Commercial Union Ins. v. Swiss Reinsurance America

• Citation: 413 F.3d 121
• Decision Date: 27 June 2005
• Docket Number: No. 04-1709.,04-1709.
• Parties: COMMERCIAL UNION INSURANCE COMPANY and American Employers' Insurance Company, Plaintiffs, Appellants, v. SWISS REINSURANCE AMERICA CORPORATION, Defendant, Appellee.
• Court: U.S. Court of Appeals — First Circuit

413 F.3d 121

COMMERCIAL UNION INSURANCE COMPANY and American Employers' Insurance Company, Plaintiffs, Appellants, v. SWISS REINSURANCE AMERICA CORPORATION, Defendant, Appellee.

No. 04-1709.

United States Court of Appeals, First Circuit.

Heard January 7, 2005.

Decided June 27, 2005.

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

Edward P. Krugman, Cahill Gordon & Reindel LLP, Eric S. Kobrick, Associate General Counsel, American International Group, Inc., on brief for The Member and Affiliated Companies of American International Group, Inc., Amici Curiae.

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

Before BOUDIN, Chief Judge, TORRUELLA, Circuit Judge, and DiCLERICO,^* District Judge.

BOUDIN, Chief Judge.

This is a dispute between an insurance company—Commercial Union Insurance Company ("Commercial Union")—and one of its reinsurers, Swiss Reinsurance America Corporation ("Swiss Re"). The principal issue is whether, under several three-year reinsurance policies, Swiss Re was protected by a single per-occurrence limit on its liability for the three-year policy period or whether the limit applies separately for each policy year, thereby enlarging Swiss Re's total exposure.

The background events involve three different tiers of insurance, coverage periods that do not precisely overlap between tiers, and pertinent clauses that are not even identical from one policy to its successor. Accordingly, in setting the stage, some oversimplification as to the policies and some postponement of detail are both necessary. We begin at the ground floor with the insured, W.R. Grace & Co. ("Grace"), a well-known company with many different facilities at different locations, and then work up through the tiers.

As to the sites at issue in this case, Grace's primary insurer during the period in question (roughly 1962 to 1974) was Maryland Casualty Co. ("Maryland"). With a one-year exception that is not important to our case, that company provided coverage to Grace under five successive one-year policies between June 30, 1962 and June 30, 1967, and two three-year policies from June 30, 1967, to June 30, 1973. The policies covered personal injury and property damage up to $1 million per occurrence but with much lower limits ($25,000, later $100,000) for losses from "gradual pollution."

Between October 20, 1962, and June 30, 1974, Commercial Union's predecessors in interest provided excess liability coverage to Grace—that is, coverage starting at the point that the Maryland policies left off—in the form of four successive multi-year umbrella policies. (The first, second and fourth policies each ran for three years; the third ran for about two years and eight months.) The policies provided coverage in the amount of $5 million for each "occurrence," defining "occurrence" to include "an event, or continuous or repeated exposure to conditions, which unexpectedly results in personal injury [or] property damage" during the policy period, and continued:

[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.

The Commercial Union policies also included clauses, known as "follow-the-form" clauses, that are designed to make coverage under a higher-tier policy (here, Commercial Union's) conform—subject to certain qualifications—to the coverage provided by the underlying policy (here, Maryland's policies). See 2 Ostrager & Newman, Handbook on Insurance Coverage Disputes § 13.01[a], at 868 (12th ed.2004). Thus, in the first two policies, the follow-the-form language provided that "the terms, conditions and limitations of this policy will not be construed any more restrictive [sic] than the terms, conditions and limitations of Underlying Insurance." The latter two provided:

[s]uch coverage as is afforded by this policy shall apply to occurrences covered by the terms and conditions of [the underlying policy] or by the terms of conditions of this policy except that the definition of Property Damage as contained in this policy shall apply.

The top tier of coverage in this case was provided by Swiss Re, which offered not insurance for Grace but "reinsurance" to Commercial Union. Swiss Re agreed, under specified conditions, to indemnify Commercial Union for specified losses it might suffer under its excess insurance policies. The form of reinsurance used, called "facultative," covers risks that the "cedent" (here, Commercial Union) bears under a specific policy or policies. 2 Ostrager & Newman, supra, § 15.03[a], at 996-97.

