Zurich American Insurance v. Watts Industries, Inc. ( 2005 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
Nos. 03-3851 & 03-3853
ZURICH AMERICAN INSURANCE COMPANY,
Petitioner-Appellee/Cross-Appellant,
v.
WATTS INDUSTRIES, INC.,
Respondent-Appellant/Cross-Appellee,
and
JAMES JONES COMPANY,
Respondent/Cross-Appellee.
____________
Appeals from the United States District Court for
the Northern District of Illinois, Eastern Division.
No. 01 C 7673—Elaine E. Bucklo, Judge.
____________
ARGUED MAY 3, 2005—DECIDED AUGUST 2, 2005
____________
Before FLAUM, Chief Judge, and KANNE and SYKES,
Circuit Judges.
KANNE, Circuit Judge. Zurich American Insurance
Company insured Watts Industries, Inc., and James Jones
Company under a program consisting of both primary lia-
bility policies and deductible agreements. Only the deduct-
2 Nos. 03-3851 & 03-3853
ible agreements contained arbitration clauses. Watts and
Jones successfully sued Zurich in California state court for
defense costs in two lawsuits filed against them by other
parties. Thereafter, the parties contested application of the
deductible agreements, and Zurich petitioned the district
court to compel arbitration. The district court granted the
petition with respect to Watts, and denied it with respect to
Jones. Both Watts and Zurich appeal; for the reasons stated
herein, we affirm the order compelling arbitration as to
Watts and exempting Jones from arbitration. We remand to
the district court for clarification of precisely which deduct-
ible agreements give rise to an arbitrable dispute.
I. History
We begin with a brief introduction of the parties and a
recap of the long and tortured history of this case. Zurich is
an insurer incorporated under New York law, with its home
office in New York City and its main administrative office
in Schaumburg, Illinois. Watts is a manufacturer of valves
and other waterworks parts that are used in municipal
water systems. Watts is incorporated under Delaware law,
with its principal place of business in Massachusetts. Jones
is another manufacturer of valves used in public water
systems, with both its incorporation and principal place of
business in California. Jones was a wholly owned subsid-
iary of Watts from 1987 until it was sold in September
1996.
Zurich issued six primary liability insurance policies to
Watts, in effect for successive one-year periods between
June 30, 1991, and June 30, 1997. The policies provided
coverage for both Watts and its subsidiary, Jones. The in-
surance contracts do not contain arbitration clauses. Watts
entered into separate deductible agreements with Zurich
Nos. 03-3851 & 03-3853 3
during these same six years.1 Each deductible agreement
contains a broad arbitration clause. For example, the 1991-
92 agreement requires arbitration of “any dispute [that]
arise[s] between the Company and the Insured with refer-
ence to the interpretation of [the] Agreement or their rights
with respect to any transaction involved[.]” (Zurich’s App.
at 337.) Each agreement provides for arbitration in
Schaumburg, Illinois. Jones did not sign any of the deduct-
ible agreements.
Watts and Jones were sued for fraud by third parties in
two cases in the California state courts in 1997 and 1998.
The cases were titled Los Angeles Department of Water and
Power, et al. ex rel. Armenta v. James Jones Co., et al.,
Los Angeles County Superior Court, Case No. BC 173487
(“Armenta”), and Rothschild v. James Jones Co., San Diego
County Superior Court, Case No. 726930 (“Rothschild”).
Both claims were tendered to Zurich, but Zurich denied its
duty to defend and indemnify Watts and Jones.
In February 2001, Watts filed suit against Zurich in the
Los Angeles Superior Court seeking defense and indemnity
for the Armenta and Rothschild actions under the primary
liability policies. Watts asserted claims for breach of con-
tract and bad faith. Jones filed a similar coverage suit
against Zurich in June 2001, and the two actions were
consolidated. The California court conducted a mandatory
settlement conference in August 2001. Zurich raised the
deductible agreements as a defense to entering a settlement
agreement during this conference, claiming that even if
Zurich were liable under the policies, Watts would be
responsible for fully reimbursing Zurich under the deduct-
ible agreements. In an order issued August 3, 2001, the
1
Signed deductible agreements exist only for the 1991-92, 1992-
93, and 1996-97 policy periods, but the parties agree that written
deductible agreements were in effect for all six policy periods.
4 Nos. 03-3851 & 03-3853
court gave the parties 60 days to attempt to resolve the
issues discussed during settlement.
