## Facts

- Sphere Drake, a London reinsurer, authorized Euro International Underwriting (EIU) to bind it to reinsurance contracts subject to an annual aggregate cap on risk.
- EIU purported to bind Sphere Drake to reinsure seven policies written by All American, documented by short-form “slip” policies retained by All American.
- Sphere Drake asserted EIU exceeded its cap and that All American (or its agents) knew of the limitation, so EIU lacked authority to bind Sphere Drake.
- A representative slip (covering workers’ compensation excess-of-loss risks written for Unicare) stated it would be governed by Illinois law “under the jurisdiction of the courts of the state of Illinois.”
- The slip also stated “in all other respects to follow the original contract in every respect,” which All American argued incorporated the underlying policy’s arbitration clause.
- Sphere Drake sued for a declaration that it was not bound to arbitrate and contested the validity of the purported reinsurance; All American moved to compel arbitration.

## Issues

1. Whether the slip’s “follow the original” language clearly incorporated an arbitration clause from the underlying policy into the reinsurance contract.
2. Whether the parties clearly and unmistakably delegated the question of arbitrability to arbitrators.
3. Whether a non-frivolous dispute that EIU lacked authority to bind Sphere Drake requires a court to decide if any arbitration agreement exists.

## Decision

- The Seventh Circuit affirmed the denial of All American’s motion to compel arbitration.
- The slip did not clearly incorporate the underlying policy’s arbitration clause; general “follow the original” wording was insufficient to create an arbitration agreement.
- The question of arbitrability remained for the court because there was no clear and unmistakable delegation to arbitrators.
- Where contract formation is challenged based on an agent’s lack of authority (and alleged knowledge by the counterparty), a court must decide whether a contract and arbitration agreement exist.

## Legal Principles

- Arbitration is consensual; a party cannot be required to arbitrate absent a contractual agreement to arbitrate.
- Incorporation of an arbitration clause by reference must be clear; generalized “follow the original” language in a reinsurance slip does not, by itself, import dispute-resolution procedures from the underlying policy.
- A forum/jurisdiction clause selecting courts tends to weigh against implying arbitration absent specific language resolving the tension.
- Delegation of arbitrability to arbitrators requires “clear and unmistakable” evidence of such an agreement, and presupposes that the parties are bound by an arbitration provision.
- Challenges going to contract formation—such as whether an agent had authority to bind the principal—are for judicial determination when the challenge is non-frivolous.

## Conclusion

The court held that All American could not compel arbitration because the reinsurance slip did not clearly incorporate the underlying policy’s arbitration clause, and because a genuine dispute over the agent’s authority required a court to decide whether any arbitration agreement existed.


Sphere Drake Ins. Ltd. v. All Am. Ins. Co., 256 F.3d 587 (7th Cir. 2001)