that Kenneth Meyer, a Napolitan account executive, performed
the analysis reflected in the report. Exhibit G to the
Napolitan Report projected aggregate losses in the 4 X 1 layer
ranging from $35.22 million in 1979 to $73.081 million in 1983
— at all times exceeding the reinsurers' cushion under the
terms of the treaty. These projections were not disclosed to
Fremont in 1978 as part of the solicitation materials for the
First Blanket Treaty, although Fremont did receive the
underlying data and loss ratios from which the projections were
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
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 of
proof. Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548,
91 L.Ed.2d 265 (1986).
1. First Blanket Treaty
The parties agreed at oral argument that AIG had a duty to
disclose to Fremont
all facts and circumstances known to AIG which materially
affected the reinsurers' risk. See, e.g., Puritan Ins. Co. v.
Eagle S.S. Co. S.A., 779 F.2d 866, 870 (2d Cir. 1985).
Materiality in this context depends on whether the information
"would have controlled the underwriter's decision" to assume
the risk. Id. at 871 (quoting Btesh v. Royal Ins. Co.,
49 F.2d 720, 721 (2d Cir. 1931)). The Court finds an issue of fact
precluding summary judgment rescinding the First Blanket Treaty
in whether or not the loss projections contained in Exhibit G
to the Napolitan Report and not disclosed to Fremont were
material. The issue of whether a nondisclosure is material so
as to entitle an underwriter to void the policy is an issue of
fact. Knight v. U.S. Fire Ins. Co., 651 F. Supp. 477, 481
(S.D.N.Y.), aff'd, 804 F.2d 9 (2d Cir. 1986)
Fremont contends that the very fact that the Napolitan
Report projected significantly greater losses than expected to
the reinsurers makes the projections material. AIG, on the
other hand, contends that the projections in Exhibit G
represent Kenneth Meyer's personal and subjective views as a
non-actuary presented as a sales proposal and do not purport
to be actuarial loss estimates of AIG. For example, AIG argues
that Meyer failed to observe certain basic actuarial
techniques by neglecting to perform on-level premium
adjustments and to account for changes in underwriting
standards, exposure or loss environment. Sandler Aff. ¶ 17.
Meyer also allegedly utilized a loss history too limited to
yield credible loss projections on a purely statistical basis.
Id. Finally, AIG contends that the Meyer loss projections were
not material since Fremont was provided with the underlying
data and its actuaries were in as good a position, if not
better, than was Meyer to calculate predicted losses. Roper
Aff., Exh. A at 1309-12.
It remains to be seen whether under the standard by which
materiality is judged, an objective one, industry practice
would consider the Meyer loss projections as material to a
reinsurer's decision to participate in the First Blanket
Treaty. See, e.g., Carlingford Australia Gen. Ins. Ltd. v. St.
Paul Fire & Marine Ins. Co., No. 86 Civ. 9011, 1989 WL 79393
(S.D.N.Y. July 11, 1989, and Nov. 15, 1989) (LEXIS, Genfed
Library, Dist File) (permitting defendant reinsurer to amend
answer to claim rescission because plaintiff's failure to
disclose expected profit may have been material). Thus, summary
judgment rescinding the First Blanket Treaty is denied.
2. The Blown Max Treaty
Fremont's argument in favor of rescission of the Blown Max
Treaty is much the same as that advanced under the First
Blanket Treaty. Fremont contends that since AIG allegedly
misrepresented the average maximum premium as a percentage of
standard premium in such a way as to expose the reinsurers to
a potential additional liability of $315,000 per policy of
which the reinsurers were unaware, the mere fact of increased
risk makes the misrepresentation material.
AIG asserts that the solicitation materials including the
Busti letter involved no misrepresentations. Rather, the
phrase "Std. Premium" is used in a different sense in the 1984
Taranto memorandum than it was in the original solicitation
materials including the Busti letter, rendering a comparison
of the type offered by Fremont meaningless. According to AIG,
the Blown Max Treaty included two different types of insurance
plans for which internal terminology differed. For the first
type, traditional "retro" plans, the maximum premium was
expressed as a percentage (greater than 100) of the initial,
or standard, premium as outsiders like Fremont understood.
However, the treaty also included "retention" plans in which
the initial premium was called the "pay-in" or "deposit"
premium and the maximum premium was called the "standard"
premium. Thus the term "standard premium" was not susceptible
of a single meaning in the documents on which Fremont relies
to establish that a misrepresentation was made.
AIG contends that the representation in the Busti letter
that "[o]ur average maximum premium is 165% with our lowest
being 120%" was accurate when made
based on AIG actuarial reports showing an average maximum
premium factor ranging from 123.4% in 1975 to 183.7% in 1979.
Gaillard Aff., Exh. 1, Col. 12. The AIG evidence is sufficient
to raise an issue of material fact precluding summary judgment
as to whether the representation in the Busti letter was
In conclusion, defendant's motion for summary judgment is
denied. Counsel are to attend a pretrial conference at 9:00
a.m. on Monday, October 1, 1990, in courtroom 444.