TREATY PROGRAM LAYER EFF.
THROUGH DIRECT PLACEMENT WITH INTERMEDIARY
1886 CASUALTY UNDERLYING _ SECOND EXCESS 10/1/75
1941 COLUMBIA CASUALTY THIRDEXCESS, 1/177
1951 CASUALTY UNDERLYING SECOND EXCESS 1177
1954 GLOBAL THIRD EXCESS Wn
2024 GLOBAL THIRD EXCESS 14778
2040 REINS DEPT-CASUALTY FAC FIRST EXCESS TN
2040 REINS DEPT-CASUALTY FAC FIRST EXCESS 1/1/80
2040 REINS DEPT-CASUALTY FAC FIRST EXCESS 1/1/81
2057 GLOBAL THIRD EXCESS wig
2127 GLOBAL THIRD EXCESS 1/1/80
2127 GLOBAL THIRD EXCESS 11781
2134 COLUMBIA CASUALTY THIAD EXCESS 4/1/80
2199 COLUMBIA CASUALTY THIRD EXCESS 1/1/81

THROUGH FACULTATIVELY PLACED
0709 BELLEFONTE REINS

Contracts commuted include all underwriting periods
whether specifically listed or not.



affiliates in Travelers, however, was less significant than the one between plaintiffs in the instant
case. The companies in Zravelers did not have a common owner and were linked only because they
planned to operate an electric power transmission system together. Jd. at 73. Outside of this link,
the companies operated individually. fd. Additionally, Travelers is a Ninth circuit case that did not
interpret Illinois law. Therefore, Travelers is inapplicable. The court concludes that under Illinois
law plaintiffs were affiliates, and the Commutation Agreement binds them both.

The court now turns to the meaning of the Commutation Agreement. Defendant argues that
the Commutation Agreement is a clear and unambiguous contract that binds both plaintiffs, and
releases defendant from all agreements listed in Schedule A, including any facultative reinsurance
agreements. Plaintiffs argue that the Commutation Agreement commuted only the treaty reinsurance
agreements in Schedule A, and that defendant is still liable under the facultative reinsurance
agreements.

The Commutation Agreement provides, quite clearly, that the “reinsurance agreements,”
defined as the “treaty reinsurance agreements listed in Schedule A” (emphasis added), were released
under the terms of the Commutation Agreement. There is no ambiguity in the text of the
Commutation Agreement itself. The problem arises because the first two pages of Schedule A are
divided into two parts: (1) “Through Direct Placement with Intermediary,” listing a number of
treaties by number, “program,” “layer,” and “Eff.” (apparently meaning effective date); and
(2) “Through Facultatively Placed,” listing thereunder only one entry: “0709 Bellefonte Reins.”
From this, defendant argues that Exhibit A, (and therefore the reinsurance agreements released by
the Commutation Agreement), encompass both the treaty reinsurance agreements and the facultative

reinsurance agreements issued by defendant’s predecessor Bellefonte ReInsurance Company.



“This Commutation & Release Agreement is by and between Continental Casualty

Company and its affiliates, including but not limited to: American Casualty Company

of Reading, PA., CNA Casualty of California, CNA Casualty of Puerto Rico,

Columbia Casualty Company, Manufacturers Trust Insurance Company, and

Transportation Insurance Company, (hereinafter collectively the “Reinsured”) and

Northwestern National Insurance Company, individually and as successor to

Universal Reinsurance Corporation and Bellefonte Re Insurance Company, formerly

Bellefonte Insurance Company, (hereinafter collectively the “Reinsurer’).”

CIC is not listed as an affiliate, and plaintiff denies that CIC was an affiliate of CCC at the time the
Commutation Agreement was executed.

