1997 WL 1134980 (W.D.Wis.,1997)

EMPLOYERS INSURANCE OF WAUSAU, a Mutual Company, Plaintiff,

v.

CERTAIN LONDON MARKET COMPANIES; Certain Underwriters at Lloyd's, London; Equitas Reinsurance Limited; Equitas Limited; Equitas Holdings Limited; Robin A.G. Jackson and Does 1 Through 500, Inclusive, Defendants.

No. 97-C-0409-C.

Oct. 27, 1997.

Jeffrey Kassel, Lafollette & Sinykin, Madison, WI, for Employers Insurance of Wausau, Plaintiff(s).

James A. Higgins, Attorney at Law, Wausau, WI, for Certain London Market Companies, Certain Underwriters at Lloyd's, Jackson, Robin A.G., Defendant(s).

Rafael Raffaelli, Law Offices of Jorge W. Moreira, New York, NY, for Banco De Seguros Del Estado, Defendant(s).

Robert A. Knuti, Lord, Bissell & Brook, Chicago, IL, for Equitas Holding Limited, Equitas Reinsurance Limited, Equitas Limited, Assicurazioni Generali, Dai-Tokyo Fire & Marine Ins. UK, Dai-Tokyo Fire & Marine Ins. Japan, Drake Insurance Company, Excess Insurance Company Limited, Instituto Deresseguros Do Brasil, Mille Reasurans/Turk Anonim Sirk, Nichido Fire & Marine Ins.Co.Ltd, Sentry Insurance, Turegum Insurance Company, Compagnie Transc. De Reassurance, Thomas W. Terwilliger, Wausau, WI, for La Paix & Abeille Reassurances, AXA Reassurance S.A., Christine Olsen, Olsen Law Office, Wausau, WI, for London Reinsurers, Defendant(s).

Neil R. Novak, Brand & Novak, Ltd., Chicago, IL, for Yasuda Fire & Marine Insurance, Yasuda Fire and Marine Insurance, Defendant(s).

George Lock, Mendes & Mount, New York NY, for Overseas Union Insurance, Limite, Defendant(s).

OPINION AND ORDER

CRABB, J.

*1 This is a civil action brought by plaintiff Employers Insurance of Wausau to recover payments it contends are due it under the terms of certain reinsurance treaties acquired at Lloyd's of London. The issue now presented is whether defendants Equitas Limited, Equitas Holdings Limited and Equitas Reinsurance Limited are bound by forum selection clauses included in the treaties. According to Lloyd's of London's chief executive officer, defendant Equitas Limited and its related companies were formed to "provide affordable 'finality" ' to Lloyd's members who had become "trapped" by mounting losses arising out of reinsurance policies that the members had underwritten, such as plaintiff's treaties. By taking on the obligations imposed by the policies, Equitas provided relief to the members, who are known as Names. Applying the rule that a non-party to a forum selection clause may be bound to the clause if the party is closely related to the dispute, I find that Equitas became bound by the forum selection clauses when it accepted the other obligations of the reinsurance policies. Pursuant to these otherwise valid forum selection clauses, personal jurisdiction may be asserted over Equitas.

Plaintiff Employers Insurance of Wausau filed this action initially in the Circuit Court for Marathon County, Wisconsin on December 30, 1996. Included as defendants were the Names who underwrote the subject reinsurance treaties with Plaintiff and various other companies involved with the underwriting of these treaties at Lloyd's. One of these other companies, Banco de Seguros del Estado, removed the case to this court pursuant to 28 U.S.C. 1441(d) and simultaneously moved to enlarge the time in which to effect removal for cause shown, pursuant to §§ 1441(d) and 1446. The motion was granted on August 22, 1997.

The personal jurisdiction issue was raised originally by Equitas in the state circuit court, but not decided there before removal took place. Because the parties have labeled the issue a matter of "personal jurisdiction," I shall treat Equitas's motion as a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(2). Although there is authority suggesting that issues concerning the validity of forum selection clauses are properly considered as matters of venue under Rule 12(b)(3), see Frietsch v. Refco, Inc., 56 F.3d 825, 830 (7th Cir.1995), the key requirement when assessing a forum selection clause is that the issue be raised at the earliest possible opportunity. It was. See id.; see also Fed.R.Civ.P. 12(h)(1).

