United States District Court, S.D. New York
October 12, 2005.
TRAVELERS CASUALTY AND SURETY COMPANY, f/k/a The Aetna Casualty and Surety Company, Plaintiff,
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
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
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
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
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
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:
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 can
the Court look to extrinsic evidence to determine the intent of
the parties at the time of the formation of the contract. Id.
But these black letter contract rules do not apply perfectly to
the interpretation of a facultative reinsurance certificate that
contains a "follow the form" clause. This is because these
clauses incorporate by reference the terms of the underlying
insurance policy (except where explicitly provided to the
contrary in the certificate, see, e.g., supra), and,
therefore, they necessarily expand the letter of the certificate
beyond its four corners. See, e.g., United Fire & Cas. Co.
v. Arkwright Mut. Ins. Co., 53 F. Supp. 2d 632, 642 (S.D.N.Y.
1999) ("Facultative reinsurance contracts are not integrated
agreements."). So the question becomes when and to what extent a
court interpreting the terms of such a certificate may look
behind the certificate's plain language and consider the
underlying insurance policy itself in order to determine the true
meaning of the certificate before considering any extrinsic
In Bellefonte, 903 F.2d 910, the issue before the Court was
whether reinsurers are obligated to pay additional sums for
defense costs over and above the limits stated in a reinsurance
certificate that contains a "follow" clause.*fn4 Id. at
910-11. The Second Circuit held that a "follow the fortunes" clause*fn5 cannot
"override the limitation on liability" of a reinsurance
certificate and that, therefore, a reinsurer is "liable only to
the extent of the risk [it] agreed to reinsure. [It] cannot be
liable for the insurer's actions in excess of the agreement."
Id. at 913-14. That Court reasoned that "follow the fortunes"
clauses "coexist with, rather than supplant, the liability cap.
To construe the certificates otherwise would effectively
eliminate the limitation on the reinsurers' liability to the
stated amounts." Id. at 913. Thus, only where the liability
terms of the certificate differ from those in the underlying
policy can the presumption of concurrence between the two
policies be overridden. In Unigard, 4 F.3d 1049, the Second
Circuit extended the logic of Bellefonte to "follow the form"
clauses and held that, where the limitation on liability
provision caps the reinsurer's liability under the certificate,
"[a]ll other contractual language must be construed in light of that cap." Id. at 1071
(quoting Bellefonte, 903 F.2d at 914).
Most recently, the First Circuit handed down two opinions that
discuss how "follow" clauses ought to govern the interpretation
of facultative reinsurance certificates. In Commercial Union
Insurance Co. and American Employers' Insurance Co. v. Swiss
Reinsurance America Corp., 413 F.3d 121 (1st Cir. 2005)
("Commercial Union"), the issue was whether, under several
three-year reinsurance certificates, defendant Swiss Re was
protected by a single per-occurrence limit on its liability for
the relevant three-year policy period or whether the limit
applied separately for each policy year. Id. at 122. That Court
found that the "basic presumption of concurrence" between terms
of a reinsurance certificate and the underlying policy is
presumed "subject only to any clear limitation to the contrary
in the [facultative certificates themselves]." Id. at 128
(emphasis added). But, the Court held, "if sufficiently clear,
specific limits in the certificate control over the general aim
of concurrence and ordinary `follow' clauses." Id. (citing
Unigard, 4 F.3d at 1070-71; Bellefonte, 903 F.2d at 914).
Similarly, in American Employers' Insurance Co. v. Swiss
Reinsurance American Corp., 413 F. 3d 129 (1st Cir. 2005)
("American Employers"), which was a companion case to
Commercial Union, supra, and also dealt with the question of
annualization of reinsurance certificates, the First Circuit
reiterated that "although . . . follow-the-form clauses presume
that the reinsurance dovetails with the underlying liability insurance, this presumption can be
overridden by clear language in the certificate that cuts off
liability under the reinsurance policy even where the cedent is
liable to the insured." Id. at 137.
