Sumitomo Marine & Fire Ins. Co., Ltd.-U.S. Branch v. Cologne Reinsurance Co. of America

Decision Date13 February 1990
Citation75 N.Y.2d 295,552 N.Y.S.2d 891,552 N.E.2d 139
CourtNew York Court of Appeals Court of Appeals
Parties, 552 N.E.2d 139 SUMITOMO MARINE & FIRE INSURANCE CO., LTD.--U.S. BRANCH, Respondent, v. COLOGNE REINSURANCE COMPANY OF AMERICA et al., Defendants, and Buffalo Reinsurance Company et al., Appellants.

Thomas R. Newman, New York City, and Barry Bassis, for appellants.

John H. Haley, for respondent.

OPINION OF THE COURT

KAYE, Judge.

This appeal calls upon us to resolve a question of reinsurance law--a field in which differences have often been settled by handshakes and umpires, and pertinent precedents of this court are few in number.

Plaintiff (Sumitomo Marine & Fire Insurance Company), an insurer, underwrote a one-year commercial property insurance policy for Auburn Steel Company, a steel mill located in upstate New York. The policy became effective on February 1, 1983, and provided "all-risks" coverage against loss of or damage to property from any hazard save those specifically excluded. Like steel mills generally, Auburn used a small quantity of cesium, a radioactive material, in the device that measured the factory's output. Loss resulting from radioactive contamination had been covered by Auburn's prior all-risks policy.

Sumitomo had not previously provided insurance to a steel mill, but agreed to provide Auburn the same coverage as had its predecessor, Factory Mutual Company. In issuing the insurance, Sumitomo therefore supplemented a Chubb policy form it was using, which listed "nuclear" among the loss or damage exclusions, by "Amendment No. 3," providing coverage for "Sudden and accidental Radioactive Contamination, including resultant radiation damage * * * from material used or stored or from processes conducted on the described premises."

Sumitomo then sought to reinsure the Auburn policy. Sumitomo's offer to purchase reinsurance was made by telex to various potential reinsurers through its agent, Thomas A. Greene & Company. The offering telex noted that Auburn was a steel mill, that its prior insurer was Factory Mutual, and that an inspection report was available, but the telex contained no explicit reference to radioactive contamination coverage. On February 9, 1983, defendant Philadelphia Reinsurance Corporation telexed its acceptance of a percentage of the Auburn insurance risk, and on February 10, defendant Buffalo Reinsurance Company telephoned its acceptance. Seven other facultative reinsurers accepted as well. (The other reinsurers are not parties to this appeal.)

Barely two weeks later, on February 21, 1983, scrap metal at the Auburn plant was contaminated with cobalt-60, a radioactive material, causing a shutdown of the facility and a business interruption loss covered by the Sumitomo policy. Defendant Buffalo was notified of the loss during February 1983; and while the precise date was not fixed, Philadelphia undisputedly received notification by October 1983. Meanwhile, Greene had sent a cover note to the reinsurers confirming their acceptance. After notice of Auburn's loss, defendants signed the note--without question or reservation--signifying acceptance.

Finally, in late 1983 copies of the actual policy that Sumitomo had issued to Auburn--including Amendment No. 3, covering radioactive contamination--were delivered to all the reinsurers. As is apparently customary, only after receiving the original policy did defendants issue their formal certificates of reinsurance. Philadelphia's certificate is dated December 28, 1983, and Buffalo's February 1, 1984. Each certificate obliged the reinsurer to "follow the fortunes" of its reinsured, except as coverage was expressly excluded, and each contained or referred to a nuclear incident exclusion clause. 1

Sumitomo settled with Auburn, and requested payment from its reinsurers. After defendants refused, Sumitomo commenced this action. As in the letter refusing payment, in their answer to the complaint defendants contended only that the loss was excluded by virtue of the nuclear incident exclusion clause contained in the reinsurance certificates. However, in their summary judgment motion, made in October 1987 upon the completion of extensive discovery, defendants raised the additional contention--pressed on this appeal--that they would not have entered into a reinsurance agreement had Sumitomo disclosed that the primary policy covered incidental radioactive contamination. Defendants argue that because of Sumitomo's alleged failure to disclose what defendants contend was a material risk, they are now entitled to rescission of the reinsurance agreement. In connection with this claim, defendants assert that the agreement was complete on February 9 or 10, 1983 when they accepted Sumitomo's telexed offer, and that later issuance of formal certificates was merely "ministerial" and without legal significance. Alternatively, defendants argue that their exclusion clause precluded coverage of the Auburn accident.

