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JEFFERSON INS. CO. v. FORTRESS

July 19, 1984

JEFFERSON INSURANCE COMPANY OF NEW YORK, Plaintiff, against FORTRESS RE, INC., and CALVERT FIRE INSURANCE COMPANY, Defendants.


The opinion of the court was delivered by: HAIGHT

MEMORANDUM OPINION AND ORDER

HAIGHT, District Judge.

 Plaintiff Jefferson Insurance Company of New York ("Jefferson") agreed to insure a New York taxicab company against that part of its accident liability exceeding $100,000 and under $1,000,000 dollars. The cab service apparently was self-insured against losses under $100,000. Jefferson then entered into a reinsurance agreement with defendant Fortress Re, Inc. ("Fortress"), acting on behalf of defendant Calvert Fire Insurance Company ("Calver"), which covered any liability of Jefferson to the cab service exceeding $100,000.Thus Fortress was required to pay only if the cab service's liability exceeded $200,000. The contract of reinsurance contained a notice clause which read:

 Prompt notice shall be given to the Reinsurer by the Company of any occurrence or accident which appears likely to involve this reinsurance and while the Reinsurer does not undertake to investigate or defend claims or suits it shall nevertheless have the right and be given the opportunity to associate with the Company and its representatives at the Reinsurer's expense in the defense and control of any claim, suit or proceeding involving this reinsurance, with the full cooperation of the Company.

 Under another provision of the policy, Jefferson "warrant[ed] to retain for its own account" the $100,000 of liability above the cab service's self-insurance and below Fortress's level of liability. In other words, Jefferson agreed not to contract for reinsurance of this $100,000 layer of liability. The purpose of such a provision is apparently to insure that the reinsured retains a stake in keeping claims below the level of the reinsurance.

 On June 28, 1975, a date when both policies were in effect, a cab driver injured two pedestrians. One victim received a concussion; the other suffered severe leg injuries. Soon thereafter it was provided with details of the lawsuit filed by the accident victims. The ad damnum clause of the complaint requested $450,000, plainly implicating Fortress's reinsurance policy. The facts as disclosed to Jefferson made it clear that the victims would almost certainly prevail on the issue of liability. Despite the ad damnum and the description of the victims' injuries as "substantial," Jefferson apparently decided that the accident would not be likely to involve Fortress's coverage, for it put aside $10,000 of its own money and sent no notice to Fortress. Two years later, on the basis of an independent medical examination of the victims, plaintiff put aside an additional $25,000 to cover the accident. Again, it did not notify Fortress.

 Finally, three years after the accident, the case was ready for trial. At a pretrial conference in June, 1978, a Jefferson representative for the first time examined the victims' physical condition.The Jefferson representative quickly concluded that, based on scarring of one of the victim's legs, a jury verdict could easily reach $400,000, and the case was settled for $235,000. Soon after, Jefferson asked Fortress for its $35,000 share of the settlement, but Fortress refused on the ground that Jefferson failed to comply with the notice requirement. It was also later disclosed that, in violation of the warranty to retain $100,000 of liability for its own account, Jefferson had farmed out $50,000 of its layer of liability through a reinsurance treaty.

 Jefferson brings this action to enforce the reinsurance agreement and to recover the $35,000.Defendants moved for summary judgment, claiming that Jefferson breached both the warranty and notice provisions of the contract. Compliance with both of these, it is claimed, was a condition precedent to Fortress's liability.

 The issues are complicated slightly by the presence of a decision in a prior lawsuit between Jefferson and Fortress. A North Carolina federal court concluded, in Fortress Re, Inc. v. Jefferson Insurance Co. of New York, 465 F. Supp. 333 (E.D. N.C. 1978), aff'd, 628 F.2d 860 (4th Cir. 1979), in circumstances very similar to these that under North Carolina law Fortress was entitled to prevail independently on both issues. Fortress claims preclusive effect for the prior decision.

 I.

 Defendants contend that North Carolina law applies to this action. Plaintiff argues that application of New York law is proper. The question is significant, for only if North Carolina law is applicable in New York will the North Carolina decision have collateral estopopel effect.

 In deciding that North Carolina law applied, the Eastern District of North Carolina of necessity applied North Carolina choice of law rules. Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487, 85 L. Ed. 1477, 61 S. Ct. 1020 (1941). By the same token, I must apply New York's. If the two states choice of law rules were identical, I would assume Jefferson to be collaterally estopped on the issue of choice of law. They are not. North Carolina applies to contract actions the law of the place where the contract was made. Tanglewood Land Co. v. Byrd, 299 N.C. 260, 261 S.E.2d 655, 656 (1980). New York applies a "contacts" analysis, applying the law of the state with the greatest interest in the litigation. Intercontinental Planning, Ltd. v. Daystrom, Inc., 24 N.Y.2d 372, 300 N.Y.S.2d 817, 825, 248 N.E.2d 576 (1969); United States v. Sonal, Inc., 573 F. Supp. 1126, 1128 (S.D.N.Y. 1983).

 The law at issue is that governing the provisions of a contract of reinsurance. The parties made no choice of law in the contract. The certificate of reinsurance was issued in North Carolina, and the obligation to perform arose upon presentation of the claim to Fortress in North Carolina, where its offices are located. Plaintiff is a New York corporation, and the risks insured against arose there.

 Based on these contacts, North Carolina's interest appears greater. That state plainly has an interest in guiding the interpretation of contracts formed and to be performed there. Although New York might have an interest in protecting its insureds under ordinary contracts of insurance, it has manifested no particular interest in protecting parties to contracts of reinsurance. Indeed, these are not so much contracts of insurance but of indemnity. Great American Insurance Co. v. Fireman's Fund Insurance Co., 481 F.2d 948, 950 (2d Cir. 1973). Plaintiff emphasizes the presence of the risk in New York. If this was a suit on the underlying contract of insurance, this factor would weigh heavily. However, the interest of New York becomes more attenuated when the suit is premised solely on the reinsurance contract. Then the question of place of risk must be weighed against other traditional factors such as place of formation and performance -- here North Carolina. ...


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