National Casualty Company, et al. v. Continental Insurance Company
Filing
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MEMORANDUM Opinion and Order written by the Honorable Lindsay C. Jenkins on 11/15/2023. Mailed notice. (jlj, )
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
National Casualty Company and
Nationwide Mutual Insurance Company,
Plaintiffs,
No. 23 CV 3143
v.
Judge Lindsay C. Jenkins
Continental Insurance Company,
Defendant.
ORDER
Before the Court is Plaintiffs National Casualty Company (“National
Casualty”) and Nationwide Mutual Insurance Company’s (“Nationwide” collectively,
the “Reinsurers”) motion to stay arbitration. [Dkt. 4.] Defendant Continental
Insurance Company (“CNA”) has filed a cross-motion to compel arbitration and to
dismiss. [Dkt. 16.] For the reasons given below, the Court grants CNA’s motion to
compel arbitration and denies the Reinsurers’ motion to stay arbitration.
Background
This lawsuit arises from three reinsurance agreements between CNA, an
insurance company, and its reinsurers, National Casualty and Nationwide
(“Reinsurance Agreements”). The Reinsurance Agreements at issue were in effect at
different times between January 1, 1969 and December 31, 1975. [Dkts. 5 at 3; 20 at
9.] 1 Each Reinsurance Agreement contains nearly identical arbitration clauses that
provided as follows:
If any dispute shall arise between the Reassured [CNA] and the
Reinsurers [National Casualty and Nationwide] with reference to the
interpretation of this Contract or their rights with respect to any
transaction involved, whether such dispute arises before or after
termination of this Contract, such dispute, upon the written request of
either party, shall be submitted to three arbitrators.
[Dkt. 20 at 31, 50, 71, 99.] The arbitration clauses declare that an arbitration “shall
be final and binding on both parties.” [Id.]
Citations to docket filings generally refer to the electronic pagination provided by
CM/ECF, which may not be consistent with page numbers in the underlying documents.
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In 2017, a dispute arose concerning certain changes to CNA’s billing
methodology and, more specifically, whether the new billing methodology was
permitted under the “Loss Occurrence” definition set forth in the Reinsurance
Agreements. [Id., ¶¶ 10–11.] Pursuant to the arbitration clauses contained in the
Reinsurance Agreements, CNA initiated separate arbitration proceedings against
National Casualty and Nationwide (the “2017 Arbitrations”). [Id., ¶ 12; Dkt. 16 at 2.]
First, CNA arbitrated with Nationwide and received a final order in March 2017;
shortly thereafter, CNA arbitrated with National Casualty and received a final order
in August 2017. [Dkt. 20, ¶¶ 13–14, 18–19.] The two arbitration awards were
subsequently confirmed by courts in the Northern District of Illinois (the “2017
Awards”). [Id., ¶¶ 16–17, 21–22.]
The parties’ current dispute revolves around the same provisions in the
Reinsurance Agreements that were the subject of the 2017 Arbitrations. [Id., ¶ 23.]
According to CNA, CNA issued billings to National Casualty and Nationwide, who
refused to pay, asserting that the billings were not permissible under the “Loss
Occurrence” definition. [Dkt. 16 at 2.] The parties discussed the billings but failed to
reach a consensus on the interpretation of “Loss Occurrence.” [Id.] On February 16,
2023, CNA demanded arbitration in two separate proceedings, one against National
Casualty and the other against Nationwide for the unpaid billings (the “New
Arbitrations.”) [Id.]
Following the demand for arbitration, National Casualty and Nationwide
initiated this suit for declaratory and injunctive relief, seeking to preclude CNA from
attempting to re-arbitrate the final decisions of the 2017 Arbitrations, and seeking to
enjoin CNA from attempting to pursue another arbitration arising from the same
issues in the future. [Dkts. 5 at 5; 20, ¶¶ 6, 27–37.] National Casualty and Nationwide
have moved to stay the New Arbitration proceedings initiated by CNA and seek to
litigate their issue preclusion argument before this Court. [Dkts. 4; 5 at 6.] CNA
opposes staying the New Arbitration proceedings and has moved to compel
arbitration and to dismiss the case. [Dkt. 16.]
Legal Standard
The Federal Arbitration Act, 9 U.S.C. §§ 1 et seq., governs when courts must
compel arbitration. Section 2 of the FAA provides that any written contract
“evidencing a transaction involving commerce to settle by arbitration a controversy
thereafter arising out of such contract or transaction . . . shall be valid, irrevocable,
and enforceable, save upon such grounds as exist at law or in equity for the revocation
of any contract . . . .” 9 U.S.C. § 2.
