Court Opinion

ID: 4846141
Source: CourtListenerOpinion
Date Created: 2021-08-23 19:03:49.40877+00
Date Added: 2024-06-11T09:01:47.221528
License: Public Domain

In the

    United States Court of Appeals
                 For the Seventh Circuit
                     ____________________
No. 20-2892
CONTINENTAL CASUALTY CO. and CONTINENTAL INSURANCE
CO.,
                                  Plaintiffs-Appellants,

                                 v.

CERTAIN UNDERWRITERS AT LLOYDS OF LONDON,
                                     Defendant-Appellee.
                     ____________________

         Appeal from the United States District Court for the
           Northern District of Illinois, Eastern Division.
         No. 19 CV 6531 — Sharon Johnson Coleman, Judge.
                     ____________________

      ARGUED APRIL 2, 2021 — DECIDED AUGUST 23, 2021
                 ____________________

   Before WOOD, HAMILTON, and KIRSCH, Circuit Judges.
    WOOD, Circuit Judge. It would be diﬃcult to overstate the
strength of the Supreme Court’s support for arbitration when
the parties have elected to resolve their disputes using that
mechanism. The Federal Arbitration Act (“FAA”), 9 U.S.C. § 1
et seq., embodies a “national policy favoring [arbitration] and
plac[ing] arbitration agreements on equal footing with all
other contracts.” Hall Street Assocs., L.L.C. v. Mattel, Inc., 552
2                                                   No. 20-2892

U.S. 576, 581 (2008) (quoting Buckeye Check Cashing, Inc. v. Car-
degna, 546 U.S. 440, 443 (2006)).
    Arbitration and adjudication in court diﬀer in a number of
meaningful ways. One central distinction relates to the ex-
ceedingly narrow scope for judicial review of a ﬁnal arbitral
award. Whereas a decision by a court of ﬁrst instance is usu-
ally subject to de novo review for questions of law, and more
deferential, yet still meaningful, review for questions of fact,
arbitration awards are largely immune from such scrutiny in
court. The FAA spells out a narrow set of reasons that may
support a court’s conﬁrmation, vacatur, or modiﬁcation of an
award, see 9 U.S.C. §§ 10–11, and the Supreme Court held that
these “provide exclusive regimes” for review. Hall Street As-
socs., 552 U.S. at 590.
    Recognizing this unfavorable terrain, Continental Casu-
alty Co. and Continental Insurance Co. (collectively, “Conti-
nental”) nevertheless seek in this appeal to set aside an arbi-
tral award. The award arose out of a dispute between Conti-
nental and Certain Underwriters at Lloyds of London (“Un-
derwriters”) over the way in which reinsurance furnished by
Underwriters should be calculated and billed. As required by
contract, Underwriters submitted this matter for arbitration,
and the arbitral panel (“the Panel”) ruled in their favor. At
Continental’s request, the Panel later issued a supplemental
award, called here Interim Order No. 3, in which it clariﬁed
how its primary award applied to certain future billings. Con-
vinced that the arbitrators had strayed beyond the scope of
the agreement, Continental brought this suit to set aside In-
terim Order No. 3, as well as a Post-Final Award Order in
which the Panel denied Continental’s motion for reconsider-
ation of the interim order.
No. 20-2892                                                     3

    If our job were to assess the merits of Continental’s posi-
tion in the same way that we approach ordinary appeals, it is
possible that we might come to a diﬀerent conclusion. But we
are constrained by the FAA, as interpreted by the Supreme
Court. We therefore aﬃrm the district court’s order conﬁrm-
ing the primary arbitral award, Interim Order No. 3, and the
Post-Final Award Order denying Continental’s motion to re-
consider.
                                I
    Continental Casualty and Continental Insurance are re-
lated primary insurance companies; they cover risks such as
mass tort and pollution liability for their customers. But they
do not bear the full burden of that potential liability; instead,
they purchase reinsurance, which can be deﬁned as “[i]nsur-
ance of all or part of one insurer’s risk by a second insurer,
who accepts the risk in exchange for a percentage of the orig-
inal premium.” Reinsurance, BLACK’S LAW DICTIONARY (11th
ed. 2019). Continental issued multi-year liability policies to its
customers, and it purchased its reinsurance from Underwrit-
ers.
    Between 1966 and 1976, Continental Casualty entered into
eight such reinsurance contracts with Underwriters, while
from 1967 to 1978, Continental Insurance entered into seven,
also with Underwriters. The 15 agreements were “treaty” re-
insurance contracts, meaning that they applied to speciﬁc cat-
egories of insurance policies issued by the Continental com-
pany, as opposed to a contract issued on a speciﬁed policy for
a particular company. A treaty contract, for example, might
specify 1966 liability policies, while a speciﬁc contract might
say “the 1966 liability policy held by XYZ corporation”. The
dispute now before us concerns ﬁve underlying accounts:
4                                                  No. 20-2892