In a letter to Watts dated August 31, 2001, Zurich
indicated that it would address the applicability of the de-
ductible agreements “in due course, as required.” Watts
responded with a letter on September 6, 2001, (“the Septem-
ber 6 letter”) stating that there was “no need for any further
delay” in resolving the issues of the deductibles and setting
out four points regarding the application of the deductible
agreements. First, Watts stated that the deductible agree-
ments do not apply to Jones. Second, Watts claimed that
“[b]ecause [Zurich] repudiated [the insurance] policies and
agreements by wrongfully refusing to fund the defense of its
insureds, Zurich [was] foreclosed from relying upon the
deductible agreements.” Third, Watts asserted that because
Zurich failed to mention the deductible agreements until 3½
years after Watts tendered the Armenta and Rothschild
actions, it “waived any rights it may have had to seek to
enforce those agreements.” Finally, Watts claimed that even
if the deductible agreements could be invoked, “Zurich
would remain liable for providing Jones with a full defense
in the underlying cases and would remain liable to fund
Watts’ defense once Watts satisfied the $500,000
deductible . . . set forth in each deductible agreement[.]”
Watts then proposed a resolution whereby Zurich would pay
the full amount of defense costs for Armenta and
Rothschild.
On September 21, 2001, Zurich responded to the
September 6 letter with a demand for arbitration against
both Watts and Jones, which Watts and Jones rejected. On
October 4, 2001, Zurich filed a petition to compel arbitration
in federal court in Illinois and asked the California superior
court to stay the California coverage action. The superior
court refused to do so, and on November 27, 2001, granted
Watts’s motion for summary judgment. Zurich was held to
have a duty to defend the Armenta action and any arbitra-
Nos. 03-3851 & 03-3853 5
ble disputes under the deductible agreements were deemed
severable from the claims and issues in the California
coverage action.
Back to the Illinois proceedings. Zurich initially asked for
arbitration of everything—the duty to defend both Watts
and Jones and application of the deductible agreements
with respect to both companies—in its October 2001 motion
to compel arbitration. On May 1, 2002, Zurich filed a motion
for a temporary restraining order in the district court
seeking to restrain the California court from enforcing its
November 2001 duty to defend order, which the district
court granted.2 On September 9, 2002, the district court
ruled on Zurich’s petition to compel arbitration in the order
that gives rise to this appeal. At that point, Zurich had
made a partial payment to Watts and Jones (more than $4
million, according to Zurich’s memorandum in support of its
petition) for claimed defense costs. The district court’s
initial order stated that Jones was not subject to arbitra-
tion, that the duty to defend in the Armenta action was not
arbitrable, and that Zurich had not waived its right to
arbitrate under the deductible agreements. The district
court granted the petition to compel arbitration as follows:
(1) as to Armenta, whether Zurich’s breach of the duty
to defend found by the California court constituted a
repudiation by Zurich of the deductible agreement;
(2) as to Rothschild, whether the provision of the 1991-
1992 deductible agreement stating that Zurich “as-
2
The court actually denied the order with respect to Armenta,
holding that it lacked jurisdiction over issues already decided by
the California court under the Rooker-Feldman doctrine, and de-
nied the order with respect to Jones. Zurich Am. Ins. Co. v. Sup.
Ct. for the State of Cal., 200 F. Supp. 2d 929, 934 (N.D. Ill. 2002).
The temporary restraining order, therefore, enjoined only further
California proceedings concerning Watts and Zurich except for
those related to the duty to defend in Armenta. Id.6 Nos. 03-3851 & 03-3853
sumes responsibility for the investigation, defense and
settlement obligations under this Agreement as re-
spects the policies . . .” creates a duty to defend under
the deductible agreement, and if so whether it was
breached; and
(3) with respect to Rothschild, what the obligations of
the parties are with respect to payment and reimburse-
ment of defense costs above the $500,000 deductible.
Then, on September 30, 2002, this court reversed the
injunction staying coverage litigation in the California
courts. See Zurich Am Ins. Co. v. Sup. Ct. for the State of
Cal., 326 F.3d 816, 827-28 (7th Cir. 2002). The district court
vacated its September 9, 2002, order pending the Seventh
Circuit opinion concerning the injunction, which was issued
on April 17, 2003. On September 25, 2003, the district court
reinstated its September 9 order, “amended only to reflect
the fact that the duty to defend in Armenta is arbitrable to
the same extent [the court] previously found the duty to
defend in Rothschild arbitrable under the deductible
agreement.”
