A. The Question Presented
As stated in the July 8 Opinion and Order, the viability of plaintiff's claim for loss adjustment expenses turns on a single legal question: can the follow-the-settlement clause
of the reinsurance agreement serve as a basis for Allendale to recover loss adjustment expenses in excess of the $ 7,000,000 cap set forth in the limit clause
? Stated another way, the question presented is whether the limit clause defined the reinsurers' maximum exposure as $ 7,000,000 inclusive of all loss adjustment expenses.
B. The July 8 Opinion and Order
My decision to dismiss plaintiff's claim for loss adjustment expenses rested on three primary grounds, which I reiterate briefly to place plaintiff's current arguments in context.
First, fundamental contract law requires the parties' intent to be discerned by reading the contract as a whole, and by considering all its clauses together to determine if and to what extent one may modify, explain or limit another. "From this it follows that a contract containing two clauses which may be in conflict should, if possible, be read to give meaning to both rather than to prefer one to the exclusion of the other." See Allendale I, at *3. As nothing expressly indicates that the parties intended the follow-the-settlement clause to supersede the limit clause under any circumstance, the contract as a matter of law could only be read to mean that the limit clause capped the reinsurers' liability inclusive of Allendale's loss adjustment expenses. See id.
Second, "this reading of the reinsurance agreement is buttressed by an understanding of the traditional role of follow-the-settlement clauses in the reinsurance industry." Leading treatises note that the purpose of follow-the-settlement clauses is "'to preclude wasteful relitigation by a reinsurer of defenses to underlying policy coverage in cases where the ceding insurer has in good faith paid a settlement or judgment'" and that "follow-the-settlement clauses have not traditionally served to modify or eliminate the limit of the reinsurer's exposure." See id. at *4 (quoting Barry R. Ostrager and Thomas R. Newman, Handbook on Insurance Coverage Disputes § 16.01 at 658 (7th ed. 1994)). See also Henry T. Kramer, "The Nature of Reinsurance" in Reinsurance 12-13 (Robert W. Strain, ed. 1980) ("It is clear that [a follow-the-fortune clause] does not supersede stated limitations or exclusions in a reinsurance agreement. . . . In a word, the concept of follow fortunes cannot create reinsurance where none exists.")
Third, both Bellefonte Reinsurance Co. v. Aetna, 903 F.2d 910 (2d Cir. 1990) and Unigard Security Ins. Co. v. North River Ins. Co., 4 F.3d 1049 (2d Cir. 1993) rejected the proposition that a follow-the-settlement clause requires a reinsurer to pay for defense costs in excess of the reinsurer's express reinsurance limit. The primary grounds for both cases was the determination that "the insurer's proposed interpretation effectively read the limit clauses out of the reinsurance contracts." Allendale I, at *4.
C. Plaintiff's Reargument
On reargument, plaintiff presents two related arguments that I will briefly describe below. First, plaintiff contends the Court overlooked the affidavits of Paul C. Thomson, former Vice President of Sorema N.A. Reinsurance Co., dated May 5, 1997 (the "Thomson Aff."), and of John J. Pomeroy, Vice President of Allendale, dated May 5th, 1997 (the "Pomeroy Aff."). It is plaintiff's position that these affidavits create a genuine issue of material fact as to the proper interpretation of the limit and follow-the-settlement clauses. The July 8 Opinion and Order did not address this argument.
Second, plaintiff argues that Bellefonte and Unigard must be distinguished because both cases involved liability insurance, whereas this case involves a property insurance policy. Plaintiff argues that because Allendale reinsured a property insurance policy that did not include coverage of the insured's defense costs, the reinsurers' duty to reimburse Allendale for possible loss adjustment expenses must as a matter of law be considered to be an obligation distinct from the risk it accepted with regard to the insured property -- and thus not subject to the limit clause. See Plaintiff's Memorandum of Law in Support of Motion for Reargument ("Plaintiff's Memo") at 8. Or in the alternative, plaintiff argues, the reinsurance agreement is ambiguous on this issue and therefore the parties' intent must be determined at trial. The July 8 Opinion and Order briefly discussed this argument, finding that "these arguments rely on the kind of 'idiosyncratic factors' that Unigard teaches should not be considered in determining whether a follow-the-settlement clause may extend a reinsurer's liability beyond the stated liability limit". See Allendale I, at *5 (quoting Unigard, 4 F.3d at 1071).