Ammco Tools, Inc.; Mine Safety Appliances; Mount Vernon
Mills; Richardson Company; and Brunswick Corporation.
     In the insurance world, we begin with the insurance com-
pany that deals directly with the insured. That policy will
specify what is covered, what exclusions or exemptions exist,
and what the premium will be. But if that insurance company
wants to protect itself against obligations at the high end of
the scale, it may wish to procure its own insurance against
that risk. It is then known as a “cedent”—that is, a ﬁrm that is
ceding or turning over part of its potential loss to a second
company—and the company assuming the ceded risk is the
reinsurer. If a reinsurance contract has a $1,000,000 retention,
that means that the reinsurer is not liable to pay anything un-
til the cedent has paid the ﬁrst million to its insured.
    For over 40 years, Underwriters and Continental agreed
on the methodology for calculating reinsurance obligations.
Continental paid its insured for its covered mass tort or pol-
lution losses, and then it annually billed Underwriters for
amounts in excess of the retention amount (i.e., the amount at
which the reinsurance kicks in) under the treaties. Even if the
policy covered several years (typically three), Continental
would calculate the retention amount on an annual basis. It
did so both for losses contained within a single year and
multi-year losses. If Continental’s policies provided for aggre-
gate limits of liability, Underwriters would indemnify Conti-
nental in the aggregate for any given policy year for amounts
that exceeded the treaties’ annual retention amount. They did
so under a provision of the treaty known as the Aggregate Ex-
tension Clause.
    Things changed in 2010 when Continental outsourced its
claims handling to Resolute Management, Inc., a third-party
No. 20-2892                                                    5

administrator. Resolute took the position that for a multi-year
loss, only one retention amount needed to be paid. This
change resulted in higher demands for payment from Under-
writers. For a loss extending over three years, for instance, as-
suming a $1,000,000 retention, the new methodology made
Continental responsible for only $1,000,000, instead of
$3,000,000. Underwriters objected to this change, and after
unsuccessful eﬀorts to resolve the matter, they sought arbitra-
tion.
   The pertinent arbitration clauses all required “any dis-
pute” to be submitted to a three-person panel of insurance in-
dustry experts. They also contained the following language:
      The arbitrators shall interpret this Agreement as an
   honorable engagement and not as merely a legal obli-
   gation; they are relieved of all judicial formalities and
   may abstain from following the strict rules of law, and
   they shall make their award with a view to eﬀecting
   the general purpose of this Agreement in a reasonable
   manner rather than in accordance with a literal inter-
   pretation of the language.
Underwriters asked the arbitrators to issue a declaratory
judgment specifying how the limits and retentions in the ﬁve
speciﬁed reinsurance contracts apply to multi-year policy
losses that either had been, or would in the future be, pre-
sented by Continental.
   The Panel conducted a hearing, at which each party pre-
sented opening and closing statements, witness testimony,
and proposed awards. The hearing concluded on July 16,
2019, and on July 17, the Panel issued its Final Award. It found
that Continental’s new methodology on aggregation was
6                                                  No. 20-2892

