Christiana General Ins. v. Great American Ins., 87 Civ. 8310 (PKL).

• Decision Date: 09 August 1990
• Docket Number: No. 87 Civ. 8310 (PKL).,87 Civ. 8310 (PKL).
• Citation: 745 F. Supp. 150
• Parties: CHRISTIANA GENERAL INSURANCE CORPORATION OF NEW YORK, Plaintiff, v. GREAT AMERICAN INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — Southern District of New York

745 F. Supp. 150

CHRISTIANA GENERAL INSURANCE CORPORATION OF NEW YORK, Plaintiff, v. GREAT AMERICAN INSURANCE COMPANY, Defendant.

No. 87 Civ. 8310 (PKL).

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

August 9, 1990.

Walder, Sondak, Berkeley & Brogan, Roseland, N.J., Budd, Larner, Gross, Picillo Rosenbaum, Greenberg & Sade, New York City (James A. Plaisted, Mark L. Alexander and Donald M. Emeigh, Jr., of counsel), for plaintiff.

Bower & Gardner, New York City (Thomas R. Newman, Thomas M. Bower and Barry T. Bassis, of counsel), for defendant.

OPINION AND ORDER

LEISURE, District Judge.

This is a declaratory judgment action, filed pursuant to 28 U.S.C. § 2201. The jurisdiction of this Court is based on diversity of citizenship. Plaintiff seeks a declaration from this Court stating that, inter alia, plaintiff is not obligated to indemnify defendant for losses incurred under certain reinsurance policies between the parties. Extensive discovery has taken place in this action, and the parties have now cross-moved for summary judgment, and plaintiff has moved for attorneys' fees. Additionally, plaintiff has moved to amend its complaint, should its summary judgment motion be denied.

BACKGROUND

The essential facts of this action are not in dispute. The disputed issues will be discussed below in the body of this opinion. This case arises out of reinsurance contracts between the parties. For four policy years stretching from 1980 to 1984¹, plaintiff Christiana General Insurance Company of New York ("Christiana") agreed by contract to reinsure certain risks insured by defendant Great American Insurance Company ("GAIC"). In the instant action, Great American was an excess insurer on a policy issued to American Honda Motor Company, Inc. ("American Honda"), and to various American Honda subsidiaries and affiliates. For the 1980 and 1981 policy years, GAIC's contract with American Honda stated that GAIC would provide $10 million in coverage in excess of $15 million dollars in losses. Thus, should American Honda's insured losses for one of those years exceed $15 million, GAIC would be obligated to cover those losses, up to $10 million. For the 1982 policy year, GAIC provided $10 million in coverage in excess of $17 million, and for the 1983 policy year, GAIC provided $7 million in coverage in excess of $18 million.

In each of the policy years 1980 through 1983, Christiana reinsured a portion of GAIC's liability obligation to American Honda.² Reinsurance is a contract between two insurance companies designed to spread the risks associated with insuring large accounts. Under a reinsurance contract, one insurer, known as the ceding insurer, transfers all or a portion of the risk it has underwritten to another insurer, known as the reinsurer, for a portion of the premium paid by the insured to the ceding insurer. See Colonial American Life Ins. Co. v. Commissioner, ___ U.S. ___, 109 S.Ct. 2408, 2411, 105 L.Ed.2d 199 (1989). As Judge Kevin Duffy of this Court has succinctly put it, "Reinsurance is simply an insurance policy issued to insurers." Employers Ins. of Wausau v. American Centennial Ins. Co., No. 86 Civ. 8576 (KTD), slip op. at 2, 1989 WL 6631 (S.D.N.Y. Jan. 24, 1989).

Reinsurance is a means for insurance companies to spread the risks they assume from insured, and to lessen the impact any individual company will suffer in the event of a catastrophic loss. Reinsurance comes in two basic forms: "treaty" reinsurance, and "facultative" reinsurance. Treaty reinsurance "involves an ongoing agreement between two insurance companies binding one in advance to cede and the other to accept certain reinsurance business pursuant to its provisions." Sumitomo Marine & Fire Ins. Co. v. Cologne Reinsurance Co., 75 N.Y.2d 295, 301, 552 N.Y.S.2d 891, 894, 552 N.E.2d 139, 142 (1990). Facultative reinsurance, on the other hand, "involves the offer of a portion of a particular risk to one or more potential reinsurers, who are then free to accept or reject the risk in whole or in part." Id. (footnote omitted) (citing Thompson, Reinsurance, at 75 (4th ed.1966)). A separate reinsurance certificate is typically issued for each risk assumed by the facultative reinsurer. The reinsurance is often placed through a broker employed by the ceding insurer, and, in the case of facultative reinsurance, a single risk is often placed with a number of reinsurers, each assuming a portion of the ceding insurer's risk. The case at bar involves facultative reinsurance.

