The opinion of the court was delivered by: Robert P. Patterson, Jr., District Judge.
This is an action by a reinsured ("AIG") against a
reinsurance company ("Fremont") on two contracts of
reinsurance, or "treaties." Defendant has moved for summary
judgment pursuant to Fed.R.Civ.P. 56 rescinding the
reinsurance treaties and dismissing the complaint. For the
reasons set forth below, defendant's motion is denied.
In October 1978, Paul Napolitan, Inc. ("Napolitan"), an
affiliate of AIG acting as a reinsurance intermediary,
solicited defendant Fremont's participation as a reinsurer of
AIG under a proposed reinsurance agreement later termed the
First Blanket Casualty Excess of Loss Reinsurance Agreement
(the "First Blanket Treaty"). Under the agreement, plaintiff
AIG remained liable for the first $1 million of loss for each
occurrence in the ceded policies. The First Blanket Treaty
provided reinsurance for the next $4 million (the "4 X 1
layer") of covered loss per occurrence in excess of $1
million. However, AIG assumed responsibility for a portion of
the losses in the 4 X 1 layer, a practice termed "additional
aggregate retention." Thus the reinsurers would not suffer a
loss under the treaty until aggregate losses in the 4 X 1
layer exceeded the combination of AIG's aggregate retention
and the premium AIG paid to the reinsurers. For the first
three years, the First Blanket Treaty provided the reinsurers
with such a loss "cushion" ranging from $24.9 million in 1979
to $28.75 million in 1981. Fremont ultimately accepted a 1.5%
participation in the First Blanket Treaty, a participation
which increased to 4.5% on January 1, 1980.
In October 1980, Interocean Agency, Inc. ("Interocean"),
solicited Fremont's participation as a reinsurer of AIG under
the Aggregate Excess Liability Excess of Loss Treaty, or the
"Blown Max" Treaty. Under the treaty, the reinsurers had no
liability until covered losses on a policy had "blown max," or
exceeded the maximum premium. The maximum premium is typically
expressed as a percentage (greater than 100) of standard
premium, with higher percentages providing the reinsurers with
a greater cushion before they are exposed to losses. If
maximum premium is only 100% of standard premium, the
reinsurers experience losses when covered losses reach an
amount equal to the standard premium with no cushion at all.
Standard premium on the risks covered by the Blown Max Treaty
Among the solicitation materials sent to Fremont was a
letter from Dennis Busti, Executive Vice President of AIG, to
Joseph Zaffarese, Senior Vice President of Interocean,
representing that AIG's "average maximum premium [was] 165%
with our lowest being 120%." Roper Aff., Exh. G, Exh IV
thereto. The letter later refers to a "700,000 standard
premium." Id. Thus, AIG represented to the reinsurers that
losses on the ceded policies must exceed a minimum cushion of
at least $140,000 (20% of $700,000) above the $700,000 standard
premium before the reinsurers' liability attached.
However, an AIG internal memorandum (the "Taranto
memorandum") dated August 9, 1984, contained a chart reporting
the average maximum premiums, established at the inception of
the covered policies, for the years 1978 through 1983. The
chart shows that the average maximum premium for the three
years prior to the solicitation of Fremont was 120% of
standard premium, not 165% as AIG had represented at the time.
Roper Aff., Exh. I. As interpreted by Fremont, the difference
would expose the reinsurers to additional potential exposure
on each covered policy of $315,000.
In addition, AIG policy files contained premium adjustment
worksheets relating to certain policies ceded to the Blown Max
Treaty showing that the maximum premium had been set at 100%
of standard premium, providing no cushion whatsoever and
controverting the original representation that the lowest
maximum premium was 120% of standard premium. Roper Aff., Exh.
Neither of these facts were disclosed to Fremont at the time
AIG solicited Fremont's participation in the Blown Max Treaty
in 1980. Fremont bases its motion for summary judgment on the
foregoing nondisclosures and misrepresentations, which it
alleges were material.
To grant a motion for summary judgment a court must find
that there is no genuine issue as to any material fact and
that the moving party is entitled to judgment as a matter of
law because, after sufficient time for discovery, the
non-moving party has failed to make a sufficient showing of an
essential element of its case as to which it has the burden ...