Employers Reinsurance v. Mid-Continent
| Decision Date | 17 February 2004 |
| Docket Number | No. 02-3291.,No. 02-3274.,02-3274.,02-3291. |
| Parties | EMPLOYERS REINSURANCE CORPORATION, Plaintiff-Counter-Claim Defendant-Appellant/Cross-Appellee, v. MID-CONTINENT CASUALTY COMPANY, Defendant-Counter-Claimant-Appellee/Cross-Appellant. |
| Court | U.S. Court of Appeals — Tenth Circuit |
Douglas R. Richmond (Patrick J. Kenny and Carlton D. Callenbach, with him on the briefs), of Armstrong Teasdale LLP, Kansas City, MO, for Plaintiff-Counter-Claim Defendant-Appellant/Cross-Appellee.
Vincent F. O'Flaherty (Julie J. Gibson and Michael L. Belancio, with him on the briefs), of Niewald, Waldeck & Brown, Kansas City, MO, for Defendant-Counter-Claimant-Appellee/Cross-Appellant.
Before HARTZ, HOLLOWAY, and McKAY, Circuit Judges.
The parties to this appeal are two insurance companies. Employers Reinsurance Corp. (ERC) and Mid-Continent Casualty Co. (MCCC), a property and casualty insurance company, entered into a Liability Excess Reinsurance Agreement (the Agreement). Under the Agreement ERC reinsured MCCC with respect to certain payments and expenses for which MCCC was responsible to its insureds under policies it issued. In addition, ERC insured MCCC for some extra-contractual liabilities it might incur to its insureds—such as liability for bad faith denial of a claim. Of particular concern on appeal, if MCCC had to pay a "loss" exceeding $300,000, ERC would reimburse MCCC for the excess of the loss above $300,000, up to a maximum loss of $1,000,000. (We will refer to the $300,000 threshold as MCCC's "retention," which is similar to a deductible in ordinary insurance policies.) Additionally, the Agreement required ERC to pay a share of "claim expenses" incurred by MCCC if the retention was exceeded.
The amounts disputed in this case arise out of declaratory judgment actions between MCCC and its insureds. In several such actions it was determined that MCCC should have provided its insured with a defense to a tort action brought by a third party against the insured. As a result, (1) MCCC had to pay its insureds the attorney fees and expenses incurred by the insureds in the declaratory judgment actions; (2) MCCC paid its own attorney fees and expenses in the declaratory judgment actions; and (3) MCCC had to pay the attorney fees incurred by the insureds in defending the underlying tort actions. This appeal centers on whether these payments and expenses were covered by the Agreement as "losses," "claim expenses," or neither.
Regarding the first type of payment, MCCC contends that the Agreement's definition of "loss" unambiguously requires ERC to reimburse amounts MCCC paid to its insureds to cover the insureds' attorney fees in the declaratory judgment actions. ERC contends that the Agreement unambiguously imposes no such obligation. We disagree with both, reverse the district court's summary judgment on the issue in favor of MCCC, and remand for further proceedings to resolve the meaning of Agreement language that we hold to be ambiguous in this context.
As for MCCC's own attorney fees incurred in the declaratory judgment action, we affirm the district court's ruling that under the contractual language presented to the district court, ERC must reimburse these attorney fees as "claim expenses."
With respect to the third challenged item—MCCC's payment of the insureds' attorney fees incurred in defending the underlying tort claims—we reverse the district court and hold that ERC need not reimburse MCCC for those payments as "loss." Rather, those payments should be treated as "claim expenses" for which ERC need make only a proportionate payment.
We also address several additional issues, including the Agreement's characterization of postjudgment interest as "loss" or "claim expenses," the percentage rate at which damage payments should be included as "loss" under the Agreement, prejudgment interest, a discovery dispute, and a cross-appeal by MCCC for attorney fees in this action.
Reinsurance is essentially insurance for insurance companies. Spreading part of the risk to the reinsurer can prevent a catastrophic loss from falling upon the insurance company and enable the insurance company to serve more clients. See, e.g., Unigard Sec. Ins. Co., Inc. v. North River Ins. Co., 4 F.3d 1049, 1053 (2d Cir.1993). Unlike typical insurance contracts that are offered on a take-it-or-leave-it basis, reinsureds ordinarily negotiate the terms, conditions, and rates in their reinsurance contracts.
For nearly 30 years MCCC purchased reinsurance coverage from ERC. From January 1, 1994, until April 1, 2000, ERC and MCCC operated under the Agreement whose meaning is at issue in this appeal.
