In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 15‐1973
STATE OF WISCONSIN LOCAL GOVERNMENT
PROPERTY INSURANCE FUND,
Plaintiff‐Appellee,
v.
LEXINGTON INSURANCE COMPANY,
Defendant‐Appellant,
v.
CINCINNATI INSURANCE COMPANY,
Defendant‐Appellee.
____________________
Appeal from the United States District Court for the
Eastern District of Wisconsin.
No. 15‐CV‐00142‐JPS — J. P. Stadtmueller, Judge.
____________________
ARGUED FEBRUARY 19, 2016 — DECIDED OCTOBER 21, 2016
____________________
2 No. 15‐1973
Before MANION and ROVNER, Circuit Judges, and BLAKEY,
District Judge.
BLAKEY, District Judge. This dispute arises from the 2013
fire at the Milwaukee County Courthouse (the “Court‐
house”). Milwaukee County (the “County”) maintained its
primary insurance policy covering the Courthouse with the
State of Wisconsin Local Government Property Insurance
Fund (the “Fund”). The Fund in turn engaged defendant Lex‐
ington Insurance Company (“Lexington”) as either its rein‐
surer or excess insurer (the parties disagree). The County also
maintained a separate insurance policy with The Cincinnati
Insurance Company (“Cincinnati”) that covered machinery
and equipment at the Courthouse.
Shortly after the fire, the County filed a claim with the
Fund. The Fund paid all but a small portion of the County’s
claimed losses. The Fund insisted that the remaining unpaid
portion of the County’s claim should be paid by Cincinnati.
Pursuant to separate Joint Loss Agreements in the County’s
policies with the Fund and Cincinnati, the Fund and Cincin‐
nati agreed to arbitrate their dispute.
This appeal concerns Lexington’s attempt to insert itself in
that arbitration between the Fund and Cincinnati. The district
court denied Lexington’s motion to compel arbitration after
concluding that Lexington’s participation was not contem‐
plated by the plain language of the Joint Loss Agreements.
Lexington appealed. For the reasons explained below, we
AFFIRM.
Of the Northern District of Illinois, sitting by designation.
No. 15‐1973 3
I. Background & Procedural History
At the time of the fire in July 2013, the County held two
separate insurance policies covering the Courthouse. The pri‐
mary policy (the “Fund Policy”) was issued by the Fund, and
explicitly excluded from coverage certain forms of electrical
damage. The County held an additional policy with Cincin‐
nati (the “Cincinnati Policy”) that specifically covered electri‐
cal and mechanical failure.
Both the Fund Policy and the Cincinnati Policy contain a
Joint Loss Agreement (“JLA”). Even though the two JLAs dif‐
fer in several material respects, both provide that, if the insur‐
ers dispute which of them bears the cost of certain damage,
the County may compel each to pay one‐half of the disputed
amount. The insurers then would submit their dispute re‐
garding the paid claim to arbitration. The purpose of the JLAs
is to make the County whole quickly, while allowing the in‐
surers to resolve their own dispute separately.
After the fire, the County initially filed a claim for approx‐
imately $19 million with the Fund pursuant to the Fund Pol‐
icy. The Fund paid the County approximately $17.4 million,
but disputed the remaining $1.6 million under the theory that
the remainder should be paid by Cincinnati. In response, the
County invoked its rights under the JLAs with Cincinnati and
the Fund. Consequently, the Fund and Cincinnati, consistent
with their JLA obligations, each paid one‐half of the disputed
amount ($800,000) to the County and agreed to arbitrate their
dispute.
Meanwhile, the Fund and Lexington maintained a sepa‐
rate policy that provided coverage for the Fund in the event it
paid on a claim worth $1.8 million or more (the “Lexington
4 No. 15‐1973
Policy”). After the Fund made its initial payment to the
County, the Fund filed a claim with Lexington under the Lex‐
ington Policy, seeking reimbursement for amounts paid by
the Fund to the County. Lexington paid the Fund $5 million
but disputes that it owes anything more.
In an attempt to secure a declaration regarding the rights
and obligations of the respective parties, the Fund initiated
this case in the Circuit Court of Milwaukee County. Lexington
removed the case to the United States District Court for the
Eastern District of Wisconsin and filed a motion to compel
Cincinnati and the Fund to allow Lexington to participate in
the arbitration contemplated by the JLAs.