contrary to the parties’ established course of dealings, and
held as follows:
       Petitioners [Underwriters] have paid the full
    amount due, if any, under the Aggregate Extension
    Clause with respect to Ammco Tools, Mount Vernon
    Mills, Mine Safety Appliances and Richardson Com-
    pany . . . and Respondents [Continental] are precluded
    from re-presenting, re-packaging, or otherwise re-bill-
    ing Petitioners for any of the Product Losses.
SA180 ¶2.
    Concerned that the Final Award was not clear about Un-
derwriters’ future reinsurance liability obligations for those
accounts, Continental asked the Panel to clarify whether the
statement “Petitioners have paid the full amount due” related
only to past bills already submitted at the time of the arbitra-
tion, or if it was meant to cover past and future billings. The
Panel’s umpire responded that he saw Continental’s point,
and he gave Underwriters ﬁve days to “plead their case.”
    Underwriters took advantage of that opportunity and ar-
gued that the Final Award was unambiguous and precluded
both past and future billings. They suggested that no clariﬁ-
cation was necessary, but they also argued that if the Panel
did choose to revisit the Final Award, it should order Conti-
nental to pay their attorneys’ fees and costs. The Panel denied
the latter request. It also issued Interim Order No. 3, in which
it denied Continental’s motion for clariﬁcation but added “As
such, Petitioners [Underwriters] have fully and ﬁnally dis-
charged their past, present and future obligations for Ammco
Tools, Mt. Vernon Mills and Richardson Company Asbestos
products losses.”
No. 20-2892                                                    7

    Dissatisﬁed with this outcome, Continental ﬁled a motion
for reconsideration. As now “clariﬁed,” it argued, this award
had become a sanction. It contended that Underwriters had
never asked the Panel to bar Continental from submitting fu-
ture bills. Moreover, it argued, the Panel lacked the authority
under the arbitration agreement to issue sanctions or penal-
ties. The ban on future bills, it said, would unjustly deprive it
of millions of dollars. Underwriters disagreed with the accu-
sation that they had not addressed future billings; they had
indeed done so, they represented, and they added that the
Panel was empowered to grant this relief. The Panel denied
Continental’s motion for reconsideration in a Post-Final
Award Order.
    Continental then turned to the district court, where it
sought conﬁrmation of the Final Award but vacatur of Interim
Order No. 3 and the Post-Final Award Order. See 9 U.S.C.
§§ 9–10. It relied on section 10(a)(4) of the FAA, which permits
a court to vacate an arbitral award “where the arbitrators ex-
ceeded their powers, or so imperfectly executed them that a
mutual, ﬁnal, and deﬁnite award upon the subject matter sub-
mitted was not made.” Id. § 10(a)(4). It pressed its argument
that there was no contractual basis for Interim Order No. 3
and that the arbitrators did not have the authority to issue a
punitive award without express authorization in the govern-
ing contract. Underwriters responded that relief from future
obligations was appropriate as a matter of contract because
Continental had committed a material breach of the reinsur-
ance treaty.
    The district court conﬁrmed everything: the Final Award,
Interim Order No. 3, and the Post-Final Award Order. It re-
jected Underwriters’ characterization of Continental’s
8                                                     No. 20-2892

behavior as a material breach, but it also saw no merit in Con-
tinental’s eﬀort to characterize the Panel’s remedy as punitive.
Instead, looking back to the parties’ agreement to arbitrate, it
noted that the arbitrators had broad authority to formulate
appropriate remedies under the “honorable engagement”
provision, and that this is exactly what they did. This appeal
followed.
                                II
    Continental accepts the district court’s decision to conﬁrm
the Final Award, and so the only issue before us is whether
the court erred by also conﬁrming Interim Order No. 3 and
the Post-Final Award Order. When reviewing a district
court’s decision to conﬁrm an arbitral award, we approach
questions of law de novo and, to the extent there are any facts
that are properly before us, we review them only for clear er-
ror. Standard Sec. Life Ins. Co. of New York v. FCE Beneﬁt Adm’rs,
Inc., 967 F.3d 667, 671 (7th Cir. 2020). The FAA requires us to
approach this task with a very light hand. An arbitral award
must “draw its essence” from the contract. United Steelworkers
v. Enterprise Wheel & Car Corp., 363 U.S. 593, 597 (1960). “It is
only when an arbitrator strays from interpretation and appli-
cation of the agreement and eﬀectively dispenses his own
brand of industrial justice that his decision may be unenforce-
able.” Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662,
671 (2010) (cleaned up); see also Major League Baseball Players
Ass’n v. Garvey, 532 U.S. 504, 509 (2001).
   The scope of the agreement to arbitrate is critical in this
connection, as the parties have the prerogative of giving either
a broad or a narrow mandate to the arbitrators. A court must
ﬁnd a violation of the agreement to arbitrate before it may set
aside the award. Chicago Typographical Union No. 16 v. Chicago
No. 20-2892                                                     9

