Sphere Drake Insurance v. American General Life Insurance

In the
United States Court of Appeals
For the Seventh Circuit
____________

No. 03-3750
SPHERE DRAKE INSURANCE LIMITED, also
known as ODYSSEY, formerly known
as ODYSSEY Re (London) Limited,
Plaintiff-Appellee,
v.

AMERICAN GENERAL LIFE INSURANCE COMPANY,
formerly known as ALL AMERICAN LIFE
INSURANCE COMPANY,
Defendant-Appellant.

____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 99 C 4573—William T. Hart, Judge.
____________
ARGUED APRIL 1, 2004—DECIDED JULY 16, 2004
____________

Before FLAUM, Chief Judge, and COFFEY and EVANS,
Circuit Judges.
EVANS, Circuit Judge. This multimillion dollar dispute
concerns the validity of a reinsurance contract between All
2 No. 03-3750

American and Sphere Drake.1 Sphere Drake argues that its
broker, Euro International Underwriting (EIU), lacked
either actual or apparent authority to bind Sphere Drake to
the reinsurance policy. The company contends that EIU had
the authority to represent Sphere Drake only up to a
certain dollar amount, a limit EIU exceeded when it entered
the reinsurance contract with All American. Thus, Sphere
Drake argues, the policy is void. All American, in contrast,
contends that the contract is valid and enforceable.
The larger underlying controversy between these parties
regards Sphere Drake’s refusal to pay tens of millions of
dollars in coverage All American contends it is owed under
seven reinsurance contracts, including the one at issue
here, referred to as the Unicare retrocession. Sphere Drake
agreed to arbitrate the six non-Unicare contracts, and the
arbitrators concluded that Sphere Drake was not bound
because EIU lacked actual or apparent authority to enter
into the contracts. All American, not liking the arbitration
results, then filed suit in federal court. The district court set
aside the arbitration decision on the grounds that one of the
arbitrators displayed “evident partiality,” a decision we
reversed in what, chronologically, was the second time this
conflict reached our door. Sphere Drake Ins. Ltd. v. All Am.
Life Ins. Co., 307 F.3d 617, 620 (7th Cir. 2002) (Sphere
Drake II).
While agreeing to arbitrate the six non-Unicare cases,
Sphere Drake filed suit in the Northern District of Illinois
seeking a declaratory judgment that it was not required to
arbitrate the Unicare dispute, insisting that the retroces-

1
During the course of the life of this case, both Sphere Drake and
All American have gone through various name changes. For
example, in 2002, All American merged into American General
Life Insurance Company. We will refer to both parties as “Sphere
Drake” and “All American,” respectively, however, regardless of
the time period at issue.
No. 03-3750 3

sion did not contain an enforceable arbitration provision.
The district court ruled in Sphere Drake’s favor. On appeal
(the first time this dispute reached us), we ruled that the
retrocession did contain an arbitration clause. Sphere Drake
Ins. Ltd. v. All Am. Ins. Co., 256 F.3d 587, 589 (7th Cir.
2001) (Sphere Drake I). Significant for our purposes here,
however, we noted that whether there is a contract in the
first place is a matter for the courts, not an arbitrator, to
decide. Id. at 591. Thus, we held, “Sphere Drake may be
required to arbitrate if and only if EIU had authority to
bind it to these reinsurance contracts.” Id. at 592. Accord-
ingly, we remanded with instructions for the district court
to “resolve the parties’ only real dispute: the extent of
EIU’s authority.” Id.
On remand, Sphere Drake filed a consolidated amended
complaint for declaratory judgment. It sought a declaration
that the Unicare retrocession was void ad initio on two
grounds: (1) EIU had written the contract in breach of
an express limit on the amount of premium EIU was au-
thorized to accept; and (2) the Unicare retrocession was
written in furtherance of a conspiracy between EIU and
Stirling Cooke (the broker that placed the contract on All
American’s behalf) and was therefore an act in breach of the
fiduciary duties EIU owed to Sphere Drake. The district
court bifurcated these issues. 221 F. Supp. 2d 874 (N.D. Ill.
2002). The effect is that only Sphere Drake’s “excess author-
ity” claim is involved in this litigation. The “fiduciary duty
claim” will be resolved in a separate arbitration if Sphere
Drake loses on its excess authority claim. Id. at 878, 880.
Both parties filed cross-motions for summary judgment
with respect to whether EIU exceeded its authority. The
district court granted summary judgment in Sphere Drake’s
favor and denied All American’s cross-motion, holding that
EIU overstepped its authority in writing the Unicare
retrocession and that Stirling Cooke knew EIU lacked
authority to write the risk. Accordingly, the court held, EIU
4 No. 03-3750

