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Ace Property & Casualty Insurance Company v. Global Reinsurance Corporation of America

March 31, 2013

ACE PROPERTY & CASUALTY INSURANCE COMPANY
v.
GLOBAL REINSURANCE CORPORATION OF AMERICA



The opinion of the court was delivered by: Juan R. Sanchez, J.

MEMORANDUM

Plaintiff ACE Property & Casualty Insurance Company, as successor in interest to Central National Insurance Company of Omaha ("CNIC"), sues Global Reinsurance Corporation of America ("Global") for breach of a facultative reinsurance certificate pursuant to which Global's predecessor, Constitution Reinsurance Corporation ("Constitution Re"), agreed to reinsure a portion of an umbrella liability insurance policy issued by CNIC. The insured under CNIC's umbrella policy incurred substantial liability for asbestos bodily injury claims, and, since 2003, CNIC has been paying a share of the insured's defense and indemnity costs pursuant to a settlement agreement with the insured and its other umbrella insurers. When CNIC's payments under the settlement exceeded $10 million, the attachment point for Global's reinsurance certificate, CNIC began billing Global under the certificate, but Global refused to pay.

Global argues it has no present obligation under the reinsurance certificate because the certificate requires CNIC to pay two separate $10 million retentions, one for the certificate's initial one-year policy period and one for its seven-month extension period, neither of which has been fully exhausted to date. Global also argues CNIC's billings are improper because they seek reimbursement for CNIC's payment of defense costs on claims for which no indemnity payment was made, which payments Global contends are both beyond the scope of the CNIC policy Global agreed to reinsure and not reimbursable under the terms of Global's reinsurance certificate. CNIC argues Global is collaterally estopped from raising the latter two defenses because the same defenses were litigated and resolved adversely to one of Global's corporate affiliates in a June 2011 arbitration involving similarly worded reinsurance certificates Global's affiliate issued to CNIC. CNIC also disputes Global's contention the reinsurance certificate at issue is subject to two $10 million retentions.

After a non-jury trial, this Court issues the following findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52(a).

FINDINGS OF FACT

Beginning in 1975, CNIC issued a series of umbrella liability insurance policies to Wylain, Inc., now known as Marley-Wylain, Inc. (collectively, "Marley"). The CNIC policies were written by Cravens Dargan ("Cravens"), an underwriting manager, which also procured reinsurance on the policies. 1/31/12 Trial Tr. 30-31, 38-39.

Among the policies CNIC issued to Marley was umbrella liability policy CNU 12-48-72 (the "1976 Policy"), which was originally effective for the policy period December 31, 1976, to December 31, 1977. Ex. 5. The 1976 Policy is an "ultimate net loss" policy, providing coverage as follows:

I. COVERAGE. The Company hereby agrees, subject to the limitations, terms and conditions hereinafter mentioned, to indemnify the Insured for all sums which the Insured shall be obligated to pay by reason of the liability

(a) imposed upon the Insured by law, or

(b) assumed under contract or agreement by the Named Insured and/or any officer, director, stockholder, partner or employee of the Named Insured, while acting in his capacity as such, for damages, direct or consequential and expenses, all as more fully defined by the term "ultimate net loss" on account of:

(1) personal injuries, including death at any time resulting therefrom,

(2) property damage,

(3) advertising liability, caused by or arising out of each occurrence happening anywhere in the world.

Ex. 5 at 000224. For purposes of the 1976 Policy, "ultimate net loss" means the total sum which the Insured, or any company as his insurer, or both, become obligated to pay by reason of personal injury, property damage or advertising liability claims, either through adjudication or compromise, and shall also include hospital, medical and funeral charges and all sums paid as salaries, wages, compensation, fees, charges and law costs; premiums on attachment or appeal bonds, interest, expenses for doctors, lawyers, nurses and investigators and other persons, and for litigation, settlement, adjustment and investigation of claims and suits which are paid as a consequence of any occurrence covered hereunder, excluding only the salaries of the Insured's or of any underlying insurer's permanent employees.

Id. An "occurrence" is an accident or a happening or event or a continuous or repeated exposure to conditions which unexpectedly and unintentionally results in personal injury, property damage or advertising liability during the policy period.

Id. The parties agree the 1976 Policy requires CNIC to pay defense costs as part of ultimate net loss in some instances; however, they disagree as to the scope of this obligation.