The FAA “mandates enforcement of valid, written arbitration agreements,”
Tinder v. Pinkerton Sec., 305 F.3d 728, 733 (7th Cir. 2002), and “embodies both a
liberal federal policy favoring arbitration and the fundamental principle that
arbitration is a matter of contract.” Gore v. Alltel Commc’ns, LLC, 666 F.3d 1027,
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1032 (7th Cir. 2012) (citation and internal quotation marks omitted). Where an
arbitration clause is broad, disputes are presumed arbitrable. AT&T Techs., Inc. v.
Commc’ns Workers of Am., 475 U.S. 643, 649 (1986). But “because arbitration is a
matter of contract, a party cannot be required to submit to arbitration any dispute
which he has not agreed so to submit.” Gore, 666 F.3d at 1032 (citation and internal
quotation marks omitted).
Accordingly, Courts should compel arbitration only “if three elements are
present: (1) an enforceable written agreement to arbitrate, (2) a dispute within the
scope of the arbitration agreement, and (3) a refusal to arbitrate.” Scheurer v. Fromm
Fam. Foods LLC, 863 F.3d 748, 752 (7th Cir. 2017).
Motion to Compel Arbitration
Both parties recognize that there are valid arbitration clauses within the
operative Reinsurance Agreements. [See Dkt. 20, ¶ 9; 16 at 2; 22 at 19–20.] It is also
undisputed that the parties consented to broad arbitration provisions, which
mandate that arbitrators must resolve any dispute concerning the interpretation of
the Reinsurance Agreements or their rights with respect to any transaction. [Dkt. 20
at 31, 50, 71, 99.]
The issue before the Court is a narrow inquiry into the arbitration clause’s
scope: whether a dispute over the preclusive effect of a prior arbitration is arbitrable.
More specifically, when a federal court order confirms an arbitration award, is the
preclusive effect of that award on a subsequent arbitration a matter for the court or
the arbitrator to decide?
The Reinsurers argue that CNA’s new claims are a rehash of the improper
billings and arguments from the 2017 Arbitrations, which resolved in favor of the
Reinsurers and was confirmed by federal court orders. [Dkt. 5 at 1, 5, 7.] While
conceding that the arbitration clauses mandated the 2017 Arbitrations, the
Reinsurers assert that the clauses “do not commit Plaintiffs to serially re-arbitrate”
the same previously decided issues. 2 [Dkt. 22 at 19–20.] The Reinsurers also argue
that because courts confirmed the 2017 Awards, the Court, not an arbitrator, must
adjudicate the “threshold question” of whether the parties agreed to “re-arbitrate
issues previously decided and accorded fully preclusive effect by the final judgment”
of the court. [Dkts. 5 at 6, 7; 22 at 10, 12–18, 20.] According to the Reinsurers, they
did not agree to arbitrate the preclusive effect of a prior arbitral award, and the
The Reinsurers admit that the 2017 Awards did not determine or dictate how billings
must be presented under the reinsurance agreements, nor did they prevent CNA from
modifying its billing method in the future. [Dkt. 22 at 9.] Rather, the Reinsurers argue that
the 2017 Awards prohibit CNA from presenting billings as “a single loss occurrence” under
the Reinsurance Agreements, and this ruling is not “dependent on or limited to the specific
facts of the particular claims addressed in those confirmed awards.” [Id.]
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arbitration clause does not “clearly and unmistakably” manifest an intent to do so.
[Dkt. 22 at 11–12.]
CNA, on the other hand, argues it does not seek to “attack or overturn” the
2017 Awards. [Dkt. 16 at 3.] According to CNA, the New Arbitrations are “entirely
separate and distinct” from the 2017 Arbitrations, involving different policyholders,
claims, and facts. 3 [Id.] CNA argues that to the extent the Reinsurers seek to raise
the 2017 Awards as a defense, “that matter is subject to the parties’ binding
arbitration agreement.” [Id.]
There is a narrow exception to the presumption of arbitration for a “question
of arbitrability”—that is, “whether parties have submitted a particular dispute to
arbitration.” Howsam v. Dean Witter Reynolds, 537 U.S. 79, 83 (2002). But this
exception is limited in scope to “the kind of narrow circumstances where contracting
parties would likely have expected a court to have decided the gateway matter.” Id.
at 84–85. Examples of questions that a court should resolve include, “whether the
arbitration contract bound parties who did not sign the agreement,” “whether an
arbitration agreement survived a corporate merger and bound the resulting
corporation,” and “whether an arbitration clause . . . applies to a particular type of
controversy.” Id. at 83–84. It is not “applicable in other kinds of general circumstance
where parties would likely expect that an arbitrator would decide the gateway
matter.” Id. at 83. Procedural questions that grow out of the dispute and bear on its
final disposition—such as issues of waiver, delay, defenses to arbitrability, time
limits, notice, laches, estoppel, and conditions precedent for arbitration—are matters
for an arbitrator to decide. Zurich Am. Ins. Co. v. Watts Indus., 466 F.3d 577, 580 (7th
Cir. 2006) (citing Howsam, 537 U.S. at 83); see Moses H. Cone Mem’l Hosp. v. Mercury
Const. Corp., 460 U.S. 1, 24–25 (1983) (“[A]ny doubts concerning the scope of
arbitrable issues should be resolved in favor of arbitration, whether the problem at
hand is the construction of the contract language itself or an allegation of waiver,
delay, or a like defense to arbitrability.”)