lacked actual and apparent authority to bind Sphere Drake
to the Unicare retrocession. 300 F. Supp. 2d 606, 617-22
(N.D. Ill. 2003). The court also rejected All American’s
affirmative defenses of ratification, waiver, and estoppel, id.
at 622-29. Thus, it held the Unicare retrocession void ab
initio. All American appeals. We review de novo the district
court’s grant of summary judgment to Sphere Drake.
Sphere Drake is an insurance company that underwrites
reinsurance protection for other insurance companies,
known as retrocessional coverage.2 In January 1997, Sphere
Drake negotiated with John Whitcombe, who was in the
process of establishing EIU, regarding EIU underwriting
business for Sphere Drake. The business plan the parties
agreed to stated that “EIU will undertake to achieve the
following gross premium forecasts: £10 million for year 1
[1997], £14 million for year 2 [1998], £20 million for year 3
[1999].”
The agreement was formalized under a binding authority
which authorized EIU to enter into certain types of insur-
ance and reinsurance contracts on Sphere Drake’s behalf.
The binding authority, however, limited the amount of
gross estimated premium income that EIU was authorized
to write. It provided that the “initial Estimated Gross
Premium” was not to exceed £2 million (the equivalent of $4
million pursuant to a $2 to £1 conversion rate set forth in
the binding authority) (for convenience purposes, we will
refer to the dollar, not pound, value throughout the balance
of this opinion). The binding authority also specifically
stated that the premium estimate would be “increased by
mutual agreement.”

2
As the Supreme Court has noted, “[i]nsurers who sell reinsur-
ance themselves often purchase insurance to cover part of the risk
they assume from the primary insurer; such ‘retrocessional
reinsurance’ does for reinsurers what reinsurance does for pri-
mary insurers.” Hartford Fire Ins. Co. v. California, 509 U.S. 764,
773 (1993).
No. 03-3750 5

EIU, on March 3, 1997, requested an increase in the an-
nual premium limit to $7 million. Sphere Drake authorized
the increase, including business already written. On
December 29, 1997, in response to another request from
EIU, Sphere Drake increased the 1997 premium limit to
$12 million.
On February 2, 1998, EIU submitted a proposal to in-
crease the premium limit for 1998 to $15 million. Sphere
Drake rejected this figure. On February 26, 1998, EIU
again sought an increase and proposed a limit of $16 mil-
lion. Sphere Drake again refused the proposed increase.
Not to be deterred, in April and May 1998, EIU again
tried to increase the premium limit. Vic Broad, Sphere
Drake’s underwriter in charge of the binding authority,
denied the request and advised Whitcombe that he could
not increase the limit without the approval of Michael
Watson, Sphere Drake’s CEO. On June 3, 1998, Whitcombe
met with Watson and expressed a desire that EIU be
permitted to write more premium, stating that he was
dissatisfied with the fact that increases had to occur on a
piecemeal basis.
Watson informed Whitcombe that Broad would handle the
decision with respect to any request for an increase. At a
trial in the United Kingdom,3 Watson testified about the

3
In 2000, Sphere Drake filed suit against EIU, Stirling
Cooke, and others, but not including All American, in the United
Kingdom alleging that the contracts EIU bound were the product
of fraud. After a year-long trial, the English Commercial Court
held that Stirling Cooke had, beyond a reasonable doubt, dis-
honestly assisted EIU in breaching EIU’s fiduciary duties to
Sphere Drake. Sphere Drake Ins. Ltd. v Euro Int’l Underwriting
Ltd., 2003 WL 21729222 (Q.B. July 8, 2003).
Before the district court, Sphere Drake sought to bar All
(continued...)
6 No. 03-3750

meeting, “I was certainly aware that [Whitcombe] wanted
to increase—he wanted more capacity but no formal request
or even informal request was made as far as I was con-
cerned.” After the June 3 meeting, according to Watson, the
matter of Whitcombe’s desired increase “remained out-
standing.” At the same trial, Whitcombe stated that he be-
lieved Watson had agreed “in principle” to give him the
authority to write up to $20 million in premium incomes.
Whitcombe admitted, however, that he understood that any
premium increase had to be first addressed with Broad.
Six days after the meeting, Whitcombe wrote to Watson:
It is my understanding that controlled expansion to a
level of premium income in the region of $20,000,000
for 1998 would not alarm you and would certainly af-
ford me a sound basis on which to plan events.
I am aware that you will be discussing our conversa-
tion with Vic Broad with a view to settling your own
plans and wishes for the future. I will await his in-
structions.

3
(...continued)
American from introducing the UK trial transcript on the ground
that the trial testimony was inadmissable hearsay. The district
court denied Sphere Drake’s motion. Citing our decision in
Stinnett v. Iron Works Gym/Executive Health Spa, Inc., 301
F.3d 610, 613 (7th Cir. 2002), the district court held that “[p]rior
testimony under oath, whether at a deposition, hearing, or trial,
that is based on personal knowledge may be considered on sum-
mary judgment because the person is likely to provide the same
testimony if called to testify at trial. It is well settled that tes-
timony given at the trial of a different case may be considered
on summary judgment.” In a footnote of its respondent’s brief,
Sphere Drake contends that the district court erred. For reasons
that will be clear, this testimony does not impact the outcome of
our decision, and it is therefore not necessary for us to evaluate
Sphere Drake’s contention.
No. 03-3750 7