The district court identified “two overarching issues” im‐
plicated by Lexington’s motion to compel arbitration. The
first is whether the Lexington Policy incorporated the JLA
from the Fund Policy. The district court answered this ques‐
tion in the affirmative, pursuant to the “follow form” provi‐
sion in the Lexington Policy. The second issue is whether the
Fund Policy JLA, as incorporated into the Lexington Policy,
compelled Lexington’s participation in the arbitration. The
district court rejected this proposed participation because: (1)
Lexington’s participation was inconsistent with the specific
text of the Fund Policy JLA; and (2) Lexington failed to meet
the Fund Policy JLA’s contractual prerequisites to arbitration.
We reexamine both issues on appeal.
II. Analysis
We review the district court’s denial of Lexington’s mo‐
tion de novo. See Sgouros v. TransUnion Corp., 817 F.3d 1029,
1033 (7th Cir. 2016) (“Our review of the issues on this ap‐
peal—the question whether an agreement to arbitrate arose,
No. 15‐1973 5
and the denial of TransUnion’s motion to compel arbitra‐
tion—is de novo.”).
In doing so, we apply Wisconsin law. The district court
presumed that Wisconsin law controls. Given that the Fund
and the County are Wisconsin entities, the Courthouse is lo‐
cated in Wisconsin, and the Cincinnati Policy contains Wis‐
consin‐specific endorsements, we agree. Indeed, no party
challenged the application of Wisconsin law.
A. Courts Decide Gateway Questions
The parties dispute the existence of an arbitration agree‐
ment between Lexington and any other entity. Under govern‐
ing precedent, this is a question reserved for the judiciary. See
Contʹl Cas. Co. v. Am. Nat. Ins. Co., 417 F.3d 727, 730 (7th Cir.
2005) (“Whether the parties have agreed to arbitrate is a ques‐
tion normally answered by the court rather than by an arbi‐
trator. The issue is governed by state law principles govern‐
ing contract formation.”). As such, we reject Lexington’s sug‐
gestion that the question posed by this appeal should be re‐
solved by an arbitrator. Courts, not arbitrators, are charged
with deciding “gateway matters, such as whether the parties
have a valid arbitration agreement at all or whether a conced‐
edly binding arbitration clause applies to a certain type of
controversy.” Green Tree Financial Corp. v. Bazzle, 539 U.S. 444,
452 (2003); see also Sphere Drake Ins. Ltd. v. All Am. Ins. Co., 256
F.3d 587, 589, 591 (7th Cir. 2001) (reaffirming “the principle
that courts, rather than arbitrators, usually determine
whether the parties have agreed to arbitrate” and that “the
judiciary rather than an arbitrator decides whether a contract
came into being”).
6 No. 15‐1973
B. Policy In Favor Of Arbitration
Does Not Apply In This Case
As a general policy matter, federal courts favor arbitration.
Lewis v. Epic Sys. Corp., 823 F.3d 1147, 1159 (7th Cir. 2016)
(“The [Federal Arbitration Act] contains a general policy fa‐
voring arbitration and a liberal federal policy favoring arbi‐
tration agreements.”) (internal quotation omitted). But that
general preference yields to explicit contrary contractual lan‐
guage. As we explained in Andermann v. Sprint Spectrum L.P.,
the “federal policy favoring arbitration” was originally for‐
mulated to simply “make clear, as had seemed necessary be‐
cause of judges’ historical hostility to arbitration, that arbitra‐
tion was no longer to be disfavored.” 785 F.3d 1157, 1159 (7th
Cir. 2015). For unambiguous contracts, however, the agree‐
ment, as reflected by the document’s explicit terms, controls.
Id. (holding that a court must respect the parties’ “dispute‐
resolution preferences as embodied in an arbitration clause”);
see also Granite Rock Co. v. Intʹl Bhd. of Teamsters, 561 U.S. 287,
303 (2010) (reiterating that “it is the court’s duty to interpret
the [parties’] agreement and to determine whether the parties
intended to arbitrate grievances concerning a particular mat‐
ter [such that] the presumption of arbitrability [applies] only
where a validly formed and enforceable arbitration agree‐
ment is ambiguous about whether it covers the dispute at
hand”) (internal quotation omitted).
