United States District Court, S.D. New York
RICHARD K. EATON, Judge.[*]
Eaton, Judge: This case involves an effort by plaintiff Granite State Insurance Company ("Granite State") to recover under certain facultative reinsurance contracts entered into with Skandia America Reinsurance Corporation, now known as Clearwater Insurance Company ("defendant" or "Clearwater"). Plaintiff seeks money damages and a declaration that defendant is obligated to make future payments billed to it under the policies at issue. Before the court are the parties' cross-motions for summary judgment and cross-motions to strike. The parties are citizens of different states, and the court exercises subject matter jurisdiction pursuant to 28 U.S.C. § 1332 (2006). Because Granite State failed to give Clearwater adequate notice of claims made under the policies, the court holds that Granite State is not entitled to recover under those policies. Therefore, Granite State's motion for summary judgment is denied, and Clearwater's cross motion for summary judgment is granted.
Clearwater's alleged reinsurance obligations to Granite State arise under two reinsurance policies (collectively, "the Granite State Policies"). Those policies reinsured Granite State's losses under two excess of loss policies issued by Granite State to McGraw Edison Company ("McGraw") in the early 1980s.
The Parties and Policies
Granite State is a Pennsylvania corporation with its principal place of business in New York. Pl.'s Statement of Undisputed Facts ¶ 1 ("Pl.'s 56.1"). Plaintiff is a subsidiary of American International Group, Inc. ("AIG"), which also has its principal place of business in New York. Pl.'s 56.1 ¶ 2-3.
Granite State issued two excess of loss policies to McGraw. Pl.'s 56.1 ¶ 11. The first policy covered the period of March 1, 1980 to March 1, 1981 ("1980 Granite State Policy"). Pl.'s 56.1 ¶ 12. The 1980 Granite State Policy provided excess coverage above the limits of the underlying insurance policies issued to McGraw by Northbrook Insurance Company and U.S. Fire Insurance Co. (collectively, "1980 Primary Underlying Policies"). Pl.'s 56.1 ¶¶ 12-13. Specifically, under the 1980 McGraw Policy, if McGraw incurred liability between $25, 000, 000 and $50, 000, 000, Granite State would be required reimburse McGraw up to $10, 000, 000, depending on the total amount of McGraw's liability. The second policy issued to McGraw covered the period of March 1, 1981 to March 1, 1982 ("1981 Granite State Policy"). Pl.'s 56.1 ¶ 14. The 1981 Granite State Policy provided excess coverage above the limits of the underlying insurance policies issued to McGraw by First State Insurance Company and U.S. Fire Insurance Co. (collectively, "1981 Primary Underlying Policies"). Pl.'s 56.1 ¶¶ 14-15. Specifically, under the 1981 McGraw Policy, if McGraw incurred liability between $25, 000, 000 and $50, 000, 000, Granite State would be required to reimburse McGraw up to $15, 000, 000, depending on the total amount of McGraw's liability.
C.V. Starr & Co. ("C.V. Starr") was an underwriting manager for Granite State and an AIG affiliate at the time the policies were issued. Pl.'s 56.1 ¶¶ 6-7. C.V. Starr issued the 1980 and 1981 Granite State Policies on behalf of Granite State through its office in Chicago, Illinois. Def.'s Statement of Undisputed Facts ¶ 3 ("Def.'s 56.1").
Clearwater is a Delaware company with its principal place of business in Connecticut. Pl.'s 56.1 ¶ 4. Clearwater issued, from its Chicago office, two facultative certificates to Granite State, reinsuring the 1980 Granite State Policy and the 1981 Granite State Policy ("the Clearwater Certificates" or "the certificates"). Pl.'s 56.1 ¶ 17. C.V. Starr procured those certificates for Granite State through its Chicago, Illinois office. Def.'s 56.1 ¶ 5. In each of the Clearwater Certificates, Clearwater agreed to provide reinsurance in an amount equal to 20% of Granite State's payments made under the 1980 and 1981 Granite State Policies, respectively. Pl.'s 56.1 ¶¶ 18, 19.