Watson responded on June 17, writing that he had asked
Broad to address the “relevant underwriting issues” but
that Whitcombe should “continue on a ‘business as usual’
basis.” Watson was “absolutely unaware of anything ap-
proving an increase.”
During this time, EIU continued to underwrite contracts
for Sphere Drake. In 1998, prior to writing the Unicare
retrocession, EIU accepted 24 contracts totaling
$14,406,427 in gross estimated premiums. With the ex-
ception of a single contract (for which the estimated pre-
mium was $81,818), the purchase of all of the 1998 risks
EIU accepted under the binding authority was brokered
through two affiliated reinsurance intermediaries, Stirling
Cooke Brown Insurance Brokers Limited and Stirling Cooke
Brown Reinsurance Brokers Limited (collectively, Stirling
Cooke), the same company that brokered the Unicare
retrocession.
In dealing with EIU, Jeffery Butler, the Stirling Cooke
broker who placed the Unicare retrocession, Butler’s as-
sistant Adrian Mortley, and Richard Wells, Stirling Cooke’s
compliance officer, admitted that in 1997 they received a
copy of the binding authority. Butler stated that in doing so,
he would have noted that the binding authority limited the
amount of premium EIU was authorized to accept on
Sphere Drake’s behalf. On February 27, 1998, Butler was
again sent copies of the binding authority which contained
the premium limit increase to $7 million. By that time,
Sphere Drake had increased the 1998 premium limit to $12
million. Stirling Cooke did not, however, obtain a copy of
that increase prior to placing the Unicare retrocession.
In mid-1998, WEB Management LLC (WEB), acting on
behalf of All American, approached EIU through Stirling
Cooke to procure reinsurance protection for All American’s
participation in a reinsurance contract issued to Unicare
Insurance Company. On June 29, 1998, EIU agreed to pro-
8 No. 03-3750

vide such coverage on behalf of Sphere Drake, and the
coverage was bound pursuant to the Unicare slip.4 Accord-
ing to Sphere Drake, the slip involved premium in the
amount of $6,208,125 that was to be counted against EIU’s
alleged 1998 premium limit.5
That same month, Sphere Drake became concerned with
EIU’s administration of the binding authority, and it began
an audit of the EIU binder. Michael Mather and John
Coppinger, two employees from the U.S. arm of Sphere
Drake, conducted the audit at EIU’s offices on July 28 and
29, 1998. In their report, which they presented to Sphere
Drake’s senior management on August 5, 1998, the auditors
stated that EIU had exceeded its premium cap of $12
million. Two days later, on August 7, Watson told

4
A reinsurance slip is a contract, in abbreviated form, between
the reinsured and the retrocessionaire. See Compagnie de
Reassurance D’lle de France v. New England Reinsurance Corp.,
825 F. Supp. 370, 374 (D. Mass. 1993), aff ’d in part, vacated in
part, rev’d in part, 57 F.3d 56 (1st Cir. 1995). It “summarizes
on one or two pages the terms of the reinsurance agreement ne-
gotiated with the reinsurer.” Eric Mills Holmes, 14 Holmes’
Appleman on Insurance 2d § 105.2 at 163 (2000). Although an
“extremely brief document,” it is “legally binding.” Id. at 164.
5
The $6.2 million premium figure is based on the dollar amount
shown on the slip policy. Nick Bentley, a Sphere Drake designee,
testified that that is the amount that would have been apparent
to an underwriter at the time the slip policy was issued. Sphere
Drake contends, however, that undisputed evidence shows that
the Unicare retrocession itself actually represented $19,659,062
in estimated gross premiums for 1998. All American argues, how-
ever, that the correct 1998 gross premium calculation for the re-
trocession is $9,864,917, the dispute being whether the over $19
million premium should be evenly divided between 1998 and 1999
or considered only for 1998. Because it is not necessary to resolve
this dispute, we will accept for our purposes the number contained
in the slip.
No. 03-3750 9

Whitcombe that EIU had “exceeded the premium cap and
that [EIU] needed to stop underwriting.”
The premium due under the Unicare slip was $4,966,500
to be paid in quarterly installments throughout the year. By
the end of 1998, All American had paid $3,166,144
in premium (less EIU’s commission) to Sphere Drake.
In December 1998, All American, via Stirling Cooke, re-
quested that Sphere Drake post a letter of credit covering
incurred losses on the Unicare retrocession. Sphere Drake
refused to do so and asserted in a letter dated December 31,
1998, which was copied to Stirling Cooke, that it was
reserving its position with respect to All American’s request
pending a review of the binding authority. That same week,
on January 4, 1999, Sphere Drake reiterated its position to
Stirling Cooke. Later that month, a representative of
Fairfax (Sphere Drake’s parent company) spoke to a senior
vice-president of All American and offered to return the
premiums accepted under the Unicare retrocession. All
American refused. On February 4, 1999, All American
acknowledged in a letter from the company’s general
counsel that as of January 8, 1999, Sphere Drake had
“taken issue with [EIU’s] authority to place business.” In
March 1999, Sphere Drake sought to rescind the Unicare
policy and return the premium. When All American rejected
Sphere Drake’s offer, Sphere Drake refused to pay any
claims arising under the reinsurance contract. In response,
All American commenced arbitration which, after the
lengthy litigation discussed above, led to this matter.
Before proceeding to the merits, we briefly address the
choice-of-law issue in this case, a matter which neither
party disputes on appeal. The Unicare retrocession provides
that “[t]his contract of Reinsurance shall be governed by
and construed in accordance with the law of the state of
Illinois, U.S.A.” Before the district court, Sphere Drake
argued that this provision is inapplicable to whether there
10 No. 03-3750

