A federal district court recently held that a commutation agreement between a retrocessionaire and a reinsurer constituted the entire agreement between the parties and that the commutation agreement precluded arbitration of a dispute concerning cessions that occurred before the commutation. Continental Cas. Co., v. LaSalle Re Ltd., No. 07-C- 4228, 2007 WL 2765797 (N.D. Ill. Sept. 21, 2007).

A reinsurer and retrocessionaire entered into several reinsurance agreements that contained arbitration provisions. Subsequently, the parties entered into a commutation agreement that purported to fully and finally terminate their obligations under the reinsurance agreements. The commutation agreement did not contain an arbitration provision.

After execution of the commutation agreement, the reinsurer sought to collect amounts from the retrocessionaire for the retrocessionaire’s share of claims that the reinsurer had paid to a cedent. The retrocessionaire refused to pay, contending that it had no retrocession obligation based on the commutation agreement.

The reinsurer argued that the retrocessionaire was obligated to pay these claims because these claims had been reported by the cedent to the retrocessionaire prior to the commutation agreement. The reinsurer contended that it merely fronted reinsurance to the cedent and that an intermediary directly reported the cedent’s claims to the retrocessionaire for payment. Because of this fronting program, the reinsurer was unaware of these claims when the commutation agreement was executed.

The reinsurer demanded arbitration with the retrocessionaire to settle the dispute. In turn, the retrocessionaire filed a declaratory judgment action in federal court claiming that the commutation agreement extinguished all of its obligations under the retrocession agreement, including its duty to arbitrate.

The commutation agreement stated, in part, that the parties “fully and finally settle, commute and extinguish all their respective past, present, and future obligations and liabilities, known and unknown, fixed and contingent . . . arising out of . . . the Reinsurance Agreements.” The agreement further stated that it “sets forth the entire agreement between the Parties with respect to the subject matter hereof and supersedes all prior agreements” between the parties.

Ruling in favor of the retrocessionaire, the court stated that “it would be difficult to envision a more clear statement of the parties’ intent to extinguish their obligations under the Retrocession Agreement.”

The reinsurer also argued that the retrocessionaire was challenging the validity of the retrocession agreement itself and that such a dispute had to be arbitrated pursuant to the terms of the retrocession agreement. The court rejected this argument, reasoning that the subsequent commutation agreement terminated the prior retrocession agreement.