Each of the Clearwater Certificates contains the following identical General Conditions language:
3. CLAIMS (a) [Granite State] agrees that it will promptly investigate and will settle or defend all claims under the policy reinsured hereunder and that it will notify [Clearwater] promptly of any event or development which [Granite State] reasonably believes might result in a claim against [Clearwater]. [Granite State] further agrees to forward to [Clearwater] copies of such pleadings and reports of investigations as are pertinent to the claim and/or as may be requested by [Clearwater];
(b) [Clearwater] shall have the right at its own expense to be associated with [Granite State] in the defense or control of any claim, suit or proceeding involving or which may involve the reinsurance provided under this Certificate and [Granite State] and [Clearwater] agree to cooperate in every respect in the defense and control of such claim, suit or proceeding.
(c) Upon receipt by [Clearwater] of satisfactory evidence of payment of a loss for which reinsurance is provided hereunder, [Clearwater] shall promptly reimburse [Granite State] for its share of the loss and loss expenses...
(d) The term "loss" shall mean only such amounts as are actually paid by [Granite State] in settlement of claims or in satisfaction of awards or judgments. The term "loss" shall not include loss expenses.
(e) [Clearwater]'s liability for its proportion of a "loss" incurred by [Granite State] shall be determined as follows... (ii) if the reinsurance provided hereunder is on a pro rata basis, [Clearwater] shall be liable for the proportion of a "loss", after application of any reinsurance, excess or pro rata, inuring to the benefit of [Clearwater]....
Both Granite State Policies, which are partially incorporated by reference into their corresponding Clearwater Certificates, contain the following language:
[Granite State] agrees... to indemnify the [McGraw] for all sums which the [McGraw] shall be obligated to pay by reason of the liability (a) imposed upon the [McGraw] by law, or (b) assumed under contract or agreement by the [McGraw]... for damages, direct or consequential and expenses... arising out of the hazards covered by and as defined in the Underlying Umbrella Policies stated in item 2 of the Declarations...
II. LIMIT OF LIABILITY, UNDERLYING LIMITS
It is expressly agreed that liability shall attach to the [Granite State] only after the Underlying Umbrella insurers have paid or have been held liable to pay the full amount of their respective ultimate net loss liability....
As of 1979, McGraw had as direct or indirect subsidiaries, Studebaker-Worthington Co. ("SW"), Atlantic Locomotive Company ("ALCO"), and Wagner Electric ("Wagner"). Pl.'s 56.1 ¶¶ 25-26; Def.'s 56.1 ¶ 27. In 1984 and 1985, McGraw sold SW and ALCO to Dresser Industries ("Dresser"). Def.'s 56.1 ¶ 28. Cooper Industries purchased McGraw in 1985, thereby also acquiring Wagner. Def.'s 56.1 ¶ 26. Wagner was then merged into Cooper's subsidiary Moog Automotive, and in 1998 the merged company was sold to Federal Mogul Products ("Federal Mogul"). Def.'s 56.1 ¶ 26.
By 2001, Federal Mogul faced tens of thousands of asbestos bodily injury claims resulting from products sold by McGraw and the McGraw subsidiaries it had acquired, and thereafter, it began making coverage demands under potentially applicable policies, including, but not limited to, the 1980 and 1981 Granite State Policies. Def.' 56.1 ¶¶ 29, 31. At around the same time, Dresser also faced large potential liability, and made claims under the 1980 and 1981 Granite State Policies and others. Def.'s 56.1 ¶¶ 32, 33. Federal Mogul filed for bankruptcy protection in 2001, and by 2003, Dresser had followed suit. Def.'s 56.1 ¶¶ 30, 38.
Beginning in 2002, because of the large number of asbestos related claims being asserted against AIG subsidiary companies, AIG "centralized the claims handling and adjusting activities for all asbestos claims, " including those asserted against Granite State, under one managerial group ("AIG Toxic Tort Group"). Decl. of Simon Yoon ¶ 7 (ECF Dkt. No. 48-11) ("Yoon Decl."). Thus, despite being separate corporate entities, Granite State and multiple other AIG companies negotiated as one unit controlled by AIG and eventually entered into settlement agreements that treated them as one unit for purposes of payment. See Dresser Settlement Agreement, Yoon Decl. at Ex. 9 (referring to Granite State and ten other entities collectively as the "AIG companies"); Federal Mogul Settlement Agreement, Decl. of Jeffrey Wactlar at Ex. 8 (ECF Dkt. No. 49-9) (referring to Granite State and seven other entities collectively as the "AIG Companies").