Sun-Times, Inc., 935 F.2d 1501, 1505 (7th Cir. 1991). Hard as it
may be to set aside our normal rules for review, we must do
so for arbitration, lest we undermine the institution. The ques-
tion “is not whether the arbitrator or arbitrators erred in in-
terpreting the contract; it is not whether they clearly erred in
interpreting the contract; it is not whether they grossly erred
in interpreting the contract; it is whether they interpreted the
contract.” United States Soccer Fed’n, Inc. v. United States Nat’l
Soccer Team Players Ass’n, 838 F.3d 826, 832 (7th Cir. 2016)
(quotations and citations omitted). Furthermore, ambiguity in
an explanatory opinion does not justify setting aside an
award. United Steelworkers, 365 U.S. at 598. Only if “there is no
possible interpretive route to the award” may a “noncontrac-
tual basis … be inferred and the award set aside.” United
States Soccer Fed’n, 838 F.3d at 832 (quoting Chicago Typograph-
ical Union, 935 F.2d at 1505–06).
    Continental urges us to ﬁnd that this is the rare case in
which an interpretive route to the two Orders it is challenging
is utterly missing. Underwriters make a few points in re-
sponse. First, they stress the fact that this arbitration clause
permitted the Panel to resolve the dispute based on commer-
cial realities, not just legal niceties. The honorable-engage-
ment clause expressly recognizes this fact. And on a more
practical note, Underwriters note that the order precluding
future billings is found in the Final Award, not just the two
later Orders that Continental is challenging. If we were to va-
cate those later Orders, we would be back to Square One, with
an Award that Underwriters would be defending as clear and
Continental would be attacking as ambiguous.
   If the two Orders can survive review under FAA § 10(a)(4),
we do not need to worry about the question whether there
10                                                 No. 20-2892

was some punitive aspect to the award, or the question
whether Continental committed a material breach. Those de-
bates about terminology and legal characterization will fall by
the wayside, so long as the arbitrators acted within the au-
thority conferred by the contract. A close look at all three
awards—the unchallenged Final Award and the two Or-
ders—satisﬁes us that the arbitrators did not stray beyond the
boundaries established by the parties.
     Arbitration Award
    The Panel’s Final Award is brief and unexplained (as
many arbitral awards are). But it is not hard to read it as pre-
cluding any future attempt by Continental to send old bills to
Underwriters for asbestos loss claims for the designated com-
panies, whether under the rebilling provision of the contract
or another provision. The ﬁrst four paragraphs of the award
illustrate this point:
        1. The billing methodology employed by Respond-
           ents subsequent to Resolute Management Inc. as-
           suming claims handling responsibility for the
           claims at issue is contrary to the parties[‘] estab-
           lished course of dealing under the Aggregate Ex-
           tension Clause under the Treaties and is therefore
           rejected.
        2. Petitioners have paid the full amount due, if any,
           under the Aggregate Extension Clause with respect
           to Ammco Tools, Mount Vernon Mills, Mine Safety
           Appliances and Richardson Company (“the Prod-
           uct Losses”) and Respondents are precluded from
           re-presenting, re-packaging, or otherwise re-billing
           Petitioners for any of the Product Losses.
No. 20-2892                                                  11

