Reinsurance and Insurance Arbitrator and Umpire Ronald S. Gass
ARIAS-U.S. Certified Arbitrator and Umpire
AAA Roster of Neutrals
Reinsurance and Insurance Dispute Resolution Services Consultant

Reference to “Arbitration Clause” in Binding Placement Slip Sufficient to Compel Arbitration

When parties fail to execute final reinsurance wordings, they must generally look to the placement slips for guidance regarding the terms of their agreement. These slips will oftentimes include as the general condition “Arbitration Clause” or similar language without elaboration, leaving the parties to sort out exactly what arbitration procedures were intended when disputes arise. In an interesting variation on this theme, an Illinois federal district court was requested by a U.S.-cedent to compel arbitration based on such an abbreviated arbitration provision in a slip which the U.K. reinsurer contended was not binding because certain conditions precedent to its acceptance of the cession had not been satisfied by the fronting cedent’s managing general agent. Under the facts of this case, the court found that the reinsurer’s conditions had been met and that there was a binding agreement to arbitrate and ordered the parties to proceed with arbitration.

This case arose in the context of a Bond Quota Share Reinsurance Agreement. The reinsurer, a Lloyd’s Syndicate, signed a slip with a fronting insurer for a share of certain bail bond business produced and underwritten by an MGA contingent upon (1) its receipt of letters of indemnification from the MGA for $2 million that the Syndicate had advanced to it to remedy cash flow problems arising from bail bond business underwritten by the MGA in prior years through another fronting carrier, and (2) written confirmation of the length of the bonds to be issued by the MGA. On February 19, 2004, the Syndicate’s managing underwriter drew a line in pencil through the Syndicate’s stamp and wrote these two conditions in abbreviated form on the slip. In a court affidavit, the underwriter stated that “under common practice in London, the Syndicate was not bound by the placement slip until the insurer removed the pencil line from its stamp.”

In an e-mail exchange on February 25, 2004, the Syndicate underwriter agreed to remove his conditions having received a satisfactory response regarding bond length and a representation from the MGA through the cedent’s broker that the requested indemnifications would be received that night. On that same date, the underwriter erased his penciled conditions in front of the broker but noted on the slip that a copy of the MGA indemnifications were to be provided to him by March 1, 2004. No such indemnifications were subsequently received by the Syndicate.

The cedent claimed that it forwarded its share of the premiums to the Syndicate and that the Syndicate subsequently refused to pay the ceded losses. The Syndicate denied that it was ever bound by the slip because it had not received the MGA indemnifications or any of the cedent’s premium payments. The Syndicate sued the cedent in a London court to avoid the contract. Subsequently, the cedent filed an arbitration demand against the Syndicate and, simultaneously, an action to compel arbitration in Illinois federal district court.

In the Illinois litigation, the Syndicate argued that there was no binding agreement to arbitrate because the condition precedent of receipt of the MGA indemnification letters had not been met. Rejecting this position, the district court found that the Syndicate underwriter’s February 25, 2004 e-mail to the broker evidenced his “clear intent” to lift the conditions immediately. Consequently, the court granted the cedent’s petition to compel arbitration ruling that a binding contract existed and that the phrase “arbitration clause” was “sufficient to establish the parties’ agreement to arbitrate disputes,” albeit without any guidance as to any of the important arbitral details such as venue and arbitrator selection. The court urged the parties to agree on these procedural details, but failing that, it would “fill the gaps” in the agreement pursuant to the Federal Arbitration Act.

Harco National Insurance Co. v. Millenium Insurance Underwriting Ltd., No. 05 C 2397, 2005 U.S. Dist. LEXIS 15960 (Aug. 3, 2005).

THE GASS COMPANY, INC.
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REDDING, CONNECTICUT 06896-1728

TELEPHONE: (203) 227-9431
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