American Employers' Ins. v. Swiss Reinsur. America

• Decision Date: 27 June 2005
• Docket Number: No. 04-2635.,04-2635.
• Parties: AMERICAN EMPLOYERS' INSURANCE COMPANY, Plaintiff, Appellant, v. SWISS REINSURANCE AMERICA CORPORATION, Defendant, Appellee.
• Court: U.S. Court of Appeals — First Circuit

413 F.3d 129

AMERICAN EMPLOYERS' INSURANCE COMPANY, Plaintiff, Appellant, v. SWISS REINSURANCE AMERICA CORPORATION, Defendant, Appellee.

No. 04-2635.

United States Court of Appeals, First Circuit.

Heard April 6, 2005.

Decided June 27, 2005.

Carter G. Phillips with whom William M. Sneed, Sidley Austin Brown & Wood L.L.P., Richard A. Johnston and Wilmer Cutler Pickering Hale and Dorr LLP were on brief for appellant.

John A. Nadas with whom David A. Attisani, Robert A. Kole, Eric B. Hermanson and Choate, Hall & Stewart were on brief for appellee.

Matthew T. Wulf, Debra J. Hall, and Cynthia J. Lamar on brief for Reinsurance Association of America, Amicus Curiae.

Before BOUDIN, Chief Judge, TORRUELLA and SELYA, Circuit Judges.

BOUDIN, Chief Judge.

This case is a companion to our decision today in Commercial Union Insurance Co. v. Swiss Reinsurance America Corp., 413 F.3d 121, No. 04-1709, 2005 WL 1503121 (1st Cir. 2005) Both involve reinsurance and the same reinsurer—Swiss Reinsurance America Corporation ("Swiss Re") and related cedents (the "cedent" being the insurance company that is reinsured). The cedent in No. 04-1709 is Commercial Union; in this case it is American Employers' Insurance Company ("American") which is now affiliated with Commercial Union. One of the two questions presented in this case overlaps with that in Commercial Union; the other differs.

We begin with the facts and litigation history. American provided excess insurance coverage to Pennsalt Chemical Company pursuant to three multiple-year umbrella insurance policies—the "A-15 policies"—together covering the period January 1, 1964, through January 1, 1971.¹ The policies covered liability for bodily injury and property damage that might be incurred by Pennsalt, over and above coverage provided by a primary insurer (who plays no role in the present litigation).

American's own liability to Pennsalt was subject to limits set forth in the American policies: $2 million for "each occurrence" under the first two American policies and $5 million per occurrence under the third. All three policies stated that the per-occurrence limit "is the total limit of the company's liability under this policy for ultimate net loss as a result of any one occurrence." All three policies, with minor variations, defined "occurrence" to mean:

(a) an accident, or (b) an event, or continuous or repeated exposure to conditions, which unexpectedly results in personal injury, property damage, or advertising liability ... during the policy period.... [A]ll personal injury and property damage ... arising out of one event or continuous or repeated exposure to substantially the same general conditions existing at or emanating from one premises location shall be deemed to be one occurrence.

For the period 1962 to 1969, a second insurance company provided additional excess coverage to Pennsalt, under the so-called "S-16 policies," triggered only when the policy limits of the A-15 policies were exceeded. The coverage was less generous to the insured because it paid only a percentage of the insured's excess liability. By the time the present controversy arose, Pennsalt's rights as the insured belonged to a successor company—Elf Atochem North America ("Elf")—and American was responsible for payments under the S-16 policies.

When it issued the A-15 policies, American had reinsured with Swiss Re by securing three multi-year reinsurance certificates corresponding to each of American's A-15 umbrella policies covering Pennsalt. Each certificate was skeletal in form, see Ostrager & Vyskocil, Modern Reinsurance Law & Practice § 5.03 (1996), comprising one two-sided page and a few attached endorsements. The front page described the contract generally: "[Swiss Re] [d]oes hereby reinsure [American] ... with respect to [American's] policy hereinafter described, in consideration of the payment of the premium, and subject to the terms, conditions and amount of liability set forth herein."

The certificate then identified the relevant American policy being reinsured, stating its limits (e.g., "$2,000,000 each occurrence and in the aggregate, in excess of underlying limits"), and then stating the "reinsurance accepted," i.e., the portion of American's payout that Swiss Re would indemnify. In the first two certificates this field read "50%"; for the third certificate, it read: "$2,000,000 each occurrence which is 40% quota share part of $5,000,000 which in turn is excess of underlying limits."