D. The Thomson and Pomeroy Affidavits
Plaintiff offers the Thomson and Pomeroy affidavits as extrinsic evidence of the parties' intent with regard to the intended meaning of the limit and follow-the-settlement clauses. In the alternative, plaintiff contends these affidavits are extrinsic evidence of the ambiguity of the reinsurance agreement. Before addressing these arguments, it is necessary to review fundamental principles of contract law.
"The determination of whether a contract term is ambiguous is a threshold question of law for the court." Walk-in Medical Centers, Inc. v. Breuer Capital Corp., 818 F.2d 260, 263 (2d Cir. 1987). See also MBL Life Assurance Corp. v. 555 Realty Co., 240 A.D.2d 375, 658 N.Y.S.2d 122, 123 (2d Dep't 1997). Contract terms are ambiguous if they are:
capable of more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business.
Nowak v. Ironworkers Local 6 Pension Fund, 81 F.3d 1182, 1192 (2d Cir. 1996) (citation and quotation omitted). It is well established that when the text of a contract is clear on its face, the court should interpret its meaning as a matter of law. See id. Also, "summary judgment is not limited to . . . where the contract is free from ambiguity and not subject to differing interpretations. If there is ambiguity in the terminology . . . and the equivocality can be resolved without reference to extrinsic evidence, the issue is . . . a question of law for the court". See Gitlen v. Margaret G.T. Gallup, 241 A.D.2d 856, 660 N.Y.S.2d 500, 1997 WL 429133, *1 (3d Dep't 1997) (citing Maio v. Gardino, 184 A.D.2d 872, 585 N.Y.S.2d 529, 530 (3d Dep't 1992)).
For reasons already explained in Allendale I, plaintiff cannot avoid summary judgment of its claim for loss adjustment expenses by presenting "objective" extrinsic evidence of the reinsurance industry's customs and practice. I have already found that "the contract as a matter of law could only be read to mean that the limit clause capped the reinsurers' liability inclusive of Allendale's loss adjustment expenses." Allendale I, at *3 (emphasis added). Allendale's proposed interpretation of the reinsurance agreement was rejected because it effectively nullified the limit clause. See Two Guys From Harrison-N.Y., Inc. v. S.F.R. Realty Assoc., 63 N.Y.2d 396, 482 N.Y.S.2d 465, 468, 472 N.E.2d 315 (1984) ("In construing a contract, one of a court's goals is to avoid an interpretation that would leave contractual clauses meaningless") (citations omitted); see also Bellefonte, 903 F.2d at 912 (citing Spencer, White & Prentis, Inc. v. Pfizer Inc., 498 F.2d 358, 363 n.23 (2d Cir. 1974)). This conclusion was supported by the reasoning of both Bellefonte and Unigard, discussed at greater length below.
In a purely semantic sense, the Reinsurance Agreement is ambiguous as to whether the follow-the-settlement clause is capped by the limit clause. Yet the cases cited above make clear that when a contract is capable of being interpreted one of two ways, courts must chose that meaning which gives effect to all the contract's clauses rather than one that renders part of the contract meaningless. See Newmont Mines Limited v. Hanover Ins. Co. 784 F.2d 127, 135 (2d Cir. 1986); Hartford Accident & Indem. Co. v. Wesolowski, 33 N.Y.2d 169, 350 N.Y.S.2d 895, 898, 305 N.E.2d 907 (1973); Restatement (Second) of Contracts § 203(a). Because only defendants' proposed interpretation gives effective meaning
to the limit clause, plaintiff's claim for loss adjustment expenses must be dismissed. No extrinsic evidence of industry practice or custom can avoid such a result. Put simply, plaintiff cannot use affidavit testimony to create a question of fact regarding the proper interpretation of the reinsurance agreement when only one interpretation is permitted by law.
E. The Distinction Between Liability and Property Insurance
Plaintiff strives to distinguish Bellefonte and Unigard. Its arguments require careful consideration because they raise what appears to be a question of first impression.
In Bellefonte, the Court of Appeals was required to interpret a limit clause and a follow-the-settlement clause that were almost identical to those at issue here. Specifically, those clauses provided:
[Provision 2]. Reinsurance Accepted: $ 500,000 part of $ 5,000,000 excess of $ 10,000,000 excess of underlying limits. . .
[Provision 4]. All claims involving this reinsurance, when settled by the [Insurer], shall be binding on the Reinsurer, which shall be bound to pay its proportion of such settlements, and in addition thereto. . . its proportion of expenses . . . incurred by the [Insurer] in the investigation and settlement of claims or suits. . . ."