Swiss Re issued three multi-year "certificates" to Commercial Union, corresponding to each of the last three (out of a total of four) multi-year excess liability policies that Commercial Union had written for Grace, i.e., roughly for the period 1965 to 1974. Each Swiss Re certificate was skeletal, identifying the Commercial Union excess liability policy in question and agreeing to share a specified portion of Commercial Union's liability to Grace. Specifically, under the first certificate Swiss Re agreed to share 50 percent of Commercial Union's first $1 million in loss for "each occurrence"; under the second, 50 percent of the first $500,000; under the third, 37.5 percent of the first $500,000.

Each certificate contained on the back side several standard conditions. These included variously phrased follow-the-form clauses saying that—except as "otherwise specifically provided" in the certificate—Swiss Re's liability would "follow" or "be subject" to the "terms and conditions" of Commercial Union's policies. Thus, through follow-the-form clauses, Swiss Re's policies looked back to Commercial Union's, and the latter's policies looked back to Maryland's policies with Grace.

In addition, the Swiss Re certificates contained "follow-the-fortunes" provisions, which—where the case involves settlements—are sometimes called "follow-the-settlements" clauses. Such provisions are designed to give the cedent reasonable latitude to settle claims against it by the primary insured and to bind the reinsurer (in some measure) from contesting the extent of the cedent's liability to the primary insured. See Ostrager & Vyskocil, Modern Reinsurance Law & Practice §§ 9.01.02 (1996); 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). Here, the follow-the-fortunes clause in each certificate reads as follows:

All claims involving this reinsurance, when settled by [Commercial Union], 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 1980s, Grace began to notify Commercial Union of potential property damage losses due to hazardous waste pollution at various Grace sites. In 1988, Maryland filed a declaratory judgment action in federal district court in New York against Grace seeking to clarify Maryland's obligations under its primary policies. See Md. Cas. Co. v. Cont'l Cas. Co., 332 F.3d 145, 148-49 (2d Cir.2003). Commercial Union and other insurers were added to the suit, and eventually the case expanded to involve over 200 waste sites.

In October 1998, Commercial Union settled with Grace based on information about nine "focus" waste sites (out of the forty for which Grace claimed Commercial Union was liable), for a single immediate payment of $57.6 million. The settlement was premised on estimates of projected liability over a substantial period due to damage at each site and on certain assumptions. Two such assumptions were (1) that the hazardous waste liability at each site should be allocated pro rata across the years of relevant insurance coverage at each site and (2) that the $5 million per-occurrence limit in each policy should be viewed as applying separately to each policy year, i.e., $15 million for a three-year policy.

When Commercial Union then sought indemnity from Swiss Re for $13.7 million (out of the $57.6 million paid to Grace), Swiss Re paid less than half that amount. It withheld part of the balance (about $6 million) on the ground that its reinsurance certificates protected it from any calculation of Commercial Union's liability to Grace, or Swiss Re's to Commercial Union, premised on the notion that the per-occurrence limit applied separately to each policy year (as opposed to the entire multi-year policy period). Swiss Re also disputed another aspect of the demand but that issue was apparently settled.

On cross-motions for summary judgment, the district court concluded that Swiss Re was correct on the "annualization" issue. The court held that Swiss Re's liability should be based on the premise that the per-occurrence limit applied once to a continuing leakage at a site over the multi-year policy period and not once for each year of the period. The court deemed this to be an explicit limit in each certificate, overriding any follow-the-form or follow-the-fortunes provision. This appeal by Commercial Union followed.

We review a grant of summary judgment de novo. Commercial Union Ins. Co. v. Walbrook Ins. Co., 7 F.3d 1047 1050 (1st Cir.1993). The present contract-interpretation dispute is governed either by the substantive law of New York or Massachusetts.¹ Further, interpretation of an insurance contract is—at least absent extrinsic evidence—a question of law for the court. See Fishman v. LaSalle Nat'l Bank, 247 F.3d 300, 303 n. 2 (1st Cir.2001). Accord Lumbermens Mut. Cas. Co. v. Offices Unlimited, Inc., 419 Mass. 462, 645 N.E.2d 1165, 1168 (1995); Sutton v. E. River Sav. Bank, 55 N.Y.2d 550, 450 N.Y.S.2d 460, 435 N.E.2d 1075, 1077-78 ...