Liberty Mut. Ins. Co. v. Nippon Sanso K.K.

• Decision Date: 09 June 2003
• Docket Number: No. 02-2338.,02-2338.
• Citation: 331 F.3d 153
• Parties: LIBERTY MUTUAL INSURANCE COMPANY and Liberty Mutual Fire Insurance Company, Plaintiffs, v. NIPPON SANSO K.K. and The Thermos Company, Defendants, Appellants/Cross-Claimants, v. Household International, Inc., Defendant, Appellee/Cross-Claimant.
• Court: U.S. Court of Appeals — First Circuit

331 F.3d 153

LIBERTY MUTUAL INSURANCE COMPANY and Liberty Mutual Fire Insurance Company, Plaintiffs, v. NIPPON SANSO K.K. and The Thermos Company, Defendants, Appellants/Cross-Claimants, v. Household International, Inc., Defendant, Appellee/Cross-Claimant.

No. 02-2338.

United States Court of Appeals, First Circuit.

Heard May 6, 2003.

Decided June 9, 2003.

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David E. Springer with whom Dhananjai Shivakumar, Dennis M. Kelleher, and Skadden, Arps, Slate, Meagher & Flom LLP were on brief for appellants.

David M. Schiffman with whom Sidley Austin Brown & Wood, Joseph L. Kociubes and Bingham & McCutchen LLP were on brief for appellee.

Before BOUDIN, Chief Judge, BOWNES, Senior Circuit Judge, and LIPEZ, Circuit Judge.

BOUDIN, Chief Judge.

This appeal is one phase of commercial litigation that has lasted over a decade. It involves liabilities pertaining to insurance coverage provided by Liberty Mutual Insurance Company and an affiliate (jointly "Liberty"). There is now little factual dispute but the contractual provisions (reprinted, in pertinent part, in an appendix to this opinion) are complex. We begin with a summary description of the background and procedural progress of the case, reserving detail for discussion of the several remaining disputes.

In January 1989, Household International, Inc. ("Household"), decided to divest certain assets, either in spin-offs to shareholders or through outright sales to third parties. The Thermos Company ("Thermos") was one of the subsidiaries formed as part of Household's reorganization plan, and various assets and liabilities from the rest of Household were transferred to Thermos through a series of assignment and assumption agreements ("A & A agreements"). In June 1989, after an intensive weekend negotiation, Household entered into a 139-page purchase agreement ("purchase agreement"), to sell Thermos to Nippon Sanso K.K. in a cash-for-share transaction for $134 million (the latter two entities collectively "Nippon").

The purchase agreement had to be completed quickly, yet the underlying insurance policies — themselves only one aspect of the purchase — were complex and covered a number of Household companies including Thermos. Negotiations were conducted under threat of a scheduled auction of Thermos by Household, and apparently the negotiators lacked first-hand knowledge of the insurance policies. Nevertheless, the purchase agreement made quite specific arrangements to allocate the still-open burdens and benefits of policy periods preceding the sale of Thermos.

For the purpose of the present disputes, it is critical to understand just how presale policy periods could have post-sale consequences. Liberty Mutual insured Household for the years 1984-1988.¹ The insurance covered three lines — workers' compensation, general liability and automobile claims — each covered by a separate policy. Each policy covered a one-year period (e.g., one policy provided automobile coverage for 1984) and each policy was occurrence-based, meaning that it insured against losses for occurrences in one policy year regardless of the time of claim. Subject to limitations periods, claims might easily be made long after the policy year.

The premiums for each policy consisted of two elements. The first is known as the initial premium, which is a projected amount determined in advance of the policy year and based on information submitted by Household to Liberty. This initial premium is paid to Liberty in installments over five years, and these installments are known as deferred premiums.

The second element consists of "retrospective premium adjustments," known as retros, which are adjustments to the initial premium amount based on actual claims experience. Retros are assessed annually, beginning approximately twenty months after the policy period expires. For example, the 1984 automobile policy, although covering only accidents occurring in 1984, may result in retros in 1987, 1988, and so on. Because the actual claims experience can (indeed probably will) diverge from the initial projection, retros can result in either credits (refunds from Liberty to Household) or debits (further payments by Household to Liberty). Either way, retros do not alter the obligation to complete the deferred payments of the initial premium.