Despite defendants' arguments to the contrary, the caselaws of
the First and Second Circuits do not differ in any material
respect. See Travelers Cas. & Sur. Co. v. Gerling Global
Reins. Corp. of Am., 419 F.3d 181 (2d Cir. 2005) (citing
generally the First Circuit cases). Both Circuits hold that,
where a certificate contains a "follow the form" clause, though
concurrency is presumed between terms of the certificate and the
underlying policy, exceptions can be made through the placement
of explicit liability limitations in the certificate itself. In
the instant case, however, the relevant and operative language
used in the underlying excess policies (as recited in Item 2 of
the Three-Year Certificates) and the reinsurance coverage (as
recited in Item 4 of the Three-Year Certificates) is identical:
i.e., both use the abbreviation "each occ.-agg." to describe
the relevant coverage period. Compare, e.g., FRC 01270,
attached as Ex. 1 to Bressman Aff., at ACE0001 (terms quoted
supra) and FRC 07107, attached as Ex. 2 to Bressman Aff., at
ACE0018 (same), with FRC 07108, attached as Ex. 3 to Bressman
Aff., at ACE0031 (same). Accordingly, since the certificates do
not clearly or explicitly limit the coverage terms of the
underlying policy, the presumption of concurrency between the
excess policy and the Three-Year Certificates is not overridden.
Therefore, without considering any extrinsic evidence, the Court concludes that the
only reasonable interpretation of the phrase "each occ.-agg." as
applied to Item 4 of the Three-Year Certificates is that each
Three-Year Certificate provides coverage for three annual
aggregate limits. See Bellefonte, 903 F.2d at 913-14;
Unigard, 4 F.3d at 1070-71; accord Commercial Union,
413 F.3d at 128; American Employers, 413 F.3d at 137.
The One-Year Certificates and Certificate FRC 01708.
Travelers also contends that ACE is improperly withholding (a)
$5,903,348.24 in billings on the One-Year Certificates, because
the One-Year Certificates only cover a one-year term and,
therefore, necessarily do not involve the so-called annualization
issue discussed supra, and (b) $417,495.75 in billings on
Three-Year Certificate FRC 01708, because this same sum would be
due under either plaintiffs' or defendant's reading of FRC 01708.
See Affidavit of Steven H. Bencher, May 26, 2005 ("Bencher
Aff."), ¶¶ 6-7; Policies Nos. FRC 02 14 04, FRC 02 14 05, FRC 02
68 92, FRC 02 68 93, FRC 03 15 70, and FRC 03 15 71 attached as
Exs. 4-9 to Bressman Aff; Policy FRC 01708 attached as Ex. 3 to
Bressman Aff.; see also Ex. 42 to Bressman Aff.
In response, ACE claims that they are operating in accordance
with industry custom and, therefore, are fully justified in
withholding payment on the One-Year Certificates because they
have "acted in this situation in exact accord with how Travelers
has acted with regard to ACE" i.e., since Travelers is
unjustifiably withholding payment on reinsurance claims unrelated to the
facultative certificates at issue in this law suit, ACE need not
pay Travelers anything here. See Defendants' Memorandum of Law
in Opposition to the Motion for Summary Judgment by Travelers
Casualty & Surety Company, at 24; Hr'g Tr., July 26, 2005. ACE
also contends that they have no obligation to pay Travelers on
any claims related to the One-Year Certificates because it is
ACE's company policy to treat all their billings under separate
facultative certificates as a whole, meaning that, unless all the
claims are resolved as to all the relevant certificates, no
payment to Travelers is required. See Dep. of Elizabeth Hinkle,
Mar. 24, 2005, at 42-45, attached as Ex. 51 to Bressman Aff.
ACE's reliance on the childhood maxim that "two wrongs make a
right" is as baseless in this dispute as it was in the schoolyard
years ago. Indeed, ACE has pointed to no caselaw or legal basis
such as a valid set-off, a claim of self help, or a discrete
contractual right that support its position that it is proper
to withhold payment on these claims. Instead, ACE relies on
unsubstantiated claims of industry custom and course of dealing
to support its actions. See British Int'l Ins. Co.,
342 F.3d at 83-84 (the burden of proving trade usage lies with the party
"benefitting from its existence" and "[t]he practice of one
company . . . is generally insufficient to establish a trade
usage") (collecting cases). But in this suit, these billings are
clearly not undifferentiated billings that must be considered en
masse; rather, the amount due under each certificate can be easily determined.
See Exs. 35-42 to Bressman Aff.; Bencher Aff. ¶¶ 6-7. And any
defense of industry custom or good faith does not trump the rule
of law or the terms of undisputedly valid certificates.
Accordingly, the Court finds that Travelers is rightly entitled
to the $6,320,843.99 currently withheld by ACE under the One-Year
Policies and under the Three-Year Certificate FRC 01708.
For the foregoing reasons, the Court grants plaintiff's motion
for summary judgment in all respects. Plaintiff shall prepare a
proposed final judgment and submit it to the Court, on three
business days' notice to defendants, by no later than October 21,
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