Am. Bankers Ins. v. Northwestern Nat'l Ins.

Decision Date30 December 1999
Docket Number98-5387,Nos. 98-5266,s. 98-5266
Parties(11th Cir. 1999) AMERICAN BANKERS INSURANCE COMPANY OF FLORIDA, Plaintiff-Counter-Defendant-Appellee, v. NORTHWESTERN NATIONAL INSURANCE COMPANY, Defendant-Counter-Claimant-Appellant. AMERICAN BANKERS INSURANCE COMPANY OF FLORIDA, Plaintiff-Counter-Defendant-Appellee-Cross-Appellant, v. NORTHWESTERN NATIONAL INSURANCE COMPANY, Defendant-Counter-Claimant-Appellant-Cross-Appellee. , & 99-4195
CourtU.S. Court of Appeals — Eleventh Circuit

Before EDMONDSON, BARKETT, Circuit Judges and COHILL*, Senior District Judge.

BARKETT, Circuit Judge:

Northwestern National Insurance Company ("Northwestern") appeals from an adverse summary judgment in favor of American Bankers Insurance Company of Florida ("American Bankers") on American Bankers' suit to enforce the reinsurance contract between the parties.1 Northwestern seeks a reversal of the district court's judgment, and a grant of summary judgment in its favor declaring that Northwestern has no liability under the insurance contract, or alternatively, a reversal of the district court's determination of the prejudgment interest amount in the amended final judgment.


This case involves the reinsurance contract between Northwestern and American Bankers to indemnify payments originally made by Hartford Insurance Company ("Hartford") to Dow Corning Corporation ("Dow") under Hartford's primary insurance policy with Dow. These payments satisfied personal injury claims asserted against Dow by women who had received silicone breast implants.

Dow was directly insured by Hartford through two policies: (1) a comprehensive general liability policy of $1 million on a "per occurrence" basis, subject to a $50,000 deductible; and (2) additional coverage on an "aggregate" basis, providing that any number of occurrences could be combined up to the $1 million policy limit, subject to a $500,000 deductible.

In order to spread its risk under this policy, Hartford purchased reinsurance protection from American Bankers for the per occurrence policy. It chose not to reinsure the aggregate basis policy. Under American Bankers' reinsurance contract with Hartford, American Bankers agreed to accept 30 percent of Hartford's liability up to $225,000 for any per occurrence loss exceeding $250,000. American Bankers in turn sought to spread its risk by purchasing reinsurance and contracted with Northwestern for this purpose. Under this contract, Northwestern agreed to accept 92.3 percent of American Bankers' exposure to Hartford up to $224,500 for any per occurrence loss greater than $225,000.

Between October 24, 1994 and March 28, 1995, Hartford paid Dow's claims, and then submitted bills to American Bankers which American Bankers paid. American Bankers subsequently billed Northwestern for its share of the payments under their contract. After paying the initial claims submitted to them by American Bankers, Northwestern objected to the billing on the basis that American Bankers had not acted reasonably in paying Hartford's claims. Northwestern asserted that although Hartford made payments to Dow on an aggregate basis, it billed American Bankers on a per occurrence basis, which would not have been covered by the reinsurance contracts. Northwestern took the position that American Bankers failed to investigate adequately and should not have paid Hartford's claims.

After Northwestern refused to make any further payments, American Bankers filed this suit to enforce the reinsurance contract. Northwestern counterclaimed for the return of payments it had already made and sought a declaration that Northwestern had no obligation to American Bankers under their contract. The district court granted summary judgment to American Bankers and denied Northwestern's cross-motion for summary judgment. Northwestern now appeals. We review a district court's grant of summary judgment de novo, applying the same standards utilized by the district court, and viewing the evidence in the light most favorable to the party against whom judgment was granted. Squish La Fish, Inc. v. Thomco Specialty Prods., Inc., 149 F.3d 1288, 1290 (11th Cir. 1998).


In this case, American Bankers seeks to enforce the reinsurance contract between the parties while Northwestern seeks a declaration that it has no obligations under the contract. Thus, our starting point is the language of the contract in order to ascertain its terms and determine whether it has been breached. The relevant language in the contract at issue is as follows:

All claims involving this reinsurance when settled by the Company, shall be binding on the Reinsurer, which shall be bound to pay its proportion of such settlements . . . .