is a binding contract. Instead, it stated that the district
court should apply English law because the United
Kingdom has the most significant relationship to the trans-
action. The court held, however, that since Illinois and
English law with regard to the disputed issues are the
same, “[t]his issue need not be decided.” Based on the same
sound reasoning, as well as the fact that both parties rely
on Illinois law in their briefs to this court, we, too, will
apply Illinois law. See Gould v. Artisoft, Inc., 1 F.3d 544,
549 n.7 (7th Cir. 1993) (“Where the parties have not
identified a conflict between the two bodies of state law that
might apply to their dispute, we will apply the law of the
forum state . . . .”).
Turning to the merits, we must determine if the district
court was correct that there is no issue of material fact that
EIU was not, at the time the Unicare retrocession was
signed, Sphere Drake’s agent. Agency is a fiduciary rela-
tionship in which the agent has the power to act on the
principal’s behalf. Amcore Bank, N.A. v. Hahnaman-
Albrecht, Inc., 759 N.E.2d 174, 181 (Ill. App. Ct. 2001). “An
agent’s authority may be either actual or apparent . . . .” Id.
However, “[o]nly the alleged principal’s words and conduct,
not those of the alleged agent, establish the agent’s author-
ity.” Id. Finally, the party alleging an agency relationship,
here All American, bears the burden of proving its existence
by a preponderance of the evidence. Id.
With those background principles in mind, we turn to
whether EIU had the actual authority to bind Sphere Drake
to the retrocession. “An agent has express authority when
the principal explicitly grants the agent the authority to
perform a particular act.” Id. Here, the evidence is clear
that at the time EIU signed the retrocession it did not have
the authority to do so. The binding authority capped the
amount of estimated gross premium EIU was permitted to
write with respect to each given year. Increases to the
premium limit, moreover, were accomplished over time only
No. 03-3750 11

by endorsement. All American cannot point to any evidence
that the premium limit was ever increased above $12
million, an amount that EIU exceeded before it entered into
the Unicare retrocession (it is undisputed that for 1998 EIU
wrote contracts prior to the Unicare retrocession in the
amount of $14,406,427).
In the face of this evidence, All American relies on EIU’s
business plan (which was provided to Sphere Drake at the
beginning of negotiations over the binding authority and
was initialed and agreed to by Sphere Drake) to argue that
the contractual premium limit was increased to $20 million.
The plan, however, merely forecasted that gross premiums
would increase to $20 million for 1997 and $28 million for
1998 (in fact, All American’s argument is a bit odd; based
on the business plan, the premium increase in 1998 should
have been $28 million, not the $20 million amount All
American focuses on). The business plan, moreover, was
executed prior to the binding authority, which is the actual
agency contract.
Equally unconvincing is All American’s argument that the
meetings and correspondence between Sphere Drake and
EIU during 1998 evidence Sphere Drake’s agreement to
increase the premium limit to $20 million. The evidence
establishes that Whitcombe did meet with Watson, who
looked favorably upon increasing the premium level.
Watson, however, clearly told Whitcombe that Whitcombe
had to further discuss the matter with Broad. In the mean-
time, Watson wrote that Whitcombe should continue with
“business as usual”—the only reasonable interpretation
of which is that the premium level remained at the $12
million level.
Therefore, at the time the Unicare retrocession was writ-
ten, the premium limit in the binding authority was $12
million, and because that limit was already exceeded, EIU
lacked the actual authority to accept the Unicare retro-
12 No. 03-3750

cession. The district court’s finding that there was no issue
of material fact that EIU lacked the actual authority to
accept the Unicare retrocession was clearly correct.
We next turn to whether EIU had the apparent authority
to accept the retrocession. Illinois law has long recognized
the doctrine of apparent authority. See, e.g., Gilbert v.
Sycamore Mun. Hosp., 622 N.E.2d 788, 795 (Ill. 1993). As
the Illinois Supreme Court has noted,
[a] principal will be bound by not only that authority
which he actually gives to another, but also by the
authority which he appears to give. Apparent authority
in an agent is the authority which the principal know-
ingly permits the agent to assume, or the authority
which the principal holds the agent out as possessing.
It is the authority which a reasonably prudent person,
exercising diligence and discretion, in view of the
principal’s conduct, would naturally suppose the agent
to possess. Where the principal creates the appearance
of authority, the principal “will not be heard to deny the
agency to the prejudice of an innocent party, who has
been led to rely upon the appearance of authority in the
agent.”
Id. (citations omitted).
Under Illinois law, the party asserting the existence of
apparent authority, here All American, must meet a three-
part test:
(1) the principal consented to or knowingly acquiesced
in the agent’s exercise of authority; (2) based on the ac-
tions of the principal and agent, the third person rea-
sonably concluded that the party was an agent of the
principal; and (3) the third person justifiably and
detrimentally relied on the agent’s apparent authority.
Amcore Bank, 759 N.E.2d at 183. We will address each part
of the test in turn.
No. 03-3750 13

