Travelers Indem. Co. v. Scor Reinsurance Co.

Decision Date07 August 1995
Docket NumberD,No. 800,800
Citation62 F.3d 74
PartiesThe TRAVELERS INDEMNITY COMPANY, Plaintiff-Appellee, v. SCOR REINSURANCE COMPANY, Defendant-Appellant. ocket 94-7411.
CourtU.S. Court of Appeals — Second Circuit

Henry H. Rossbacher, Rossbacher & Associates, Los Angeles, CA (Tracy W. Young, Rossbacher & Associates, Los Angeles, CA, Charles F. Corcoran, III, Corcoran, Mallin & Aresco, P.C., Hartford, CT, of counsel), for defendant-appellant.

John M. Nonna, Werner & Kennedy, New York City (Larry P. Schiffer, John S. Pak, of counsel) for plaintiff-appellee.

Before: VAN GRAAFEILAND, WINTER, and LEVAL, Circuit Judges.

WINTER, Circuit Judge:

This appeal involves a dispute arising out of a reinsurer's refusal to pay claims by a primary insurer under a reinsurance contract. Scor Reinsurance Company appeals from Judge Nevas's denial of its motion for a judgment notwithstanding the verdict or, alternatively, for a new trial. Scor claims that the district court erred by finding the contracts at issue ambiguous, by admitting expert testimony regarding industry custom and practice, and by giving the jury prejudicially confusing instructions. Scor further contends that the evidence was insufficient as a matter of law to support the jury's verdict. We affirm.

BACKGROUND

Primary insurers reinsure to diversify risk. The mechanics of reinsurance can be simply described. One insurer (a "ceding insurer") "cedes" all or part of the risk relating to a policy, or a group of policies, to a reinsurer. A portion of risk not "ceded" is "retained." The reinsurer indemnifies the ceding insurer for any liability incurred that is covered by the reinsurance. The relationship created is strictly one of indemnification. The reinsurer has no privity with, and is generally not liable to, the original purchaser of the underlying policy. See Delta Holdings, Inc. v. National Distillers, 945 F.2d 1226, 1229 (2d Cir.1991), cert. denied, 503 U.S. 985, 112 S.Ct. 1671, 118 L.Ed.2d 390 (1992); Unigard Sec. Ins. Co., Inc. v. North River Ins., 4 F.3d 1049, 1053 (2d Cir.1993).

Reinsurance is feasible only if it costs less than the underlying insurance. Unigard, 4 F.3d at 1054. Reinsurers thus generally do not duplicate the functions of the ceding insurers, such as evaluating risks and processing claims. Reinsurers may not even have actuarial expertise. See Delta, 945 F.2d at 1229 and 1241. Instead, they rely on their common interests with the ceding insurers and on an industry custom of utmost good faith, including the sharing of information. See Unigard, 4 F.3d at 1054 and Steven W. Thomas, Note, Utmost Good Faith in Reinsurance: A Tradition in Need of Adjustment, 41 Duke L.J. 1548, 1558-61 (1992). Reinsurers depend on ceding insurers to provide information concerning potential liability on the underlying policies. See generally Unigard, 4 F.3d 1049.

There are two broad categories of reinsurance contracts: facultative and treaty. Facultative reinsurance covers part or all of an individual policy. Treaty reinsurance covers specific classes of a ceding insurer's portfolio of contracts. See Unigard, 4 F.3d at 1053-4.

The instant case involves two facultative reinsurance policies between Travelers Indemnity Company--the ceding insurer--and Scor Reinsurance Company--the reinsurer. Travelers had issued a $500,000 primary policy and $5 million excess policy to the Bernhardt Furniture Company. Under a reinsurance contract between Scor and Travelers, Scor was to indemnify Travelers for 90% of the first $1 million in liability under the excess policy and 100% of the remaining $4 million in liability. Travelers did not reinsure the Bernhardt primary policy. The second reinsurance contract between Scor and Travelers concerned a policy issued by Travelers to the Chessie System Railroad. Under that contract, Travelers would receive no indemnification for the first $100,000 of liability under the policy, but Scor would indemnify 90% of the next $400,000.