This jurisdictional determination will rest on the written materials and affidavits submitted by the parties. See Nelson v. Park Indus., Inc., 717 F.2d 1120, 1123 (7th Cir.1983). Plaintiff and Equitas have furnished affidavits of persons who reportedly have expert knowledge concerning the relationship between Equitas and the Names. Additionally, the parties have provided copies of the original treaties between plaintiff and the defendant Names; the "Settlement Offer" for "Reconstruction & Renewal" made by Lloyd's to the Names that led to the formation of Equitas; and the resulting "Reinsurance and Run-Off Contract" between Equitas and the Names. The pleadings and certain requests for admissions served on Equitas by plaintiff provide other facts. In addition, as sources of background facts, the parties have referred to treatises and various court decisions involving Lloyd's, the Names and Equitas. I have culled facts from these materials and categorized those that are undisputed into "background facts," which are set out only as an aid to the reader, and "findings of fact," which are material to this jurisdictional dispute.

BACKGROUND FACTS

*2 This case concerns reinsurance, which is simply insurance for insurers. With it, a primary insurer, such as plaintiff, can discharge some of the risks it faces as a result of issuing insurance. In exchange for a premium, the reinsurer agrees to reimburse the primary insurer for some of the claims that might be made against the primary insurer. There are two basic types of reinsurance, "faculative" and "treaty." Generally, under treaty reinsurance, such as that between plaintiff and the Names, the reinsurer accepts a class of the primary insurer's risk for some portion of the primary insurer's premiums.

Lloyd's is a unique reinsurer because it is organized around individuals, the Names, rather than some type of corporate, limited liability business form. The hallmark of reinsurance obtained at Lloyd's is that it is backed by the personal assets of the Names, who underwrite the policy, as the phrase goes, "down to their last cufflinks." There are tens of thousands of Names; most are British subjects, but a significant number are United States citizens. To become a Name, a person must pledge some of his or her personal assets as security and sign a membership agreement with Lloyd's. Although the Names personally back the policies they underwrite, they organize into syndicates that perform collectively many of the administrative tasks of underwriting and servicing reinsurance policies. Further, the Names have agents that handle the technical aspects of brokerage and risk and premium estimation. In reality, Lloyd's is a marketplace at which Names form syndicates that offer reinsurance. The British Parliament has established a central authority to oversee the market and a central fund has been created to protect the reinsurance purchaser in the event that a Name defaults.

In addition to underwriting policies for outsiders, syndicates bundle the risks underwritten by other syndicates over an accounting year, in effect reinsuring other syndicates. At the end of a period, the profits, losses and estimated outstanding liabilities of a syndicate are determined and the outstanding liability is reinsured by another syndicate. Through this process, a syndicate can effectively close its books. The success of this process hinges on the ability to estimate the syndicate's outstanding liability; if the estimate cannot be made, then each Name within that syndicate remains liable on a proportionate share of the risk.

Increasing claims by primary insurers in the late 1980s and early 1990s, stemming from natural disasters, pollution abatement efforts and product liability suits, caused a significant problem at Lloyd's. The payments to primary insurers began to outpace the premiums collected by Names; one estimate placed the losses under pre-1993 policies at over $20 billion. Names accused their agents of negligently and even fraudulently estimating risks and general mismanagement. Some Names refused to pay claims made against them and others defaulted on their liabilities to Lloyd's central fund. Extensive litigation ensued.

FINDINGS OF FACT

*3 The mounting financial problems at Lloyd's stimulated an effort to restore the market's integrity and to draft a restructuring plan that was completed in 1996. At the heart of this plan was the formation of Equitas. The restructuring provided the Names with the ability to consolidate and close out all of their pre-1993 obligations by entering into a comprehensive "Reinsurance and Run-Off contract" with Equitas. To sign on to the plan, the Names were required to drop their claims against their agents and the central fund. In exchange, the Names received a monetary settlement and a commitment from Equitas to reinsure and manage the Names' pre-1993 obligations (with certain exceptions not relevant to this dispute). Lloyd's' chief executive officer summarized the plan as being "designed to settle the litigation affecting the Lloyd's market and to provide affordable 'finality' to the many Names trapped on open years of account."