C. The Lexington Agreement Incorporates
The JLA Set Forth In The Fund Policy
The district court held that the Lexington Policy incorpo‐
rates the Fund Policy’s JLA. The court grounded its reasoning
in Endorsement A to the Lexington Policy, which provides
No. 15‐1973 7
that: “Policy follows form and is excess over the [Fund Policy]
and endorsements.” App’x 5 at 32.
Following form “is an insurance industry term of art that
is typically understood by insurance professionals to suggest
that an excess or umbrella policy incorporates the terms of an‐
other underlying policy.” Wadzinski v. Auto‐Owners Ins. Co.,
818 N.W.2d 819, 829 (Wis. 2012) (citation omitted). As such,
absent explicit limitations to the contrary, a follow form pro‐
vision incorporates the terms, definitions, exclusions, and
conditions of the underlying policy “to ensure that the same
terms of coverage are maintained between primary and ex‐
cess levels of insurance.” Id.
Here, the district court determined that: (1) the Lexington
Policy, pursuant to its Endorsement A, followed the form of
the Fund Policy; (2) no other provisions of the Lexington Pol‐
icy removed the Fund Policy’s JLA from the scope of the Lex‐
ington Policy’s follow form provision; and therefore, (3) the
Lexington Policy incorporated the Fund Policy’s JLA. The
Fund concedes this argument on appeal, and with good rea‐
son. We affirm the district court’s finding that the Lexington
Policy incorporates the Fund Policy’s JLA.
D. The JLA Does Not Compel Lexington’s
Participation In The Arbitration
We now turn to whether the Fund Policy’s JLA entitles
Lexington to insert itself in the arbitration between Cincinnati
and the Fund. In this case, the only potential basis for such an
imposition is the Fund Policy’s JLA, as incorporated into the
Lexington Policy. As always, we begin with the operative text.
See State ex rel. Journal/Sentinel, Inc. v. Pleva, 456 N.W.2d 359,
362 (Wis. 1990) (reiterating that the “cornerstone of contract
8 No. 15‐1973
construction is to ascertain the true intentions of the parties as
expressed by the contractual language”).
E. The JLA Provisions Are Clear
The Fund Policy’s JLA, incorporated into the Lexington
Policy by virtue of the latter’s follow form provision, states as
follows:
In the event of damage to or destruction of
property, at a location designated in this policy
and also designated in a Boiler and Machinery
Insurance Policy(ies) and there is a disagree‐
ment between the insurers with respect to:
(1) Whether such damage or destruction was
caused by a peril insured against by this policy
or by a peril insured against by such Boiler and
Machinery Insurance Policy(ies) or
(2) The extent of participation of this policy and
of such Boiler and Machinery Insurance Pol‐
icy(ies) in a loss of which is insured against, par‐
tially or wholly, by any or all of said policies.
This company shall, upon written request of the
insured, pay to the insured one‐half of the
amount of the loss which is in disagreement, but
in no event more than this company would have
paid if there had been Boiler and Machinery In‐
surance Policy(ies) in effect, subject to the fol‐
lowing conditions:
(1) The amount of loss which is in disagreement,
after making provisions for any undisputed
claims payable under the said policies and after
No. 15‐1973 9
the amount of the loss is agreed upon by the in‐
sured and the insurers, is limited to the mini‐
mum amount remaining payable under either
the Boiler and Machinery or Fire Policy(ies);
(2) The Boiler and Machinery insurer(s) shall
simultaneously pay to the insured one‐half of
said amount which is in disagreement;
(3) The payments by the insurers hereunder and ac‐
ceptance of the same by the insured signify the agree‐
ment of the insurers to submit to and proceed with
arbitration within 90 days of such payments; the ar‐
bitrators shall be three in number, one shall be
appointed by the Boiler and Machinery insurer,
one shall be appointed by the Fund, and the
third appointed by consent of the other two. The
decision by the arbitrators shall be binding on
the insurers and that judgment upon such
award may be entered in any court of compe‐
tent jurisdiction;
(4) The insured agrees to cooperate in connec‐
tion with such arbitration but not to intervene
therein;
(5) The provisions of this endorsement shall not
apply unless such other policy(ies) issued by the
Boiler and Machinery insurance company(ies)
is similarly endorsed; and
(6) Acceptance by the insured of some payment
pursuant to the provisions of this endorsement,
including an arbitration award, shall not oper‐
10 No. 15‐1973
ate to alter, waive, surrender or in any way af‐
fect the rights of the insured against any of the
insurers.