To begin, the evidence establishes that Sphere Drake did
not knowingly acquiesce in EIU’s exercise of authority. As
noted above, the binding authority explicitly limited EIU’s
authority to agree to premiums above a certain amount—
at the time $12 million. It was not until August 1998— after
the retrocession was signed (on June 29, 1998)—that
Sphere Drake had knowledge regarding the cost of the
Unicare retrocession or the fact that the premium limit had
been exceeded. In fact, the evidence shows that the most
recent bordereau6 EIU provided to Sphere Drake prior to
accepting the Unicare retrocession was in May 1998. That
bordereau specifically indicated that EIU was still within
the premium limits. Because of this misrepresentation, it
was not possible for Sphere Drake to “knowingly acquiesce”
in EIU’s actions.
Second, and in many ways more significant, it was not
reasonable for All American to conclude that EIU was, at
the time, authorized to bind Sphere Drake to the retro-
cession. As the Restatement (Second) of Agency makes clear,
if a person has means of knowledge reasonably open to
him as to the limits of the agent’s authority, he cannot
hold the principal unless he uses ordinary diligence to
ascertain them, even in those situations in which a
principal is otherwise held although the agent goes
beyond his authority. He has means of knowledge if he
knows or has reason to know that the authority is evi-
denced by a document open to and intended for his
inspection.
Restatement (Second) of Agency § 167 cmt. a. See also
General Ref. & Plumb. Co. v. Goodwill Indus. of St. Louis,

6
A bordereau is “[a] report provided periodically by the reinsured
detailing the reinsurance premiums and/or reinsurance losses
with respect to specific risks ceded under the reinsurance agree-
ment.” Holmes § 102.6 at 57.
14 No. 03-3750

Missouri, 333 N.E.2d 607, 611 (Ill. App. Ct. 1975) (The
principal may act on a presumption that third persons
dealing with the agent “will not be negligent in failing to
ascertain the extent of his authority as well as the existence
of his agency” (quoting 3 Am.Jur.2d, Agency, § 78 (1962)).);
Lawcock v. U.S. Trotting Ass’n, 204 N.E.2d 802, 805-06 (Ill
App. Ct. 1965) (“third person asserting apparent authority
may not act negligently with regard to extent of agent’s
authority or blindly trust agent’s statement”); Application
of Lester, 386 N.Y.S.2d 509, 514 (N.Y. Sup. Ct. 1976)
(stating that “[t]he ordinary rule is that ‘Diligence to
ascertain if an agent is exceeding his authority devolves on
those who deal with him, not on his principal’ ”) (quoting
Richmond Guano Co. v. E.I. DuPont de Nemours & Co., 284
F. 803, 809 (4th Cir. 1922)).
Here, All American had the means to determine the
extent of EIU’s authority. Stirling Cooke, at the time All
American’s agent (more on this later), knew that EIU’s
authority to accept business for Sphere Drake was limited
by a premium cap contained in the binding authority. In
fact, by February 27, 1998, Stirling Cooke had obtained a
copy of the binding authority showing a premium limit of $7
million (there is no evidence that Stirling Cooke knew that
Sphere Drake increased the premium limit to $12 million).
Equally significant, it had knowledge that EIU had already
written premium in excess of $7 million (and, in fact, $12
million). Indeed, prior to placing the Unicare retrocession,
Stirling Cooke had placed 1998 contracts with EIU with
premiums to Sphere Drake totaling over $14 million.
Whether it knew the exact limit or not, a reasonable broker
in Stirling Cooke’s situation who knew about the limit in
the binding authority would have investigated what the
dollar limit was. We cannot therefore say that it exercised
due diligence or that it was reasonable to believe that EIU
had the authority to bind Sphere Drake at the time it
signed the retrocession.
No. 03-3750 15

Nevertheless, All American argues that it acted reason-
ably and that it had no obligation to determine the limits of
EIU’s authority prior to placing the retrocession. Specifi-
cally, it contends, quoting a decision from the Court of
Appeals of Indiana, that “the law is clear that a third
person dealing with [an agent] is not bound to inquire into
his specific authority, nor is the principal protected by
secret limitations upon the authority of such an agent.”
Yellow Mfg. Acceptance Corp. v. Voss, 303 N.E.2d 281, 283-
84 (Ind. Ct. App. 1973). All American also points to Ameri-
can Insurance Co. v. Meyer Steel Drum, Inc., 1990 WL
92882, at *4 n.4 (N.D. Ill. June 27, 1990), for the proposi-
tion that “[w]here an agent has apparent authority to act,
the principle will be liable in spite of undisclosed limita-
tions the principle has placed on that authority.” Reliance
on these cases is misplaced, however. EIU’s authority was
not constrained by “undisclosed” or “secret” limitations. To
the contrary, Stirling Cooke knew that EIU was bound by
a premium cap, it just did not know what the exact limit
was.
A contrast with Meyer Steel Drum, which All American
argues is “similar to the present case,” is illustrative. There,
in support of the conclusion that the purported agent had
apparent authority, the court found “[t]here is no evidence
demonstrating that Meyer Steel Drum disclosed to Ameri-
can that [the agent] was authorized only to secure insur-
ance with annual premiums not exceeding $50,000.” In
other words, there was no evidence that American knew
about any premium limit. In such a circumstance, it may be
reasonable for the insurer not to inquire into whether a
limit existed and, if so, what the value of the limit was.
That is a critically different situation than the one All
American faces, where it knew EIU’s authority was con-
fined, had knowledge that the limit it was aware of had
been exceeded, and knew the limit was subject to change.
16 No. 03-3750

