Allendale Mut. Ins. Co. v. Excess Ins. Co., Ltd.

• Decision Date: 08 July 1997
• Docket Number: No. 95 Civ. 10970(SAS).,95 Civ. 10970(SAS).
• Citation: 970 F.Supp. 265
• Parties: ALLENDALE MUTUAL INSURANCE COMPANY, Plaintiff, v. EXCESS INSURANCE COMPANY, LTD., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

970 F.Supp. 265

ALLENDALE MUTUAL INSURANCE COMPANY, Plaintiff, v. EXCESS INSURANCE COMPANY, LTD., et al., Defendants.

No. 95 Civ. 10970(SAS).

United States District Court, S.D. New York.

July 8, 1997.

Bernard London, James L. Fischer, James Walsh, London & Fischer, New York City, for Plaintiff.

Richard A. Walker, Jeffrey E. Margulis, Kaplan, Begy & Von Ohlen, Chicago, IL, Robert J. Brown, Chalos & Brown, New York City, for Defendants.

OPINION AND ORDER

SCHEINDLIN, District Judge.

This law suit, brought under diversity jurisdiction, rises from the ashes of a fire that destroyed a warehouse in Seclin, France during the summer of 1991. Plaintiff Allendale Mutual Insurance Company ("Allendale") seeks to recover $7,000,000 in unpaid reinsurance, $5,000,000 in "loss adjustment expenses" and interest, and an unspecified amount for legal fees and expenses incurred in the defense of a prior action for declaratory relief brought by defendants against Allendale in England. Defendants, all British reinsurers, now move for partial summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure.¹ For the reasons set forth below, defendants' motion is granted in part.

I. Applicable Legal Standard

A party is entitled to summary judgment when there is "no genuine issue of material fact" and the undisputed facts warrant judgment for the moving party as a matter of law. See Fed.R.Civ.P. 56(c); Celotex v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The burden of demonstrating the absence of a material factual dispute rests on the moving party. See Gallo v. Prudential Residential Svcs., Ltd., 22 F.3d 1219, 1223 (2d Cir.1994). Once that burden is met, the non-moving party must present "significant probative supporting evidence" that a factual dispute exists. Fed.R.Civ.P. 56(e); Anderson, 477 U.S. at 249, 106 S.Ct. at 2510-11.

The court's role is not to try issues of fact, but rather to determine whether issues exist to be tried. See Balderman v. United States Veterans Admin., 870 F.2d 57, 60 (2d Cir. 1989); Donahue v. Windsor Locks Bd. of Fire Comm'rs, 834 F.2d 54, 58 (2d Cir.1987). All ambiguities must be resolved and all inferences drawn in favor of the party against whom summary judgment is sought. See Anderson, 477 U.S. at 255, 106 S.Ct. at 2513-14; Donahue, 834 F.2d at 57, 60. If there is any evidence in the record from which a reasonable inference could be drawn in favor of the non-moving party on a material issue of fact, summary judgment is improper. See Chambers v. TRM Copy Centers Corp., 43 F.3d 29, 37 (2d Cir.1994).

II. Factual and Procedural Background

The following facts are not in dispute. In December of 1990, Allendale insured the contents of a warehouse leased to Bull Data Systems ("Bull Data") in Seclin, France. This policy was replaced on January 1, 1991, by a policy issued by FM Insurance Company Ltd. ("FMI"), an insurer partially-owned and entirely controlled by Allendale (the "direct insurance policy"). Allendale then reinsured 100% of FMI's policy.² The limit of FMI's liability — and Allendale's — under these policies was $48,000,000.

In turn, Allendale arranged for the placement of facultative reinsurance³ of 100% of the fronting cession. The disputes in this case relate to Allendale's reinsurance agreement with defendants in the amount of $7,000,000 for the portion of the reinsurance layer between $25,000,000 and $38,500,000.⁴ The reinsurance agreement was initially issued on January 1, 1991, and was renewed for the year commencing June 1, 1991. In pertinent part, the reinsurance agreement stated as follows:

* * *

                REASSURED:   ALLENDALE INSURANCE
                             COMPANY
                ASSURED:     BULL DATA CORPORATION
                             and/or as original
                PERIOD:      Twelve months at 1st June, 1991
                             and/or as original. Both days
                             inclusive
                LOCATIONS:   Bull Data Corporation, Seclin
                             France as original
                INTEREST:    Goods and/or Merchandise incidental
                             to the Assured's business
                             consisting principally of personal
                             computers and/or as original
                LIMIT:       US$ 7,000,000 any one occurrence
                             p/o US$13,500,000 any one
                

                             occurrence excess of US$ 25,000,000
                             any one occurrence.
                CONDITIONS:  As original and subject to the
                             same valuation, clauses and conditions
                             as contained in the original
                             policy or policies but only to
                             cover risks of All Risks of Physical
                             Loss or Damage but excluding
                             Inventory Shortage.
                             Including Strikes, Riots, Civil
                             Commotions and Malicious Damage
                             risks and as original. Premium
                             payable as in original.
                             Reinsurers agree to follow the
                             settlements of the Reassured in
                             all respects and to bear their
                             proportion of any expenses incurred,
                             whether legal or otherwise,
                             in the investigation and defense
                             of any claim hereunder.
                             Service of Suit Clause (U.S.A.).
                             Insolvency Clause.
                