App’x 4 at 24 (emphasis added).
The JLA is not ambiguous. See Tufail v. Midwest Hosp., LLC,
833 N.W.2d 586, 594 n.8 (Wis. 2013) (“Ambiguity is found
where a contract is fairly susceptible of more than one con‐
struction, not necessarily where different constructions are ar‐
gued.”) (internal quotation omitted). Wisconsin contract law
provides that “terms incorporated by reference within the
contract (but which the contract does not go on to define) do
not create an ambiguity.” Matthews v. Wisconsin Energy Corp.,
534 F.3d 547, 554 (7th Cir. 2008) (citation omitted). So long as
“the extrinsic terms are clearly identifiable, the parties agree
to abide by those terms just as they agree to the other terms in
the contract.” Id. (citation omitted); see also Barrons v. J. H.
Findorff & Sons, Inc., 278 N.W.2d 827, 831 (Wis. 1979) (terms of
a preceding contract “incorporated by reference in the [oper‐
ative] contract” govern). This principle of interpretation is
particularly forceful when, as here, the provision at issue is
incorporated wholesale by virtue of a follow form provision.
See Wadzinski, 818 N.W.2d at 829 (following form “is typically
understood by insurance professionals to suggest that an ex‐
cess or umbrella policy incorporates the terms of another”) (em‐
phasis added); see also Tufail, 833 N.W.2d at 592 (“Contract
language is construed according to its plain or ordinary
meaning, consistent with what a reasonable person would
understand the words to mean under the circumstances. For
a business contract, that is the manner that it would be under‐
stood by persons in the business to which the contract re‐
lates.”) (internal quotations omitted).
No. 15‐1973 11
In sum, the terms of the Fund Policy JLA mean the same
thing whether they are read within the Fund Policy or incor‐
porated into the Lexington Policy. Thus, “insured,” as origi‐
nally used in the Fund Policy JLA (and as incorporated in the
Lexington Policy) means the County. This is hardly revela‐
tory—unambiguous language remains unambiguous when it
is incorporated into another contract. Our task now is to apply
this same unambiguous language “according to its literal
terms and consistent with what a reasonable person would
understand the words to mean under the circumstances.”
Fabco Equip., Inc. v. Kreilkamp Trucking, Inc., 841 N.W.2d 542,
546 (Wis. Ct. App. 2013) (internal quotation omitted).
F. The JLA Does Not Constitute An Agreement
To Arbitrate With Lexington
The Fund Policy JLA, by its “literal terms,” is not an agree‐
ment to arbitrate at all. Instead, the Fund Policy JLA merely
codifies a procedure whereby the parties can potentially agree
to arbitrate. App’x 4 at 24 (“The payments by the insurers …
and acceptance of the same by the insured signify the agreement
of the insurers to submit to and proceed with arbitration
within 90 days of such payments.”) (emphasis added). That
procedure, as spelled out above, requires a demand by the in‐
sured; a dispute between the insurers about liability; payment
by each insurer of half the disputed amount; and acceptance
of payment by the insured. Only by completing each of these
enumerated steps can the parties form an agreement to arbi‐
trate under the Fund Policy JLA. None of these steps occurred
with respect to Lexington.
To be clear, the Fund Policy JLA’s payment‐and‐ac‐
ceptance process is not merely a procedural mechanism at‐
12 No. 15‐1973
tendant to an already‐enforceable arbitration agreement. In‐
stead, this procedure is the means by which the parties form
an agreement to arbitrate. The stark contrast provided by Cin‐
cinnati and the Fund underscores this critical difference. Both
the Fund and Cincinnati disputed the demands made by the
County. Both the Fund and Cincinnati paid the County one‐
half of the disputed amount in response to the County’s invo‐
cation of its rights under the two JLAs. By the JLAs’ literal
terms, the Fund and Cincinnati were only obligated to arbi‐
trate their dispute upon the County’s acceptance of those
same payments. In other words, the “literal terms” of the
Fund Policy JLA provide the method by which the parties can
“signify” their agreement to arbitrate.
