Plaintiff appeals from an order of the Supreme Court, New York County (Richard B. Lowe III, J.), entered November 29, 2007, which denied its motion for partial summary judgment, and granted defendant Gerling's motion for partial summary judgment.
The opinion of the court was delivered by: McGUIRE, J.
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
David B. Saxe, J.P., Eugene Nardelli, James M. Catterson and James M. McGuire, JJ.
This appeal requires us to resolve numerous disputes arising from litigation between Gulf Insurance Company and Gerling Global Reinsurance Corporation of America concerning a series of "quota share" treaties between Gulf on the one hand and Gerling and other reinsurers on the other, and a series of separate agreements, "Interests and Liabilities Contracts" (I & Ls), between Gulf and each of the reinsurers individually, pursuant to which the reinsurers agreed to reinsure a portion of Gulf's losses under a portfolio of automobile residual value insurance (RVI) that Gulf began issuing in 1996 to various policyholders, including nonparty First Union Corporation. The participating reinsurers in "quota share" reinsurance treaties agree in each treaty year to accept a specified percentage of the cedent's covered losses in that year, and to receive in return the same percentage of the premiums paid to the cedent from all the policyholders in the particular "book" of business (see Ostrager & Vyskocil,§ 2.01[a], [b] [2d ed 2000]; see also Christiana Gen. Ins. Co. Of N.Y. v Great Am. Ins. Co., 979 F2d 268, 271 [2d Cir 1992] ["Treaty reinsurance obligates the reinsurer to accept in advance a portion of certain types of risks that the ceding company underwrites"]). Facultative reinsurance, by contrast, "is reinsurance that is purchased for a specific risk insured by the cedent" (id. § 2.01[b]; see also Christiana, 979 F2d at 271, supra ["Facultative reinsurance covers only a particular risk or a portion of it, which the reinsurer is free to accept or not"]).
In March 2000, First Union brought a coverage action against Gulf in North Carolina and ultimately claimed that Gulf owed it $418 million in RVI losses under the First Union policy. In February 2003, Gulf and First Union agreed to settle the litigation for $266 million. The next month, Gulf submitted a bill to the applicable reinsurers, a group that did not include Gerling, for the treaty years 1996 through 1998. The reinsurers refused to pay and Gulf initiated this action to collect the reinsurance protection to which it contended it was entitled. In March 2004, Gulf submitted a second billing to the applicable reinsurers for later treaty years, including 1999; Gerling was among this group of reinsurers. Gerling also refused to pay and commenced a separate action against Gulf that was consolidated for pretrial purposes with the action commenced by Gulf.
In its complaint, Gerling seeks to rescind the three treaties it concededly participated in, the 1999, 2000 and 2001 treaties, on the basis of alleged nondisclosures and misrepresentations that it claimed Gulf either made or for which it was responsible. In addition, Gerling contends in its sixth cause of action that although Gulf had billed losses to Gerling as if it were a participant in the 1998 treaty, no agreement exists between Gerling and Gulf with respect to the 1998 treaty. Thereafter, Gulf amended its complaint to include Gerling as a defendant and alleged, among other things, in the first cause of action of its second amended complaint, that Gerling had breached its indemnification obligations under the 1999 treaty by failing to pay some $789,820, its alleged share of the First Union settlement. In addition, in its answer in the action commenced by Gerling, Gulf brought this same claim as its first counterclaim; Gulf's fifth counterclaim, also for breach of contract, asserted that Gerling had failed to pay over $31,775,000, representing Gerling's alleged share of losses under the 1998, 1999, 2000 and 2001 treaties relating to RVI policies other than the First Union policy. As discussed below, moreover, Gulf also asserted, in the alternative, two counterclaims for reformation of certain of the I & L contracts.
Following discovery, Gulf moved for partial summary judgment on its first cause of action against Gerling and other of the reinsurers. Gerling also moved for partial summary judgment in both actions and, insofar as is relevant to this appeal, sought a declaration that no agreement existed between Gulf and Gerling with respect to the 1998 treaty, a declaration concerning the extent of Gerling's participation in the 1999 and 2000 treaties, a declaration that the First Union policy is not covered by the 1999 treaty and dismissal of Gulf's second amended complaint. In addition, Gerling sought summary judgment dismissing Gulf's counterclaims for reformation. Eventually, Gulf settled with all reinsurers other than Gerling. As discussed below, Supreme Court denied Gulf's motion and granted Gerling's. Gulf appeals from the order denying its motion and granting Gerling's.