All American also relies on industry custom. Custom and
practice in the industry is relevant towards determining
whether a third party acted reasonably and diligently.
See, e.g., Property Advisory Group, Inc. v. Bevona, 718 F.
Supp. 209, 211-12 (S.D.N.Y. 1989) (examining practice and
custom in determining apparent authority issue); Lincoln
Cardinal Partners v. Barrick, 578 N.E.2d 316, 318 (Ill. Ct.
App. 1991) (same). Here, several witnesses testified that the
normal practice is that a broker such as Stirling Cooke does
not have a duty to determine if there is a premium cap or to
monitor the amount of gross premium written by an
underwriter like EIU. In a traditional situation, such a
custom makes sense. A third party may not know the
existence of a premium cap and would usually lack the
necessary information as to an agent’s other business. In
this particular circumstance, however, such a custom
carries little weight. First, Stirling Cooke knew that a
premium cap existed and knew it was subject to change.
Even more significant, the vast majority of the business
EIU conducted on behalf of Sphere Drake was with Stirling
Cooke. In fact, of the 24 contracts EIU accepted for Sphere
Drake prior to the Unicare retrocession (totaling over $14
million), Stirling Cooke brokered all but one of them (for
which the estimated premium to Sphere Drake was
$81,818). Stirling Cooke did not have to monitor all of EIU’s
business to determine if EIU had exceeded the premium
cap. It only had to keep track of the business it had done.
Finally, All American contends that requiring it to moni-
tor EIU’s actions would constitute “unsound public policy.”
It has long been established, however, that one who deals
with an agent “takes the risk not only of ascertaining
whether the person with whom he is dealing is the agent,
but also of ascertaining the scope of his powers.” Ernst
v. Searle, 22 P.2d 715, 717-18 (Cal. 1933). See also Henry
Modell & Co. v. City of New York, 552 N.Y.S.2d 632, 634
(N.Y. App. Div. 1990) (those who deal with “agents must
No. 03-3750 17

ascertain the extent of the agents’ authority, or else proceed
at their own risk”). In sum, Stirling Cooke had knowledge
that EIU was constrained by a premium limit and knew
that by itself Stirling Cooke, before the Unicare re-
trocession, entered into business with EIU totaling over $14
million. Contrary to All American’s suggestion that “knowl-
edge that there is a premium limit that will be increased
over time is far different from knowing what the limit is,”
considering the facts of this case, we believe it would have
constituted a minimal burden to ascertain the limits of
EIU’s authority. In fact, a simple phone call inquiring into
the premium limit would have done the trick. Any reliance
on EIU’s authority was thus unreasonable and cannot be
used to create the existence of apparent authority.
In the alternative, All American contends that Stirling
Cooke’s knowledge of EIU’s lack of authority cannot be
imputed to All American because Stirling Cooke acted “as
a neutral reinsurance intermediary between the parties,
rather than as any party’s agent.” A reinsurance intermedi-
ary, however, is considered an agent. “Whether a broker is
an agent for the insured, the insurer or both,” however, is
“a question of fact.” Capitol Indem. Corp. v. Stewart Smith
Intermediaries, Inc., 593 N.E.2d 872, 876 (Ill. App. Ct.
1992). See also Philan Ins. Ltd. v. Frank B. Hall & Co., 748
F. Supp. 190, 197 (S.D.N.Y. 1990) (“specific factual situation
demonstrating the parties’ intent determines whether the
intermediary acts as agent of the ceding insurer or of the
reinsurer”). We emphasize, moreover, that the “the general
rule is that a reinsurance intermediary serves as the
cedent’s agent.” Stephen W. Schwab, et al., Caught Between
Rocks and Hard Places: The Plight of Reinsurance Interme-
diaries Under U.S. and English Law, 16 Mich. J. Int’l L.
485, 494 (1995); Holmes7 § 105.2 at 213 (“That the reinsur-

7
Full cite at our footnote 4.
18 No. 03-3750

ance intermediary should be considered to be the ceding
insurer’s agent is consistent with the usual rule in the
context of direct insurance.”). The weight of authorities
applies this principle. See Aetna Ins. Co. v. Glens Falls Ins.
Co., 453 F.2d 687, 690 (5th Cir. 1972) (holding that the
intermediary was the agent of the reinsured.); In re Prit-
chard & Baird, Inc., 8 B.R. 265 (D.N.J. 1980), aff’d, 673
F.2d 1301 (3rd Cir. 1981) (upholding the ruling of the
bankruptcy court that Pritchard & Baird was the agent of
ceding insurer (reinsured)); Calvert Fire Ins. Co. v. Unigard
Mut. Ins. Co., 526 F. Supp. 623, 638-39 (D. Neb. 1980),
aff’d, 676 F.2d 707 (8th Cir. 1982) (holding that intermedi-
aries were agents of the reinsured).
Here, there is not the slightest doubt that Stirling Cooke
was acting for All American. WEB (an admitted agent of All
American) authorized Stirling Cooke to place the Unicare
retrocession on All American’s behalf.8 In fact, All American

