Commercial Union Ins. v. Seven Provinces Ins. Co.

• Decision Date: 15 June 1998
• Docket Number: No. 95-10894-NG.,95-10894-NG.
• Citation: 9 F.Supp.2d 49
• Parties: COMMERCIAL UNION INSURANCE COMPANY, As Successor in Interest to Employers' Surplus Lines Insurance Company, Plaintiff, v. SEVEN PROVINCES INSURANCE COMPANY, LTD., Defendant.
• Court: U.S. District Court — District of Massachusetts

9 F.Supp.2d 49

COMMERCIAL UNION INSURANCE COMPANY, As Successor in Interest to Employers' Surplus Lines Insurance Company, Plaintiff, v. SEVEN PROVINCES INSURANCE COMPANY, LTD., Defendant.

No. 95-10894-NG.

United States District Court, D. Massachusetts.

June 15, 1998.

COPYRIGHT MATERIAL OMITTED

Bruce M. Friedman, Kroll & Tract, New York, NY, Thomas J. Hogan, Kroll, Rubin & Fiorella LLP, Boston, MA, for Commercial Union Insurance Company.

Brian A. Davis, Kurt Wm. Hemr, Choate, Hall & Stewart, Boston, MA, Ralph Phalen, H. Northcraft, Mark V. Dugan, Blackwell, Sanders, Matheny, Weary & Lobardi P.C., Kansas City, MI, for Seven Provinces Insurance Company, Ltd.

MEMORANDUM

GERTNER, District Judge.

A trial was held in this action to recover on a policy of reinsurance. The dispute arises out of a reinsurance arrangement entered into thirty-five years ago between Employers' Surplus Lines Insurance Company("ESLIC") and defendant Seven Provinces Insurance Company, Ltd. ("Seven Provinces"). ESLIC insured Teledyne, a California-based manufacturing company, through a number of different insurance policies. In 1963, ESLIC ceded a portion of the Teledyne risk covered by one of those policies to Seven Provinces.

In 1982, environmental contamination was discovered at a number of Teledyne sites. The company was faced with third-party suits and Environmental Protection Agency ("EPA") claims for millions of dollars in clean-up costs. It submitted a claim to its insurers, including ESLIC's successor-in-interest, plaintiff Commercial Union ("CU"). CU's obligations to Teledyne under various policies and for various contaminated sites were litigated in California and eventually settled. Under the terms of the settlement, CU paid Teledyne $2.2 million and Teledyne released CU from all future liability for any environmental claims against Teledyne.

According to CU, one site in particular was the focus of negotiations: the "semiconductor site," where Teledyne had carried on manufacturing activity since 1962, and for which clean-up costs were estimated to be $20.93 million. ESLIC had insured Teledyne the year after the site began operations, from July 1, 1963 to July 1, 1964, under a general liability policy that covered losses in excess of $50,000 and up to $1.95 million. CU allocated $843,000 of the $2.2 million to that site and billed its reinsurers accordingly. All loss in excess of $500,000 was covered by a reinsurer not a party to this case. Of the remaining $450,000, CU billed half, or $225,000, to Seven Provinces. It then billed $180,000 of its half of the risk to a pool of treaty reinsurers, leaving CU itself to absorb only $45,000 of the loss.¹

CU brings this suit in order to recover the $225,000 it billed Seven Provinces, as well as damages and attorneys fees under Mass. Gen. L. ch. 93A, for Seven Provinces' failure to satisfy this claim for over four years. CU bases its claim for $225,000 in reinsurance on its internal records of the reinsurance relationship between the parties and on the facultative certificate² ("fac. cert.") formalizing that relationship. It bases its claim for 93A damages in part on the unique mores of the industry, notably the obligation of "uberrimae fidei," the obligation to act with utmost good faith. See Compagnie de Reassurance d'Ile de France v. New England Reinsurance Corp., 944 F.Supp. 986, 992-94 (D.Mass. 1996).

Seven Provinces raises several defenses to this claim. (1) The net retention claim: Seven Provinces argues primarily that the facultative certificate links its reinsurance obligation to the amount of risk ESLIC (now Commercial Union) retained. Because $180,000 of ESLIC's $225,000 portion of the Teledyne risk was covered by a pool of treaty reinsurers, Seven Provinces' obligation was reduced by equal measure, to $45,000. (2) The allocation claim: Seven Provinces has also raised a range of challenges to CU's decision to allocate $843,000 of the $2.2 million Teledyne settlement to the semiconductor site: that it was not done in good faith; that it wrongly billed reinsurers for ex gratia payments, not required by the insurance policies that had been settled, but instead given voluntarily in order to obtain the general release from all future claims; that it failed to allocate any payments to a "difference in conditions" — essentially, property damage — policy ESLIC had issued to Teledyne; and that the entirety of Teledyne's claim against CU was barred by the "owned property" exclusion in the ESLIC-Teledyne policy reinsured by Seven Provinces. (3) The 93A Claim: Seven Provinces argues in part that the mores of the reinsurance industry have changes and its behavior conforms to 1990s standards.

