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TRAVELERS CAS. & SURETY CO. v. ACE AMERICAN REINSURANCE CO.

October 12, 2005.

TRAVELERS CASUALTY AND SURETY COMPANY, f/k/a The Aetna Casualty and Surety Company, Plaintiff,
v.
ACE AMERICAN REINSURANCE COMPANY, f/k/a CIGNA Reinsurance Company, f/k/a INA Reinsurance Company, and INSURANCE COMPANY OF NORTH AMERICA, Defendants.



The opinion of the court was delivered by: JED RAKOFF, District Judge

OPINION AND ORDER

This is a reinsurance collection dispute brought by plaintiff Travelers Casualty and Surety Company ("Travelers"), formerly known as the Aetna Casualty and Surety Company, against defendants ACE American Reinsurance Company, formerly known as the CIGNA Reinsurance Company, formerly known as INA Reinsurance Company, and Insurance Company of North America (collectively, "ACE") for breach of contract relating to ACE's refusal to pay Travelers' outstanding billings on three three-year facultative reinsurance certificates (the "Three-Year Certificates") and six one-year facultative reinsurance certificates (the "One-Year Certificates"). Both parties have moved for summary judgment.

The following facts are not in genuine dispute. Between 1971 and 1985, Travelers issued three excess insurance policies with annual aggregates to Dow Corning Corporation ("Dow"); the policies provided coverage in excess of the coverage of umbrella policies issued by the Home Insurance Company. See Policies Nos. 01 XN 247, 01 XN 752, and 01 XN 753 attached as Exs. 10-12 to Affidavit of Marc I. Bressman, May 26, 2006 ("Bressman Aff."); Policies HEC 4345068 and HEC 4973974 attached Exs. G and H to Affidavit of Elizabeth Hinkle, May 25, 2005. The relevant terms of coverage under these excess policies may be summarized as follows:
01 XN 247 (policy period: 6/11/72 to 6/11/75): "30% ($4,500,000 Maximum) Quota Share of $15,000,000. Each Occurrence." "30% ($4,500,000 Maximum) Quota Share of $15,000,000. Annual Aggregate."
01 XN 752 (policy period: 6/11/75 to 6/11/78): "53.33% ($8,000.000 Maximum) Quota Share of $15,000,000. Each Occurrence." "53.33% ($8,000.000 Maximum) Quota Share of $15,000,000. Annual Aggregate."
01 XN 753 (policy period: 6/11/75 to 6/11/78): "54.55% ($6,000,000 Maximum) Quota Share of $11,000,000. Each Occurrence." "54.55% ($6,000,000 Maximum) Quota Share of $11,000,000. Annual Aggregate."
Id.
  To minimize its risk on these policies, Travelers purchased reinsurance from several reinsurers including ACE. These included the Three-Year Certificates, see Policies Nos. FRC 01270, FRC 07107, FRC 07108 attached as Exs. 1-3 to Bressman Aff, the terms of which may be summarized as follows:
FRC 01270 (policy period: 6/11/72 to 6/11/75): Item 2 (Policy Limits and Application): "$4,500,000 CSL each occ. agg. part of $15,000,000 CSL each occ.-agg. excess of $9,000,000 CSL each occ.-agg. which is excess of underlying insurance"
Item 4 (Reinsurance Accepted): "$1,500,000 CSL each occ.-agg. part of $4,500,000 CSL each occ.-agg." FRC 07107 (policy period: 6/11/75 to 6/11/78): Item 2 (Policy Limits and Application): "$8,000,000 CSL each occ.-agg. part of $15,000,000 CSL each occ.-agg. which is excess of $24,000,000 CSL each occ.-agg. which is excess of underlying insurance"
Item 4 (Reinsurance Accepted): "$2,000,000 CSL each occ.-agg. part of $8,000,000 CSL each occ.-agg. part of $15,000,000 CSL each occ.-agg."
FRC 07108 (policy period 6/11/75 to 6/11/78):
Item 2 (Policy Limits and Application): "$6,000,000 CSL each occ.-agg. part of $11,000,000 CSL each occ.-agg. excess of $39,000,000 CSL each occ.-agg. which is excess of underlying insurance"
Item 4 (Reinsurance Accepted): "$500,000 CSL each occ.-agg. part of $6,000,000 CSL each occ.-agg. of $11,000,000 CSL each occ.-agg."
Id. In addition, each of the Three-Year Certificates included what is commonly known in the insurance industry as a "follow the form" clause, which states in pertinent part that
 
the liability of the Reinsurer specified in Item 4 of the said Declarations shall follow that of the Company and except as otherwise specifically provided herein, shall be subject in all respects to all the terms and conditions of the Company's policy.
See ACE0004, ACE0021, and ACE0034, attached as Exs. 1-3 to Bressman Aff.*fn1 Travelers subsequently extended the reinsurance provided under two of the three Three-Year Certificates for two additional years through the purchase of six One-Year Certificates, the relevant terms of coverage of which can be summarized as follows:*fn2
 