The parties agree that the second issue slated for arbi-
tration by the district court, concerning a duty to defend the
Rothschild case arising out of the deductible agreement,
was erroneously ordered by the district court. Neither
Watts nor Zurich has ever contended that any deductible
agreement imposed a duty to defend on Zurich. Also, be-
cause the California Court of Appeal affirmed the superior
court’s summary judgment order finding that Zurich was
bound to pay for Watts’s and Jones’s defense, and the
California Supreme Court declined to review that decision,
the issue of whether Zurich has a duty to defend is moot.
See Watts Indus., Inc. v. Zurich Am. Ins. Co., 121 Cal. App.
4th 1029, 1035 (Cal. Ct. App. 2004). We are left with an
order exempting Jones from arbitration, and compelling
arbitration of the following issues: (1) whether Zurich repu-
Nos. 03-3851 & 03-3853 7
diated the deductible agreement by breaching the duty to
defend Armenta, and (2) what obligations the parties have
with respect to the deductible agreements.3
II. Analysis
Both Watts and Zurich appeal the revised order. Watts
contends that there are no arbitrable disputes under the
deductible agreements at all, claiming that there was (and
is) no ripe dispute between the parties under the deductible
agreements and that it did not anticipatorily repudiate the
deductible agreements in the September 6 letter. Zurich, for
its part, argues that Jones should be forced to arbitrate
despite the fact that it was not a signatory to the deductible
agreements.
Under the Federal Arbitration Act, arbitration may be
compelled if the following three elements are shown: a
written agreement to arbitrate, a dispute within the scope
of the arbitration agreement, and a refusal to arbitrate. See
9 U.S.C. § 4; see also Kiefer Specialty Flooring, Inc. v.
Tarkett, Inc., 174 F.3d 907, 909-10 (7th Cir. 1999). We
review de novo a district court’s order compelling arbitra-
tion. Kiefer, 174 F.3d at 909.
A. Zurich’s Appeal
We address Zurich’s appeal first, which deals with the
relatively simple issue of whether Jones can be compelled
to arbitrate under the deductible agreements. Jones did not
sign the agreements containing arbitration clauses and
3
It appears that the district court erroneously ordered arbitra-
tion of the deductible agreement issue with respect to Rothschild.
According to the briefs and the September 6 letter, the dispute is
actually related to Armenta.
8 Nos. 03-3851 & 03-3853
states that it never agreed to arbitrate anything. Zurich
argues that Jones is bound to arbitrate issues respecting
the deductible agreements despite the fact that it did not
sign them, asserting that (1) Watts, as Jones’s parent com-
pany, bound Jones to the agreements, and (2) Jones has
invoked the benefits of the insurance policies, and thus may
not avoid the obligation of arbitration contained in the
agreements associated with the insurance policies.
The language of the 1994-95, 1995-96, and 1996-97 de-
ductible agreements indicates that “[Watts] and each named
insured stated in the Policy(ies) shall be jointly and sever-
ally responsible for the obligations under [the agreements].”
(Watts’s App. at 150, 176, 189.) Jones was, of course, a
“named insured” in the primary liability policies. But
“[a]rbitration is contractual by nature—‘a party cannot be
required to submit to arbitration any dispute which he has
not agreed so to submit.’ ” Thomson-CSF, S.A. v. Am.
Arbitration Ass’n, 64 F.3d 773, 776 (7th Cir. 1995) (quoting
United Steelworkers of Am. v. Warrior & Gulf Navigation
Co., 363 U.S. 574, 582 (1960)). That said, there are five
doctrines through which a non-signatory can be bound by
arbitration agreements entered into by others: (1) assump-
tion; (2) agency; (3) estoppel; (4) veil piercing; and (5) in-
corporation by reference. Fyrnetics (H.K.) Ltd. v. Quantum
Group, Inc., 293 F.3d 1023, 1029 (7th Cir. 2002); accord Am.
Bureau of Shipping v. Tencara Shipyard S.P.A., 170 F.3d
349, 352 (2d Cir. 1999).