Equitas's agreement to accept the Names' obligations is memorialized in the Reinsurance and Run-Off Contract, which provides, in a section captioned "Scope of reinsurance obligation:"

3.1 ERL shall, in consideration of:

(a) the obligation to transfer the Segregated Account Assets held in respect of each and every Syndicate;

(b) the obligation of the Names to pay their Names's Premiums;

...

reinsure and indemnify each and every Syndicate and each Closed Year Syndicate.

...

3.2 The reinsurance and indemnity obligation of ERL shall be to indemnify without limitation in time and amount ... each Syndicate and each Closed Year Syndicate from and including the Effective Date, by way of reinsurance, in respect of all liabilities, losses, claims, returns, reinsurance premiums, costs and other liabilities including extra-contractual obligations or punitive or penal damages arising in relation to the Syndicate 1992 and Prior Business of the Syndicate of Closed Year Syndicate....

The term "ERL" in the provisions refers to defendant Equitas Reinsurance Limited. The settlement between the Names and Lloyd's gave Equitas significant authority to address the Names' pre-1993 obligations. Section 9.2 of the Reinsurance and Run-Off Contract, which is captioned "Powers of ERL," provides that "ERL will assume exclusive and irrevocable responsibility for the Run-off of the Syndicate 1992 and Prior Business of each Syndicate and each Closed Year Syndicate." Moreover, pursuant to § 9.2(a), ERL has the power to "adjust, handle, agree, settle, pay, compromise or repudiate any Claim, return premium, reinsurance premium or any other insurance or reinsurance liability on behalf of the Syndicate or Closed Year Syndicate." Under § 9.2(d), ERL assumes the power to "commence, conduct, pursue, prosecute, settle, appeal or compromise any Legal Proceedings on behalf of the Syndicate or Closed Year Syndicate or any Name or to defend any such proceedings taken out against the Syndicate or Closed Year Syndicate or any Name or Closed Year Name...."

*4 Nonetheless, because the Reinsurance and Run-Off Contract was intended to compromise disputes between the Names and Lloyd's, § 3.7 states that "this Agreement is not intended to and does not create any obligations to, or confer any rights upon, Insurance Creditors or any other persons not parties to the Agreement." Also, in § 25.1, the Names and Lloyd's agree that the contract will be interpreted according to English law and that the High Court of England and Wales will be the exclusive forum for litigating disputes arising out of the contract.

Plaintiff's treaties fall within the class of pre-1993 obligations that were the subject of the Names' agreement with Equitas. In the mid-1970s, plaintiff entered into several treaties with various Names; the actual number of treaties that are involved is a disputed issue. Also, plaintiff has not yet identified all the Names that are involved, listing many simply as "Does" on the complaint. Nonetheless, it is settled that plaintiff's treaties contain forum selection clauses that provide that the signatory Names "will submit to the jurisdiction of any court of competent jurisdiction within the United States." A related provision in plaintiff's treaties states that "all matters arising hereunder shall be determined in accordance with the law and practice of such Court [that is the selected forum]." These clauses were an important feature of plaintiff's treaties (and other reinsurance policies offered at Lloyd's) because the clause made the reinsurance more attractive to plaintiff, as they would to any other American insurer. The clauses protect such insurers from the costs and risks of litigating disputes in a distant forum.

OPINION

Before turning to the arguments, I will outline the legal issues on which the parties agree. They do not dispute how these forum selection clauses affect the Names and how the clauses might affect Equitas; the clauses provide the court with jurisdiction over anyone bound by them. Moreover, there is no dispute concerning the validity of the clauses; for example, Equitas does not allege that the inclusion of the clauses resulted from unfair bargaining. Cf. Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 590 (1991)("[W]e do not address the question whether respondents had sufficient notice of the forum clause before entering the contract").