       3. Respondents are required to present future billings
          for incurred product/aggregate liability claims pur-
          suant to the Treaties’ Aggregate Extension Clause,
          unless the underlying loss can be objectively
          demonstrated to be a single occurrence under the
          relevant policy. . . .
       4. The Brunswick claim is now closed with no
          amounts due from Petitioners and cannot be re-pre-
          sented, re-packaged, or otherwise re-billed.
The use of the preﬁx “re,” the present perfect verb tense in the
second paragraph, and the use of the phrase “amount due” in
paragraphs 2 and 4 covers old claims, but it does not say one
way or the other whether future billings arising from new
events may be submitted. Continental spotted this problem,
and that is why it submitted its request for clariﬁcation.
   Interim Order No. 3
   The Panel’s answer came in the form of Interim Order
No. 3, which reads as follows in its entirety:
   The Panel has carefully reviewed the submissions of the
   parties on Underwriters’ Motion for Clariﬁcation and
   rules as follows:
   The Motion for Clariﬁcation is DENIED.
   As such, Petitioners have fully and ﬁnally discharged their
   past, present and future obligations for Ammco Tools,
   Mount Vernon Mills and Richardson Company asbestos
   products losses.
   Andreas Stahl
   Umpire
   For and on behalf of the Panel
12                                                 No. 20-2892

There are a few points one could make about this Order. First,
it mistakenly said that it was Underwriters who had moved
for clariﬁcation, though it was Continental. This error was
ﬁxed in the reconsideration order, set out below. Second, the
Panel did not really deny Continental’s motion. By referring
to “past, present and future obligations” for the three listed
companies, it eliminated any doubt about the coverage of fu-
ture billings. Whether the arbitrators had the power to ad-
dress future billings is a matter to which we return in a mo-
ment.
     Post-Final Award Order
    As we noted earlier, Continental was displeased with the
response to its request for clariﬁcation, and so it moved for
reconsideration. The Panel resolved that motion through the
following order:
     The Panel has carefully reviewed the submissions of
     the Parties regarding Respondents’ Motion to Recon-
     sider or, In the Alternative, to Clarify (“the Motion”)
     and rules as follows:
     The motion is DENIED.
     Interim Order Number 3 is UPHELD as stated, subject
     only to the clariﬁcation that it was the Respondents
     and not Underwriters who initially ﬁled the Motion for
     Clariﬁcation which was the subject of Interim Order
     Number 3.
     The Panel is Functus Oﬃcio [ﬁnished with this matter].
     For a Majority of the Panel
     Andreas Stahl
     Umpire
No. 20-2892                                                     13

For better or for worse, in other words, the Panel decided not
only the speciﬁc billing methodology question that Under-
writers originally had presented, but also what the conse-
quences of its ruling were for the three companies it named.
And it clariﬁed the question that remained after the Final Or-
der about the applicability of its ruling to future billings relat-
ing to asbestos products losses for those three companies.
    The district court concluded that the arbitrators had the
authority to address remedies as they ultimately did because
the arbitral agreement called on them to “interpret the agree-
ment as an honorable engagement and not merely a legal ob-
ligation.” That language, it thought, gave the Panel wide dis-
cretion over remedies. The Second Circuit agrees with that
view: “Courts have read such [honorable engagement]
clauses generously, consistently ﬁnding that arbitrators have
wide discretion to order remedies they deem appropriate.”
Banco de Seguros del Estado v. Mut. Marine Oﬀ., Inc., 344 F.3d
255, 261 (2d Cir. 2003). The First Circuit’s understanding is
similar. It has held that honorable engagement clauses “em-
power[] arbitrators to grant forms of relief, such as equitable
remedies, not explicitly mentioned in the underlying agree-
ment.” First State Ins. Co. v. Nat’l Cas. Co., 781 F.3d 7, 12 (1st
Cir. 2015).
   Although we have not spoken directly to the question of
honorable-engagement clauses, we too have noted that “[i]t is
commonplace to leave the arbitrators pretty much at large in
the formulation of remedies, just as in the formulation of the
principles of contract interpretation.” Baravati v. Josephthal,
Lyon & Ross, Inc., 28 F.3d 704, 710 (7th Cir. 1994). When an
arbitration clause is silent about the scope of the arbitrators’
power, we have cautioned that “[n]o negative inference can
14                                                 No. 20-2892