Zurich does not argue that Jones has shown an intent to
assume obligations under the deductible agreements or that
the agreements are incorporated by reference to the
insurance policies. Rather than explicitly arguing that
principles of agency or veil piercing are applicable, Zurich
alludes vaguely to the fact that Jones was a wholly owned
Nos. 03-3851 & 03-3853 9
subsidiary of Watts,4 and thus should not be permitted to
avoid arbitration. The district court correctly found that the
relationship between Watts and Jones is insufficient for
Jones to be bound by Watts’s signature on any type of
agency or alter ego theory. As the court’s September 9,
2002, order noted, “a mere parent-subsidiary relationship
‘does not create the relation of principal and agent or alter
ego between the two.’ ” (Quoting Caligiuri v. First Colony
Life Ins. Co., 742 N.E.2d 750, 756 (Ill. App. Ct. 2000)). A
corporate relationship is generally not enough to bind a
nonsignatory to an arbitration agreement. Thomson-CSF,
64 F.3d at 777.
Zurich’s remaining argument, that Jones “cannot take
policy benefits without being bound . . . to the associated
deductible agreements and the duty to arbitrate issues re-
specting those agreements[,]” is based on an estoppel
theory. A nonsignatory party is estopped from avoiding ar-
bitration if it knowingly seeks the benefits of the contract
containing the arbitration clause. See Thomson-CSF, 64
F.3d at 778; see also Indus. Elecs. Corp. of Wis. v. iPower
Distribution Group, 215 F.3d 677, 680 (7th Cir. 2000)
(stating in dicta that a third-party beneficiary of a contract
would be bound by its arbitration provision).
But caselaw consistently requires a direct benefit under
the contract containing an arbitration clause before a reluc-
tant party can be forced into arbitration. See Thomson-CSF,
64 F.3d at 779 (holding that although the unwilling party
received a benefit, the benefit did not derive directly from
the agreement containing the arbitration clause and thus
arbitration could not be compelled); accord Am. Bureau of
Shipping, 170 F.3d at 353 (ordering arbitration because the
nonsignatory received the direct benefits of a lower insur-
4
Again, Jones was sold in September 1996, so it was not a sub-
sidiary of Watts for the entire time period relevant to this case.
10 Nos. 03-3851 & 03-3853
ance rate and the ability to sail under the French flag as a
result of an agreement containing an arbitration provision).
Jones has not sought to enforce any rights it has under the
deductible agreements, and in fact there would be no
benefits to Jones under those agreements. Even assuming
that Jones has benefitted from the deductible agreements
by paying lower insurance premiums based on the deduct-
ibles, this benefit is too attenuated and indirect to force
arbitration under an estoppel theory. We conclude that
there are no grounds for compelling Jones to arbitrate, and
we will affirm the district court’s decision with respect to
this issue.
B. Watts’s Appeal
We now turn to Watts’s appeal. The district court’s deci-
sion compelling arbitration was based solely on the Septem-
ber 6 letter which, in the court’s view, showed a dispute
within the scope of the deductible agreements because
Watts had “anticipatorily repudiated” the agreements.
Watts contends that this letter was a settlement communi-
cation, and that the court’s consideration of it to Watts’s
disadvantage was a violation of Federal Rule of Evidence
408. Watts also argues that there was not—and is not—a
dispute ripe for arbitration under the deductible agree-
ments.
The rules of evidence provide:
Evidence of (1) furnishing or offering or promising to
furnish, or (2) accepting or offering or promising to
accept, a valuable consideration in compromising or at-
tempting to compromise a claim which was disputed as
to either validity or amount, is not admissible to prove
liability for or invalidity of the claim or its amount.
Evidence of conduct or statements made in compromise
negotiations is likewise not admissible.
Nos. 03-3851 & 03-3853 11
Fed. R. Evid. 408. The primary policy reason for excluding
settlement communications is that the law favors out-of-
court settlements, and allowing offers of compromise to be
used as admissions of liability might chill voluntary efforts
at dispute resolution. See, e.g., Perzinski v. Chevron Chem.
Co., 503 F.2d 654, 658 (7th Cir. 1974).
We assume for the purposes of this analysis that Watts’s
September 6 letter is in fact a settlement communication
subject to Rule 408.5 By its terms, the rule forbids admis-
sion of evidence only when it is offered to prove “liability for
or invalidity of the claim or its amount.” See Advisory
Committee’s Note, Fed. R. Evid. 408. The district court has
broad discretion to admit evidence for a purpose other than
proving liability; we review the district court’s decision to do
so for abuse of discretion and reverse only if there is
manifest error. See Belton v. Fibreboard Corp., 724 F.2d
500, 505 (5th Cir. 1984); see also Starter Corp. v. Converse,
Inc., 170 F.3d 286, 293 (2d Cir. 1999).