The 1976 Policy also includes several endorsements, two of which are relevant here. Endorsement No. 3 provides, in relevant part:

IN THE EVENT OF REDUCTION OR EXHAUSTION OF THE AGGREGATE LIMITS OF LIABILITY UNDER THE UNDERLYING INSURANCES BY REASON OF PAYMENT OF CLAIMS IN RESPECT OF OCCURRENCES OCCURRING DURING THE PERIOD OF THIS POLICY, THIS POLICY, SUBJECT TO ALL THE TERMS, CONDITIONS AND DEFINITIONS HEREOF, SHALL . . . IN THE EVENT OF EXHAUSTION CONTINUE IN FORCE AS UNDERLYING INSURANCE.

Id. at 000229. Endorsement No. 4, captioned "DEFENSE COVERAGE ENDORSEMENT," provides:

AS RESPECTS OCCURRENCES COVERED UNDER THIS POLICY, BUT NOT COVERED UNDER THE UNDERLYING INSURANCE OR UNDER ANY OTHER COLLECTIBLE INSURANCE, THE COMPANY SHALL . . . DEFEND IN HIS NAME AND BEHALF AND SUIT AGAINST THE INSURED ALLEGING LIABILITY INSURED UNDER THE PROVISIONS OF THIS POLICY AND SEEKING DAMAGES ON ACCOUNT THEREOF; EVEN IF SUCH SUIT IS GROUNDLESS, FALSE OR FRAUDULENT . . . .

Id. at 000230.

The 1976 Policy provides $25 million in coverage per occurrence and in the aggregate, excess of $500,000 underlying insurance. The $25 million aggregate limit applies "with respect to all ultimate net loss caused by one or more occurrences, during each annual period, while this policy is in force . . . ." Id. at 000224. The term "annual period" means "each consecutive period of one year commencing from the inception date of this policy." Id. As originally written, the 1976 Policy covered one annual period, from December 31, 1976, to December 31, 1977, and therefore had one aggregate limit of $25 million.

Because Cravens was not a risk-bearing entity, before issuing the 1976 Policy, it fully reinsured the Policy through a combination of facultative and treaty reinsurance. 1/31/12 Trial Tr. 38-42; Exs. 41, 48.*fn1 "[R]einsurance is insurance for insurance companies." Pac. Emp'rs Ins. Co. v. Global Reins. Corp. of Am., 693 F.3d 417, 421 (3d Cir.2012). Under a contract of reinsurance, the insurer "cedes" all or part of a risk it has underwritten to another insurer, along with a portion of the premium. See N. River Ins. Co. v. CIGNA Reins. Co., 52 F.3d 1194, 1199 (3d Cir. 1995). Facultative and treaty reinsurance are two different types of reinsurance contracts.

Under a reinsurance treaty, the reinsurer agrees to accept an entire block of business from the reinsured. Once a treaty is written, a reinsurer is bound to accept all of the policies under the block of business, including those as yet unwritten. Because a treaty reinsurer accepts an entire block of business, it does not assess the individual risks being reinsured; rather, it evaluates the overall risk pool.

Facultative reinsurance entails the ceding of a particular risk or policy. Unlike a treaty reinsurer who must accept all covered business, the facultative reinsurer assesses the unique characteristics of each policy to determine whether to reinsure the risk, and at what price. Thus, a facultative reinsurer retains the faculty, or option, to accept or reject any risk.

Id. at 1199 (internal quotation marks and citations omitted).

Cravens reinsured the 1976 Policy in four layers: (1) the first $1 million of the Policy, (2) the next $4 million in excess of $1 million, (3) the next $5 million in excess of $5 million, and (4) the remaining $15 million in excess of $10 million. See Ex. 41; 1/31/12 Trial Tr. 39-42. Within each layer, each participating reinsurer received a premium proportionate to the share of the risk ceded to it. See Ex. 41; 1/31/12 Trial Tr. 40-42.

Global, through its predecessor Constitution Re, was one of the insurers that reinsured the fourth layer of the 1976 Policy, issuing facultative reinsurance certificate no. 64217 (the "Certificate" or the "Global Certificate") in which it agreed to reinsure "$2,000,000 EACH OCCURRENCE AND IN THE AGGREGATE WHERE APPLICABLE PART OF $15,000,000 WHICH IS EXCESS OF $10,000,000 WHICH IN TURN IS EXCESS OF UNDERLYING INSURANCE." Ex. 36 at 016552. In other words, Global agreed to reinsure two-fifteenths of the $15 million layer of risk after CNIC paid the first $10 million of coverage. In exchange, Global received a premium of $4,000 (less a 25% ceding commission), an amount equal to two-fifteenths of the $30,000 total premium paid to all of the reinsurers accepting a portion of the $15 million layer. Exs. 36, 41.

