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United States District Court, S.D. New York

November 8, 2005.

TIG INSURANCE COMPANY, successor by Merger to International Insurance Company, Plaintiff,

The opinion of the court was delivered by: SHIRA SCHEINDLIN, District Judge


TIG Insurance Company ("TIG") brings this action for breach of contract and declaratory judgment against Newmont Mining Company ("Newmont"). TIG alleges first, that Newmont unreasonably withheld a portion of a settlement recovery owed to TIG, and second that Newmont owes interest to TIG on certain late payments.*fn1 A bench trial was held from October 7, 2005 to October 14, 2005. The Court has diversity jurisdiction over this matter pursuant to 28 U.S.C. § 1332. Venue is proper in this district pursuant to 28 U.S.C. § 1391(a). The following constitutes the Court's findings of fact and conclusions of law.


  A. The Parties*fn2

  TIG is a California corporation with its principal place of business in Irving, Texas. TIG is the successor by merger to International Insurance Company ("International"). During the early 1980s, International issued certain Environmental Impairment Liability insurance policies to Newmont. Newmont is a Delaware corporation with its principal place of business in Denver, Colorado.

  B. The Idarado and Resurrection Mining Sites

  Significant mining began at the Idarado and Resurrection sites in Colorado after the Civil War.*fn3 Two Newmont subsidiaries, Idarado Mining Company and Resurrection Mining Company, conducted operations at these sites during the twentieth century.*fn4 In the 1980s, the State of Colorado brought actions against Newmont related to environmental contamination at Idarado and Resurrection.*fn5 Newmont claims that it incurred approximately seventy five to eighty million dollars in total costs related to these actions.*fn6 Subsequently, Newmont became involved in lawsuits with International and various of its comprehensive general liability insurers ("CGL Insurers") over coverage for these claims.*fn7

  C. The Agreement

  On February 1, 1995, International and Newmont executed a settlement agreement resolving their coverage dispute (the "Agreement").*fn8 The Agreement required International to pay $18,500,000 to Newmont by February 2, 1995.*fn9 This sum was paid.*fn10 In turn, Newmont was to remit to International twenty percent of any net recovery from the CGL Insurers "with respect to coverage for environmental claims involving the Idarado and/or Resurrection sites."*fn11

  The Agreement gives Newmont "the sole right, without interference" to settle its actions with the CGL insurers "in such manner as Newmont believes to be appropriate."*fn12 Newmont is charged with determining the "gross amount(s) received from any CGL Insurer with respect to environmental claims involving the Resurrection or Idarado Sites."*fn13 The Agreement does not provide any remedies for International in the event that it disputes Newmont's calculation of this amount.*fn14

  Before calculating International's twenty percent share of Newmont's recoveries from CGL Insurers, the Agreement allowed Newmont to deduct fees and expenses "incurred in connection with any litigation between Newmont and any CGL Insurer . . . involving the Idarado or Resurrection sites."*fn15 Newmont could deduct fees and expenses from an action even if no recovery had been obtained in that action.*fn16 Newmont was required to certify the amount of its deductible fees and expenses, and International was entitled to review Newmont's underlying bills for sixty days thereafter.*fn17 Additionally, for ninety days after Newmont's final payment under the Agreement, International had the right to seek review of Newmont's fees and expenses for "mathematical errors" by a "Referee."*fn18 If the Referee found that "any fees and expenses incurred for purposes other than litigation with a CGL Insurer with respect to the Idarado and Resurrection sites were deducted by Newmont," Newmont would be required to pay any amounts due to International, plus an additional ten percent.*fn19

  Payments became due to International when Newmont recovered settlement proceeds in excess of its fees and expenses on February 1, 1996, December 31, 1996, and each June 30 and December 31 thereafter.*fn20 The Agreement required Newmont to "periodically" deliver to International copies of documents filed in its actions against the CGL Insurers.*fn21 The Agreement is silent on the question of interest on any late payments from Newmont to International.*fn22 In the event of litigation, the Agreement allows costs and attorney's fees to the prevailing party.*fn23

  D. The Lloyds/North River Settlement

  Underwriters at Lloyds of London, certain London Market Insurance Companies, and North River Insurance Company (collectively, "Lloyds/North River") had issued excess and umbrella policies*fn24 to Newmont, covering occurrences from 1952 to 1968 and 1979 to 1984,*fn25 with limits totaling at least $250 million.*fn26 In 1993, Newmont brought suit in Colorado against Lloyds/North River and various other CGL Insurers for coverage related to the Idarado and Resurrection sites (the "Colorado CGL Action").*fn27