By the end of October 2003, declaratory judgment actions and bankruptcy proceedings making claims against Granite State and other AIG companies were in full swing and the AIG companies, Dresser, and Federal Mogul were involved in discussions, formal or informal, to resolve the coverage disputes. Yoon Dep. 53:22-54:25, 57:19-60:9, Decl. of Stephen M. Kennedy at Ex. 5 (ECF Dkt. No. 65-5). In 2004, Dresser and Federal Mogul agreed that they would evenly split the limits of the policies issued to McGraw by Granite State in a Partitioning Agreement. Pl.'s 56.1 ¶ 27; Def.'s 56.1 ¶ 66. In other words, Dresser and Federal Mogul agreed that each would be entitled to half of the available limits under each of the Granite State policies and other policies not at issue in this case.
The Dresser Settlement
At the time of Dresser's bankruptcy filing in 2003, the company estimated that its liabilities traceable to SW and ALCO would be at least $412, 000, 000. Def.'s 56.1 ¶ 39. The AIG Toxic Tort Group was "aware of the existence of potential coverage defenses, " that might apply to individual policies, but "concluded that settlement was preferable to the risk of litigating policy-by-policy coverage defenses" and "that a settlement at a significant discount off of AIG's combined policy limits would be a very favorable result." Yoon Decl. ¶ 21.
Granite State, the other AIG companies, and other unrelated insurance carriers,  against which Dresser had asserted claims, engaged NERA Economic Consulting ("NERA") to assist "in calculating the carriers' individual potential contributions to the various global settlement offers [that the group] made to Dresser." Pl.'s 56.1 ¶ 31. NERA modeled "exposure scenarios based on various combinations of criteria and assumptions proposed by the carriers, such as Dresser's potential liability, potential discount factors accounting for differing policy language which might support various coverage defenses, and alternative payout periods." Yoon Decl. ¶ 24. NERA produced a report that documented the amount each of the companies involved in the settlement negotiations, including the AIG companies and unaffiliated companies, "agreed to contribute to [a settlement] offer" made to Dresser. Yoon Decl. ¶ 29. The amounts, keyed to each policy in the table NERA generated, "reflect the exposure factors" NERA was engaged to analyze. Yoon Decl. ¶ 29. Thus, the table reflected the "potential liability, potential discount factors accounting for differing policy language which might support various coverage defenses, and alternative payout periods" available for each policy, including the sixty-three policies issued by AIG subsidiary companies. Yoon Decl. ¶ 24. The table indicated an exposure of $2, 876, 106 under the 1980 Granite State Policy and $4, 390, 560 under the 1981 Granite State Policy. Yoon Decl. at Ex. 7. These figures were well below the limits of the policies available to Dresser under the Partitioning Agreement ($5, 000, 000 and $7, 500, 000, respectively). The NERA report, which was expressly not a "substantive coverage analysis, " is nonetheless the only analysis of any kind on the record that indicates Granite State's individual potential liability to Dresser under the reinsured Granite State Policies. Yoon Decl. ¶ 24.
Despite the policy by policy breakdowns in the NERA report, Granite State and the other AIG companies, did not "intend or expect that the documents generated by NERA would have any impact on AIG's internal allocation of the final loss amount agreed upon in settlement." Yoon Decl. ¶ 26. Indeed, the expected contributions to the settlement offer of each of the AIG subsidiaries' policies were left blank in the NERA report, despite the inclusion of a liability estimate. See Yoon Decl. at Ex. 7. Therefore, Granite State and the other AIG companies adopted NERA's less-than-policy-limits estimated liability under the Granite State Policies for the purpose of settlement of the Dresser claims against AIG subsidiaries in the aggregate. AIG did not intend the NERA report to establish the amounts Clearwater and the reinsurers of the policies issued by other AIG affiliates would be billed. Yoon Decl. ¶ 26.