It is well settled in the Seventh Circuit, and other circuits, too, that the
preclusive effect of a prior arbitral award—whether or not confirmed by a court—is a
defense subject to arbitration. Trustmark Ins. Co. v. John Hancock Life Ins. Co., 631
F.3d 869, 874 (7th Cir. 2011) (“Arbitrators are entitled to decide for themselves those
procedural questions that arise on the way to a final disposition, including the
preclusive effect (if any) of an earlier award.”); Consolidation Coal Co. v. United Mine
Workers of Am., 213 F.3d 404, 407 (7th Cir. 2000) (stating, “the question of the
preclusive force of the first arbitration is, like any other defense, itself an issue for a
The Reinsurers do not dispute that the present claims pertain to different
policyholders than those involved in the 2017 Arbitrations. [Dkt. 22 at 3.]
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subsequent arbitrator to decide.”); Indep. Lift Truck Builders Union v. NACCO
Materials Handling Grp., Inc., 202 F.3d 965, 968 (7th Cir. 2000) (noting that it is
“well-established that ‘the preclusive effect of the first arbitrator’s decision is an issue
for a later arbitrator to consider.’” (quoting Bhd. of Maint. of Way Emps. v. Burlington
N.R.R. Co., 24 F.3d 937, 940 (7th Cir.1994))).
As discussed above, a question of arbitrability does not include procedural
defenses. Howsam, 537 U.S. 79 at 84–85. Cloaked as a “threshold question of
arbitrability,” the Reinsurers ask the Court to disregard well-established law, and to
determine the preclusive effect of the 2017 Awards on the New Arbitrations. But
deciding that question would require the Court to inappropriately delve into the
merits of the claims, assessing the presence of all prerequisites for collateral estoppel.
This the Court cannot do. See Zurich Am. Ins. Co., 466 F.3d at 580 (holding that in
determining a request to compel arbitration, the court’s duty is to determine whether
the parties’ grievance belongs in arbitration, not rule on the potential merits of the
underlying dispute between the parties); Prod. & Maint. Emps. Local 504 v.
Roadmaster Corp., 916 F.2d 1161, 1162 (7th Cir. 1990) (“Whether more than one
arbitrator can take a crack at interpreting the contract is itself a question of
contractual interpretation. . . . Arbitrators frequently interpret the scope and binding
effect of earlier arbitral decisions.”); see also Citigroup, Inc. v. Abu Dhabi Inv. Auth.,
776 F.3d 126, 131 (2d Cir. 2015) (explaining that preclusion is not a question of
arbitrability because like other affirmative defenses, it is a legal defense to the
opposing party’s claims and is “itself a component of the dispute on the merits.”). Any
dispute—whether old or new—concerning “the interpretation of [the parties’]
Contract or their rights with respect to any transaction involved” is subject to
arbitration. [Dkt. 20 at 31, 50, 71, 99.] It will be for an arbitration panel to determine
what impact, if any, the 2017 Awards have on the current and future disputes.
Without citation to any supporting caselaw, the Reinsurers assert that Section
13 of the FAA dictates that courts must adjudicate the preclusive effect of an
arbitration award that has been confirmed by a court pursuant to Section 9 of the
FAA, such as the 2017 Awards in this case. [Dkt. 22 at 14–17.] The Court has not
identified any Seventh Circuit caselaw squarely addressing this argument. But both
the First Circuit and the Ninth Circuit have rejected the argument that the
confirmation of an earlier arbitration award confers authority upon a federal court to
consider a res judicata defense in subsequent legal proceedings. Emps. Ins. Co. of
Wausau v. OneBeacon Am. Ins. Co., 744 F.3d 25, 28–29 (1st Cir. 2014) (reasoning that
because a federal judgment confirming an arbitration award “does not address the
steps leading to the decision on the merits,” there is “no reason why that [judgment]
should give the federal court the exclusive power to determine the preclusive effect of
the arbitration”); Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1133–34
(9th Cir. 2000) (reasoning that the policy underlying vesting district courts with
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authority to determine the claim–preclusive effect of their own judgments “is not
served . . . when the district court merely confirmed the decision issued by another
entity, the arbitrator, and was not uniquely qualified to ascertain [the] scope and
preclusive effect” of that decision). Given these holdings, together with the lack of any
caselaw citation to the contrary, the fact that the 2017 Arbitrations were
subsequently confirmed by a court does not warrant “deviat[ing] [ ] from the general
rule that the preclusive effect of a prior arbitration is an arbitrable issue.” Emps. Ins.