  Prior to trial in the Colorado CGL Action, Newmont had incurred approximately sixty million dollars in unreimbursed costs related to the Idarado and Resurrection sites.*fn28 During the summer of 1997, Newmont made a settlement offer to Lloyds/North River "in the tens of millions of dollars."*fn29 Newmont's offer was based on the "all sums theory" of allocation.*fn30 On this theory, when a loss occurs over more than one year and there are multiple insurers, the loss is allocated to a single year, insurers are jointly and severally liable, and insurers may be able to seek contribution from one another.*fn31 Lloyds/North River countered Newmont's demand with an offer of $900,000, and suggested that they would pay more if the settlement included a "buy back" of all policies issued by Lloyds/North River to Newmont.*fn32 The parties did not reach a settlement at that time.*fn33

  When the trial in the Colorado CGL Action began on November 3, 1997, Judge Robert P. Fullerton ruled that first, the all sums approach of joint and several liability did not apply to the facts of the case, and second, the jury would be asked to allocate damages by occurrence to "policy years and also prepolicy years, because . . . the court does not deem that it would be fair to require these insurers to pay for damages that occurred before their policies were in effect."*fn34 If the jury was not able to allocate damages, the court would apply the "time on the risk approach."*fn35 Under this theory of allocation, total damages are divided by the number of years in which they occurred, and an insurer's payment is determined by multiplying this number by the number of years that insurer was "on the risk."*fn36 Newmont considered Judge Fullerton's ruling to be "very adverse" to its position with respect to the value of its Idarado and Resurrection claims.*fn37 In Newmont's assessment, Judge Fullerton's ruling created the risk that damages would be divided over a century of mining operations.*fn38 Applying the time on the risk analysis, damages for any one year might not have reached the minimum threshold to trigger coverage under the Lloyds/North River policies.*fn39

  Prior to a jury verdict, Lloyds and Newmont reached a settlement in principle.*fn40 On December 12, 1997, Newmont and Lloyds/North River executed a settlement agreement and release ("Lloyds/North River Agreement") resolving the pending litigation as well as releasing Lloyds/North River from all obligations under certain policies issued to Newmont.*fn41 Newmont eventually received a total of $6,038,109 pursuant to the Lloyds/North River Agreement.*fn42

  To calculate the amount owed to International on account of this settlement, Newmont allocated approximately twenty percent, or $1,200,000, to settlement of claims involving the Idarado and Resurrection sites, and the balance to the policy buy back.*fn43 Newmont based its allocation in part on the fact that prior to Judge Fullerton's favorable ruling for Lloyds/North River, Lloyds/North River had made a settlement offer, excluding any buy back, of "around $1 million."*fn44 In Newmont's assessment, the buy back extinguished any potential coverage Newmont might have had for environmental costs related to mining operations such as Dawn Mining, near Spokane, Washington, and Pinal Creek, near Phoenix, Arizona.*fn45 Internally, Newmont divided the settlement amount between its subsidiaries and the parent corporation in accord with this 20%/80% allocation.*fn46 The Lloyds/North River Agreement does not speak to the question of allocation, and Lloyds/North River did not dictate that Newmont make any particular allocation.*fn47 Newmont deducted 100% of its fees and expenses related to the Lloyds/North River Agreement, because it considered the expenses incurred to negotiate the buy back and to settle claims involving the Idarado and Resurrection sites, such as the costs of travel to London, to be "overlapp[ing]."*fn48

  TIG alleges that Newmont improperly withheld amounts of the Lloyds/North River settlement from its calculation.*fn49 TIG claims damages for this breach in the amount of $960,000 (twenty percent of $4.8 million).*fn50 Thus, TIG claims that the entire Lloyds/North River settlement should be allocated to the settlement of the Idarado and Resurrection sites.

  E. Late Payments by Newmont to International and TIG

  The parties have stipulated that Newmont received a total of $17,265,000 in settlement funds from certain CGL Insurers with respect to the Idarado and Resurrection sites prior to December 31, 1997.*fn51 Deductible fees and expenses as of that date were equal to or less than $11,841,152.93, the amount Newmont certified it had incurred as of June 5, 1998.*fn52 Therefore, at least $1,084,769.41 (twenty percent of the net settlement recovery of $5,423,847.07) was due to International under the Agreement on December 31, 1997. Newmont made no payment and sent no notice to International on that date. On February 2, 1998, Newmont informed International that it had reached settlements totaling approximately $20 million, but that "not all of the settlements have been paid."*fn53 Newmont also stated that its expenses were "very near $12 million."*fn54 On April 3, 1998, International requested an update on the status of Newmont's settlements and the opportunity to review supporting documents.*fn55