Thus, one set of issues posed by the sale concerned post-sale responsibility — as between Household and Nippon — for amounts owed or coming due as a result of policies covering the pre-sale years. These issues included (1) who was responsible for paying deferred premiums still unpaid at the time of sale, and (2) who would pay retro debits and/or benefit from retro credits as actual claims experience generated new retros.

To the extent that Nippon was responsible for any of these payments, a second set of issues concerned the proper allocation of Thermos's proportionate share as between it and Household. Before the sale each single policy covered a number of Household businesses, including operations that were retained by Household or otherwise disposed of under the plan of reorganization. Prior to Household's 1989 reorganization, it internally allocated retros to each profit center, including the Thermos operations; it made the internal allocation according to a method known as the "traditional method."

The purchase agreement explicitly addresses retros and the allocation of retros between Thermos and other Household units; but the provisions are more usefully described in conjunction with the analysis of legal issues later in this decision. See purchase agreement § 5.10(b). In addition, the purchase agreement contains a representation by Household that, while arguably unclear in its literal language,² both sides now treat as warranting that the initial premium (including deferred installments) due Liberty for the pre-sale policy years had already been paid. The agreement also contains an indemnification clause: section 9.2 obligated Household to indemnify Nippon against "all Losses and Claims based upon, arising out of, or resulting from ... any failure of [Household] to perform in all material respects [its] obligation under [the purchase agreement]."

After the sale of Thermos, Household continued to provide, for a fee, certain administrative services with respect to the insurance policies written by Liberty. Household apportioned to Nippon a share of the credit and debit retros, and it also billed Nippon for a portion of the deferred premiums; all of these apportionments were done according to the traditional method. Nippon paid the assessments, including about $1.6 million in deferred premiums, until around March 1992 when Household, taking the view that Nippon should pay Liberty directly for deferred premiums and retro debits, tired of this middleman function and stopped paying Liberty on Nippon's behalf.

Liberty then sued Household in the federal district court in Massachusetts in May 1992. Roughly at the same time, Nippon stopped reimbursing Household for retros and deferred premiums. Household reacted by suing Nippon in state court in Illinois. The two actions were effectively consolidated in the district court litigation when Liberty added Nippon as a defendant in the Liberty-Household suit and the two defendants — Household and Nippon — filed cross claims against each other. The parties agree that Illinois law supplies the substantive rules of decision.

In September 1997, after a two-week bench trial, the district court issued a decision on a set of issues between Household and Nippon. Among other rulings, it determined that Household rather than Nippon was liable for all of the deferred premiums and owed Nippon $1.6 million in restitution; that as to the allocation of retros, Household had improperly used the traditional method instead of the so-called "share formula" provided in the purchase agreement; that the allocation of debits and credits should be computed for each policy individually; and, finally, that Household did not owe Nippon attorneys' fees under the indemnification clause.

In March 1999, the district court made additional pertinent rulings. Most important, it decided that under the terms of the purchase agreement, Nippon had an obligation to pay retro debits but did not have a right to receive retro credits which instead accrued to Household's benefit. The court also rejected Nippon's claim for prejudgment interest on the $1.6 million restitution of deferred premiums that Household had mistakenly collected from Nippon. The court also declined to reconsider earlier rulings. A final judgment was entered after Liberty and Household settled the disputes between them.

Nippon has now appealed, making three claims: first, that as to retros, it is entitled as to each policy to offset debits against credits and also to retain any net credits; second, that it is entitled to prejudgment interest on the $1.6 million in deferred premiums restored to it; and third, that it is entitled to attorneys' fees and other litigation expenses. Our review is de novo as to questions of law and for clear error as to fact-findings by the district court. Fed.R.Civ.P. 52; Principal Mut. Life Ins. Co. v. Racal-Datacom, Inc., 233 F.3d 1, 3 (1st Cir.2000).

Credits and Debits. The trickiest question is the offset of credits against debits and retention of net credits. Recall that an individual policy (say, automobile coverage for accidents occurring in 1984) will likely result in a series of retro adjustments in each later year as claims are made; for one later year, this might be a debit obligating Household or Thermos to pay Liberty a further premium adjustment and for the next year it might be a credit resulting in a refund by Liberty. Nippon concedes that it is responsible under the purchase agreement for debits, but it wants to be able, as to any policy, to reduce debits owed to Liberty by credits from years when...