The opinion of the court was delivered by: Sweet, District Judge.
Plaintiffs United Fire & Casualty Company, Guaranty National Insurance
Company; Sphere Drake Insurance Public Limited Company, Terra Nova
Insurance Company Limited, River Thames Insurance Company Limited, and
Uni Storebrand Insurance Company (U.K.) Limited (the "Western Re
Reinsurers"), and Axa Reinsurance Company (hereinafter "Axa Re" and
collectively the "Plaintiffs"), have moved under Rule 56, Fed.R.Civ.P.
for summary judgment to declare that the Certificates of Facultative
Insurance do not reinsure the Extended Period of Indemnity Endorsement
contained in the insurance policy issued by defendant Arkwright Mutual
Insurance Company ("Arkwright") to the Warnaco Group Inc. ("Warnaco") and
that the liability of the Plaintiffs is limited to $1,036,501. Upon the
following findings of fact and conclusions of law, the Plaintiffs' motion
Here the earthquake damages suffered by Warnaco, Arkwright's insured,
require a resolution of the meaning and effect of the documents and
practices governing the reinsurance obtained by Arkwright from the
Plaintiffs as to whether or not Business Interruption endorsement to a
policy ("BI") includes an Extended Period of Indorsement provision
("EPI"). Because there are no material facts at issue since the specific
must control over the general, and because the duty of utmost good faith
falls principally upon the ceding insurer, summary judgment in favor of
the Plaintiffs, though not easily arrived at, is appropriate. Despite the
difficulty of the issues, skilled counsel for both sides have made the
task of resolution if not easy, at least comprehensible.
This action was commenced on June 4, 1997 by the filing of a complaint
by the Plaintiffs setting forth two causes of action, the first seeking
rescission of the Certificates of Facultative Reinsurance which they had
issued on the grounds that Arkwright obtained its reinsurance through the
misrepresentation of material facts, and the second seeking a declaratory
judgment that the Extended Period of Indemnity Endorsement contained in
the Arkwright policy of insurance issued to Warnaco was not reinsured by
Plaintiffs and that the Plaintiffs are not liable under their
Certificates of Facultative Reinsurance. An answer was filed and
discovery was taken.
On January 22, 1999, the Plaintiffs filed the instant motion seeking
summary judgment on their second cause of action and a declaration that
their liability is limited to $1,036,501. The motion was marked fully
submitted on March 24, 1999.
The facts found below are based upon the statements submitted by the
parties in accordance with Rule 56.1 of the Civil Rules of the Rules of
the United States District Courts for the Southern and Eastern Districts
and are not in dispute except as noted.
Warnaco is a manufacturer and distributor of apparel. Warnaco's Olga
Division manufactures and distributes women's undergarments. Its Olga
Division's finishing and distribution center was located in Sylmar,
Arkwright issued to Warnaco a first-party property damage and business
interruption insurance policy, No. 06020044, effective January 18, 1993
to January 18, 1996, covering Warnaco's property throughout the United
States and Mexico, including its Sylmar, California location ("the
Balis & Co., Inc. ("Balis") is a reinsurance intermediary whose
function is to place facultative reinsurance with reinsurers on behalf of
Arkwright. It placed facultative reinsurance for the Warnaco Policy with
Western Re and Axe Re.
Axa Re is a reinsurer who issued to Arkwright a certificate of
facultative reinsurance, No. P11260/93, effective March 1, 1993 to March
1, 1994, reinsuring portions of the Warnaco Policy (the "Axa Re
Certificate of Facultative Reinsurance"). The Western Re Reinsurers, are
reinsurers who issued to Arkwright a certificate of facultative
reinsurance, No. WRE113435, effective March 1, 1993 to March 1, 1994,
reinsuring portions of the Warnaco Policy (the "Western Re Certificate of
Western Re/Managers ("Western Re") is the managing general agent for
the Western Re Reinsurers for the purpose of underwriting facultative
reinsurance and issuing certificates of facultative reinsurance on their
behalf. Western Re issued the Western Re Certificate of Facultative
Reinsurance on behalf of the Western Reinsurers.