  On June 5, 1998, Newmont paid $1,500,000 to International.*fn56 Newmont certified that, as of that date, it had collected a gross amount of $19,665,000 from CGL Insurers involving the Resurrection and Idarado sites.*fn57 Twenty percent of the net recovery is $1,564,769.41. Newmont withheld $64,769.41 to reserve for "anticipated future costs and expenses."*fn58 Newmont did not disclose the dates it had collected its settlement recoveries at that time, and International accepted payment without waiver of its rights in connection with the Agreement.*fn59

  Prior to June 30, 2002, Newmont collected an additional $2,600,000 from CGL Insurers with respect to the Idarado and Resurrection sites.*fn60 On June 17, 2003, Newmont paid $472,000 to International.*fn61 On September 10, 2003, Newmont certified that as of June 17, 2003, it had incurred $239,602.39 in deductible expenses.*fn62 Twenty percent of the net amount is $472,079.52. Newmont "round[ed]" that number to $472,000 when it made its June 17, 2003 payment.*fn63 On April 28, 2005, Newmont paid $64,848.87 to TIG on account of sums previously unpaid in June 1998 and June 2003.*fn64 TIG alleges that it suffered damages in the amount of interest on those late payments.*fn65


  A. Breach of Contract

  To establish a claim for breach of contract under New York law, TIG must prove, "(1) a contract; (2) performance of the contract by one party; (3) breach by the other party; and (4) damages."*fn66 The party asserting a breach of contract claim "has the burden of proving the material allegations in the complaint by a fair preponderance of the evidence."*fn67

  In determining a party's obligations under a contract, it is not for the court to "supply a specific obligation the parties themselves did not spell out."*fn68 "Nor, in the absence of fraud or other overreaching, is it the court's function to rewrite improvident or inequitable provisions of a contract."*fn69

  However, "[i]mplicit in all contracts is a covenant of good faith and fair dealing in the course of contract performance. . . . Where the contract contemplates the exercise of discretion, this pledge includes a promise not to act arbitrarily or irrationally in exercising that discretion."*fn70 One party's discretion cannot "go so far as to enable the party to eviscerate [a] term [of the contract] and frustrate a fundamental purpose underlying the agreement."*fn71 To prove breach of the implied covenant of good faith and fair dealing, the plaintiff must establish that "`the defendant sought to prevent performance of the contract or to withhold its benefits from the plaintiff.'"*fn72 B. Statute of Limitations

  New York has a six-year statute of limitations for an action to recover damages for breach of contract.*fn73 "[A] cause of action accrues and the statute of limitations begins to run in contract actions from the time of the breach . . . when the plaintiff possesses a legal right to demand payment."*fn74 But "`[o]ur courts have long had the power, both at law and equity, to bar the assertion of the affirmative defense of the Statute of Limitations where it is the defendant's affirmative wrongdoing . . . which produced the long delay between the accrual of the cause of action and the institution of the legal proceeding.'"*fn75 "The equitable bar to a defense may arise by virtue of positive acts, or omissions where there was a duty to act."*fn76 "If a plaintiff possesses sufficient knowledge of the possible existence of a claim, he or she is under a duty to make inquiry and ascertain all the relevant facts before the statute of limitations expires."*fn77 This Court has already described the law applicable to damages for untimely payments in its Interest Opinion, and familiarity with that Opinion is assumed.

  C. Prevailing Party

  To determine the prevailing party entitled to fees and expenses under the Agreement, this Court must first analyze "the true scope of the dispute litigated" and then compare "what each party achieved within that scope."*fn78 The prevailing party need not prevail on every one of its claims.*fn79


  A. Allocation of the Lloyds/North River Settlement

  1. Newmont's Obligations Under the Agreement

  The parties do not dispute the existence of the Agreement and TIG's performance thereunder. The principal issue is whether Newmont's allocation of the proceeds of the Lloyds/North River settlement was a breach of the Agreement. The Agreement requires Newmont to remit twenty percent of any recovery from a CGL Insurer "with respect to" the Idarado and Resurrection sites to TIG.*fn80 But the Agreement provides no method for allocating a settlement that is not entirely "with respect to coverage for environmental claims involving" those sites. Neither does the Agreement provide a mechanism for TIG to challenge Newmont's allocation of settlement amounts. International could have reserved such a right through inclusion of appropriate language in the Agreement, just as it secured a mechanism to challenge the fees and expenses deducted by Newmont, but it did not.*fn81 Therefore, Newmont's allocation of the Lloyds/North River settlement recovery did not directly breach any provision of the Agreement. Because there is no evidence that the Agreement was a result of fraud or overreaching, this Court cannot rewrite the Agreement to provide additional remedies to TIG.*fn82

