GERLING REINS. v. HOME INS.

• Decision Date: 17 December 2002
• Parties: GERLING GLOBAL REINSURANCE CORPORATION, Appellant,<BR>v.<BR>HOME INSURANCE COMPANY, Respondent.
• Court: New York Supreme Court — Appellate Division

302 A.D.2d 118

752 N.Y.S.2d 611

GERLING GLOBAL REINSURANCE CORPORATION, Appellant,

v.HOME INSURANCE COMPANY, Respondent.

SULLIVAN, J.

December 17, 2002.

Sylvia Semerdjian of counsel (David L. Pitchford, attorney), for appellant.

Daniel A. Hargraves of counsel (Andrew J. Costigan on the brief; Hargraves, McConnell & Costigan, P.C. and Jonathan Rosen, attorneys), for respondent.

MAZZARELLI, J.P., ANDRIAS and BUCKLEY, JJ., concur.

OPINION OF THE COURT

SULLIVAN, J.

This appeal—from the grant of defendant's motion to compel arbitration and stay this action seeking the recovery of approximately $3.1 million—presents the issue of whether a reinsurer's claim in equity for restitution of monies had and received, mistakenly paid by the reinsurer, comes within the scope of an arbitration clause limited to disputes involving the interpretation of the reinsurance contracts.

Defendant, The Home Insurance Company, issued three successive excess insurance policies (first policy: $5 million, 1962-1965; second policy: $5 million, 1965-1968; third policy: $10 million, 1968-1971), providing liability coverage for environmental pollution claims against its insured, Federal Pacific Electric Company (FedPac). Home partially reinsured its liability under these policies pursuant to facultative certificates, including two certificates issued by plaintiff, Gerling Global Reinsurance Corporation, which reinsured Home's second and third policies.

Each certificate issued by Gerling contained the following provision, section 9: "[T]he liability of [Gerling] * * * shall follow that of [Home] and except as otherwise specifically provided herein, shall be subject in all respects to all the terms and conditions of [Home's] policy." Section 11 of these certificates provided, "All claims involving this reinsurance, when settled by [Home], shall be binding on [Gerling], who shall be bound to pay its proportion of such settlements." Each of the certificates also contained an arbitration clause stating, "Should an irreconcilable difference of opinion arise as to the interpretation of this [c]ontract, it is hereby mutually agreed that, as a condition precedent to any right of action hereunder, such difference shall be submitted to arbitration."

FedPac sought indemnification from Home for claims arising at a number of pollution sites around the country. Since, under Home's policies, environmental pollution claims arising from losses incurred at each separate site are typically deemed to constitute a separate occurrence, the claim as to each qualifies as a separate claim against the policy limits. In FedPac's case, Home, in terms of the decision whether to pay the claim and as to the amount to be paid in settlement, handled the various site claims seriatim. FedPac's pollution claims all involved continuing damage/injury that occurred during the policy periods of each of the three policies, causing each of the policies' coverage to be triggered. Each of Home's settlement agreements with FedPac released all three of the Home policies in exchange for a single lump sum payment. None of the settlements allocated the loss among the various policies.

For purposes of billing its reinsurers, however, Home decided upon a methodology for allocating its settlement payment among its several policies, applied the methodology to the triggered policies and, from the resulting allocation, calculated the amount due from the reinsurers pursuant to the coverages provided under the applicable reinsurance contract.

At issue are Gerling's reinsurance payment for the settlement of claims at three sites: New Bedford Harbor, Sullivan's Ledge and Norwood. By July 1998, Gerling had paid Home a total of $3,099,996 in settlement of these claims and closed its files. According to Gerling, its auditors' subsequent review of Home's claim files in May 2000 revealed that Home had settled a FedPac claim with respect to an additional site, Santa Clara, but had not billed Gerling for a reinsurance payment. Further investigation revealed that Home would not have billed Gerling on the earlier New Bedford Harbor, Sullivan's Ledge and Norwood sites either except for the fact that Home's billings for those sites had been grossly miscalculated by incorporating incorrect factual data as to the number of policies actually triggered and the terms of the policies involved in Home's loss allocation. Gerling alleges that by misapplying its own allocation methodology, Home incorrectly placed millions of dollars of loss in the wrong policy years, while failing to place other millions of dollars of loss in the years where they properly belonged. According to Gerling, proper calculation of Home's allocation of the claims for the New Bedford Harbor, Sullivan's Ledge and Norwood sites would have resulted, as in the case of the Santa Clara site, in no billing as to any of the sites.

