Old Republic Ins. v. Ace Property and Cas.

• Decision Date: 24 March 2009
• Docket Number: No. 1-07-2668.,1-07-2668.
• Citation: 906 N.E.2d 630,389 Ill. App. 3d 356
• Parties: OLD REPUBLIC INSURANCE COMPANY, Plaintiff-Appellee, v. ACE PROPERTY AND CASUALTY INSURANCE COMPANY, as Successor in Interest to The Central National Insurance Company of Omaha, Defendant-Appellant.
• Court: United States Appellate Court of Illinois

906 N.E.2d 630

389 Ill. App. 3d 356

OLD REPUBLIC INSURANCE COMPANY, Plaintiff-Appellee, v. ACE PROPERTY AND CASUALTY INSURANCE COMPANY, as Successor in Interest to The Central National Insurance Company of Omaha, Defendant-Appellant.

No. 1-07-2668.

Appellate Court of Illinois, First District, Second Division.

March 24, 2009.

Mound, Cotton, Wollan & Greengrass, One Battery Park Plaza (Michael H. Goldstein and Daniel J. Endick, of counsel), New York, NY, and Connelly, Roberts & McGivney, LLC, (Matthew P. Connelly and Cory D. Anderson, of counsel), Chicago, IL, for Appellant.

Justice CUNNINGHAM delivered the opinion of the court:

The defendant Ace Property and Casualty Insurance Company¹ (Ace Casualty), as a successor-in-interest to Central National Insurance Company of Omaha (Central National), appeals from the circuit court of Cook County's August 29, 2007 order holding that: (1) Ace Casualty's arbitration demand against the plaintiff, Old Republic Insurance Company² (Old Republic), is stayed; and (2) the rights and obligations of both Ace Casualty and Old Republic under all reinsurance agreements entered into between Old Republic and Central National prior to August 3, 1990 were extinguished by a commutation agreement entered into on that same date. On appeal, Ace Property alleges that: (1) the trial court's legal conclusion established in the August 29, 2007 order was inherently flawed and inconsistent with its factual findings; (2) the trial court committed reversible error when it held that the commutation agreement was not ambiguous, despite its two prior rulings to the contrary and the evidence presented at the bench trial in support of Ace Casualty's position; and (3) two of the trial court's factual findings were against the manifest weight of the evidence. For the following reasons, we affirm.

BACKGROUND

On November 18, 1982, Old Republic issued a certificate of casualty facultative reinsurance (the certificate) to Ace Casualty's predecessor-in-interest, Central National. Under the terms of the certificate, Old Republic provided reinsurance to Central National for a comprehensive liability policy issued by Central National³ to Seattle School District # 1 for the coverage period from August 31, 1982, to August 31, 1984. The face of the comprehensive liability policy issued to the Seattle School District # 1 includes both the names of Central National and Cravens, Dargan & Company Pacific Coast (CDPC). At trial, Michael Davlin, a representative of Central National, testified that throughout the relevant time period, CDPC was an insurance agency that was wholly owned by Ace Casualty and that CDPC used Central National as a "fronting" company in order to write insurance policies in Central National's name. The certificate included an arbitration clause.

In 1990, Central National experienced financial difficulties and was required to be placed in rehabilitation by the State of Nebraska in which it was operating at that time. At that time, multiple reinsurance contracts existed between Central National and Old Republic — some in which Central National reinsured Old Republic, and others in which Old Republic reinsured Central National.

On February 5, 1990, representatives from both Central National and Old Republic met in Omaha, Nebraska, to discuss a proposed commutation of their reinsurance obligations. The impetus for the meeting was Central National's serious financial troubles. Central National was the party that conceived the idea of a commutation agreement. Central National owed Old Republic a significant amount of money at that time under reinsurance contracts that Central National had issued to Old Republic. Michael C. Davlin, then senior vice-president and counsel for Central National; Aldo Zucaro, Old Republic's then chairman, chief executive officer and president; and Spencer LeRoy, Old Republic's then outside counsel, all attended the meeting in Omaha. No agreement was reached at that meeting regarding the terms of a commutation.

On July 19, 1990, Zucaro, appearing on behalf of Old Republic, met again with Davlin and other Central National representatives in Nebraska to further discuss the possibility of a commutation agreement. At this time, Central National owed Old Republic approximately $18 million in reinsurance balances as a result of reinsurance contracts that Central National had issued to Old Republic. During the meeting, Zucaro, acting on behalf of Old Republic, accepted an offer of $3.5 million from Central National, in exchange for commutation of the liabilities owed. It is the scope of this commutation agreement that is the principle issue in this case.