Co. of Wausau, 744 F.3d at 29; Emps. Ins. of Wausau v. Cont’l Cas. Co., 2016 WL
632642, at *2–3 (W.D. Wis. Feb. 17, 2016) (rejecting the argument that the court was
the proper forum to decide if CNA was improperly “rebilling” plaintiffs in violation of
a court confirmed arbitration decision.)
The Reinsurers’ final argument is that “[a]t the time the agreements at issue
were entered into, the established law did not hold that the preclusive effect of a
federal judgment was for arbitrators to decide.” [Dkt. 22 at 13.] But the cases the
Reinsurers cite fail to support this assertion. They either do not consider the question
of whether courts or an arbitrator should decide the preclusive effect of a prior
arbitration award on subsequent arbitrations, see, e.g., Brown v. Bridgeport Rolling
Mills Co., 245 F. Supp. 41 (D. Conn. 1965) (considering the preclusive effect of a court
judgment that had denied a motion to vacate an arbitration award); or are irrelevant
because arbitration was not an option in the subsequent proceedings, see, e.g.,
Allessandrini v. Am. Fed’n of Musicians of the U.S. and Can., 439 F.2d 699 (2d Cir.
1971) (considering the preclusive effect of a prior arbitration on subsequent court
litigation).
The Court agrees with CNA that the preclusive effect of the 2017 Awards on
the current proceedings or on future arbitrations is within the scope of the arbitration
clauses. An arbitrator must decide what, if any, effect the prior awards have on the
parties’ disputes. Accordingly, CNA’s motion to compel arbitration is granted.
Stay Claim or Dismiss
Having granted the motion to compel arbitration, the remaining issue is
whether the Court should dismiss or stay the action. [Dkts. 4, 5, 16, 21, 22.]4 The FAA
instructs that once a court is satisfied that an issue is arbitrable, it “shall on
application of one of the parties stay the trial of the action until such arbitration has
been had in accordance with the terms of the agreement.” 9 U.S.C. § 3. For this
reason, the Seventh Circuit generally counsels to “stay the proceedings rather than
to dismiss outright.” Halim v. Great Gatsby’s Auction Gallery, Inc., 516 F.3d 557, 561
(7th Cir. 2008) (citations omitted). But where the entire dispute clearly will be
decided in arbitration, there is no reason to hold on to the case. Johnson v. Orkin,
The Reinsurers do not urge the Court to stay this action in the event it granted the
motion to compel arbitration. [Dkt. 22.]
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LLC, 928 F. Supp. 2d 989, 1008–09 (N.D. Ill. Mar. 6, 2013) (describing “a judiciallycreated exception to the general rule which indicates district courts may, in their
discretion dismiss an action rather than stay it where it is clear the entire controversy
between the parties will be resolved by arbitration”) (quoting Green v. SuperShuttle
Int’l, Inc., 653 F.3d 766, 769–70 (8th Cir. 2011))). Although the Seventh Circuit has
not outright approved of this approach, it has repeatedly affirmed dismissals where
all claims are arbitrable. See, e.g., Wallace v. Grubhub Holdings Inc., 2019 WL
1399986, at *6 (N.D. Ill. Mar. 28, 2019), aff’d, 970 F.3d 798 (7th. Cir. 2020); Johnson,
928 F. Supp. 2d at 1008, aff'’d, 556 F. App’x 543 (7th Cir. 2014); Baumann v. Finish
Line, Inc., 2009 WL 2750094, at *3 (S.D. Ind. Aug. 26, 2009), aff’d, 421 F. App’x 632
(7th Cir. 2011).
Here, the amended complaint seeks a declaratory judgment and injunctive
relief with respect to the parties’ respective rights and obligations under the Final
Awards and Judgments. [Dkt. 20.] Because the Court has concluded that all the
claims are subject to arbitration, there is no matter “for the court to decide unless and
until a party seeks confirmation of or challenges the arbitrators’ award.” Employers
Ins. of Wausau, 2016 WL 632642, at *3. Under the circumstances, a dismissal without
prejudice, rather than a stay, is warranted.
Conclusion
For the reason stated above, Plaintiffs National Casualty and Nationwide’s
motion to stay arbitration [Dkt. 4] is denied, and Defendant CNA’s motion to compel
arbitration and motion to dismiss is granted. [Dkt. 16.] The matter is dismissed
without prejudice.
Enter: 23 CV 3143
Date: November 15, 2023
__________________________________________
Lindsay C. Jenkins
United States District Judge
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