One of the disputes between the parties concerns the extent of the participation by Gerling in the risks it reinsured under the treaties for 1999 and 2000 and the accompanying I & L contracts. That dispute turns on whether Gerling's participation is stated as a percentage of the risk assumed by all the reinsurers collectively or as a percentage of all the risk assumed by Gulf under its RVI book. As elucidating this dispute will help explain the other disputes, we begin with it. A Under the 1999 treaty --- the relevant language of the 2000 treaty is identical --- the reinsurance coverage is divided into "Section A" and "Section B," with the former covering Gulf's liabilities to its policyholders under all but one of the RVI policies and the latter covering its liabilities to nonparty General Electric Capital Auto Financing Services, Inc. The "Business Covered" section of the treaty provides with respect to Section A that "[t]he Company [Gulf] shall cede to the Reinsurer [a term defined to include all participating reinsurers collectively] and the Reinsurer shall accept from the Company a 45% quota share participation of the net retained insurance liability of the Company on each risk insured." With respect to Section B, the relevant language is identical except that it provides for a 65% quota share participation. The term "net retained insurance liability" is defined as "the remaining portion of the Company's gross liability on each risk reinsured under this Agreement after deducting recoveries from all reinsurance, other than the reinsurance provided hereunder and the reinsurance provided in the Company Retention Article." With respect to Section A, the treaty states in Article VII, "Company Retention," that "[t]he Company will maintain for its net account a 55% participation in the business reinsured hereunder. However, at its discretion, the Company may purchase facultative reinsurance." With respect to Section B, the language in Article VII is identical except that a 35% participation is specified.
The last clause of the definition of "net retained insurance liability" is problematic*fn1. In its brief, Gerling states that the term is defined "as Gulf's gross liability on each risk reinsured... after deducting recoveries from all [other] reinsurance...'" [brackets in original]. Gerling thus states -- Gulf expresses no disagreement --- that recoveries from any facultative reinsurance Gulf purchased but not recoveries from the reinsurance provided under the treaty are deducted from Gulf's gross liability of 100% to determine Gulf's "net retained insurance liability." In computing Gulf's "net retained insurance liability" it makes sense not to deduct from Gulf's gross liability the amount of the recoveries from the reinsurance provided under the treaty, because the amount of those recoveries is itself a function of Gulf's "net retained insurance liability." Read literally, however, the last clause of the definition also would require that Gulf's gross liability not be reduced by recoveries from any facultative reinsurance Gulf purchased in accordance with its discretionary authority under Article VII. As the parties appear to agree that a portion of the last clause of the definition -- i.e., the phrase "and the reinsurance provided in the Company Retention Article" -- should be read out of the treaty, we follow the course they have charted (see Mitchell v New York Hosp., 61 NY2d 208, 214 ).
Because Gulf's gross liability of 100% is reduced to the extent it secures facultative reinsurance, it follows that its "net retained insurance liability" is not necessarily a constant over the life of the treaty. For the same reason, although the quota share ceded to the reinsurer for the two sections is fixed at 45% and 65%, those percentages also are not necessarily constant over the life of the treaty when expressed as a percentage of Gulf's total exposure for each section under its RVI book.
Gulf, however, relies on extrinsic evidence --- i.e., that it never exercised its right to purchase facultative reinsurance. Gerling does not object to or dispute this extrinsic evidence, perhaps because it relies on it as well and contends that the absence of any facultative reinsurance supports its position. In any event, Gulf stresses that it is undisputed that it never obtained any reinsurance for its RVI book other than that provided under each treaty, and thus that its "net retained insurance liability" was at all times equal to its "gross liability" of 100%. Accordingly, it argues with respect to Section A --- the analysis is the same with respect to Section B --- that "[i]t follows per force [sic] that the portion of Gulf's net retained insurance liability' ceded to the quota share reinsurers collectively was 45% of its gross liability' of 100%." Gulf further maintains that this conclusion is reinforced by the provision in Article VII, the "Company Retention" article, stating, with respect to Section A, that "[t]he Company will maintain for its own net account a 55% participation in the business reinsured hereunder." Again, the analysis is the same with respect to Section B, as Article VII goes on to provide that Gulf will maintain for its own net account a 35% participation.
