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AM. HOME ASSUR. CO. v. FREMONT INDEM.

September 19, 1990

AMERICAN HOME ASSURANCE COMPANY, THE INSURANCE COMPANY OF THE STATE OF PENNSYLVANIA, NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., BIRMINGHAM FIRE INSURANCE COMPANY OF PENNSYLVANIA, AIU INSURANCE COMPANY, THE NEW HAMPSHIRE INSURANCE COMPANY, AMERICAN INTERNATIONAL INSURANCE COMPANY OF PUERTO RICO, COMMERCE AND INDUSTRY INSURANCE COMPANY, AND COMMERCE AND INDUSTRY INSURANCE COMPANY OF CANADA, PLAINTIFFS,
v.
FREMONT INDEMNITY COMPANY, DEFENDANT.



The opinion of the court was delivered by: Robert P. Patterson, Jr., District Judge.

OPINION AND ORDER

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.

BACKGROUND

1. First Blanket Treaty

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.

2. Blown Max Treaty*fn1

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 was $700,000.

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. K.

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.

DISCUSSION

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 ...


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