* * *

Affidavit of Bernard London, Counsel for Plaintiff ("London Aff."), dated May 5, 1997, Ex. E (emphasis added).⁵

In June of 1991, a fire completely destroyed Bull Data's warehouse. When Bull Data subsequently presented a claim to FMI and Allendale, they refused payment on the grounds that the fire was the result of arson. Bull Data and its affiliates commenced an action before the courts of France to recover under the direct insurance policies (the "French action"). Allendale and FMI also commenced an action against Bull Data in the United States District Court for the Northern District of Illinois. Specifically, defendants sought a declaration that they were not liable to the insured (the "Illinois action"). Ultimately, Allendale agreed to pay Bull Data's claim up to the limits of the direct insurance policies plus interest thereon.

After Allendale agreed to pay Bull Data, it put its reinsurers on notice and requested that the reinsurers make payment. In March of 1992, before any other lawsuit between Allendale and defendants had been filed or served in the United States or elsewhere, defendants commenced an action against Allendale in the Commercial Court of the High Court of Justice, Queen's Bench Division (the "UK action"), seeking a declaration that they were not liable to Allendale under the reinsurance agreement on the grounds that Allendale's alleged misrepresentations and non-disclosures had rendered the reinsurance agreement void ab initio. The UK action was eventually dismissed on appeal for lack of jurisdiction.⁶

Allendale commenced this action on December 28, 1995 against defendants to recover $7,000,000 in allegedly unpaid reinsurance, an additional $5,000,000 for defendants' alleged proportionate share⁷ of "loss adjustment expenses" incurred in the course of the French and Illinois actions, and unspecified damages arising from defendants' alleged breach of the "service of suit" clause in the reinsurance contract inflicted by pursuing the UK action.

III. Discussion

A. Allendale's Claim for Loss Adjustment Expenses in Excess of $7,000,000

Turning now to the substance of defendants' motion, I address first their argument that Allendale's claim for $5,000,000 in loss adjustment expenses is precluded by the reinsurance agreement, or more precisely by two clauses of that contract. The first clause, which I shall refer to as the "limit clause", states:

LIMIT: US$ 7,000,000 any one occurrence p/o US$13,500,000 any one occurrence excess of US$ 25,000,000 any one occurrence.

London Aff., Ex. E. The second clause, which I shall refer to as the "follow-the-settlement" clause, states:

Reinsurers agree to follow the settlements of the Reassured in all respects and to bear their proportion of any expenses incurred, whether legal or otherwise, in the investigation and defense of any claim hereunder.

Id.

Defendants argue that Allendale cannot recover both on its claim for $7,000,000 in unpaid reinsurance and on its claim for $5,000,000 in loss adjustment expenses because the limit clause caps their liability at $7,000,000 inclusive of all costs and expenses. Allendale, in turn, contends the follow-the-settlement clause required the reinsurers to indemnify it for their proportion of expenses and litigation costs even if those expenses and costs exceeded the $7,000,000 cap. The viability of Allendale's loss adjustment expenses claim therefore turns on a single legal question: can the follow-the-settlement clause serve as a basis for Allendale to recover expenses and costs in excess of the stated limit of $7,000,000?

I begin the analysis of this question with a recitation of certain contract law fundamentals. "The cardinal principle for the construction and interpretation of insurance contracts — as with all contracts — is that the intentions of the parties should control." Newmont Mines Limited v. Hanover Ins. Co., 784 F.2d 127, 135 (2d Cir.1986). See also Hartford Accident & Indem. Co. v. Wesolowski, 33 N.Y.2d 169, 350 N.Y.S.2d 895, 898, 305 N.E.2d 907, 909-10 (1973) (same). To determine the parties' intent, the contract must be read as a whole, and all its clauses must be considered together to determine if and to what extent one may modify, explain or limit another. From this, it follows that a contract containing two clauses which may be in conflict should, if possible, be read to give meaning to both rather than to prefer one to the exclusion of the other. This is especially true when interpreting contracts drafted by sophisticated and experienced entities, for such are not likely to inadvertently write meaningless, contradictory or vestigial language into a contract. See Restatement (Second) of Contracts § 203(a) ("an interpretation which gives a...