TRAVELERS CO. v. Underwriters

• Decision Date: 16 October 2001
• Citation: 96 N.Y.2d 583,760 N.E.2d 319,734 N.Y.S.2d 531
• Parties: TRAVELERS CASUALTY AND SURETY COMPANY, Formerly Known as AETNA CASUALTY AND SURETY COMPANY, Appellant, v. CERTAIN UNDERWRITERS AT LLOYD'S OF LONDON et al., Respondents, et al., Defendants. TRAVELERS CASUALTY AND SURETY COMPANY, Formerly Known as AETNA CASUALTY AND SURETY COMPANY, Appellant, v. CERTAIN UNDERWRITERS AT LLOYD'S OF LONDON et al., Respondents, et al., Defendants.
• Court: New York Court of Appeals Court of Appeals

96 N.Y.2d 583

760 N.E.2d 319

734 N.Y.S.2d 531

TRAVELERS CASUALTY AND SURETY COMPANY, Formerly Known as AETNA CASUALTY AND SURETY COMPANY, Appellant, v. CERTAIN UNDERWRITERS AT LLOYD'S OF LONDON et al., Respondents, et al., Defendants.

TRAVELERS CASUALTY AND SURETY COMPANY, Formerly Known as AETNA CASUALTY AND SURETY COMPANY, Appellant, v. CERTAIN UNDERWRITERS AT LLOYD'S OF LONDON et al., Respondents, et al., Defendants.

Court of Appeals of the State of New York.

Argued September 5, 2001.

Decided October 16, 2001.

Simpson Thacher & Bartlettt, New York City (Mary Kay Vyskocil, Joseph M. McLaughlin, Paul C. Gluckow, Michelle A. Kisloff and Tyler B. Robinson of counsel), for appellant in the first and second above-entitled actions.

Wachtell, Lipton, Rosen & Katz, New York City (Herbert M. Wachtell, Michael W. Schwartz, Ben M. Germana and Israel Friedman of counsel), and Lord, Bissell & Brook (Robert B. Robinson, of the Illinois Bar, admitted pro hac vice, and Jill Van Wormer of counsel), for respondents in the first and second above-entitled actions.

Cuyler Burk, L. L. P., New York City (Christopher Erd of counsel), and Bates & Carey, Chicago, Illinois (Robert J. Bates, Jr., and Mark G. Sheridan of counsel), for Reinsurance Association of America and another, amici curiae in the first and second above-entitled actions.

Rivkin Radler, L. L. P., Uniondale (William M. Savino, Stephen J. Smirti, Jr., and M. Paul Gorfinkel of counsel), for American Insurance Association, amicus curiae in the first and second above-entitled actions.

Anderson Kill & Olick, P. C., New York City (Eugene R. Anderson of counsel), for United Policyholders and others, amici curiae in the first and second above-entitled actions.

Cahill Gordon & Reindel, New York City (Edward P. Krugman of counsel), and Eric S. Kobrick for American International Group, Inc., amicus curiae in the first and second above-entitled actions.

Chief Judge KAYE and Judges SMITH, LEVINE, CIPARICK, WESLEY and ROSENBLATT concur.

OPINION OF THE COURT

GRAFFEO, J.

These appeals present a common issue of contract interpretation: whether losses from environmental injury claims involving decades of commercial activities at numerous industrial and waste disposal sites may properly be aggregated as a single "disaster and/or casualty" under certain reinsurance treaties. We conclude, under the facts and reinsurance contracts at issue, that the aggregation of these losses is beyond the scope of the applicable treaties.

We begin with a general explanation of the purpose and structure of reinsurance. As we described in Matter of Union Indem. Ins. Co., "[r]einsurance is `the insurance of one insurer (the "reinsured") by another insurer (the "reinsurer") by means of which the reinsured is indemnified for loss under insurance policies issued by the reinsured to the public'" (89 NY2d 94, 105-106 [quoting Kramer, The Nature of Reinsurance, reprinted in Reinsurance, at 5 (Strain ed 1980)]; see also, Matter of Midland Ins. Co., 79 NY2d 253, 258

; Sumitomo Mar. & Fire Ins. Co. v Cologne Reins. Co., 75 NY2d 295, 301; Staring, Reinsurance §§ 2:1-2:3, at 1-4 [1993]). When entering into a reinsurance contract, an insurance company agrees to pay a particular premium to a reinsurer in return for reimbursement of a portion of its potential financial exposure under certain direct insurance policies it has issued to its customers. Through this indemnity relationship, the reinsured seeks to "cede" or spread its risk of loss among one or more reinsurers. Reinsurance differs from direct insurance, such as excess insurance, in that the reinsurer is not, in most cases, directly obligated to the original insured; in fact, reinsurance indemnity does not arise until the reinsured has paid a claim.

