Bellefonte Reinsurance Co. v. Aetna Cas. and Sur. Co.

• Citation: 903 F.2d 910
• Decision Date: 18 May 1990
• Docket Number: No. 1164,D,1164
• Parties: BELLEFONTE REINSURANCE CO., Mission Insurance Co., The Insurance Co. of the State of Pennsylvania, North American Co. for Property and Casualty Insurance, Constitution Reinsurance Corp. and Gerling Global Reinsurance Co., Appellees, v. The AETNA CASUALTY AND SURETY CO., Appellant. ocket 90-7009.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Page 910

903 F.2d 910

BELLEFONTE REINSURANCE CO., Mission Insurance Co., The

Insurance Co. of the State of Pennsylvania, North American

Co. for Property and Casualty Insurance, Constitution

Reinsurance Corp. and Gerling Global Reinsurance Co., Appellees, v. The AETNA CASUALTY AND SURETY CO., Appellant.

No. 1164, Docket 90-7009.

United States Court of Appeals,

Second Circuit.

Argued April 18, 1990.

Decided May 18, 1990.

Deborah F. Cohen, Philadelphia, Pa. (Henry M. Justi, and Pepper, Hamilton & Scheetz, Philadelphia, Pa.; Howard S. Veisz, Mark Platt, and Kornstein, Veisz & Wexler, New York City, on the brief) for appellant Aetna Cas. and Sur. Co.

Frank M. Nicoletti, New York City (George J. Koelzer, Clarkson S. Fisher, Jr., and Ober, Kaler, Grimes & Shriver, New York City, on the brief) for appellees.

Before TIMBERS, PRATT and MINER, Circuit Judges.

TIMBERS, Circuit Judge:

Appellant Aetna Casualty and Surety Co. ("Aetna") appeals from a summary judgment entered November 28, 1989, in the Southern District of New York, John F. Keenan, District Judge, in favor of appellees, six reinsurance companies ("the reinsurers"). The district court held that the reinsurers were not obligated to pay Aetna any additional sums for defense costs over and above the limits on liability stated in the reinsurance certificates.

The sole issue on appeal is whether the reinsurers are obligated to pay additional sums for defense costs over and above the limits stated in the reinsurance certificates.

For the reasons which follow, we affirm the judgment of the district court.

I.

We summarize only those facts and prior proceedings believed necessary to an understanding of the issue raised on appeal.

This appeal arises out of the explosion of litigation over the Dalkon Shield intrauterine device. Aetna was the primary insurer of A.H. Robins Co., manufacturer of the Dalkon Shield. Appellees are six reinsurance companies that agreed to reinsure a portion of Aetna's risk.

From 1968 through 1977, Aetna issued primary and excess insurance policies which insured Robins against liability for personal injuries arising from use of Robins' products. From 1971 through 1976, the reinsurers issued certificates of facultative reinsurance which would reinsure specified portions of the excess insurance policies issued by Aetna for Robins.

After a number of products liability actions were brought against Robins, Aetna and Robins had a dispute over the extent of Aetna's liability as insurer for expenses incurred in defending the actions. Robins commenced a declaratory judgment action against Aetna in the Chancery Court in Richmond, Virginia. It sought a decision that defense costs were to be paid by Aetna, regardless of whether those defense costs exceeded the limitations of liability stated in the excess insurance policies. In 1984, the parties settled their dispute. Aetna agreed to pay an amount substantially in excess of the cap stated in the policies ($72 million more, according to appellees). The reinsurers did not participate in these settlement negotiations. They did not sign the agreement.

After signing the settlement agreement, Aetna turned to the reinsurers for a portion of the excess. Aetna had signed separate reinsurance agreements with each of the six reinsurers, but all of the certificates contain relevant provisions which are substantially the same. The following excerpts are from the certificate of appellee Constitution Reinsurance Corp.:

"[Provision 1]

[Reinsurer] ... [d]oes hereby reinsure Aetna ... (herein called the Company) in respect of the Company's contract hereinafter described, in consideration of the payment of the premium and subject to the terms, conditions and amount of liability set forth herein, as follows....

[Provision 2]

Reinsurance Accepted

$500,000 part of $5,000,000 excess of $10,000,000 excess of underlying limits ...

[Provision 3]

The Company warrants to retain for its own account ... the amount of liability specified ... above, and the liability of the Reinsurer specified ... above [i.e., amount of reinsurance accepted] shall follow that of the Company....