In 2004, after the AIG Toxic Tort Group, acting for Granite State and the other AIG companies, was not able to enter into a settlement with Dresser as part of the larger group of carriers that included companies not affiliated with AIG, the AIG Toxic Tort Group entered into a separate Settlement and Release Agreement with Dresser. Pl.'s 56.1 ¶¶ 30, 32, 34, 36. Under the terms of the Settlement Agreement, the AIG Toxic Tort Group was to cause a trust created and controlled by Lehman Brothers, Inc. ("Lehman") to pay Dresser $173, 620, 556 immediately. Dresser Settlement Agreement at Ex. 3, Yoon Decl. at Ex. 9. In turn, Dresser assigned its interest in the AIG policies to Lehman, to which Granite State and the other AIG Companies were required to make "a stream of payments" over a period of years amounting to $262, 202, 864 pursuant to a financing agreement. Yoon Decl. ¶¶ 33, 34; Dresser Settlement Agreement at Ex. 3, Yoon Decl. at Ex. 9; Letter from Lehman Brothers to Christopher J. Eskeland, AIG Technical Services, Inc., Feb. 8, 2005, Yoon Decl. at Ex. 10 (detailing payment instructions). The amount and terms of this latter set of payments "were negotiated and agreed entirely by and between the AIG companies and Lehman." Def.'s 56.1 ¶ 60. Obtaining the longest possible pay stream was one of AIG's primary considerations in the negotiation. Yoon Dep. 131:11-131:17; Pl.'s Resp. to Def.'s 56.1 ¶ 59 (ECF Dkt. No. 79) (The Lehman "arrangement was the result of the AIG companies' informing Dresser that it would only agree to settlement with an extended payment stream.").
The Clearwater Certificates were not, however, assigned to Lehman and the Dresser Settlement and Financing agreements contained language indicating that Granite State and the other AIG companies would seek recovery from their reinsurers. See Dresser Agreement 10, 14, 22 ("Notwithstanding any of the foregoing, however, nothing contained in this Section 3.1(E) shall limit the rights of the Participating Carriers to make reinsurance claims and pursue reinsurance recoveries.... [;] Indemnifying Policyholders shall have no indemnification obligation to any Released Carrier for... Claims for reinsurance.... [;] Nothing in this Agreement shall impact in any way the reinsurance rights of the Participating Carriers."); Financing Agreement, Yoon Decl. at Ex. 9B at 21, 23 ("The Releasing Policyholders shall use their reasonable best efforts to comply with reasonable requests from the AIG Companies for documents and other information required by the AIG Companies in connection with any reinsurance claims.... [;] Nothing in this agreement shall impact in any way the reinsurance rights of the AIG companies."). Despite this language, Clearwater was neither a party to the Settlement and Financing agreements, nor was Clearwater a participant in their negotiation.
In March of 2005, "AIG began making quarterly payments" pursuant to the Settlement and Financing Agreements. Decl. of Leticia Diaz ¶ 11 (ECF Dkt. No. 47) ("Diaz Decl."). AIG would decide which policies issued by one of its subsidiaries, including Granite State, would be "required to make a payment in any given quarter, and then arrange for those payments to be processed." Diaz Decl. ¶ 9. Payments were made by an AIG affiliated corporate entity, that is not a party to this case, pursuant to a "pooling arrangement that was internally created by AIG for regulatory purposes." Decl. of Matthew Mansour ¶ 20 (ECF Dkt. No. 46) ("Mansour Decl."). Some of these payments were "attributable to the Granite State Policies" according to an allocation method determined exclusively by AIG. Diaz Decl. ¶ 14. There is no evidence on the record that Granite State, as a free-standing legal entity, has made any payments to Dresser, Lehman, or, for that matter, into a pooled fund. Rather, payments were made to Lehman from "pool accounts maintained in the name of" other AIG entities which were "periodically reconciled to assign debits and credits on a per policy basis" and "[a]s a result of this reconciliation process" certain payments "were charged to Granite State." Second Decl. of Matthew Mansour ¶ 6 (ECF Dkt. No. 82) ("Second Mansour Decl.").
The Federal Mogul Settlement
By 2004, Federal Mogul estimated that its accrued and potential liabilities arising from Wagner would range from $523, 900, 000 to $1, 786, 000, 000. Pl.'s 56.1 ¶ 47. Granite State and other AIG companies, acting in concert through the AIG Toxic Tort Group, and a group of other insurers who were not affiliated with AIG, "participated in mediation concerning the underlying Federal Mogul asbestos claims jointly with Federal Mogul's other insurers." Pl.'s 56.1 ¶ 48; Def.'s Resp. to Pl.'s 56.1 ¶ 48 (ECF Dkt. No. 70). As with the Dresser claims, the AIG Toxic Tort Group was "aware of the existence of potential coverage defenses" that might apply to individual policies but "concluded that settlement was preferable to the risk of litigating ...