The particulars of the erroneous billings paid by Gerling are as follows. Home paid $4,300,000 to settle FedPac's environmental pollution claims in connection with the New Bedford Harbor site, receiving in exchange a release for all of Home's FedPac policies. Home allocated the entire settlement payment equally to all of the annual periods during which, without a pollution exclusion, it provided coverage to FedPac. According to Gerling, Home's communications uniformly represented that it had issued policies without a pollution exclusion only for the six-year period of 1965-1971, that is, the years covered by the second and third policies. Accordingly, Home allocated $716,666 per year ($4,300,000 ÷ 6) to each of the six annual periods from July 1, 1965 through July 1, 1971, during which period Gerling provided annual reinsurance coverage, excess of $500,000, and submitted reinsurance billings to Gerling of $216,666 ($716,666-$500,000) for each of the six years for a total of $1,299,996 ($216,666 × 6). Accepting as true Home's representation that it provided coverage without a pollution exclusion in only six years, Gerling paid the $1,299,996 billing on or about August 31, 1992 and closed its file.

As Gerling later learned, contrary to Home's billing representations, Home had, in fact, issued FedPac policies (the first, second and third) without a pollution exclusion covering nine, not six, years, for the period 1962 to 1971. Applying the loss properly against Home's allocation methodology, i.e. to all the policy years without a pollution exclusion, would result in an annual allocation of $477,777 ($4,300,000 ÷ 9) per year, an amount below Home's $500,000 retention under Gerling's facultative reinsurance. Thus, Gerling seeks $1,299,996, which, it argues, it paid as the result of a factual mistake incorporated into Home's computation of its own settlement allocation.

In connection with the Norwood site, while Home, unlike in New Bedford Harbor, did include the first policy in its allocation, it failed to identify which of its policies contained a "Non-Cumulation" clause, sometimes referred to as "Condition C."^[*] This paragraph was the determinative provision under Home's method of allocation of the Norwood claim as well as the Sullivan's Ledge claim. For purposes of reinsurance allocation, Home applies Condition C as sweeping forward a continuous loss, such as the pollution losses at issue herein, into the earliest triggered Home policy containing such condition. The first, second and third policies all contained Condition C and, under Home's method of allocation, the entire loss payment for Norwood should have been allocated to the first policy, which Gerling did not reinsure.

The underlying facts of the Norwood billing are as follows. In September 1996, Home paid $4,400,000 to settle the Norwood site pollution claims, receiving, in exchange, a release under all of Home's FedPac policies. Home advised Gerling that the $4,400,000 loss payment would initially be spread in equal portions of $1,466,666 ($4,400,000 ÷ 3) to each of the first, second and third policies. Home would then apply Condition C to sweep the loss forward into the earliest triggered Home policy containing such provision. Gerling claims that at the time Home was soliciting its agreement to the reinsurance billing, Home represented that "all policies but the first one contain Condition C," reconfirming yet again that "[the first policy] * * * does not contain Condition C." Before it paid the claim, Gerling requested explicit reconfirmation as to which of the policies contained Condition C. In response Home reconfirmed, without qualification, that "all policies except [the first policy] contain Condition C," reiterating that "[the second policy] and [the third policy] do contain Condition C." Accordingly, Home allocated $1,466,666 to the first policy, $2,933,332 to the second policy ($1,466,666 + $1,466,666 swept in from the third policy) and nothing to the third policy and billed Gerling $1,225,000 under two certificates of reinsurance covering portions of the second policy. Gerling paid $1,049,999.50 in satisfaction of the Norwood reinsurance billings, after receiving a 15% discount for its acceptance of Home's methodology with respect to the allocation of Condition C for purposes of the Norwood and Sullivan's Ledge claims. Since, in fact, the first policy contained Condition C, by virtue of Home's own methodology, all of the Norwood loss was allocable to the first policy, which Gerling did not reinsure.

Home claims that the Sullivan's Ledge billing was predicated on the same false premise as led to the improper Norwood billing. In or about July 1997, Home paid $3,000,000 to settle FedPac's environmental pollution claims in connection with the Sullivan's Ledge site, receiving, in exchange, a release under all three policies. Home advised Gerling of the settlement and its allocation methodology: the $3,000,000 loss payment would initially be allocated in equal portions of $1,000,000 ($3,000,000 ÷ 3) to each of the first, second and third policies, Home...