With these matters out of the way, the arguments regarding whether the clauses run against Equitas may be explored. Plaintiff frames its theory in this manner. It believes that the Reinsurance and Run-Off Contract between Equitas and the Names is much more than a typical reinsurance contract under which Equitas would have accepted some of the risk embodied in the reinsurance polices that were underwritten before 1993, thereby agreeing to reimburse the Names for the losses the Names would face from those policies. Instead, plaintiff contends, Equitas has taken control over all aspects of the Names' pre-1993 obligations, including, with respect to plaintiff's treaties, the obligation to submit to jurisdiction in the United States. Indeed, plaintiff characterizes the agreement between Equitas and the Names not as a reinsurance contract, as Equitas and the Names have labeled it, but rather as an "assumption agreement." As factual support for this theory, plaintiff notes that the Names granted Equitas exclusive power to address the pre-1993 obligations, particularly the power to litigate any claims related to the obligations. Further, plaintiff points to the recent history surrounding the crisis at Lloyd's and how Equitas was created specifically to provide the Names with "finality" in respect to pre-1993 obligations. Because Equitas has intentionally positioned itself between the Names and those holding pre-1993 policies, plaintiff requests that the court interpret the agreement by its substance, not its label, and find that jurisdiction exists over Equitas in the same manner it exists over defendant Names.

*5 Equitas responds that the Reinsurance and Run-Off Contract is a typical reinsurance contract, "albeit a highly complex one." In support, Equitas points to a Minnesota state district court decision holding the Reinsurance and Run-Off Contract a "reinsurance contract" on the basis of the repeated use of the terms "reinsurance" and "resurance obligations." See First State Ins. Co. v. Minnesota Mining & Manufacturing Co., No. C3-94-12780, slip op. at 5-6 (Ramsey Co., Minn., District Court, May 1, 1997). Further, Equitas contends that its agreement with the Names was made at arm's length and notes that the parties included a provision in which they agreed that the contract would not provide any "rights" to third parties, such as plaintiff. Equitas adds that its agreement with the Names is subject to English law and thus, even without this provision, plaintiff could not receive the right to litigate in the United States because under English law, benefits cannot be bestowed upon third parties to a contract without a "novation." Finally, with respect to Equitas's power to manage and control litigation, Equitas explains that there is "nothing unusual about it." Equitas states that such delegation of authority is a practical necessity that "has long been vital to the operation of the Lloyd's insurance market." Because each insurer who purchases reinsurance at Lloyd's actually contracts with many Names, the authority of each Name to handle matters associated with his or her obligation must be centralized.

As this summary shows, the parties have directed their arguments at the agreement between Equitas and the Names and at the possibility that this agreement somehow binds Equitas to litigate in the United States. Accordingly, most of the case law cited by the parties addresses the interpretation of reinsurance contracts. However, the most direct source of jurisdiction over Equitas is the forum selection clauses within plaintiff's treaties, not the later formed agreement between the Names and Equitas. Determining whether jurisdiction exists over Equitas involves the law concerning forum selection clauses, not the law of reinsurance.

The analysis of these forum selection clauses must begin with a determination of what law should be used to measure them. The briefs are not helpful in this regard. The only choice of law matter expressly raised is Equitas's contention that its contract with the Names must be evaluated under English law. Plaintiff's treaties contain a clause that holds that Wisconsin law should apply because it is the forum selected by plaintiff. However, reliance on this choice of law provision would be putting the cart before the horse until it is decided whether Equitas is bound by the various provisions within plaintiff's treaties. Although the parties' arguments are not aimed directly at the forum selection clauses, the parties cite Wisconsin authority primarily in the arguments that they do advance. Their choice to rely on Wisconsin law implies their agreement that Wisconsin law should govern the question presented in this case (unless that requires interpretation of Equitas's agreement with the Names). See Casio, Inc. v. S.M. & R. Co., Inc., 755 F.2d 528, 531 (7th Cir.1985) ("Parties can within broad limits stipulate the substantive law to be applied to their dispute"). Therefore, I will apply Wisconsin law.