Gulf then points to its I & L contract with Gerling for 1999, which states that Gerling "shall have a 6.50% participation as respects Section A and a 26.50% participation as respects Section B in the Interests and Liabilities of the Reinsurer as set forth in the agreement attached hereto entitled Quota Share Reinsurance Agreement." According to Gulf, the treaty defines the participation of the reinsurers collectively as a percentage of Gulf's total risk of loss under the RVI book, and thus it contends that "Gerling's individual participation therein necessarily also reflects a percentage in Gulf's total risk of loss."*fn2 Gulf buttresses this conclusion with additional evidence (as discussed below, it also is extrinsic evidence) by pointing to the I & L contracts with the other reinsurers and asserting that "when all of the reinsurers' individual participations under their I & L contracts are added up (TRC 12.5%; XL 11.25%; Odyssey 11.25%; and Gerling 10%), they total the 45% share of Gulf's gross liabilities that the... reinsurers agreed collectively to accept under the [treaty]."*fn3
Finally, Gulf relies on other extrinsic evidence, including, most significantly, testimony that for each treaty year Gerling and other reinsurers received premiums from Gulf that matched the premiums that would be due if the stated percentage participation of each reinsurer were a percentage of Gulf's 100% total risk. Thus, for example, with respect to Section A liabilities for 1999, Gerling received 6.5% of all the premiums Gulf received from its policyholders. For its part, Gerling does not deny that it received a premium that significantly exceeded the amount that would be due to it under its construction of the treaties and I & L contracts. Rather, it offers an explanation. As Supreme Court stated in apparently accepting that explanation, "Gerling explains that its acceptance of the [higher amounts of premium] was based upon its mistaken acceptance of the broker's representations to its bookkeeping department that the amounts were correct." In addition, Gerling maintains that because the premium was received after, not contemporaneously with, execution of the contract documents, its receipt and related documents of its bookkeepers "do not reflect any interpretation of treaty wordings."*fn4
Gerling's arguments also focus for illustrative purposes on Section A under the 1999 treaty and I & L contract. Gerling's argument, however, stresses that the I & L contract unequivocally states that "[Gulf] shall pay [Gerling] 6.50% of all premiums due... the Reinsurer in accordance with the provisions of the Agreement [the treaty] attached." The treaty states that "[Gulf] shall pay to the Reinsurer 45% of [Gulf's] original gross net written premium... in respect to its net retained insurance liability." As noted above, the treaty defines "original gross net written premium" as "gross written premium less returns, cancellations, inuring excess of loss reinsurance and facultative reinsurance, if any." Gerling goes on to argue that Gulf's "original gross net written premium" is "simply put --- the 100% of policy premiums from which it pays the reinsurers their 45% portion." The truth of that statement depends on extrinsic matters, including whether Gulf exercised its right to purchase facultative reinsurance; Gerling immediately goes on to state, citing to Gulf's brief, that Gulf obtained no other reinsurance.
Although extrinsic proof is necessary to determine whether Gulf's "gross written premium" equals its "original gross net written premium," Gerling's reliance on extrinsic evidence in this regard is inconsequential. After all, the provision of the I & L contract specifying that Gerling is entitled to 6.5% of all premiums "due... the Reinsurer" is consistent with Gulf's position that Gerling assumed 6.5% of Gulf's "net retained insurance liability" --- which happens here to equal Gulf's "gross liability" of 100% --- only if the reinsurer is entitled under the treaty to 100% of Gulf's "original gross net written premium." Obviously, the reinsurer is entitled to far less, the specified 45% of Gulf's "original gross net written premium." In short, the language of these provisions unambiguously supports Gerling's position.
Gerling also relies on equally unambiguous language in the 1999 I & L contract specifying its share of Section A liabilities. Consistent with the provisions specifying Gerling's share of premiums, it states that "[Gerling] shall have a 6.50% participation... in the Interests and Liabilities of the Reinsurer as set forth in the Agreement attached hereto entitled Quota Share Reinsurance Agreement." The treaty provides that "Gulf shall cede to the Reinsurer and the Reinsurer shall accept from [Gulf] a 45% quota share participation of [Gulf's] net retained insurance liability... on each risk insured." Accordingly, reading both documents together, Gerling has a 6.5% participation in the 45% quota share of Gulf's net retained insurance liability. Again, the fact that it cannot be determined from the four corners of both documents whether Gulf's net retained insurance liability is equal to or less than 100% of Gulf's gross liabillity of 100% is irrelevant. The crucial and unambiguous fact is that Gerling has a 6.5% participation in the 45% quota share and that quota share cannot be equal to 100% of Gulf's net retained insurance liability.
In any event, the extrinsic proof that Gulf relies on, however powerful it may be, is irrelevant for it cannot be admitted to vary the unambiguous language of each I & L contract and its accompanying treaty (see Greenfield v Philles Records, 98 NY2d 562, 569-70 ). It may be, the point need not be decided, that the relevant language of each I & L between Gulf and Gerling and its accompanying treaty might be rendered ambiguous if each of these sets of agreements could be read in conjunction with the other I & L contracts for each treaty year. Gulf correctly argues that each of its I & L contracts with Gerling must be read with the applicable treaty as a single agreement as the I & L contract and treaty for each year form part of a single transaction (Nau v Vulcan Rail & Constr. Co., 286 NY 188, 197  ["All three instruments were executed at substantially the same time, related to the same subject-matter, were contemporaneous writings and must be read together as one"]; see also This Is Me, Inc. v Taylor, 157 F3d 139, 143 [2d Cir 1998] [same, construing New York law]). But Gulf cites to nothing in the record to support the proposition that for each year the treaty and the I & L contracts with all the reinsurers, regardless of when each I & L contract was executed, can be regarded as a single transaction. Indeed, Gulf does not so contend and advances only the correct and more modest argument that each of its I & L contracts with Gerling must be read together with the accompanying treaty. Thus, we have neither ...