Reversing the trial court's award of summary judgment to defendants, 2 the Appellate Division unanimously rejected defendants' first claim, and held that in the circumstances defendants were obliged to determine the actual scope of coverage before issuing their formal certificates of reinsurance. 149 A.D.2d 377, 539 N.Y.S.2d 947. A divided court went on to hold that the reinsurance certificate covered an incidental radioactive loss, and it remanded for a factual determination as to whether the risk here was considered primary or incidental. While we agree with the Appellate Division's reading of the exclusion clause and affirm that court's order, we do so on somewhat different grounds.

We begin our analysis with certain fundamental propositions in the law of reinsurance.

Reinsurance is a means by which insurers reallocate their risk. In general terms, it is "the insurance of one insurer (the 'reinsured') by another insurer (the 'reinsurer') by means of which the reinsured is indemnified for loss under insurance policies issued by the reinsured to the public." (Kramer, Nature of Reinsurance, reprinted in Reinsurance, at 5 [Strain ed. 1980].) The agreement at issue in this case is "facultative" reinsurance. As contrasted with "treaty" reinsurance, which involves an ongoing agreement between two insurance companies binding one in advance to cede and the other to accept certain reinsurance business pursuant to its provisions, facultative reinsurance involves the offer 3 of a portion of a particular risk to one or more potential reinsurers, who are then free to accept or reject the risk in whole or part (see generally, Thompson, Reinsurance, at 75 [4th ed. 1966].

Typically, the details of the risk proposed to be ceded by the reinsured are circulated to possible reinsurers, who in turn indicate their willingness to accept some portion of the risk, and to be bound by their agreement to do so. In the London market--the Mecca of the reinsurance world--this was traditionally accomplished by the ceding company or its broker preparing a slip with brief details of the risk to be placed; the slip was then taken to prospective reinsurers who, if prepared to accept, initialed it, indicating the proportion of the risk they wanted. Under normal circumstances, the initialing of the slip constituted a binding agreement. With electronic advances, the slip has been replaced by an exchange of telephone calls or telexes, as in this case. Delivery of the original insurance policy to the reinsurer and issuance by the latter of a formal certificate of reinsurance may not occur until much later, and indeed are technically unnecessary for a binding agreement (Butler & Merkin, Reinsurance Law, at A5.1-02).

It is this swift, seemingly almost casual process of contract formation that has given rise to the controversy before us. Defendants claim that at the time of the binder they were never informed of the allegedly unusual radiation coverage Sumitomo provided Auburn; Sumitomo as vehemently asserts that defendants knew or should have known that such coverage would be provided to Auburn, as it generally was to steel mills (who necessarily use cesium) and as it actually had been by Factory Mutual.

While that factual difference remains unresolved, it is unnecessary to the disposition of this appeal. What instead becomes determinative are defendants' acts subsequent to the binder, including their issuance of the reinsurance certificates.

Turning first to the question of contract interpretation, we agree with the Appellate Division majority's reading of defendants' clause. Unlike paragraphs 3 and 4 of the exclusion--both of which refer back to prior paragraphs--paragraph 5 unqualifiedly declares that the entire exclusion is inoperative "where the nuclear exposure is not considered by the Reassured to be the primary hazard." Here, the parties are now in accord that the use of radioactive isotopes was not considered by Sumitomo to be the primary hazard. Thus, the nuclear exclusion clause, on a straightforward reading, would not preclude coverage in this case.

Contrary to defendants' claim, the natural reading of this clause is neither unusual nor absurd. Exclusion clauses commonly specify that they do not apply where the excluded operations are considered incidental, with the determination left to the reinsured (see, Salm, Reinsurance Contract Wording, reprinted in Reinsurance, at 79, 82 [Strain ed. 1980]. Indeed, defendants' suggestion that paragraph 5 can apply only where the direct policy does not name radioactive contamination as a covered hazard--in other words, that the reinsurance includes this risk only when the original policy does not--seems the more strained construction. We therefore conclude that the plain language of defendants' own clause should prevail.

Accordingly, by the terms of their reinsurance certificates, defendants...

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