*6 The Wisconsin courts have had few opportunities to examine forum selection clauses. As general matter, the state courts hold such clauses "enforceable unless the contract provision is substantively unreasonable in view of the bargaining power of the parties." See Leasefirst v. Hartford Rexall Drugs, 168 Wis.2d 83, 88, 483 N.W.2d 585, 587 (Ct.App.1992). This principle is similar to that advanced by the Supreme Court in the seminal case of The Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972), in which the Court explained that "[t]here are compelling reasons why a freely negotiated private international agreement, unaffected by fraud, undue influence, or overweening bargaining power, ... should be given full effect." See id. at 12-13 (footnote omitted); see also Leasefirst, 168 Wis.2d at 90, 483 N.W.2d at 588 (citing The Bremen ).

Although Wisconsin appears to follow the generally accepted principles of forum selection clauses applied in the federal courts, no Wisconsin decisions yield an answer to the question in this case. However, some federal courts have engaged in an analysis that provides guidance. In Hugel v. Corporation of Lloyd's, 999 F.2d 206, 209 (7th Cir.1993), the court of appeals applied the rule that a "non-party to a forum selection clause" may be bound to the clause when the non-party is "closely related to the dispute such that it becomes foreseeable that it will be bound." See id. at 209 (citing Mannetti-Farrow, Inc. v. Gucci America, Inc., 858 F.2d 509, 514 n. 5 (9th Cir1988) and Coastal Steel Corp. v. Tilghman Wheelabrator, Ltd., 709 F.2d 190, 203 (3d Cir.1983)); see also Baker v. LeBoeuf, Lamb, Leiby & Macrae, 105 F.3d 1102, 1105-06 (6th Cir.1997) and In re Lloyd's American Trust Fund Litigation, 954 F.Supp. 656, 669-70 (S.D.N.Y.1997) (both applying the Hugel approach). The rule's acceptance in five jurisdictions suggests that the Wisconsin courts would recognize its validity as well. It requires the factfinder to examine the relationship between the parties expressly bound by the clause and the non-party alleged to be closely related to the dispute and make a factual determination whether the non-party should be bound as well because such a result was foreseeable. See Hugel 999 F.2d at 209-210 (applying clearly erroneous standard to district court's findings)

Although the Hugel approach has adherents, the two guideposts of its analysis, "closely related" and "foreseeability" have been criticized as being "vague" and "not much of a help." See Frietsch v. Refco, Inc., 56 F.3d 825, 827 (7th Cir.1995) (advancing theory that principle of mutuality should guide the Hugel analysis). However, such concerns are not relevant in this case. The Hugel approach has been applied in three cases involving Lloyd's. Collectively, the reasoning of these cases indicates the nature of parties that are closely related to Lloyd's and what may be foreseeable to such parties. These cases put flesh on the approach's bare bones.

*7 In Hugel, an American Name was subjected to discplinary proceedings because of alleged misconduct in his dealings at Lloyd's. After the proceedings were dismissed, the Name and the insurance firms of which he was president sued Lloyd's in the United States, alleging that Lloyd's had breached its agreement to keep the proceedings confidential. Although the district court accepted Lloyd's argument that the Name was bound to the forum selection clause in his Lloyd's membership agreement and that he was required to bring his challenge in England, the Name argued on appeal that the clause did not bind his insurance firms, who were not parties to the membership agreement. See id. at 207-09. The court of appeals rejected the Name's challenge and upheld the district court, which had viewed the Name's ownership of most of the shares of the firm and firm's participatation in the proceedings at Lloyd's as indications that the firms should be bound to the forum selection clause just as the Name was. See id. at 210.

Next, in Baker, 105 F.3d at 1103, the United States counsel for Lloyd's defended a suit brought by a group of American Names. As part of their agreement to join Lloyd's, the Names had consented to granting counsel limited powers of attorney, but the Names alleged that counsel had made mispresentations to the IRS in matters related to their tax treatment and concealed information from them concerning losses they were likely to face in 1988, 1989 and 1990. The defendant counsel moved to dismiss the case because of improper venue, alleging that the dispute was so closely related to the Names' activities at Lloyd's that the Names were required to bring their suit in England. See id. at 1102, 1105-06. However, the appellate court upheld the district court's findings that counsel was not "in a position similar to a Lloyd's entity defendant." The district court had emphasized that counsel was accused of negligently representing the plaintiff Names; thus, the dispute was not related to any action counsel had taken on behalf of Lloyd's. See id. at 1105-06.