Renewal of FRC 07108 (supra): FRC 021404 (policy period: 6/11/78 to 6/11/79); FRC 026892 (policy period: 6/11/79 to 6/11/80); FRC 031570 (policy period: 6/11/80 to 6/11/81): Item 4 (Reinsurance Accepted): "$1,250,000 CSL each occ.-agg. part of $10,000,000 CSL each occ.-agg."
Renewal of FRC 07107 (supra): FRC 021405 (policy period: 6/11/78 to 6/11/79); FRC 026893 (policy period: 6/11/79 to 6/11/80); FRC 031571 (policy period: 6/11/80 to 6/11/81): Item 4 (Reinsurance Accepted): "$1,250,000 CSL each occ.-agg. part of $10,000,000 CSL each occ.-agg."
See Policies Nos. FRC 021404, FRC 026892, FRC 031570, FRC 021405, FRC 026893, and FRC 031571 attached as Exs. 4-9 to Bressman Aff. The One-Year Certificates also included "follow the form" clauses that are materially similar to those found in the Three-Year Certificates. See id. ¶ 1 (Application of Certificate).

  During that same time period, Dow was engaged in, among other things, the business of manufacturing, selling, and distributing silicone breast implants and was subsequently exposed to thousands of products liability claims. Thereafter, Dow brought suit for insurance coverage relating to these breast implant claims against Travelers. In November 1994, Travelers entered into a settlement agreement with Dow (the "1994 Settlement") resolving the coverage dispute between them. In May 1995, Dow filed for Chapter 11 bankruptcy protection, and almost a decade later, in June 2004, Dow's Plan of Reorganization became effective. On June 17, 2004, Travelers billed ACE $12,070,615.98 for payment on claims settled pursuant to the 1994 settlement. ACE refused payment on these claims and this suit followed.

  The Three-Year Certificates.

  While the parties are in agreement that the underlying excess policies provide coverage up to certain aggregate limits, they disagree about whether the Three-Year Certificates provide coverage up to a single aggregate limit for the three-year period or for three annual aggregate limits. Coverage under the latter type of liability limit could significantly enlarge ACE's total exposure.

  Travelers contends that ACE's refusal to pay its outstanding billings is contrary to the terms of the Three-Year Certificates, which, according to Travelers, provide for three annual aggregate limits. In support of its "annualization" reading of the Three-Year Certificates, Travelers points to the "follow the form" clauses found in each certificate that it contends indicate a clear intent by the parties to have the terms of the Three-Year Certificates mirror the terms of the underlying, reinsured excess policies. See supra; ACE0004, ACE0021, and ACE0034, respectively, attached as Exs. 1-3 to Bressman Aff. Any other reading, according to plaintiff, would subvert what it says is the hallmark of facultative reinsurance: concurrency.

  In addition, Travelers points to the affidavit of Charles Stevens, who was employed by a predecessor concern of plaintiff where he underwrote excess insurance policies. Stevens states that "there was an implicit (if not explicit) agreement between [Travelers] and [ACE] that the reinsurer would follow all of the terms of the reinsured contract" and that he never would have agreed to the Three-Year Certificates without annual aggregate limits. Affidavit of Charles Stevens, May 25, 2005, ¶¶ 1-2, 5, 9.*fn3 Finally, Travelers contends that there is a course of dealing between the parties that evidences that defendants understood the Three-Year Certificates to contain three annual aggregate limits. See Bressman Aff., Exs. 42-43, 21-27, 52.

  On the other side, ACE argues that the language of the Three-Year Certificates clearly and unambiguously provides for a single aggregate limit for the three-year coverage period. Since the language of the certificates nowhere includes the word "annual," the certificates do not lend themselves to more than one reasonable interpretation, and, therefore, any interpretation of the certificates must be limited to the four corners of the relevant instrument without regard to any extrinsic evidence. In support of their reading, defendants point to the expert report of Geroge Gottheimer, an international consultant at Kernan Associates, Inc., for the proposition that the absence of the word "annual" in the certificates is determinative. See Expert Report of George Gottheimer, March 23, 2005, at 4, attached as Ex. A to Affirmation of James M. Dennis, June 24, 2005. Any interpretation that were to read the word "annual" into the certificate language or were to consider extrinsic evidence, according to Gottheimer, would be inappropriate. Id.

  Furthermore, defendants read the Second Circuit's decisions in Unigard Security Insurance Co. v. North River Insurance Co., 4 F.3d 1049 (2d Cir. 1993) and Bellefonte Reinsurance Co. v. Aetna Casualty and Surety Co., 903 F.2d 910 (2d Cir. 1990), to stand for the proposition that the language in a facultative reinsurance certificate is of paramount importance and that, therefore, a "follow the form" clause cannot be used to trump or rewrite the liability limit of a certificate.

  It is well settled under New York law, which here governs, that reinsurance contracts are interpreted in accord with general contract principles. See British Int'l Ins. Co. Ltd. v. Seguros La Republica, S.A., 342 F.3d 78, 81-82 (2d Cir. 2003). Where a reinsurance contract "is clear and unambiguous on its face, the intent of the parties must be gleaned from within the four corners of the instrument, and not from extrinsic evidence." Id. at 82 (internal quotation omitted). Only where an ambiguity exists ...


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