Houston Cas. v. Underwriters at Lloyd's London

• Decision Date: 30 March 1999
• Docket Number: No. Civ.A. H-97-1381.,Civ.A. H-97-1381.
• Citation: 51 F.Supp.2d 789
• Parties: HOUSTON CASUALTY COMPANY, Plaintiff, v. CERTAIN UNDERWRITERS AT LLOYD'S LONDON subscribing to Reinsurance Policy No. 839/DA44790, Defendants/Third Party Plaintiffs, v. Fenchurch Insurance Brokers, Ltd., Third Party Defendant.
• Court: U.S. District Court — Southern District of Texas

Page 789

51 F.Supp.2d 789

HOUSTON CASUALTY COMPANY, Plaintiff, v. CERTAIN UNDERWRITERS AT LLOYD'S LONDON subscribing to Reinsurance Policy No. 839/DA44790, Defendants/Third Party Plaintiffs, v. Fenchurch Insurance Brokers, Ltd., Third Party Defendant.

No. Civ.A. H-97-1381.

United States District Court, S.D. Texas, Houston Division.

March 30, 1999.

COPYRIGHT MATERIAL OMITTED

ORDER

RAINEY, District Judge.

Pending before the Court are Third Party Defendant's Motion to Dismiss and for Summary Judgment (Dkt.# 31), Defendants' Motion for Summary Judgment (Dkt.# 32), and Plaintiff's Motion for Summary Judgment (Dkt.# 34).

I. FACTUAL BACKGROUND

A. Lloyd's London

Lloyd's London ("Lloyd's") is a 300-year-old market in which individual and corporate underwriters, known as Names, underwrite insurance.¹ Lloyd's itself is not an insurance company; it merely provides the physical premises and administrative staff and services to enable the actual underwriters to carry on their business. To increase efficiency and multiply resources, Names have joined together to form syndicates, of which there are now more than four hundred; a particular syndicate may have a few hundred or several thousand Names. Syndicates have no legal existence apart from the Names, and syndicates neither assume liability nor underwrite risks. Within each syndicate, an "active" underwriter is authorized to determine the conditions to which a risk will be subject, the percentage of risk to be assumed by the syndicate on behalf of the Names, and the percentage of risk each Name in the syndicate will assume. Thus, when the active underwriter accepts a percentage of the risk, he binds every Name in the syndicate. Each Name assumes unlimited liability for his share of the syndicate's losses, but he is liable for no other portion assumed by any other Name.

Only approved brokers are permitted to place risks with Lloyd's underwriters. Typically, a broker will prepare the "slip," a summary of the details of the risk the broker is seeking to insure (or reinsure). The broker and the active underwriter proceed to negotiate the terms and premium, indicating as much on the slip itself. The underwriter who structures the transaction with the broker is known as the "lead" underwriter; the lead underwriter's syndicate is known as the "market lead" or "leader of the market" for that particular risk. When the underwriter signs (or "scratches") the slip, a binding contract between his syndicate and the insured is formed. Having obtained the signature of the lead underwriter, the broker retains the slip and approaches other syndicates or insurance companies to secure coverage for the remaining risk. Once the broker has succeeded in procuring full coverage, he retains the slip and provides subscribing underwriters with copies of the terms and conditions of the coverage. If a claim under the insurance (or reinsurance) agreement is not outstanding, an underwriter may agree to waive issuance of a policy; the slip is then signed "on risk." Otherwise, the broker's policy department prepares the policy and forwards it to the Lloyd's Policy Signing Office ("LPSO"). The LPSO checks the policy against the slip to ensure that the policy contains all the terms and conditions of the slip. If no inconsistencies are discovered, the policy issues, often long after the initial signing of the slip.

B. The Transaction

Plaintiff Houston Casualty Company ("HCC") is an insurance company with its principal place of business in Houston, Texas. Between December 15, 1994, and September 15, 1995, HCC insured Beech Holdings Corporation ("Beech") and its subsidiary and affiliated companies (including Budget Rent-A-Car) under HCC Policy No. 050028/35/37011 (the "Beech policy"), which provided coverage for, inter alia, Beech's interest in a fleet of rental vehicles. The Beech policy had limits of $5,000,000 per occurrence, with a deductible of $1,000,000 per occurrence, and in the aggregate annually, and $250,000 per occurrence thereafter. Seeking to limit its exposure under the Beech policy, HCC requested that Third Party Defendant Fenchurch Insurance Brokers, Ltd. ("Fenchurch") secure reinsurance in the London market for a portion of HCC's risk. (HCC's chairman, Stephen Way, had "broked" on the floor of Lloyd's earlier in his career and had been a Name with several syndicates; consequently, a significant portion of HCC's dealings were in the London market.) To this end, in late December of 1994, Fenchurch — in the person of Julian Hall — approached Colin Baker, the Active Underwriter for Syndicate 947, a syndicate of underwriters at Lloyd's. Syndicate 947 signed on as the lead syndicate for the reinsurance sought by HCC, and by January 6, 1995, Fenchurch had procured 100% of the coverage sought by HCC.