  However, implied in the Agreement is the covenant of good faith and fair dealing, which prohibits Newmont from exercising its discretion to eviscerate a term of the contract.*fn83 Therefore, the Court must analyze whether Newmont exercised its discretion in allocating the Lloyds/North River settlement recovery "arbitrarily or irrationally,"*fn84 or in an attempt to withhold the benefits of the Agreement from TIG.*fn85

  The Court must assess Newmont's allocation under a deferential standard of review. Paragraph 9 of the Agreement forbids TIG from second-guessing Newmont's settlement decisions by giving Newmont the "sole right" to dispose of its actions with CGL Insurers. Any attempt by this Court to re-allocate the proceeds of the Lloyds/North River Agreement would require the type of searching factual inquiry into Newmont's settlement decisions that Paragraph 9 of the Agreement is intended to avoid. In any event, the Court could not determine what percentage of the settlement was "with respect to environmental claims involving" these sites as a factual matter, because there is no objective basis for such an allocation.*fn86 Newmont's allocation was necessarily a subjective risk assessment and business judgment.

  Cases from the reinsurance context provide guidance on the appropriate framework for analyzing whether Newmont breached the covenant of good faith and fair dealing. Reinsurance disputes often involve settlements between insurers and policy holders based on complicated risk assessments.*fn87 Under the doctrine of "follow-the-settlements,"*fn88 a reinsurer is required to indemnify an insurer, or cedent,*fn89 for its settlement with a policyholder as long as that settlement was not fraudulent, in bad faith, or beyond the scope of the policy.*fn90 "The purpose of the follow-the-settlements doctrine is to prevent the reinsurer from `second-guessing' the settlement decisions of the ceding company."*fn91 Otherwise a cedent would never settle with a policyholder for fear that the reinsurer would refuse to reimburse it for that settlement.*fn92 In North River Insurance Company v. Ace American Reinsurance Company, the Second Circuit extended the follow-the-settlements doctrine to prevent reinsurers from second guessing a cedent's post-settlement allocation of indemnification obligations among multiple reinsurers.*fn93 The reinsurer argued that the cedent had based its allocation on a different theory than the one it relied on in negotiating the settlement.*fn94 The court refused to re-allocate because it would have required precisely the kind of "intrusive factual inquiry" into the cedent's settlement negotiations that the follow-the-settlements doctrine is meant to avoid.*fn95 By the same token, this Court must afford deference to Newmont's settlement allocation, and analyze the allocation based on whether it was in good faith and reasonable.*fn96 2. Reasonableness of Newmont's Allocation

  TIG has not proven by a preponderance of the evidence, that, in exercising its discretion under the Agreement to make its 20%/80% allocation, Newmont violated the covenant of good faith and fair dealing.*fn97 Newmont's allocation was one of "several reasonable allocation possibilities."*fn98 Simply because that allocation reduced the amount of money available to TIG is not a basis for a finding of bad faith.*fn99 Newmont based its allocation on the history of its settlement negotiations with Lloyds/North River and on Judge Fullerton's adverse ruling.*fn100 Newmont's allocation method was neither irrational nor arbitrary,*fn101 but rather, "was reasonable when viewed in the context of then-prevailing case law."*fn102 Newmont's expert witness, William J. Russell, testified that he reached a similar dollar amount assessment for the value of the Idarado and Resurrection claims*fn103 using the "orthodox" time on the risk approach and allocating damages pro rata over the entire number of years since mining operations began.*fn104

  TIG argues that Newmont's allocation was not credible, but in order to prove that the allocation was done in bad faith, TIG must make an "`extraordinary showing of a disingenuous or dishonest failure.'"*fn105 TIG has not done so. Michael Aylward, TIG's insurance law expert, testified that he had been involved with approximately fifty settlements in which buy backs were negotiated, and that never was a buy back amount more than twenty-five percent of any total settlement.*fn106 Though Newmont's allocation of eighty percent of the Lloyds/North River settlement to the buy back may be out of step with Aylward's experience, it is possible that the Lloyds/North River Agreement is an unusual case. Aylward testified that generally, the amount that a carrier would pay for a buy back is small because a reinsurer will reimburse a cedent for a settlement of claims, but not a buy back.*fn107 TIG presented no evidence that Lloyds/North River had reinsurance coverage for these claims.