Each certificate contained on the back side several standard conditions. These included a follow-the-form clause:

The liability of [Swiss Re] specified in Item 4 of this Certificate shall follow that of [American], and except as otherwise specifically provided herein, shall be subject in all respects to the terms and conditions of [American's] policy.

Such clauses are designed to make the terms of coverage under an excess policy or reinsurance policy (here Swiss Re's certificate) conform—subject to certain qualifications—to the coverage provided by an underlying policy (here, American's excess policies). Aetna Cas. & Sur. Co. v. Home Ins. Co., 882 F.Supp. 1328, 1337 (S.D.N.Y.1995) ("Where a following form clause is found ... a policy of reinsurance will be construed as offering the same terms, conditions and scope of coverage as exist in the reinsured policy...."); Ostrager & Vyskocil, supra, § 2.03[a], at 2-9; see also Associated Int'l Ins. Co. v. Blythe, 286 F.3d 780, 782 (5th Cir.2002).

The certificates also contained "follow-the-fortunes" provisions, often described as "follow-the-settlements" provisions. They preclude the reinsurer from challenging a cedent's decision to settle so long as the settlement is "reasonably within the terms of the [cedent's] policy, even if not technically covered by it" and so long as the cedent has acted in good faith. See Ostrager & Vyskocil, supra, §§ 9.01-.02; Travelers Cas. & Sur. Co. v. Certain Underwriters at Lloyd's of London, 96 N.Y.2d 583, 734 N.Y.S.2d 531, 760 N.E.2d 319, 328 (2001). The clauses here read:

All claims involving this reinsurance, when settled by [American], shall be binding on [Swiss Re], which shall be bound to pay its proportion of such settlements promptly following receipt of proof of loss.

In the early 1990s, Elf began to notify American of potential hazardous waste losses involving property damage and bodily injury caused by pollution at various sites. On August 29, 1994, American filed a declaratory judgment action in New Jersey Superior Court against Elf in response to Elf's demand for indemnification of property and injury claims arising out of pollution at a Bryan, Texas, site. The case soon expanded to involve additional insurers, parties, issues, and property and injury claims at 82 sites.

Discovery over the next four years focused on the Bryan, Texas, site. In April 1998, Elf presented American with a proposal—which American did not accept—to settle many of its claims against American at 37 sites for $95 million. An underlying premise of Elf's calculations (not explicitly stated but clear from the figures in the document) was that the per-occurrence limit in the American policies applied once per policy period to continuous or repeated exposures like the pollution damage at issue here.

Most courts read such per-occurrence language in such a once-per-policy-period manner, see Commercial Union, slip op. at 10, 413 F.3d at ___. New Jersey law arguably has adopted an "annualization" approach that for these kinds of continuing or recurring losses applies per-occurrence limits to each year of a multi-year policy. See, e.g., Benjamin Moore & Co. v. Aetna Cas. & Sur. Co., 179 N.J. 87, 843 A.2d 1094, 1103 (2004). Such an approach would ordinarily enlarge the insured's coverage and increase the insurer's liability. Id. at 9-11, 413 F.3d at ___-___.

In June 1998, American's coverage counsel—an outside law firm—provided a status report to American's reinsurers. It said inter alia that American would argue against annualization of the per-occurrence limits but noted "certain factors"² that might support an annualization reading of the policies—a reading which Elf had not urged in settlement but which Elf was free to argue in the event the matter had to be litigated. In substance, coverage counsel assumed annualization as a possibility because, as an American representative said later, the aim was to tell the reinsurers "what the exposure could potentially be."

One of the wild-card issues throughout the litigation and settlement negotiations was which jurisdiction's law would be taken to apply to the construction of the policies as to individual waste sites and to "allocation" issues where more than one policy would cover the losses at a site (for example, when several successive policies of one or more insurers covered various years). In a case-management conference in March 1999, the judge presiding in the New Jersey case indicated that the law of the situs state would "govern the case" as to that site, although he later obliquely suggested that allocation would occur "pursuant to Owen," a reference to a leading New Jersey allocation case. See Owens-Illinois, Inc. v. United Ins. Co., 138 N.J. 437, 650 A.2d 974 (1994).

For most of 1999, mediation progressed under the auspices of the New Jersey court. Efforts initially focused on what the parties deemed to be the 10 most important of the 37 relevant sites. Elf furnished information as to remediation costs at these sites, and American hired an expert environmental consulting firm to make its own assessment of the total damages. The environmental consultant's work ultimately produced much lower estimates of remediation costs than Elf did.

In June 1999, Elf presented another settlement demand seeking $120 million from American for the 37 sites;³ its spreadsheet calculations assumed high remediation costs but no annualization of the per-occurrence limits. On this premise,...