8
In determining that All American acted unreasonably in relying
on EIU’s apparent authority, the district court also discussed
WEB’s obligations. Specifically, it cited a Connecticut statute,
Conn. Gen. Stat. § 38a-760f(a)(4)(K), which requires a licensed
reinsurance-intermediary manager to keep written evidence that
a reinsurer has delegated binding authority to its representative.
Because WEB did not fulfill its statutory duty, the court held,
All American cannot contend it reasonably relied on apparent
authority. 303 F. Supp. 2d at 621. On appeal, All American con-
tends, first, that Connecticut’s act “does not create a private right
of action.” This argument mischaracterizes the relevance of the
statute. Sphere Drake has not asserted any private right of action
against WEB but merely points to the statute as evidence that
WEB, and therefore All American, did not act reasonably and
diligently in relying on EIU’s apparent authority. Second, All
American argues that the statute does not apply to WEB. Because
it does not affect our decision, it is not necessary for us to resolve
this dispute and delve into the intricacies of Connecticut insur-
(continued...)
No. 03-3750 19

admits that Stirling Cooke entered into and negotiated the
retrocession for it, and it points to no evidentiary basis for
finding that Stirling Cooke was not its agent. See, e.g.,
Petersen v. U.S. Reduction Co., 641 N.E.2d 845, 851 (Ill.
App. Ct. 1994) (“Our courts have consistently stated that
the distinguishing characteristic of an agent is that he
represents another contractually. An agent, ‘[w]hen prop-
erly authorized, . . . makes contracts or other negotiations
of a business nature on behalf of his principal . . . .’ ”).
Because Stirling Cooke was acting as All American’s agent,
Stirling Cooke’s lack of due diligence in determining the
dollar amount limit on EIU’s authority precludes a finding
that apparent authority existed.
Because we hold that Sphere Drake did not consent or
knowingly acquiesce to EIU’s exercise of authority and that
All American could not reasonably conclude that EIU was
authorized to enter into the retrocession, it is unnecessary
to also consider whether All American satisfies the detri-
mental reliance requirement for apparent authority.
Although EIU lacked both actual and apparent authority
to bind Sphere Drake to the Unicare retrocession, All
American argues the contract should still be enforced. It
contends that by at least August 5, 1998, Sphere Drake
knew that the premium limit had been exceeded. Neverthe-
less, Sphere Drake waited until March 1999 to rescind the
retrocession. All American contends that this constitutes
ratification of the retrocession or, in the alternative, waiver
or estoppel of any right to repudiate the contract.
Where an agent acts without the authority to enter into
a contract on the principal’s behalf, the contract may still be
ratified by the principal. “A principal can ratify his agent’s
actions either by not repudiating them or by accepting their

8
(...continued)
ance law.
20 No. 03-3750

benefit.” Amcore Bank, 759 N.E.2d at 185. Ratification
requires “that the principal have full knowledge of the facts
and the choice to either accept or reject the benefit of the
transaction.” Id. “Ratification may be inferred from sur-
rounding circumstances, including long-term acquiescence,
after notice, to the benefits of an allegedly unauthorized
transaction.” Stathis v. Geldermann, Inc., 692 N.E.2d 798,
808 (Ill. App. Ct. 1998). The important inquiry is whether
Sphere Drake repudiated the contract within a “reasonable
time.” See, e.g., Corn Belt Bank v. Lincoln Sav. & Loan
Ass’n, 456 N.E.2d 150, 159 (Ill. App. Ct. 1983).
Here, the May 1998 bordereau EIU provided to Sphere
Drake prior to accepting the Unicare retrocession incor-
rectly indicated that EIU was still within the premium
limits. Nevertheless, because of problems with an unrelated
policy known as the “Versace claim,” Sphere Drake decided
to investigate EIU in the summer of 1998. On June 30, 1998
(one day after EIU agreed to the Unicare retrocession),
Sphere Drake conducted an administrative audit of EIU
underwriting. On July 28 and 29, 1998, Sphere Drake
employees Michael Mather and John Coppinger conducted
a more thorough audit. On August 5, 1998, they issued
their report, concluding that through June 30, 1998, EIU
had exceeded the $12 million premium limit for 1998. The
report also indicated that EIU failed to adequately evaluate
the risks and value of the retrocessions it received. Two
days after receiving the report, on August 7, 1998, Watson
informed Whitcombe that EIU needed to stop underwriting
because the premium limit had been exceeded.
At that time, Sphere Drake did not take action to rescind
any of retrocessions, however, because it did not consider
the August 5, 1998, report conclusive. For example, as the
district court noted, “as of August 1998, Sphere Drake did
not yet have enough information to determine the order
in which retrocession were accepted.” As a result, it did
not know which retrocession to rescind. In addition, Sphere
No. 03-3750 21

Drake wanted to further investigate EIU, including possible
collusion between EIU and Stirling Cooke. Importantly,
while conducting the investigation, Sphere Drake kept
Stirling Cooke appraised of its concerns. On December 31,
1998, Sphere Drake notified Stirling Cooke that Sphere
Drake was reserving its rights pending a review of the
binding authority. Several days later, in a meeting on
January 4, 1999, Sphere Drake further explained its con-
cerns regarding the Unicare retrocession. All American’s
general counsel noted that by January 8, 1999, it knew that
Sphere Drake had “taken issue with [EIU’s] authority to
place business” on its behalf.
Sphere Drake’s investigation continued through March
1999. Robert Forness of Sphere Drake testified, “It took
[Sphere Drake] at least a couple of months just to identify
who had participated in various programs and to arrange
visits to speak to them or to schedule audits. I don’t believe
even by October [1998] we had a full understanding of what
had occurred. We were starting to put a picture together,
but that’s about how I would describe it.” After conducting
the investigation, on March 31, 1999, Sphere Drake for-
mally repudiated the retrocession.
Considering this evidence, we agree with the district court
that All American did not meet its burden of establishing
ratification. All American’s reliance on the August 5 report
is insufficient. All that is established is that, beginning in
June 1998 and continuing to the spring of 1999, Sphere
Drake was involved in a reasonable investigation into EIU’s
actions. Such a circumstance does not rise to the level of
ratification. See, e.g., Capital Dist. Physician’s Health Plan
v. O’Higgins, 951 F. Supp. 352, 362 (N.D.N.Y. 1997),
vacated pursuant to settlement by 1998 WL 340836199
(N.D.N.Y. Jan 8, 1998) (“Considering the surrounding facts,
it seems patent that [plaintiff] was not ratifying an invest-
ment with full knowledge of the facts surrounding its
purchase, but was rather collecting information on an
22 No. 03-3750