Evidence coming out of settlement negotiations is obvi-
ously admissible to show bias or prejudice of a witness. See
Advisory Committee’s Note, Fed. R. Evid. 408. It has also
been admitted by courts for additional purposes other than
establishing liability, including for purposes of rebuttal, for
purposes of impeachment, to show knowledge and intent, to
show a continuing course of reckless conduct, and to prove
estoppel. Bankcard Am., Inc. v. Universal Bancard Sys.,
Inc., 203 F.3d 477, 484 (7th Cir. 2000) (collecting authority).
In deciding whether Rule 408 should be applied to exclude
evidence, courts must consider the spirit and purpose of the
rule and decide whether the need for the settlement
5
Zurich argues that because Watts demanded full payment for
its defense in Rothschild and Armenta rather than proposing a
“compromise,” the September 6 letter is not a settlement com-
munication subject to Rule 408.
12 Nos. 03-3851 & 03-3853
evidence outweighs the potentially chilling effect on future
settlement negotiations. Id.; Starter, 170 F.3d at 293. The
balance is especially likely to tip in favor of admitting evi-
dence when the settlement communications at issue arise
out of a dispute distinct from the one for which the evidence
is being offered. See Towerridge, Inc. v. T.A.O., Inc., 111
F.3d 758, 770 (10th Cir. 1997) (“Rule 408 does not require
the exclusion of evidence regarding the settlement of a
claim different from the one litigated, though admission of
such evidence may nonetheless implicate the same concerns
of prejudice and deterrence of settlements which underlie
Rule 408[.]”) (citations omitted); Broadcort Capital Corp. v.
Summa Med. Corp., 972 F.2d 1183, 1194 (10th Cir. 1992)
(“Rule 408 did not bar this evidence because it related to
settlement discussions that involved a different claim than
the one at issue in the current trial.”); Vulcan Hart Corp. v.
NLRB, 718 F.2d 269, 277 (8th Cir. 1983) (“Rule 408 ex-
cludes evidence of settlement offers only if such evidence is
offered to prove liability for or invalidity of the claim under
negotiation.”); cf. Starter, 170 F.3d at 294 (holding that
evidence of agreement to settle trademark case was prop-
erly admitted in subsequent dispute between parties in
which one asserted a claim for estoppel).
In this case, the September 6 letter was written, by
Watts’s own admission, in an effort to settle the California
coverage action out of court. Of course the two actions are
not totally unrelated. Zurich did, after all, raise the de-
ductible agreements as a defense to its duty to defend Watts
in Armenta and Rothschild. Still, the California ac-
tion—based on the primary liability insurance policies—is
distinct from the Illinois petition to compel arbitration
under the deductible agreements. Notwithstanding Watts’s
protestation that “[h]ad [it] known that settlement efforts
would be used by the court as proof of the need for an arbi-
tration, [it] would not have engaged in settlement efforts[,]”
we do not believe that the policy behind Rule 408 is
Nos. 03-3851 & 03-3853 13
thwarted by admission of this evidence in the instant case.
Watts could have negotiated settlement of the California
coverage action without bringing the deductible agreements
into the mix.6 The district court did not abuse its discretion
by admitting the September 6 letter, related to settlement
of the action in California state court, for the purpose of
determining whether there was an arbitrable dispute under
the deductible agreements.
Having found that the September 6 letter was properly
admitted in evidence, we return to a de novo analysis of
whether arbitration was properly compelled. In the letter,
Watts asserted its position that Zurich could not enforce the
deductible agreements against Watts because Zurich had
breached its duty to defend Watts under the primary
liability policies. Watts also claimed that Zurich had waived
its right to enforce the agreements. Finally, Watts wrote
that even if the deductible agreements were applicable,
Watts could be liable for no more than $500,000 for its own
defense. Contrary to the district court’s finding, Watts ar-
gues, this language did not constitute anticipatory repudia-
tion, because Watts did not definitively state that unless its
demand was met, it would not perform under the deductible
agreement. See 9 Corbin on Contracts, Ch. 54, § 973 (2005).
Watts could be right. But Zurich need not show that Watts
anticipatorily repudiated the deductible agreements to
compel arbitration; it need only show a written agreement
to arbitrate, a dispute within the scope of the agreement,
and a refusal by Watts to arbitrate. See Kiefer, 174 F.3d at6
Zurich’s letter dated August 31, 2001, stated that Zurich would
address the applicability of the deductible agreements “in due
course, as required.” Watts’s response in its September 6 letter
was that “the time to resolve [the deductible agreement] issues is
now.”