Reinsurance comes primarily in two forms: facultative and treaty reinsurance. Facultative reinsurance is policy-specific, meaning that all or a portion of a reinsured's risk under a specific contract of direct coverage will be indemnified by the reinsurer in the event of loss. In contrast, a carrier seeking to reduce potential financial losses from policies issued to a class of customers or an industry may purchase treaty reinsurance (see, Staring, supra, § 2:3). "In a treaty reinsurance relationship, there is `1) no individual risk scrutiny by the reinsurer, 2) obligatory acceptance by the reinsurer of covered business, and 3) a long-term relationship in which the reinsurer's profitability is expected, but measured and adjusted over an extended period of time'" (Union Indem., 89 NY2d, at 106 [quoting Clark, Facultative Reinsurance: Reinsuring Individual Policies, reprinted in Reinsurance, at 121 (Strain ed 1980)]).

Reinsurance can be structured to provide coverage in a number of ways. Two of the more common variations are quota share and excess of loss reinsurance (see, Staring, supra, §§ 2:4-2:5). "The characteristics of the quota share [reinsurance or proportional reinsurance] are that a reinsurer takes a given percentage of the risk of each underlying policy and also receives a certain percentage of the premiums charged, all within stated upper limits of liability" (id., § 2:4). In excess of loss reinsurance, also called non-proportional reinsurance, the reinsurer indemnifies "all or a percentage, usually high, of the excess of loss on the reinsured risks, above a stated amount, after the collection of any proportional reinsurance and up to a stated limit" (id., § 2:5). The "stated amount" or deductible is referred to as the "retention," above which the reinsurer is obligated to pay the reinsured's loss to the extent set forth in the contract (see, id.). Generally, the premiums for excess of loss reinsurance are lower than those for quota share reinsurance as the risks are not shared proportionately by the reinsured and reinsurer (see, Webb, The Pro Rata Property Treaty, reprinted in Reinsurance, at 72 [Strain ed 1997]). Here, it is undisputed that the various reinsurance contracts at issue are nonproportional, or excess of loss, reinsurance treaties.

Against this backdrop, we turn to the particular facts before us.

The Koppers Litigation

From 1960 to 1981, plaintiff Travelers Casualty and Surety Company¹ provided primary, excess and umbrella general liability insurance policies to the Koppers Company,² a chemical manufacturer that has operated in locations throughout the United States since the early 1900s. The primary policies issued from 1960 to 1972 established varying property damage liability limits per occurrence while the excess policies for the years 1966 to 1972 limited coverage to $10 million per occurrence. Beginning in 1971, the primary policies contained "sudden and accidental" pollution exclusion clauses; a similar clause first appeared in the excess policies the following year.

During the period relevant to this appeal, Travelers purchased various types of reinsurance in connection with its policies issued to Koppers. In particular, Travelers purchased facultative reinsurance for 50% of the limits of its excess liability policies issued to Koppers from January 1, 1966 to March 1, 1972. In addition, it secured catastrophic excess of loss reinsurance from defendants, a number of foreign reinsurance companies,³ for the years 1960 to 1970. These reinsurance treaties obligate the Reinsurers to pay Travelers for "each and every loss" incurred by Travelers that exceeds the retentions established under the treaties. The treaties define "each and every loss" as

"all loss arising out of any one disaster and/or casualty under coverage of any or all insureds of the Companies, or all loss under the products liability coverage of any one insured, or all loss arising out of the occupational disease hazard under Workmen's Compensation and Employers' Liability coverage of any one insured" (emphasis added).

In turn, the definition of "disaster and/or casualty" is described as

"each and every accident, occurrence and/or causative incident, it being further understood that all loss resulting from a series of accidents, occurrences and/or causative incidents having a common origin and/or being traceable to the same act, omission, error and/or mistake shall be considered as having resulted from a single accident, occurrence and/or causative incident."

The treaties also contain a so-called "follow the fortunes" clause which reads:

"Any and all payments made by [Travelers] in settlement of loss or losses under [its] policies, whether in satisfaction of a judgment in any Court against the Insured or [Travelers] or made voluntarily by [Travelers] before judgment, in full settlement or as a compromise, shall be unconditionally binding upon the [Reinsurers] and amounts falling to the share of the [Reinsurers] shall be immediately payable to [Travelers] by [the Reinsurers] upon reasonable evidence of the amount paid by [Travelers] being presented * * *

"The [Reinsurers] agree to abide by the loss settlements of [Travelers], such settlements to be considered as satisfactory proofs of loss."

The underlying environmental claims at issue arose in the early 1980s when federal, state and local governments, as well as a number of private parties, commenced environmental actions directed at more than 150 of Koppers' plant and disposal sites throughout the country, many of which had been in operation for over 60 years.

In 1985, Koppers commenced an action in Federal District Court against Travelers and other insurers, including some of the defendants in this action in their capacity as direct insurers, seeking damages and a declaration that the insurers were obligated to defend and indemnify Koppers for its potential liabilities at these sites. Following a decade of litigation, Travelers eventually settled with Koppers for approximately $140 million. According to the parties' stipulation, the "settlement with Koppers resolved Travelers['] alleged liability to provide insurance coverage for pollution...