investment about which it entertained serious doubts”);
Bernstein v. Centaur Ins. Co., 644 F. Supp. 1361, 1370
(S.D.N.Y. 1986) (“The Court finds that Centaur initiated an
investigation once the April Claims Report was received
and repudiated the contract within a reasonable time
thereafter.”). As the district court held, Sphere Drake acted
in a reasonable and timely manner in investigating the
potential fraud before offering to return the premium.
All American also argues that Sphere Drake was at fault
for failing to adequately monitor EIU’s underwriting. All
American’s duty to reasonably and diligently inquire into
whether EIU had authority to accept the retrocession “does
not obviate” Sphere Drake’s “own duty to third parties,
which is to exercise reasonable diligence in monitoring its
agents’ activities so that they are not exceeding their
authority.” Progress Printing Corp. v. Jane Byrne Political
Comm., 601 N.E.2d 1055, 1067 (Ill. Ct. App. 1992). Al-
though normally a principal’s actual knowledge of the
transaction is essential in determining ratification, “one
whose ignorance or mistake was the result of gross or
culpable negligence in failing to learn the facts will be
estopped as if he had full knowledge of the facts.” Id. at
1067-68 (quoting 18 Ill. Law & Prac. Estoppel § 23 at 84
(1956)). Here, evidence shows that Broad, Sphere Drake’s
underwriter in charge of the binding authority, was not
particularly diligent in monitoring EIU. Indeed, Watson
himself described Broad as a “seat of the pants under-
writer,” and Sphere Drake acknowledged in the UK trial
that Broad “ought to have been far more cautious about
granting the binder in the first place and more diligent
in supervising its operation.” Significantly, however, the
latest bordereau that was provided to Sphere Drake (and
Broad) showed, incorrectly, that the premium limit had not
been exceeded. We agree with the district court that
“[e]vents in this case show that a determination that the
premium limit had been exceeded required an audit and
No. 03-3750 23

further investigation was needed to determine which retro-
cessions were accepted after the limit was reached. The
evidence does not support that Sphere Drake would have
learned the limit had been exceeded if Broad had performed
his duties in a reasonably diligent manner.”
Finally, All American raises the related defenses of
waiver and estoppel. It maintains that the delay in re-
scinding should operate as a waiver of Sphere Drake’s right
to rescind or should otherwise estop Sphere Drake from
denying the existence of a purported contract. For the same
reasons we reject All American’s ratification argument, we
hold that the district court did not err in rejecting All
American’s waiver and estoppel claims.
Under Illinois law, “[e]stoppel arises only when a party’s
statement or conduct misleads another into the belief that
a right will not be enforced and cause him to act to his
detriment in reliance on that belief.” Old Security Life Ins.
Co. v. Continental Ill. Nat’l Bank & Trust Co. of Chicago,
740 F.2d 1384, 1392 (7th Cir. 1984). Here, All American
cannot prove that it was misled into believing that Sphere
Drake would not assert its right to repudiate the retro-
cession. As the district court found, Sphere Drake acted in
a reasonable and timely manner in investigating the
potential fraud before offering to return the premium. And
throughout this investigation it kept both Stirling Cooke
and All American well-appraised and well-informed of the
situation.
Likewise, in order to establish waiver, All American must
show that Sphere Drake “clearly, unequivocally, and
decisively” took action waiving the right. Solow v.
Northwest Airlines (In re Midway Airlines), 180 B.R. 851,
919-20 (Bankr. N.D. Ill. 1995). “Waiver of a contractual
right is shown only when a party conducts itself in a
manner which is wholly inconsistent with the clause or
condition, thereby indicating its intent to abandon the con-
24 No. 03-3750

tractual right.” Id. Here, Sphere Drake did not engage in
any conduct that “clearly, unequivocally, and decisively”
indicated its intent to waive its right to repudiate the re-
trocession. Sphere Drake reasonably conducted an investi-
gation into EIU before repudiating the contract and as early
as January 1999 indicated to All American of the possibil-
ity.
For the foregoing reasons, we agree that there are no
material factual disputes and that the district court did not
err in entering summary judgment for Sphere Drake.
Because we decide the excess authority claim in Sphere
Drake’s favor, moreover, the case is over. Other than re-
turning the premiums already paid, Sphere Drake is not
liable on the Unicare retrocession. There is, therefore, no
need to further litigate the fiduciary duty claim.
The judgment of the district court is AFFIRMED.

A true Copy:
Teste:

________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit

USCA-02-C-0072—7-16-04