In the instant case, GAIC, after entering into its insurance agreement with American Honda, utilized a licensed New York reinsurance intermediary, Willcox, Barringer & Co. ("Willcox"), who brokered GAIC's American Honda liability to a number of reinsurance companies, including Christiana.³ Provision 7 of each of the facultative reinsurance certificates provides:

Prompt notice shall be given by the Company GAIC to the Reinsurer of any occurrence or accident which appears likely to involve this reinsurance and, while the Reinsurer does not undertake to investigate or defend claims or suits, the Reinsurer through its representative and/or counsel, shall nevertheless have the right and be given the opportunity to associate with the Company and its representatives at the Reinsurer's expense in the defense and control of any claim, suit or proceeding which may involve this reinsurance, with the full cooperation of the Company.

It is this provision that underlies much of plaintiff's allegations in this action. Plaintiff asserts that defendant failed to give adequate notice to its reinsurers that defendant's excess insurance layer was likely to be pierced for most or all of the policy years reinsured in part by defendant. Plaintiff further alleges that failure to provide prompt notice to plaintiff and other reinsurers constituted a breach of a fiduciary duty of good faith owed to the reinsurers by GAIC. Finally, plaintiff contends that GAIC misrepresented the products and risks being reinsured, thus misleading plaintiff and other reinsurers into accepting risks they otherwise would have rejected.

American Honda is the wholly-owned United States subsidiary of the well-known Japanese manufacturer of automobiles, motorcycles, power equipment and related products. American Honda is the exclusive distributor of Honda products in the United States. See Cabriolet Porsche Audi, Inc. v. American Honda Motor Co., 773 F.2d 1193, 1198 (11th Cir.1985), cert. denied, 475 U.S. 1122, 106 S.Ct. 1641, 90 L.Ed.2d 186 (1986). Among the Honda products distributed by American Honda are all-terrain vehicles ("ATVs"). ATVs are three- or four-wheeled motorized vehicles capable of operating off-road. They come in a number of models designed for a variety of purposes. Some of the more powerful models, particularly in a four-wheel configuration, can be used as a small tractor. During the late 1970s and early 1980s, however, ATVs were principally marketed as recreational vehicles. Apparently, many users treated ATVs in a manner previously reserved for "dirt bikes" — racing them offroad or attempting to traverse difficult terrain at relatively high speeds. Most states did not require a driver's license or any other type of permit to operate an ATV, and only a few states required riders to wear a helmet or other protective gear. Accordingly, it was not uncommon for children under the age of sixteen to operate ATVs with little or no training or protective clothing.

ATVs, it turns out, were not well designed for the activities for which many Americans purchased them. The three-wheeled versions, which look similar to large, motorized tricycles with oversized, deep-tread tires, were particularly popular with off-road enthusiasts. The smaller, less-powerful three-wheel ATVs were popular amongst teenagers and children both as recreational vehicles and, in some cases, as a form of transportation. ATVs, particularly the three-wheeled models, turned out to be unstable and deceptively difficult to operate. In the early 1980s, as the popularity of ATVs began to increase, the number of accidents resulting from ATV use increased dramatically. The injuries suffered in ATV accidents were often severe. By mid-1985, there were 161 ATV-related deaths reported nationwide for the period from 1982 to 1985. Of those victims, 73 were under the age of sixteen, and 39 were under the age of twelve. There were also numerous reports of accident victims with severe brain and spinal cord injuries.

In the spring of 1985 the Federal Consumer Product Safety Commission ("CPSC") released a report, indicating that ATVs might pose an unreasonable risk of injury. Two months after its first announcement, the CPSC issued a proposed rule, designed to reduce the risks associated with ATVs, and initiated judicial action to ban the products as unduly hazardous. The CPSC action spurred journalistic interest in the ATVs. Between the two CPSC announcements in the spring of 1985, the ABC television news show 20/20 aired a segment which focused on the risks associated with ATVs, and on some of the accidents which had resulted from ATV use. Despite this publicity, American Honda continued to market and sell ATVs.⁴ Finally, in 1988, with injuries and deaths from ATV use continuing to mount, American Honda and its parent entered into a consent decree with the CPSC to reduce the harm associated with ATVs. Specifically, American Honda agreed to cease selling all three-wheel ATVs, to limit sales of the remaining models to buyers of an appropriate age, and to undertake an extensive program to promote safe ATV use. This consent decree has, apparently, resulted in a significant reduction in ATV-related injuries.

The legacy of the ATVs is obvious in the instant action. As early as 1985, it was clear to at least some of American Honda's primary and excess insurers that the ATVs posed a serious liability problem. The number of lawsuits arising from ATV accidents was rising...