[Provision 4]

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, and in addition thereto, in the ratio that the Reinsurer's loss payment bears to the Company's gross loss payment, its proportion of expenses ... incurred by the Company in the investigation and settlement of claims or suits...."

The reinsurers conceded that they were liable up to the amount of the limitation of liability provisions (Provisions 1 and 2) of each of the reinsurance certificates, but refused to pay any share of the excess amount. Aetna sought a sum totalling more than $5 million--from all of the reinsurers combined--in excess of the liability caps.

The reinsurers commenced the instant action in 1985, seeking a declaratory judgment limiting their liability to the amount stated in the reinsurance certificates. Aetna answered and counterclaimed for a declaratory judgment that the reinsurance certificates obligated the reinsurers to "follow the fortunes" of Aetna and indemnify Aetna for the excess defense costs owed to Robins. The reinsurers and Aetna both moved for summary judgment.

In an opinion dated September 5, 1989, the district court held that the dollar amount typed in the column entitled "Reinsurance Accepted" was an overall limitation, and that the reinsurance certificates were cost-inclusive and capped by that amount. In an opinion dated November 21, 1989, the court denied Aetna's motion for reconsideration. The order granting the reinsurers' motion for summary judgment was entered November 28. This appeal followed.

II.

Since this is an appeal from a summary judgment, we review the record in the light most favorable to appellant. Kronfeld v. Trans World Airlines Inc., 832 F.2d 726, 731 (2 Cir.1987), cert. denied, 485 U.S. 1007 (1988). The material facts are undisputed. The dispute is over the interpretation of the text of the reinsurance certificates. The proper standard for appellate review of a pure textual construction by the district court, whatever the procedural posture of the case, is de novo. Meyers v. Selznick Co., 373 F.2d 218, 222 n. 2 (2 Cir.1966) (Friendly, J.); Eddy v. Prudence Bonds Corp., 165 F.2d 157, 163 (2 Cir.1947) (L. Hand, J.), cert. denied, 333 U.S. 845 (1948).

III.

The sole issue presented on this appeal is whether the reinsurers are obligated to Aetna for an amount greater than the amounts stated in the reinsurance certificates. We are mindful in interpreting the agreements that, as with all contracts, they should be construed, if possible, so as to give effect to all of their material provisions. Spencer, White & Prentis, Inc. v. Pfizer Inc., 498 F.2d 358, 363 n. 23 (2 Cir.1974).

(A)

We turn first to Aetna's contention that the "follow the fortunes" doctrine of reinsurance law obligates a reinsurer to indemnify a reinsured for all of the reinsured's defense expenses and costs, even when those expenses and costs bring the total amount to more than the explicit limitation on liability contained in Provisions 1 and 2 of each reinsurance certificate. Aetna claims that the "follow the fortunes" doctrine applies whenever the reinsured makes a reasonable settlement with the underlying insured. We reject this claim. We hold that the doctrine of "follow the fortunes" does not render the reinsurers liable in this case.

Aetna asserts that the third provision of each of the certificates contains a general "follow the fortunes" clause, typical of most reinsurance contracts. The doctrine of "follow the fortunes" has been defined as meaning that "the reinsurer will follow the fortunes or be placed in the position of the [insurer]." Koehnen, "Administration and Maintenance of Business in Force," Reinsurance 509 (Strain ed. 1980); see also Kramer, "The Nature of Reinsurance," Reinsurance, supra, at 11-12 (reinsurer shall "follow the fortunes" of the insured as if the reinsurer were a party to the original insurance). Basically, the doctrine burdens the reinsurer with those risks which the direct insurer bears under the direct insurer's policy covering the original insured. American Ins. Co. v. North American Co. for Property and Casualty Ins., 697 F.2d 79, 81 (2 Cir.1982) ("AIC "); see also Gerathewohl, 1 Reinsurance Principles and Practice 466 (1980).

The reinsurers do not dispute that they must follow Aetna's fortunes with respect to the Robins settlement up to the liability cap. Aetna, however, contends that the reinsurers are liable beyond the stated limits where, as here, the excess was for "reasonable" defense costs expended on settlement in "good faith" of a dispute arising from the underlying policy.

According to Aetna, that result is required by our decision in AIC. There, the reinsurer agreed to assume part of the risk of damage awards assessed against the underlying insured. In one action, a jury awarded punitive damages against the insured. The underlying policy was ambiguous as to whether punitive damages were included. Rather than appeal, however, the insurer...