be drawn[.] … Silence implies—given the tradition of allow-
ing arbitrators ﬂexible remedial discretion—the absence of
categorical limitations. Since that is the norm, we assume that
the parties would have said something in the arbitration
clause had they wanted to depart from it.” Id.
    We have no trouble seeing how the arbitrators in this case
might have thought that implicit in Underwriters’ request for
resolution of the aggregate billing question was the conse-
quence of a ruling either way. The Panel may have thought
that, having announced that RMI’s methodology was incom-
patible with the parties’ course of dealing under the govern-
ing treaties, the eﬃcient way to wrap up the case would be to
announce where that left both sides, for their past, present,
and future billings. Continental’s decision to acquiesce in
RMI’s aggressive position, the Panel might have thought,
might not have been a one-time event. By ruling on liability,
the Panel members (all, recall, from industry) may have been
striving to eﬀectuate the broader purpose of the agreement.
That is enough, in our view, to show that the arbitrators’ ﬁnal
two orders fell within the scope of their authority.
   Continental has one more arrow in its quiver: it argues
that the orders we are considering have the eﬀect of wiping
out part of the beneﬁt of its bargain with Underwriters. It
notes that the Insuring Clause found in Article IV of the agree-
ment is unqualiﬁed:
         As respects the ultimate net loss to the Company
     arising out of each loss occurrence covered hereunder
     on which the Company has paid or advanced or agreed
     to pay or advance, or becomes liable to pay to or on
     behalf of its insured or reinsured an amount exceeding
     the applicable company retention as set forth in the
No. 20-2892                                                  15

   schedule hereinbelow provided, Reinsurers shall pay
   to the Company the applicable amount as provided in
   the schedule. …
Article IV continues by saying “[n]otwithstanding the provi-
sions hereinbefore set forth in this ARTICLE: … In the event
of termination of this Agreement, liability hereunder shall
cease in respect of the unexpired portions of the Company’s
original policies.”
     Continental contends that Interim Order No. 3 and the
Post-Final Award Order squarely conﬂict with this language
and thus on that basis also that the arbitrators exceeded their
authority. Those orders, it continues, eﬀectively delete the
“basic grant of reinsurance coverage to Continental for
amounts that Continental pays to its underlying insureds.”
But that signiﬁcantly overstates the scope and eﬀect of the or-
ders. Interim Order No. 3 precludes Continental only from
billing asbestos products losses from Ammco Tools, Mt.
Vernon Mills, and Richardson Company. Ex ante, we do not
know whether any other losses, such as environmental liabil-
ities, will ever materialize. If they do not, then there will be
nothing that would trigger a reinsurance payment, but if they
do, then the contract still has some force. In addition, some
types of liability may not extend forever into the future. As-
bestos is a good example. While there are still asbestos expo-
sure cases in the courts, many companies have ﬁnally re-
solved this aspect of their legal exposure. The record does not
tell us why the arbitrators deliberately cut oﬀ coverage for fu-
ture asbestos claims for those companies, but they may have
been persuaded that no such claims were likely to come
along.
16                                                 No. 20-2892

   This is not a case in which the insuring agreements in-
cluded speciﬁc directives or guidance with respect to remedy.
The arbitrators thus had a relatively free hand in deciding
how to wrap up the case. And once again, if there were any
doubt on that point, the honorable engagement clause should
remove it.
                              III
    When all is said and done, this dispute is nothing more
than one between two insurance entities—a cedant and a re-
insurer—about the way in which certain claims should be
billed and the consequences for failing to use the proper
methodology. The arbitrators reasonably thought that they
needed information about both past billings and future
amounts due. In the two post-Final Award orders, they spec-
iﬁed how the named accounts should be treated. It is possible
to ﬁnd an interpretive route to those two orders. The arbitra-
tors may have thought that the only way to implement the
purpose of the agreement was to preclude all of the asbestos
bills for the three named companies. The agreement gave
them the power to resolve the case on general principles, not
just legal entitlements, and that seems to be what they did.
    Given the narrow scope of our role in reviewing arbitral
awards, we must decline Continental’s invitation to revisit
this dispute. We conclude that the arbitrators did not stray be-
yond the boundaries of their authority, and so we AFFIRM
the judgment of the district court conﬁrming Interim Order
No. 3 and the Post-Final Award Order.