The Certificate is a two-page form document signed by Global underwriter Roger Hughes. Ex. 36 at 016552; Hughes Dep. 19-20. The first page of the Certificate, typically referred to as the "declarations" page, includes a number of items that must be completed by the reinsurer to provide information about the policy being reinsured, the reinsurance accepted, and the basis of the acceptance (i.e., "excess of loss," "contributing excess," and "non-concurrent"). Ex. 36 at 016552; Hughes Dep. 19-20; 1/31/12 Trial Tr. 47-48. The second page sets forth the standard "reinsuring agreements and conditions." Ex. 36 at 016553; Hughes Dep. 21 (stating Global "used the same form for everything").

The Certificate includes a "follow the form" clause, providing [t]he liability of the Reinsurer, as specified in Item 4 of the Declarations, shall follow that of the Company and shall be subject in all respects to all the terms and conditions of the Company's policy except when otherwise specifically provided herein or designated as non-concurrent reinsurance in the Declarations.

Ex. 36 at 016553. The Certificate was not designated "non-concurrent"*fn2 ; therefore, pursuant to this provision, Global agreed its liability would follow CNIC's liability under the 1976 Policy, "except when otherwise specifically provided" in the Certificate itself. The Certificate also includes a "follow the settlements" clause, providing

All loss settlements made by the Company, provided they are within the terms and conditions of the original policy(ies) and within the terms and conditions of this Certificate of Reinsurance, shall be binding on the reinsurer. Upon receipt of a definitive statement of loss, the Reinsurer shall promptly pay its proportion of such loss as set forth in the Declarations. In addition thereto, the Reinsurer shall pay its proportion of expenses (other than office expenses and payments to any salaried employee) incurred by the Company in the investigation and its proportion of court costs and interest on any judgment or award, in the ratio that the Reinsurer's loss payment bears to the Company's gross loss payment. If there is no loss payment, the Reinsurer shall pay its proportion of such expenses only in respect of business accepted on a contributing excess basis and then only in the percentage stated in Item 4 of the Declarations in the first layer of participation.

Id.

Toward the end of 1977, CNIC issued an endorsement to the 1976 Policy that extended the Policy's expiration date by seven months, to August 1, 1978, in consideration of Marley's payment of an additional premium.*fn3 Ex. 5 at 000244. The endorsement does not address how the seven-month extension period should be treated for purposes of applying the 1976 Policy's $25 million aggregate limits, i.e., whether the Policy should be regarded as having a single 19-month annual period subject to a single $25 million aggregate limit or two separate annual periods of one year and seven months, respectively, each subject to a separate $25 million aggregate limit.

Before issuing the endorsement extending the 1976 Policy's expiration date, Cravens sought agreement from the Policy's reinsurers to extend their reinsurance coverage so as to ensure the Policy would continue to be fully reinsured during the seven-month extension period. See 1/31/12 Trial Tr. 115. As part of that effort, on September 22, 1977, Kenneth Mann, the underwriter for Cravens, sent a telex to Roger Hughes requesting Global's agreement to extend the expiration date of the Certificate "AT PRO RATA EXISTING TERMS FROM 12/31/77 TO 8/1/78 TO TRACK WITH EXPIRATION DATE OF UNDERLYING." Ex. 44; 1/31/12 Trial Tr. 103, 108-09. Mann also reported there were "NO LOSSES OVER $10,000." Ex. 44. Hughes responded by telex the following day, advising, "SUBJECT TO CONF[I]RMATION THAT AGG. COVER IS REINSTATED OF 12/31/77 WE CAN AGREE TO EXT. TO 8/1/78, IF AGG. PERIOD IS TO BE 12 PLUS 8 MOS."*fn4 Ex. 45.

There are no further communications between Mann and Hughes in the record; however, on October 4, 1977, Mann prepared a memo noting Cravens had "received agreement from all present reinsurers" to extend the expiration date of their certificates from December 31, 1977, to August 1, 1978, and indicating the endorsement was "to be issued on a pro rata basis with 10% additional premium across the board for all layers." Ex. 46. Cravens appears to have been authorized to proceed with the issuance of the endorsement extending the 1976 Policy shortly thereafter. See Ex. 123; 1/31/12 Trial Tr. 117.

On December 29, 1977, Global issued Endorsement No. 1 to the Certificate, effective December 31, 1977, ...


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