The Commutation Agreement states in the first recital that, “the Reinsured and Reinsurer are
parties to the Treaty Reinsurance Agreements listed in Schedule A,” and then defines the term
“Reinsurance Agreements” to be read “Treaty Reinsurance Agreements listed in Schedule A.” (A
copy of the front two pages from Schedule A is appended to this opinion.) The second recital states
that, “the Reinsured and the Reinsurer now desire to fully and finally settle and commute all their
respective past, present, and future obligations and liabilities, known and unknown, under the
Reinsurance Agreements.” Defendant claims that the Commutation Agreement included both the
insurance agreements listed in Schedule A under the subtitle “Through Direct Placement With
Intermediary” and the insurance agreements listed under the subtitle “Through Facultatively Placed.”
Plaintiff claims that the Commutation Agreement cancelled only the list under “Through Direct
Placement With Intermediary” and did not cancel facultative reinsurance agreements under which

defendant owes CIC $2.6 million billed by CIC under facultative reinsurance agreements defendant

issued to CIC and other insurance companies owned by the Continental Corporation.



of business in Ohio. Defendant is sued in its own right, and as successor of Universal Reinsurance
Company, Bellefonte Re Insurance Company, and Bellefonte Insurance Company.

CNA Financial Corporation (“CNA") is an insurance holding company. At all times
pertinent to this litigation, CNA has directly owned CCC, which itself owned fifteen to twenty other
insurance companies. In 1995, CNA purchased the Continental Corporation, an insurance holding
company, which directly owned CIC. As a result, by year end of 1995 CNA owned both CCC and
CIC.

According to the complaint, under a reinsurance contract, an insurance company, known as
the “ceding company” or “cedent,” obtains insurance from another professional insurer, known as
the “reinsurer,” in order to transfer some or all of the insured risk the cedent has assumed. In the
instant case, plaintiffs were cedents and defendant was the reinsurer. Both plaintiffs and defendant
agree that reinsurance contracts take two forms. The first type is a “treaty reinsurance agreement,”
which covers an entire line or segment of the cedent company’s business over a period of time. An
example is reinsurance covering all directors’ and officers’ insurance policies issued by the cedent
in 2002. The second type of reinsurance agreement is a “facultative reinsurance agreement,” which
applies to a single policy issued by the cedent and is negotiated on an individual basis. An example
is reinsurance covering the specific directors’ and officers’ insurance policy issued by the cedent to
XYZ Corporation on February 1, 2002. Defendant entered into various treaty reinsurance
agreements with CCC from the 1960s through the 1980s. Defendant also entered into various
facultative reinsurance agreements with CCC and CIC from the 1960s through the 1980s.

In May 1996 CCC and defendant entered into the Commutation & Release Agreement

(“Commutation Agreement”), which states in part:



IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION :

DOCKETED

AUG 0 4 2003

CONTINENTAL CASUALTY COMPANY, an
Illinois insurance company, and CONTINENTAL
INSURANCE COMPANY, a New Hampshire
insurance company,

wore

Plaintiffs, .
No. 03 C1455

v.

Judge Robert W. Gettleman
NORTHWESTERN NATIONAL INSURANCE

COMPANY, a Wisconsin insurance company,

SSS SS SS SS SS

Defendant.

MEMORANDUM OPINION AND ORDER

Plaintiffs Continental Casualty Company (“CCC”) and Continental Insurance Company
(“CIC”) have brought a one count complaint for declaratory judgment against defendant
Northwestern National Insurance Company seeking interpretation of a contract between CCC and
defendant. Specifically, plaintiffs are seeking a declaration that a 1996 Commutation & Release
Agreement (“Commutation Agreement”) cancelled treaty reinsurance agreements between defendant
and CCC only, and did not cancel any agreements between CIC and defendant. Defendant has
moved to dismiss pursuant to Fed.R.Civ.P. 12(b)(6), for failure to state a claim upon which relief
can be granted. For the reasons set forth below, defendant’s motion is denied.

FACTS
Plaintiffs are insurance companies with their principle places of business in Illinois.

Defendant is an insurance company organized under the laws of Wisconsin with its principle place