The Warnaco Policy is an all-risk property insurance policy insuring
property owned or operated by Warnaco at scheduled locations throughout
the United States and Mexico. The Warnaco Policy covers property damage
and business interruption loss caused by any insured peril, including
fire, windstorm, vandalism, earthquake and flood.
Arkwright standard policy Form No. 3200-the Business Interruption
Endorsement ("BI"), provided the basic business interruption coverage in
the Warnaco Policy and covers the policyholder for its business
interruption loss sustained during the "period of interruption," which is
defined as the time necessary to repair or replace property damaged by an
EPI covers remote business interruption losses and losses of market
share occurring beyond the basic period of interruption, losses which are
not insured under Form No. 3200 of the Warnaco Policy. The EPI
endorsement extended the period of interruption in the Warnaco Policy for
an additional 270 consecutive days beyond the time afforded by the basic
business interruption coverage in form No. 3200.
Arkwright charged Warnaco an additional premium of $51,793 for adding
the EPI endorsement to the Warnaco Policy.
The Warnaco Earthquake Loss
The Northridge, California earthquake of January 17, 1994 damaged
Warnaco's Sylmar, California location and as a result Warnaco sustained
business interruption losses which were covered by the Warnaco Policy.
The business interruption loss sustained by Warnaco under Arkwright
standard policy Form No. 3200, the Business Interruption Endorsement was
$12,664,243. This represents the amount of business interruption loss
sustained by Warnaco during the seven months between the date of the
earthquake (January 17, 1994) and the time that the Sylmar facility was
ready to be reoccupied (July 1994). Warnaco's business interruption loss
sustained under Arkwright Form No. 3213, the Extended Period of Indemnity
Endorsement was $5,726,998. This represents the amount of business
interruption loss sustained by Warnaco in the 270 days subsequent to July
1994, ending in April 1994 and resulted primarily from the difficulty in
recategorizing stock and the consequent inability to fill orders and a
resultant loss of market share.
The costs of the move, relocation, reestablishment of Warnaco's
operations, loss of business, and lost profits, comprise the business
interruption loss known as the "Warnaco Loss."
The extent of the Warnaco loss was unexpected. It took two major
accounting firms (one hired by Warnaco and one by Arkwright), a team of
adjusters, and numerous Warnaco and Arkwright staff over two years to
calculate the extent of the business interruption loss sustained by
In recognition that the loss, although unforeseen, was covered by the
Warnaco policy, Arkwright adjusted the loss and negotiated a settlement
with Warnaco in which the loss was agreed to be $18,371,241, the
deductible was negotiated to be $5,571,241, and Arkwright agreed to pay
Warnaco $12,800,000. Certain of the Plaintiffs paid interim payments
without objection prior to the time the extent of the Warnaco loss was
By July 12, 1995, the Plaintiffs were provided with notice of a
potential claim by Arkwright for payment of their share of the Warnaco
Loss resulting from the Northridge earthquake.
By July 20, 1995, Plaintiffs had received loss estimates of the Warnaco
Loss from Arkwright's adjusters, which noted the existence of the Warnaco
Policy's extended period of indemnity for business interruption losses,
and the potential for a loss within that period. They made no objection
or statement that they did not reinsure EPI.
In September 1995, Plaintiffs received copies of loss adjusters'
reports prepared a year earlier which specified that Warnaco's business
interruption loss had an EPI component with a negative balance of
$(570,129). By September 27, 1995, the Plaintiffs were sent proofs of
loss and asked to pay their share of interim payments made by Arkwright
to Warnaco for the business interruption loss, including its EPI
In December 1995, as the loss predictions approached $12 million ($7
million to the reinsurance layer in which Plaintiffs provided 50% of the
reinsurance), the Plaintiffs for the first time sent a reservation of
rights letter raising objections to the billings for losses during the
Under their certificates of Facultative Reinsurance in effect at the
time of the earthquake, the Western Re Reinsurers and Axa Re collectively
reinsured $5 million part of $10 million of reinsured losses in excess of
Arkwright made claim to the Plaintiffs under the Certificates of
Facultative Reinsurance for their alleged 50 percent share of Arkwright's
$12.8 million payment to Warnaco in excess of $5 million (i.e. 50 percent
of $7.8 million, or $3.9 million), which payment includes compensation ...