The Court heard six days of testimony and admitted numerous pages of exhibits documenting the relationship between the parties and between CU, ESLIC, and Teledyne. Specifically, several years of correspondence between the parties about the Teledyne claim were authenticated and made part of the record. Each side offered the testimony of the officers directly involved in this dispute, as well as of an expert in the customs and practices of the highly specialized world of reinsurance.

This memorandum provides my findings of fact and conclusions of law in my resolution of all of CU's claims against Seven Provinces.

I. FINDINGS OF FACT

A. The Formation of the Reinsurance Relationship

The background to the formation of the reinsurance relationship between Seven Provinces and ESLIC is undisputed. During the early 1960s, both ESLIC and Seven Provinces operated in California through a managing general agent, Sayre & Toso. Sayre & Toso was authorized to write insurance and reinsurance business for ESLIC, Seven Provinces, and several other insurance companies. On October 29, 1963, it wrote a policy of reinsurance between ESLIC and Seven Provinces, memorializing that relationship in a facultative certificate, # SP016069. The facultative certificate was made up of a series of numbered, standardized forms. The first page of the certificate was a Seven Provinces' form and the number beginning "SP" indicates "Seven Provinces," making Seven Provinces technically the drafter of the agreement.

By the terms of the facultative certificate, the reinsurance relationship with Seven Provinces covered the ESLIC policy with Teledyne, policy # E506432, for the same period as the underlying policy, from July 1, 1963 to July 1, 1964, and on the same risks. The ESLIC policy with Teledyne was a general liability policy, covering risks in excess of $50,000 and up to $1,950,000. As a liability policy, it excluded coverage for damage to property owned by Teledyne. ESLIC had obtained reinsurance for all losses above $500,000 from another reinsurer, listed as "Brandt" in CU's records.³ Of the remaining $450,000 of risk it retained, ESLIC ceded $225,000 to Seven Provinces. Thus, by the express terms of the facultative certificate, Seven Provinces agreed that should Teledyne make a claim against ESLIC for $450,0000 under the ESLIC-Teledyne liability policy Seven Provinces would in effect reimburse ESLIC for half its loss.

However, Seven Provinces' obligation was not unconditional; it was qualified by a "net retention" provision. After setting out the amount of reinsurance and the nature of the risk reinsured, the last page of the certificate contained the following paragraph 2:

[1] Being a reinsurance of and warranted same NETT⁴ rate, terms and conditions as and to follow the settlements of the EMPLOYER SURPLUS LINES INSURANCE COMPANY and that the local office of the said Company retains during the currency of this insurance at least $225,000.00 BEING 50% OF $450,000.00 EXCESS $50,000.00 COMBINED SINGLE LIMIT ([2] subject to reduction by any general excess loss or excess catastrophe reinsurance whether effected by the head office or local office of the Company) [3] on the identical subject matter and risk and in identically the same proportion on each separate part thereof, but [4] in the event of the retained line being less than as above, Underwriter's lines to be proportionally reduced.⁵

This clause, it is agreed, required the "local office" to retain for ESLIC's account 50% of the Teledyne risk covered by the ESLIC-Seven Provinces policy, and ceded the other 50% to Seven Provinces. Whether it restricted ESLIC's head office at all, and if so, in what ways, is at the heart of this dispute. Seven Provinces claims that this clause required ESLIC to retain the entirety of its 50% of the Teledyne risk for its own account. If it reduced its risk by obtaining any further reinsurance, Seven Provinces' responsibility under the contract would be proportionately reduced as well. Because CU admits that $180,000 of the Teledyne risk was covered by a treaty reinsurance pool, Seven Provinces argues that its liability is also reduced by $180,000. It now owes CU $45,000, at the most.

CU argues that this clause bound only the "local office" or its functional equivalent, ESLIC's managing general agent Sayre & Toso. Only if Sayre & Toso obtained facultative reinsurance on the ESLIC-Seven Provinces policy, it argues, would Seven Provinces' responsibility be reduced. If the ESLIC's main office obtained facultative reinsurance, or if either office obtained treaty reinsurance, Seven Provinces' responsibility would remain the same: the $225,000 CU is seeking in this action.

B. The Net Retention Clause

I find that a reinsurance relationship existed between the parties. It is documented in the facultative certificate, which is of undisputed authenticity.

I find that the express terms of the facultative certificate provided for the cession of $225,000 of the Teledyne risk to Seven Provinces.

I find that the language of paragraph two is ambiguous at several key points:

(1) Does the phrase "[b]eing a reinsurance of and warranted same NETT rate, terms and conditions as and to follow the settlements of [ESLIC] and that the local office ......