Based upon the undisputed record here, Lexington simply
did not employ the signifying procedure to trigger an agree‐
ment to arbitrate. Lexington never received a request for pay‐
ment from the County, and Lexington never made a payment
to the County.1 Moreover, neither Cincinnati nor the Fund nor
the County communicated any of the enumerated signals to
Lexington. Consequently, the parties did not agree to arbi‐
trate a dispute with Lexington under the Fund Policy JLA.
G. This Court’s Reading Remains Consistent
With Madison Teachers
Lexington argues that, under Wisconsin law, “the failure
to satisfy one condition in an agreement to proceed to arbitra‐
tion” may not “thwart the intent of an arbitration provision,
1
Lexington did pay $5 million to the Fund. Under the Fund Policy
JLA, however, the County (not the Fund) is the “insured.” Moreover, Lex‐
ington does not argue that this transfer had anything to do with the Fund
Policy JLA’s payment‐and‐acceptance process.
No. 15‐1973 13
which is to resolve a dispute with an arbitrator rather than in
a courthouse.” Appellant Br. at 36 (citing Madison Teachers,
Inc. v. Wisconsin Educ. Ass’n Council, 703 N.W.2d 711 (Wis. Ct.
App. 2005)). This principle is true (so far as it goes), but not
controlling here.
In Madison Teachers, the parties’ arbitration agreement spe‐
cifically named an individual to serve as arbitrator; however,
the named individual was not available at the time of the par‐
ties’ dispute. Madison Teachers, Inc., 703 N.W.2d at 717. The
trial court held that the parties were no longer bound to arbi‐
trate in the absence of the named arbitrator. Id. at 713. The
Wisconsin Court of Appeals reversed on the grounds that the
named arbitrator’s absence was not “more important than the
arbitration process itself.” Id. at 717. Indeed, the court took
pains to note that the use of the named arbitrator in that case
was not a “condition precedent … central to” the parties’ ar‐
bitration agreement. Id. at 715–16.
Madison Teachers is clearly not this case. Madison Teachers
involved an express agreement to arbitrate. The Fund Policy
JLA does not contain an express agreement to arbitrate, but
merely provides a means by which the parties may express an
agreement to arbitrate, and no party ever agreed to arbitrate
any dispute with Lexington. Nor did Lexington engage in the
Fund Policy JLA’s payment‐and‐acceptance process.
H. This Court’s Reading Gives Full Force And
Effect To The Provisions Of The JLA
Lexington also argues that if we do not interpret the Fund
Policy JLA to compel its participation in the arbitration be‐
tween the Fund and Cincinnati, we render the Fund Policy
14 No. 15‐1973
JLA a nullity in contravention of established principles of con‐
tractual interpretation. Appellant Br. at 22. Not so. The plain
text of the Fund Policy JLA provides a means by which the
“insured” and the “insurers” can “signify” their agreement to
arbitrate. The JLA, both as it is originally found in the Fund
Policy and as incorporated into the Lexington Policy, retains
this meaning today. It is merely dormant here because, as a
factual matter, no party availed itself of this procedure vis‐à‐
vis Lexington.
I. Lexington’s Status As A Reinsurer Or Excess
Insurer Remains Irrelevant
The parties have spent considerable time on appeal debat‐
ing a question left unanswered by the district court, namely,
whether Lexington is an “excess insurer” or a “reinsurer.” We
agree with the district court that there is no need to answer
this particular question.
The only possible ground for granting Lexington the relief
it seeks is the JLA, as incorporated into the Lexington Policy
from the Fund Policy. The JLA, in turn, is an unambiguous
contractual provision, which we interpret according to its lit‐
eral terms. The parties’ dueling characterizations of the nature
of the Lexington Policy are simply not implicated by that pro‐
cess.
III. Conclusion
The Fund Policy JLA provides a procedure whereby the
parties could “signify” an agreement to arbitrate. No such sig‐
nals were exchanged between Lexington and any party here
and, as a result, no agreement to arbitrate exists between Lex‐
No. 15‐1973 15
ington and the other insurers. Absent such an agreement, Lex‐
ington is not entitled to insert itself into the arbitration be‐
tween the Fund and Cincinnati.
For these reasons, the judgment of the district court is
AFFIRMED.