14 Nos. 03-3851 & 03-3853
909. As the first and third elements are uncontested,7
all that remains is for Zurich to prove “any dispute . . .
between [Zurich] and [Watts] with reference to the interpre-
tation of [the] agreement[.]” (1991-92 Deductible
Agreement, Zurich’s App. at 337.) The district court cor-
rectly noted that to show a “dispute,” Zurich “must show
that [Watts] has acted, or has threatened to act, in a
manner inconsistent with [Zurich’s] interpretation of the
contract.” Chi. Typographical Union No. 16 v. Chi. Sun-
Times, Inc., 860 F.2d 1420, 1426 (7th Cir. 1988). Watts’s
view of the deductible agreements and their applicability as
set forth in its September 6 letter were inconsistent with
Zurich’s interpretation as set forth in its September 21,
2001, letter. (Watts’s App. at 18-22 (stating that Zurich dis-
agreed with each of Watts’s four contentions with respect to
the deductible agreements and demanding arbitration).)
Watts’s statements were a sufficient threat that it would
not perform its deductible obligations—sufficient to show a
“dispute”—and, considering the broad scope of the arbitra-
tion clauses at issue, this dispute is clearly within the scope
of the deductible agreements.
There is some discussion in the briefs about the amount
of money Zurich had paid Watts at the time the petition for
arbitration was filed (none)8 and how this affects the
ripeness of the petition. As Watts points out, it could hardly
7
Although Watts maintains in its brief that it “never refused to
arbitrate a dispute under the applicable Deductible Agreements[,]”
Watts’s conduct after Zurich’s request for arbitration and position
taken in these proceedings clearly manifest a refusal to arbitrate.
On October 2, 2001, Watts sent a letter to the California court
presiding over the coverage action denying its duty to arbitrate.
(Watts’s App. at 24.)
8
Zurich made a partial payment of $4 million immediately prior
to the district court’s ruling, almost one year after filing the peti-
tion to compel arbitration. At this point, Zurich has paid more
than $41 million in defense costs.
Nos. 03-3851 & 03-3853 15
have been obligated to reimburse Zurich under the deduct-
ible agreement when it had not received the money for its
defense in the underlying actions in the first place. But,
because of the broad arbitration clause and the fact that the
agreement does not require actual breach as a precondition
for arbitration, the issue is irrelevant. Watts’s threat of
nonperformance under the deductible agreements in the
September 6 letter made the dispute ripe. We will therefore
affirm the district court’s order to arbitrate.
Not surprisingly, the parties also dispute the scope of
the compelled arbitration. Watts says that, assuming any
issues are arbitrable, that arbitration should be limited
to (1) whether Zurich has repudiated the deductible agree-
ments by failing to pay for Watts’s defense under the 1994-
95 and 1995-96 primary liability policies, and (2) the par-
ties’ respective rights and obligations under the deductible
agreements from those two years—the only two correspond-
ing to the policy periods under which payments have been
made. The California court determined that defense costs
were only payable under the policies covering 1994-1996,
not under all six policies as Zurich desired. For its part,
Zurich says that arbitration should occur under all six
deductible agreements.
“Whether or not [a] company [is] bound to arbitrate, as
well as what issues it must arbitrate, is a matter to be de-
termined by the Court on the basis of the contract entered
into by the parties.” AT&T Techs., Inc. v. Communications
Workers of Am., 475 U.S. 643, 649 (1986) (internal quota-
tion and citation omitted). We have already discussed the
fact that Watts is bound to arbitrate any dispute that
amounts to a differing interpretation than Zurich’s of a
given deductible agreement. The district court did not make
a finding regarding which deductible agreements the
parties dispute. Noting that the court is not to rule on the
potential merits of the underlying claims, see id., we will
remand to the district court to identify precisely which
16 Nos. 03-3851 & 03-3853
agreements the parties’ dispute arises under, and thus
under which agreements their obligations and rights may
be arbitrated.
III. Conclusion
For the foregoing reasons, we AFFIRM the district court’s
order compelling arbitration between Zurich and Watts and
exempting Jones from arbitration. We REMAND for clarifica-
tion as to which deductible agreements are subject to the
arbitration between Zurich and Watts.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—8-2-05