American Bankers contends that under this provision of the contract Northwestern cannot "second-guess" its decisions to pay claims and must defer to American Bankers' judgment. Northwestern argues that although this may be true generally, Northwestern is not obligated to defer to American Bankers' judgments where, as here, American Bankers did not fulfill its obligation to act in good faith.

When faced with reviewing the terms of a reinsurance contract, courts have recognized that the parties to these particular contracts are sophisticated companies regularly involved in bargaining on an equal footing. Both parties to this relationship are experts in the subject around which their relationship centers. Moreover, reinsurance contracts themselves are sophisticated documents. The Second Circuit has succinctly explained the nature of the reinsurance contract and the pragmatic derivations of the need both to defer to the decisions of the ceding insurance company, but at the same time, to require good faith in the making of those decisions:

Reinsurance involves contracts of indemnity, not liability. Reinsurers do not examine risks, receive notice of loss from the original insured, or investigate claims. In practice, the reinsurer has no contact with the insured. . . . The reinsurance relationship is often characterized as one of "utmost good faith." This utmost good faith may be viewed as a legal rule but also as a tradition honored by ceding insurers and reinsurers in their ongoing commercial relationships. Historically, the reinsurance market has relied on a practice of the exercise of utmost good faith to decrease monitoring costs and ex ante contracting costs. . . . [R]einsurers cannot duplicate the costly but necessary efforts of the primary insurer in evaluating risks and handling claims. Reinsurers may thus not have actuarial expertise . . . in defending ordinary claims. They are protected, however, by a large area of common interest with ceding insurers and by the tradition of utmost good faith.

Unigard Sec. Ins. Co. v. North River Ins. Co., 4 F.3d 1049, 1054 (2d Cir. 1993) (citations omitted). The relationship of these reinsurance contracts and companies leads to the principle that reinsurers are generally bound by the reinsured's decision to pay the claim and must refrain from second guessing a good faith decision to do so. See Henry T. Kramer, The Nature of Reinsurance, in Reinsurance 1, 5 (R.W. Strain ed., 1980); Christiania Gen. Ins. Corp. v. Great Am. Ins. Co., 979 F.2d 268, 280 (2d Cir. 1992) ("A reinsurer cannot second guess the good faith liability determinations made by its reinsured . . . .").

The contractual articulation of this general principle has been called the "follow the fortunes" clause in reinsurance certificates or contracts. As it does in this case, the clause usually states that when an insurer loses to -- or settles with -- the insured, the reinsurer must "follow the fortunes" of the ceding company and pay on its reinsurance obligations. The Third Circuit has noted the compelling policy reasons that counsel against de novo review of the insured's decision to pay under the "follow the fortunes" doctrine:

To permit the reinsurer to revisit coverage issues resolved between the insurer and its insured would place insurers in the untenable position of advancing defenses in coverage contests that would be used against them by reinsurers seeking to deny coverage. . . . Were the Court to conduct a de novo review of [the insurer's] decision-making process, the foundation of the cedent-reinsurer relationship would be forever damaged. The goals of maximum coverage and settlement that have been long established would give way to a proliferation of litigation. Cedents faced with de novo review of their claims determinations would ultimately litigate every coverage issue before making any attempt at settlement.

North River Ins. Co. v. CIGNA Reinsurance Co., 52 F.3d 1194, 1206 (3rd Cir. 1995) (citations omitted).

This is not to say that there are no limitations to this doctrine. A court must still ask whether the ceding insurer acted in good faith in settling or paying the claims. This in turn requires that we determine what constitutes good faith in this context. We are persuaded that simple negligence cannot be enough to establish bad faith. Virtually every decision by the ceding insurance company could be second-guessed and litigated under a simple negligence standard. Thus, to equate bad faith with simple negligence would vitiate all of the policy reasons that give rise to the follow the fortunes doctrine. Rather, we agree with the Second Circuit that the proper minimum standard for bad faith should be deliberate deception, gross negligence or recklessness. See Unigard, 4 F.3d at 1069; see also North River, 52 F.3d at 1216 ("As we have noted, bad faith requires an extraordinary showing of a disingenuous or dishonest failure to carry out a contract. The standard is not mere negligence, but gross negligence or recklessness. "); id. at 1207 ("`[F]ollow the fortunes'...

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