The remaining terms of the commutation agreement were left for negotiation through a later exchange of draft documents. After the meeting, as part of his normal business practice, Zucaro wrote a memorandum (Zucaro memo) to LeRoy, his outside counsel, regarding the details of the meeting. The memo written by Zucaro was addressed "To Counsel at LB & B," which at trial Zucaro testified was intended for LeRoy, a lawyer at the law firm of Lord, Bissell & Brook, LLP. The memo stated:

"As scheduled, I had a meeting today with management representatives of Central National Ins. Co.

* * *

They provided an update of their financial position which continues [to be] bad. They indicated that the Nebraska Department had now placed the company under an order of rehabilitation. An insurance department official now must pre-approve all transactions.

We deliberated for quite a while about the true financial condition of the company. * * *

At best we are looking at an asset coverage ratio of 24%. Given the problems associated with their discounting (i.e. there is little likelihood that $50 million of real money can serve to pay ultimate liabilities of $138 million or $200 million), we are probably looking at a coverage ratio of $.10 on the dollar.

After some further discussions back and forth, they were willing to go back to the commissioner for an approval of a $3.5 million commutation on our balances (approximately $17.7 million at 3/31/90 (with IBNR of $5.0 million)). If this were done, the pay back to us would represent $.20 on the dollar.

It will be interesting to see if they can come through with this. The time value of money alone is, in my judgment, sufficient reason for us to so discount a hairy mess on our balance sheet and secure a welcomed tax deduction for us."

On July 20, 1990, Davlin, as counsel for Central National, sent LeRoy, counsel for Old Republic, an initial draft of the commutation agreement for review, the relevant portion of which is as follows:

"THIS AGREEMENT is made effective ________ by and between OLD REPUBLIC INSURANCE COMPANY (the `Company') and THE CENTRAL NATIONAL INSURANCE COMPANY OF OMAHA (the `Reinsurer').

WHEREAS, the Reinsurer reinsured the Company under various reinsurance contracts, including but not limited to reinsurance contracts issued on behalf of the Reinsurer by Cravens Re Facultative Facilities, Inc., and Transco Insurance Services, Inc. (the `Reinsurance Agreement'); and

WHEREAS, the parties hereto now wish to fully and finally determine and settle all liabilities and obligations of the Reinsurer under the Reinsurance Agreements."

On July 26, 1990, LeRoy, as counsel for Old Republic, sent a letter to Zucaro regarding the initial draft of the commutation agreement that he had received from Davlin. In the letter, LeRoy noted that "[t]he proposed agreement is straightforward and uncomplicated," but that he had two comments concerning it. He pointed out that, first, "the agreement refers to `various reinsurance contracts' between Central National and Old Republic," without any attempt to "list, identify or describe those contracts." Secondly, he noted that the agreement constituted "a complete mutual release between the parties with respect to all of their `various reinsurance contracts.'" However, LeRoy indicated that the principal reinsurance liabilities arose out of the "Baccala and Shoop business," an insurance agency hired by Old Republic in 1981 to procure facultative reinsurance for policies issued by Old Republic.

The next day, on July 27, 1990, LeRoy sent Davlin a revised draft of the commutation agreement, along with a cover letter stating that the changes "consist of a slight broadening in the referred to reinsurance agreements between the parties which are the subject of the commutation and mutual releases." LeRoy's proposed changes were underlined in the text of the revised version:

"THIS AGREEMENT is made effective ________ by and between OLD REPUBLIC INSURANCE COMPANY (`Old Republic') and THE CENTRAL NATIONAL INSURANCE COMPANY OF OMAHA (`Central National').

WHEREAS, Old Republic and Central National have heretofore entered into various reinsurance contracts with one another, under which reinsurance agreements there are or may be certain liabilities and obligations outstanding (the `Reinsurance Agreement'); and

WHEREAS, the parties hereto now wish to fully and finally determine and settle all liabilities and obligations of the parties to each other under the Reinsurance Agreements."

After receiving LeRoy's proposed revisions, Davlin neither contacted nor questioned LeRoy about the proposed changes. The final commutation agreement, signed by the parties and made effective on August 3, 1990, incorporated all of LeRoy's proposed revisions. Articles IIA and IIB of the final version of the commutation agreement remained largely unchanged from its initial draft. The only changes LeRoy made to these two sections, which were incorporated into the final version, were those that involved the names of the parties — namely, "Old Republic" in place of "the company" and "Central National" in place of "Reinsurer." Article IIA states: "In consideration of the payment described in Article I above, Old Republic does hereby release and forever discharge Central National * * *...