Both contracts contained an identical notice of occurrence clause. It reads:

C. Notice of Occurrence. The Company shall notify the Reinsurer promptly of any occurrence which in the Company's estimate of the value of injuries or damages sought, without regard to liability, might result in judgment in an amount sufficient to involve this certificate of reinsurance. The Company shall also notify the Reinsurer promptly of any occurrence in respect of which the Company has created a loss reserve equal to or greater than fifty (50) percent of the Company's retention specified in item 3 of the Declarations: or, if this reinsurance applies on a contributing excess basis, when notice of claim is received by the company. While the Reinsurer does not undertake to investigate or defend claims or suits, it shall nevertheless have the right and shall be given the opportunity, with the full cooperation of the Company, to associate counsel at its own expense and to join with the Company and its representatives in the defense and control of any claim, suit or proceeding involving this certificate of reinsurance.

The underlying dispute concerns the timeliness of Travelers' notice to Scor of events leading to Travelers' making of a claim under each reinsurance policy. Given the verdict for Travelers, we view the evidence in the light most favorable to it.

In 1986, an action was filed against several defendants, including Bernhardt. Travelers, which had reason to believe that Bernhardt's exposure was minimal, set initial reserves of $175,000. In early 1989, Bernhardt's share of a proposed settlement fund was $250,000, and reserves were accordingly set at that level, which was still within the primary policy's limits. Evidence substantially increasing Bernhardt's exposure to liability was discovered by a defendant's expert whose deposition was completed in September 1989. Travelers raised the reserves to $1 million on October 2, 1989. This loss reserve level was higher than 50% of Travelers's retention under the policy, and Travelers mailed a notice to Scor on October 11, 1989, as specifically required by the notice of occurrence provision. It was received on October 29. Meanwhile, the case was settled on October 13 for $2,800,000. Travelers' share was $1,500,000, the other defendants paying the remaining $1,300,000. Scor denied Travelers' claim for $900,000 on the ground that the notice was untimely.

The Chessie policy became implicated following an accident involving a Chessie trailer. The third-party company hauling the trailer had agreed to use only subcontractors approved by Chessie. Initially, the absence of a relationship between Chessie and the hauler involved in the accident led Travelers to conclude that liability on the policy was unlikely. Consequently, Travelers set an initial reserve at $17,500, an amount less than the trigger for the reinsurance. Shortly before trial, however, it was discovered that Chessie had known about the hauler for some time before the accident, and that the hauler was indeed a subcontractor covered by the underlying policy. Two and a half weeks after that discovery, Travelers raised the reserve to $1,250,000 and assumed Chessie's defense. Five days after that, on January 10, 1990, Travelers sent notice to Scor. On January 16, the case was settled with the two main plaintiffs for $1,300,000 and $30,000 respectively. Scor denied Travelers' claim on the ground that the notice was untimely.

At trial, Robert Hall testified as an expert for Travelers. Scor objected to the admission of his testimony on industry custom and practice regarding the giving of notice. At the close of Travelers' case, Scor moved for a directed verdict on the ground that Travelers failed to disprove prejudice to Scor because of untimely notice. At no time did Scor move for a directed verdict or a judgment as a matter of law on the issue of whether notice was untimely under the notice of occurrence clause. Scor requested a jury instruction that the notice of occurrence clause was not ambiguous and objected to the district court's instruction that it was ambiguous as a matter of law. Scor did not object to the district court's instructions on contract interpretation. The jury found that Travelers had provided Scor with timely notice regarding both claims. Subsequently, the district court denied Scor's motion for a judgment notwithstanding the verdict and, alternatively, for a new trial.

DISCUSSION

The parties agree that Connecticut law governs this diversity case. The principal issue is whether the notice of occurrence clause was ambiguous as a matter of law. Clearly, it was. A contract is ambiguous under Connecticut law if its meaning regarding the point at issue is not clear simply from reading it, and a trier of fact interpreting the document is thus forced to choose between two or more possible meanings. Cf. ...

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