Finally, In re Lloyd's, 954 F.Supp. at 656, addresses an argument made by Citibank, the trustee who oversees the funds held on behalf of American Names, that the plaintiff American Names were bound to litigate their claims against the bank in England, not in the United States. The plaintiff Names had accused Citibank of commingling the funds it held in trust for separate syndicates. Citibank argued that the forum selection clause in the Names' membership agreement with Lloyd's bound the Names to file suit in England because the matter was closely related to the Names' dealings with Lloyd's. See id. at 669-70. The district court noted the validity of the analysis in Hugel, but found that it did not apply because Citibank and Lloyd's had no control over each other. Thus, it was not foreseeable to the Names that Citibank would attempt to bind them to the clause. See id. at 670.

*8 These three cases instruct that the closely related guidepost focuses on the power that the party bound to the forum selection clause has over the non-party alleged to be encompassed by the clause as well. In Hugel, Lloyd's alleged that the Name's firms were bound to the clause and the court agreed because the Name owned most of the non-party and the Name had the non-party participate in the dispute. See Hugel, 999 F.2d at 209-10. However, in Baker, although the non-party defendant counsel alleged that it was covered by the forum selection clause, it was found not to be because, in regard to the disputed matters, counsel was not acting as an agent of Lloyd's. See Baker, 105 F.3d at 1106. Likewise, the court in In re Lloyd's rejected Citibank's claim that it was covered by the forum clause because Citibank and Lloyd's did not control each other's affairs. See In re Lloyd's, 954 F.Supp. at 670.

Regarding the foreseeabilty factor, these three cases direct a court to examine whether the party resisting application of the clause should have anticipated its application. In Hugel, the Name should have anticipated that involving his firms in his dealings at Lloyd's might make them subject to the forum selection clause. See Hugel, 999 F.2d at 210. In Baker, the plaintiff Names would not foresee that the clause would be applied in a dispute concerning defendant counsel's actions made on their behalf. See Baker, 105 F.3d at 1106. Finally, because Citibank and Lloyd's did not share authority, the Names suing Citibank in In re Lloyd's would not have anticipated that Citibank would attempt to bind the Names to the forum selection clause. See In Re Lloyd's, 954 F.Supp. at 670.

Applying the Hugel analysis, I agree with plaintiff's basic contention that Equitas is so closely related to its dispute with defendant Names that Equitas should be bound to the forum selection clauses that bind defendant Names. Equitas was formed to represent the interests of the Names and to provide the Names with finality in pre-1993 matters. It must be closely related to defendant Names and the claims against the Names. How could a party not closely related be capable of providing the Names with finality? Adding support for this finding is the fact that Equitas has agreed to indemnify Names for losses arising from disputes, such as those between plaintiff and defendant Names. Last, and most significant to the existence of a close relationship between defendant Names and Equitas, Equitas has assumed control over all litigation relating to disputes over defendant Names' pre-1993 policies. Such a broad grant of authority makes Equitas closely related to the dispute.

Regarding the forseeability phase of the Hugel analysis, I find that when Equitas took control of the Name's pre-1993 obligations and assumed the power to litigate disputes arising out of those obligations, it should have realized it would be bound to these forum selection clauses. Such clauses were an important part of all treaties underwritten at Lloyd's. Equitas should have anticipated that the clauses might affect their efforts to settle matters for the Names. Cf. The Bremen, 407 U.S. at 14 ("There is strong evidence that the forum clause was a vital part of the agreement, and it would be unrealistic to think that the parties did not conduct their negotiations, including fixing the monetary terms, with the consequences of the forum clause figuring prominently in their calculations.") (Footnote omitted).

*9 For these reasons, I find that although Equitas is a non-party to plaintiff's treaties, it is so closely related to the contractual dispute arising out of these treaties that it is bound to the forum selection clauses within those treaties. Pursuant to these otherwise valid forum selection clauses, this court has personal jurisdiction over Equitas and its related companies.

ORDER

IT IS ORDERED that the motion of Equitas Limited, Equitas Reinsurance Limited and Equitas Holdings Limited to dismiss for lack of personal jurisdiction pursuant to Fed.R.Civ.P. 12(b)(2) is DENIED.