plaintiffs; and (3) whether, if so, defendants breached their duty of uberrimae fidei, i.e., their duty to act with the highest degree of good faith.
1. Plaintiffs' Belief
I find that plaintiffs reasonably believed, when they accepted the reinsurance proposal, that the reassured was retaining a portion of the FPA risk.
First, although there were some problems with both their testimony in certain respects,
I found both Hyland and Turoff to be credible with respect to their testimony that they believed, when they accepted the proposal, that their respective companies were agreeing to reinsure 60% (or 51% or 25%) of the reassured's FPA risk with the reassured retaining 40% (or 49% or 75%).
Second, NH&M's written proposal (TX 1) could reasonably be read as an offer to reinsure 60% of the reassured's FPA exposure. The hereto clause is ambiguous: it does not specify whether the percentages listed refer (a) to 60% (or 51% or 25%) of 100% of the FPA risk or (b) to 100% of the London Underwriter's 60% (or 51% or 25%) share of the total FPA risk. Indeed, the first interpretation is the more reasonable one, since the latter interpretation requires the addition of two facts not readily apparent from the document: that only the London Underwriters were seeking reinsurance and that the London Underwriters only had 60% of the FPA risk.
Third, the customary practice in reinsurance (with the exceptions of "blue water hull" insurance and "fronting" situations, which exceptions are not applicable to this case) is for the reassured to retain a portion of the risk. Plaintiffs presented four witnesses who testified that it was highly unusual for a reassured to cede 100% of its risk, and the testimony of plaintiffs' witnesses that a 100% cession showed lack of confidence on the part of the reassured in the risk makes sense. The only witness who suggested that it was not uncommon for a reassured to cede 100% of an FPA risk (it happens " all day and every day" (Tr. 598)) was defendant's purported expert witness. The witness, however, conceded that he had "no experience generally" in the American market. (Tr. 606). In fact, he testified that he did not believe that he was an expert on reinsurance in the American market. (Tr. 607-08). Hence, his opinions are entitled to little if any weight.
2. The Brokers' Actions and Omissions
The mere fact that plaintiffs reasonably believed the reassured was retaining a portion of the FPA risk does not, of course, end the inquiry. Rather, plaintiffs must also show that they were misled by the brokers into believing that the reassured was retaining a portion of the reinsurance risk. I find that plaintiffs were misled and induced into accepting the reinsurance proposal by the brokers' actions and omissions.
Although the issue of retention and the identities of the reassured were not explicitly discussed in the negotiations leading up to execution of the binder (Tr. 128, 175, 179), the proposal (TX 1) was still misleading. The "reassured" clause listed both Tugu and London Underwriters as possible reassureds. Hence, the proposal suggested -- at minimum -- that Tugu was interested in reinsuring a portion of its risk.
In fact, however, Energex did not have any positive indication of interest from any of the decisionmakers at Tugu, and Tugu ultimately rejected the proposal. Hence, Energex was only acting on behalf of London Underwriters when it shopped the proposal to the United States market, and the suggestion that it was also acting for Tugu was misleading. (Tr. 301-02, 395-96). n11 (Footnote omitted) This suggestion was important, for plaintiffs would have looked at the proposal differently if they had thought the only reassured was London Underwriters. (See, e.g., Tr. 285, 307, 310, 329).
To compound the problem, although the reassured clause made reference to both Tugu and London Underwriters, the reference to the percentages in the "hereto" clause purportedly referred only to the London Underwriters' percentage interests, and did not include Tugu's percentage interests. But because the reassured clause made reference to both Tugu and London Underwriters, plaintiffs could not know, from the face of the proposal, that the percentages in the hereto clause were 100% of the London Underwriters' percentages. Indeed, because the reassured clause referred to both Tugu and London Underwriters, plaintiffs were led to believe that the references to 60% (and 51% and 25%) in the hereto clause were to 60% (and 51% and 25%) of the reassured's interest and that, consequently, the remaining 40% (and 49% and 75%) of the FPA risk was being retained by the reassured.
The brokers knew or should have known that the proposal was misleading. Scott Darragh had to clarify Energex's written proposal by making a note to himself on his copy of the proposal to clarify that the proposal was looking for 100% FPA reinsurance of the reassured. (TX 26H; Tr. 433, 457, 459). Although he found it necessary to make a note to assist him in understanding the proposal, he did not include the clarification in the proposal that he had re-typed. (Compare TX 26H with TX 1). In fact, NH&M prepared a written proposal -- dated March 16, 1993, the same date as TX 1 -- that made it clear that the reassured(s) were seeking 100% reinsurance, but this proposal was not used. (TX 26T; Tr. 495-98).
The brokers could -- and should -- have made the proposal clearer. They could have, for example, written the hereto clause to state that the order was "for 100% part of 60%." (See Tr. 398). As Mr. Cox, one of plaintiffs' experts, testified, the brokers "had an order for 100 percent [of] the 60 percent . . . but [they] didn't so stipulate . . . ." (Tr. 410). As Mr. Byron, plaintiffs' other expert, explained, the brokers should have explained (i) that their client was London Underwriters, (ii) that London Underwriters wanted to reinsure 100% of their FPA exposure, which was 60% of the total FPA exposure, and (iii) that there was a possibility "down the road" of Tugu also reinsuring all or part of its 40% interest in the FPA risk. (Tr. 304).
The brokers failed to disclose the fact that the reassured was ceding 100% of its FPA risk, and they drafted a proposal that was unclear and misleading. As a result, plaintiffs were misled into believing that the reassured was retaining up to a 40% interest in the risk, and they were induced to bind a risk that they might not have bound had they known the complete picture.
3. The Duty of Uberrimae Fidei
As the evidence in this case showed, marine insurance contracts are unlike other arms-length commercial transactions in that marine insurance binders are often signed "on trust," and risks are often bound even where significant information has not been provided. (Tr. 346). Here, for example, Reliance originally bound itself to a $ 6 million risk even though the order was only "provisional" and was "to be advised" (TX 6), and NYMGIC bound itself to a $ 2.4 million risk even though Turoff had asked questions of the broker that were not answered. (Tr. 145). In fact, Darragh took the position that the binder was enforceable even though the final policy could have provided reinsurance for as few as 1 and as many as 92 reassureds for between as little as 0% and as much as 100% of the FPA risk. (Tr. 471).
The doctrine of uberrimae fidei developed out of the recognition that the marine insurance contract
is conceived in the uttermost good faith and incubated in a legal environment which transcends the sharper practices of the world of commerce.
Albany Ins. Co. v. Wisniewski, 579 F. Supp. 1004, 1014 (D.R.I. 1984) (applying both federal admiralty law and New York law). Under the doctrine,
the parties to a marine insurance policy must accord each other the highest degree of good faith. . . . This stringent doctrine requires the assured to disclose to the insurer all known circumstances that materially affect the risk being insured.