On April 29, 1995, the Dallas/Fort Worth area was besieged by a hail storm that damaged a number of Beech's vehicles. Beech notified HCC of the loss and requested indemnification. HCC adjusted Beech's loss at a total of $4,393,106.66 and paid Beech $4,143,106.66 (the total less HCC's deductible), $4,141,127.00 of which accounted for damage to Beech's vehicles. Another hail storm in early May caused additional damage to Beech's vehicles, for which Beech again sought indemnification. HCC adjusted Beech's second loss at $2,439,117.39 and paid Beech $2,126,627.39 (the total less HCC's deductible). HCC apprised the Lloyd's underwriters subscribing to the reinsurance agreement (collectively the "Underwriters") of these two payments and requested indemnification of $2,267,744.39, plus loss allocated expenses of $83,720.94. The Underwriters, however, refused, and continue to refuse, to pay any amount to HCC.

The subject of the parties' dispute is the Lloyd's Standard Wording 507 Basis of Loss Clause (the "LSW 507 clause"). Before he scratched the slip, lead underwriter Colin Baker added in his own handwriting at the top of the slip the phrase "Basis of Loss Clause based LSW 507." Underwriters' Exhibit ("Ex.") 8. Baker has since explained that he meant to require the inclusion of a clause "[t]he same or substantially the same as [LSW] 507," Deposition of Colin Baker 59 [hereinafter Baker Deposition], a clause which controls the basis of loss on damaged vehicles, specifying how certain claims will be adjusted and requiring that depreciation of value must be taken into account.² On December 28, 1994, Fenchurch advised HCC of the addition of the new condition, Ex. 8, and on January 1, 1995, HCC returned to Fenchurch an edited version of the slip, marked up with amendments that it wished to see incorporated in the slip; that version included "Basis of Loss Clause based L.S.W. 507" typed in its "Conditions" section. Ex. 12. Fenchurch was able to announce to HCC on January 3 that Baker had assented to various additions and that 40% of the risk had been covered; a clean copy of the slip still incorporated Baker's "based L.S.W. 507" language. Ex. 13. On January 6, 1995, Fenchurch announced that 100% of the coverage sought had been secured. Ex. 17. The cover note,³ dated February 3, 1995, listed as a condition "Basis of Loss Clause based on Dealer's Open Lot — Basis of Loss Settlement LSW 507."

On September 5, 1995 — four months after the Texas hail storms — a copy of the slip forwarded by Fenchurch to HCC still contained the "based L.S.W. 507" phrase. Ex. 32. On September 18, 1995, HCC advised Fenchurch of its claims resulting from the hail storms. Fenchurch passed on the information to the Underwriters, one of whom wrote on the face of the fax "We expect a full report from the Reinsured with details of the loss adjustment ... bearing in mind the basis of loss settlement clause (LSW 507) attached to the wording." Ex. 71; Deposition of Peter Dodds 55. On January 4, 1996, in an effort finally to issue a policy, a member of Fenchurch's wording department wrote in an interoffice memo, "[W]e have a problem. The conditions [in the slip] contain various conditions which are applicable to the original policy only and therefore we need to amend the slip to show these to be `as original' or put them under information." Ex. 100. Adam Long, the author of those sentences, has explained,

It would appear that I made the assumption that the slip showed various conditions which were applicable to the original policy and therefore would follow through to the reinsurance policy.

Therefore, I said that these should be shown as "as original," stating they were in the original policy, or they should be put under information because, again, they were in the original policy.

Deposition of Adam Long 51 [hereinafter Long Deposition]. Among the conditions listed in the memo was the "based LSW 507" clause; no party now disputes that the Beech policy in fact did not have the LSW 507 clause, or one based thereon.

On January 5, 1996, Fenchurch issued Endorsement No. 3, which amended the slip to read, "Basis of Loss Clause based 507, as original." Ex. 46 (emphasis added). There is consensus that the emphasized phrase signified that the LSW 507 clause, or one like it, was part of the Beech (the "original") policy. See, e.g., Baker Deposition 41; Long Deposition 27; Way Deposition Way 72; Deposition of Leonard Bateman 42; Deposition of Alan Parker 27. Duncan Bennett, in Fenchurch's technical department, prepared the endorsement, and Alan Parker, with Syndicate 947, scratched his approval. Thereafter, the LPSO, upon review of the proposed wording of the policy alongside the slip (including Endorsement No. 3), approved and stamped Policy No. 839/DA44790, sans the LSW 507 clause.

When HCC sought indemnification from the Underwriters under the reinsurance policy, the Underwriters balked, insisting that adjustment of loss had not been performed in accordance with the LSW 507 clause. See Second Amended Answer 5 ("Pursuant to LSW 507 wording, in order for the reinsurance to be invoked, the vehicles must have been sold at retail and retail...