The Agreement required ERC to reimburse MCCC for all "loss" in excess of $300,000 for each occurrence, with a reinsurance limit of $1,000,000 for each occurrence. Additionally, the Agreement required ERC to reimburse MCCC for "claim expenses" at a rate equal to the fraction of the "loss" for which ERC was responsible. If, for example, MCCC had to pay a "loss" of $500,000, ERC would have to reimburse MCCC for $200,000 of that "loss" ($500,000-$300,000). Because ERC thus paid 40% of the total "loss" ($200,000/$500,000 = 40%), ERC would reimburse MCCC for 40% of the "claim expenses" MCCC incurred.
The parties dispute the meaning of the terms "loss" and "claim expenses" in the Agreement. Article VIII of the Agreement defines "loss":
The word "loss" shall mean only such amounts:
(a) within applicable policy limits as are actually paid by [MCCC] in settlement of claims or in satisfaction of awards or judgments (including prejudgment interest and plaintiff's costs included in the judgment and subject with the judgment to the applicable policy limit);
(b) equal to 80% of the amount paid by [MCCC] in excess of applicable third party liability coverage policy limits occasioned by liability imposed upon [MCCC] on account of the failure of [MCCC] to settle a claim for an amount within such policy limits;
(c)(1) equal to 80% of the amount paid by [MCCC] for punitive, exemplary, or compensatory damages awarded to the insured and arising out of the conduct of [MCCC] in the investigation, trial or settlement of any claim or failure to pay or delay in payment of any benefits under any policy if [ERC] has not, in advance of any such conduct by [MCCC] counseled with [MCCC] and concurred in [MCCC's] course of conduct; or
(c)(2) equal to 100% of the amount paid by [MCCC] for punitive, exemplary, or compensatory damages awarded to the insured and arising out of the conduct of [MCCC] in the investigation, trial or settlement of any claim or failure to pay or delay in payment of any benefits under any policy if [ERC] has, in advance of any such conduct by [MCCC] counseled with [MCCC] and concurred in [MCCC's] course of conduct.
App. 600. For the dispute before us, the relevant part of the definition appears in paragraphs (c)(1) and (c)(2), which require ERC to reimburse MCCC for "compensatory damages ... arising out of the conduct of [MCCC] in the investigation, trial or settlement of any claim or failure to pay or delay in payment of any benefits under any policy." (A subsidiary dispute concerns whether it is (c)(1) or (c)(2) that applies.)
"Claim expenses" are defined in Article VIII of the Agreement as follows:
The term "claim expenses" shall mean all payment under the supplementary payments provisions of the [MCCC] policy, including court costs, interest upon judgments, and allocated investigation, adjustment and legal expenses." App. 601. As presented to the district court, the pertinent part of the supplementary payments provisions incorporated by reference from insurance policies issued by MCCC states:
SUPPLEMENTARY PAYMENTS — COVERAGES A AND B
We will pay, with respect to any claim we investigate or settle or "suit" against an insured we defend:
a. All expenses we incur.
....
e. All costs taxed against the insured in the "suit".
f. Prejudgment interest awarded against the insured on that part of the judgment we pay. If we make an offer to pay the applicable limit of insurance, we will not pay any prejudgment interest based on that period of time after the offer.
g. All interest on the full amount of any judgment that accrues after entry of the judgment and before we have paid, offered to pay, or deposited in court the part of the judgment that is within the applicable limit of insurance.
These payments will not reduce the limits of insurance.
The payments and expenses at issue in this litigation arose out of other lawsuits: tort actions against MCCC insureds, and declaratory judgment actions between MCCC and its insureds to determine MCCC's responsibility to provide coverage with respect to the tort actions. As a result of the declaratory judgment actions, MCCC had to pay its insureds' attorney fees in the declaratory judgment actions, had to pay its own attorney fees for attorneys representing MCCC in the declaratory judgment actions, and had to reimburse its insureds for the damages awarded in the underlying tort actions and for the fees incurred by the insureds for legal representation in the tort action.
The lawsuit between MCCC and ERC involves whether ERC must reimburse MCCC for these costs and expenses. After ERC had reimbursed MCCC for payments and expenses arising out of four declaratory judgment actions, it brought this diversity action for return of the reimbursements. MCCC counterclaimed for reimbursement of payments and expenses arising out of three other declaratory judgment actions.
The district court granted MCCC summary judgment against ERC with respect to MCCC's payment of its insureds' attorney fees and expenses in the declaratory judgment actions. The court ruled that "the plain and ordinary meaning of the term `compensatory...
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