757 F.2d 523 (2nd Cir. 1985), 385, Bellefonte Re Ins. Co. v. Argonaut Ins. Co.

Docket Nº:385, 392, 490, Docket 84-7582, 84-7584 and 84-7590.
Citation:757 F.2d 523
Party Name:BELLEFONTE RE INSURANCE COMPANY, Plaintiff-Appellant-Cross-Appellee, v. ARGONAUT INSURANCE COMPANY, Defendant-Appellee-Cross-Appellant. UNIVERSAL REINSURANCE COMPANY, Plaintiff-Appellant-Cross-Appellee, v. ARGONAUT INSURANCE COMPANY, Defendant-Appellee-Cross-Appellant.
Case Date:March 18, 1985
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit
 
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Page 523

757 F.2d 523 (2nd Cir. 1985)

BELLEFONTE RE INSURANCE COMPANY, Plaintiff-Appellant-Cross-Appellee,

v.

ARGONAUT INSURANCE COMPANY, Defendant-Appellee-Cross-Appellant.

UNIVERSAL REINSURANCE COMPANY, Plaintiff-Appellant-Cross-Appellee,

v.

ARGONAUT INSURANCE COMPANY, Defendant-Appellee-Cross-Appellant.

Nos. 385, 392, 490, Docket 84-7582, 84-7584 and 84-7590.

United States Court of Appeals, Second Circuit

March 18, 1985

Argued Dec. 19, 1984.

Page 524

Lawrence I. Brandes, New York City (Robert M. Raives, Clifford H. Schoenberg, Steven S. Honigman, Miller, Singer & Raives, P.C., New York City, on brief), for plaintiffs-appellants-cross-appellees.

James I. Rubin, Chicago, Ill. (Brigitte Schmidt Bell, Robert N. Hermes, Butler, Rubin, Newcomer, Saltarelli & Boyd, Harold C. Wheeler, Winston & Strawn, Chicago, Ill. Gibson, Dunn & Crutcher, New York City, on brief), for defendant-appellee-cross-appellant.

Before MESKILL, KEARSE and CARDAMONE, Circuit Judges.

KEARSE, Circuit Judge.

Plaintiffs Bellefonte Re Insurance Company ("Bellefonte") and Universal Reinsurance Company ("Universal") appeal from final judgments of the United States District Court for the Southern District of New York, Robert L. Carter, Judge, see 581 F.Supp. 241 (1984), dismissing their complaints seeking rescission of reinsurance contracts and settlement agreements entered into with defendant Argonaut Insurance Company ("Argonaut") on the ground that Argonaut procured the reinsurance and settlement agreements by means of fraudulent nondisclosures. The district court granted Argonaut's motion for summary judgment dismissing the complaints on the ground that the settlement agreements clearly barred plaintiffs from asserting their only alleged basis for rescission of either the reinsurance contracts or the settlement agreements. Id. at 244. The court dismissed Argonaut's counterclaims for damages for plaintiffs' breach of the covenants not to sue contained in the settlement agreements on the ground that the present actions had not been brought in bad faith or in obvious breach of the covenants. See 586 F.Supp. 1286 (1984).

On appeal, plaintiffs contend that they were induced to enter into both the reinsurance contracts and the settlement agreements by Argonaut's nondisclosures of material facts, and that under the custom and practice in the reinsurance industry, the settlement agreements cannot be read to bar rescission on grounds of fraud. In addition, Universal contends that the district court erred in not taking into account its evidence that the alleged fraudulent nondisclosures on the basis of which it sought rescission of its settlement agreement were not raised in its presettlement dispute with Argonaut. In its cross-appeal, Argonaut contends that the court should have upheld its counterclaims for the cost of defending the present actions because the covenants not to sue precluded plaintiffs from commencing litigation of any kind.

Finding no merit in any of the parties' contentions, we affirm.

Page 525

I. BACKGROUND

In 1973, Argonaut entered into an agreement with Resources Facilities, Inc. ("RFI"), to act as a "front" company for the writing of insurance by RFI, i.e., to lend its name to the issuance of insurance policies written by RFI; RFI was to be considered Argonaut's managing general agent ("MGA") for such insurance. Pursuant to this agreement, RFI was to pay Argonaut 10% of the premiums obtained and was to obtain reinsurance; Argonaut was to retain 2 1/2% of the first $100,000 of exposure per risk. In 1974, Bellefonte and Universal, separately, entered into reinsurance contracts ("treaties") with Argonaut on the business written by RFI as Argonaut's MGA.

  1. The Original Disputes and the Settlement Agreements

    In February 1976, Argonaut sued RFI, charging it with a variety of contract violations and frauds. Soon thereafter, Universal and Bellefonte stopped making payments on losses to Argonaut arguably covered by the reinsurance contracts.

    1. Bellefonte's Claims

    Bellefonte became involved in a dispute with Argonaut over the validity of the reinsurance contracts and the balances allegedly due to Argonaut from Bellefonte under those contracts. In January 1978, the two entered into a settlement agreement ("B/A Settlement Agreement") to resolve this dispute. In the B/A Settlement Agreement, which recited that Bellefonte and Argonaut were "involved in a dispute regarding the validity of [the RFI-related] contracts of reinsurance and the balances due to [Argonaut] thereunder," Bellefonte agreed to pay Argonaut a certain sum, and each party agreed not to sue the other in connection with, inter alia, "any and all matters arising out of the dispute regarding the [RFI-related] contracts of reinsurance." The covenant not to sue stated, in pertinent part, that Bellefonte and Argonaut agreed

    not to demand arbitration or commence litigation of any kind anywhere in the world and agree[d] to refrain forever from instituting, prosecuting, collecting or in any way aiding or proceeding directly or indirectly ... upon any and all claims, demands and liability of every kind and nature known and unknown, arising from or relating to any act, omission to act or transaction which occurred prior to the execution of this Agreement in connection with any and all matters arising out of the dispute regarding the [RFI-related] contracts of reinsurance.

    2. Universal's Claims

    Following Argonaut's institution of suit against RFI, Universal also became involved in a dispute with Argonaut. In December 1976, Universal and Argonaut entered into a settlement agreement ("U/A Settlement Agreement") to resolve this dispute. The U/A Settlement Agreement recited that the parties were "involved in a dispute regarding [Universal's] liability to [Argonaut] under the [RFI-related] contract of reinsurance"; it did not expressly mention a dispute as to the validity of that contract. Under this agreement, Universal agreed to pay Argonaut a certain sum; and each party agreed not to sue the other in connection with, inter alia, "any and all matters arising out of the dispute regarding the [RFI-related] contract of reinsurance." The covenant not to sue was virtually identical to the one included in the B/A Settlement Agreement described and quoted above.

  2. The Present Disputes and the Proceedings Below

    In December 1982, Bellefonte and Universal brought the present actions against Argonaut, each seeking rescission of its settlement agreement on the ground that Argonaut had fraudulently induced it to enter into the agreement by not disclosing relevant material facts that Argonaut had a duty to disclose. The complaints alleged that Argonaut had fraudulently induced plaintiffs to enter into the reinsurance contracts by failing to disclose, inter alia, that Argonaut had originally refused to do business

    Page 526

    with RFI because of the "unsatisfactory reputation" of RFI's president, and that Argonaut had no meaningful retention of risk in the RFI-generated business because it had demanded and received an indemnification against loss on that business. Plaintiffs contended that they would not have entered into the reinsurance contracts with Argonaut had they been given the undisclosed material information.

    Plaintiffs urged the court to rescind the settlement agreements and the reinsurance contracts. Each complaint stated...

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