  Aylward also testified that he premised his opinion on his belief that Newmont had not given up any significant coverage through the buyback, other than coverage for the Idarado and Resurrection claims.*fn108 Aylward discounted the value of a potential Dawn Mining claim against Lloyds/North River because he believed that the claim would be dispersed over too many years to trigger the policy minimums. But he had no information on the period of operation of the Dawn Mining site.*fn109 Nor did he consider that Newmont believed that its other layers of insurance would have been exhausted by its settlements with other CGL Insurers.*fn110 Additionally, Aylward was under the impression that litigation over Pinal Creek had been resolved at the time of the buy back.*fn111 Joy Hansen testified that Pinal Creek was a concern for Newmont at that time and that the litigation was still pending.*fn112

  TIG also failed to prove that Newmont's allocation was not in accord with its settlements with other insurers.*fn113 Aylward compared the Lloyds/North River settlement with the settlements of four other CGL Insurers.*fn114 Although none of those settlements involved policy buy backs, the amounts paid by those CGL Insurers with respect to Idarado and Resurrection, as a percentage of their total liability limits, were in the approximate range of the entire Lloyds/North River settlement (1% to 8.9% of total limits).*fn115 But TIG presented no evidence that these CGL Insurers and Newmont were similarly situated. Newmont argues that one of these carriers only covered risks over eighteen days, while Lloyds/North River provided coverage for a total of twenty-one years.*fn116 Another carrier was not even an insurer of Newmont during the relevant time period.*fn117 In sum, TIG has not carried its burden, by a preponderance of the evidence, to demonstrate that Newmont's allocation was unreasonable or in bad faith.

  B. Late Payments

  Based on all the evidence admitted at the trial I conclude that Newmont breached the Agreement by failing to make three payments in a timely fashion. First, TIG has proven that $1,084,769.41 was due, but not paid, as of December 31, 1997. At nine percent per annum, interest accruing until June 5, 1998 amounts to $41,726.46. Second, $64,769.41 was due on June 30, 1998, which amount Newmont did not pay until April 28, 2005, resulting in the accrual of interest in the amount of $39,798.58. Third, $472,000 was due on June 30, 2002, which amount Newmont did not pay until June 17, 2003, resulting in the accrual of interest in the amount of $40,967.01. TIG's total damages amount to $122,492.05.

  Newmont offered no defense at trial to the claims for interest on the payments due June 30, 1998 and June 20, 2002.*fn118 Newmont offered a statute of limitations defense to the claim for interest on the payment due December 31, 1997. Newmont asserts that the six year statute of limitations on that claim elapsed on December 31, 2004, five months before TIG commenced this action.*fn119 However, Newmont is estopped from asserting the statute of limitations defense because it was Newmont's failure to make timely reports of its collections under the Agreement that induced TIG's delay in bringing the action.*fn120 The Agreement obligated Newmont to inform International and remit payment when it had collected settlement proceeds in excess of fees and expenses.*fn121 Newmont informed International on February 2, 1998, that it had reached settlements with certain CGL Insurers, but claimed that not all settlements had been collected, obscuring the fact that a payment might have been due on December 31, 1997.*fn122 International had no reason to know the June 5, 1998 payment should have been made on December 31, 1997 until discovery in this action revealed the actual dates of Newmont's collections from the CGL Insurers. International did not waive its claim to collect interest on this amount, because it expressly reserved all rights in connection with the Agreement.*fn123

  C. Prevailing Party

  Both parties argue that they are the prevailing party for purposes of an award of fees and costs.*fn124 Although TIG has won a judgment in this litigation, it has not prevailed on the allocation issue, its most substantial claim. However, the judgment against Newmont is not de minimis. Thus, neither party's success in this action is sufficient to justify a finding that either is the prevailing party for purposes of an award of fees and costs under the Agreement.

  D. Prejudgment Interest

  Pursuant to the Interest Opinion, prejudgment interest on TIG's award is calculated as follows. First, prejudgment interest on the judgment amount of $41,726.46,*fn125 accruing from June 5, 1998 to the date of judgment is $27,892.71. Second, prejudgment interest on the judgment amount of $39,798.58,*fn126 accruing from April 28, 2005 to the date of judgment is $1,903.79. Third, prejudgment interest on the judgment amount of $40,967.01,*fn127 accruing from June 17, 2003 to the date of judgment is $8,828.67. Thus, prejudgment interest totals $38,625.17 on a total judgment of $122,492.05.


  For the foregoing reasons, TIG is awarded $161,117.22 in damages against Newmont for breach of contract, inclusive of statutory interest. The Clerk of the Court is directed to close this case. SO ORDERED.


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