Utica Mut. Ins. Co. v. Munich Reinsurance Am., Inc., 6:12-cv-00196 (BKS/ATB)

• Decision Date: 29 March 2019
• Docket Number: 6:12-cv-00196 (BKS/ATB) , 6:13-cv-00743(BKS/ATB)
• Citation: 381 F.Supp.3d 185
• Parties: UTICA MUTUAL INSURANCE COMPANY, Plaintiff, v. MUNICH REINSURANCE AMERICA, INC., Defendant. Munich Reinsurance America, Inc., Plaintiff, v. Utica Mutual Insurance Company, Defendant.
• Court: U.S. District Court — Northern District of New York

381 F.Supp.3d 185

UTICA MUTUAL INSURANCE COMPANY, Plaintiff,

v.MUNICH REINSURANCE AMERICA, INC., Defendant.

Munich Reinsurance America, Inc., Plaintiff,

v.Utica Mutual Insurance Company, Defendant.

6:12-cv-00196 (BKS/ATB)

6:13-cv-00743(BKS/ATB)

United States District Court, N.D. New York.

Signed March 29, 2019

For Utica Mutual Insurance Company:, Syed S. Ahmad, Patrick M. McDermott, Latosha M. Ellis, Hunton & Williams LLP, 2200 Pennsylvania Avenue NW, Washington, DC 20037, Mary Beth Forshaw, Christopher G. Lee, Simpson, Thacher & Bartlett LLP, 425 Lexington Avenue, New York, NY 10017.

For Munich Reinsurance America, Inc.:, Bruce M. Friedman, Crystal D. Monahan, Jason B. Eson, Rubin, Fiorella & Friedman LLP, 630 Third Avenue, 3rd Floor, New York, NY 10017.

MEMORANDUM-DECISION AND ORDER

Brenda K. Sannes, U.S. District Judge

I. INTRODUCTION

These related diversity breach-of-contract actions arise from Utica Mutual Insurance Company's ("Utica") billings to Munich Reinsurance America, Inc.¹ ("Munich") under the terms of the facultative reinsurance certificates Munich issued to Utica in 1973 (6:12-cv-196) ("Utica I ") and 1977 (6:13-cv-743) ("Utica II ").² In Utica I , Utica claims that Munich violated the 1973 facultative reinsurance certificate ("1973 Certificate") by failing to pay $ 2,760,533.96 in expenses. In Utica II , Munich claims that Utica violated the terms of the 1977 facultative reinsurance certificate ("1977 Certificate") by billing it for $ 789,813.47 in expenses; Munich paid that expense billing and now seeks reimbursement.³

Munich has paid the $ 5 million and $ 1 million liability limits on the Certificates. At issue here is Munich's liability for additional loss expenses—that is, whether Munich is obligated to pay loss expenses incurred in investigating, adjusting, and litigating claims supplemental to the liability limits. The resolution of this issue hinges on the interpretation of certificates issued and umbrella policies reinsured in the 1970s, when neither party likely anticipated the kind of catastrophic asbestos claims faced by Utica in this case.⁴

In July 2018, the Court held a ten-day bench trial in Syracuse, New York, at which ten fact witnesses and five expert witnesses testified. Both parties have submitted proposed findings of fact and conclusions of law. (Dkt. Nos. 429, 430, 431, 431-1, 440–442, 447, 449, 449-1, 450, 450-1). The Court has carefully considered the trial record, the credibility of the witnesses at trial, and the submissions of the parties. In accordance with Rule 52(a) of the Federal Rules of Civil Procedure, the Court makes the following findings of fact and conclusions of law.

For the reasons set forth below, the Court finds that, with respect to the 1973 Certificate, Munich is not liable for any additional monies to Utica. Even assuming that Munich's liability under the 1977 Certificate is limited to the $ 1 million policy limit, the Court finds that the voluntary payment doctrine bars Munich from recovering the loss and declaratory judgment expenses it has already paid Utica. The Court therefore finds that Munich is entitled to judgment in Utica I , and that Utica is entitled to judgment in Utica II .⁵

II. FINDINGS OF FACT⁶

A. The Primary Policies, Umbrella Policies, and Facultative Reinsurance Certificates

Utica, an insurance company, issued primary general liability insurance policies (the "primary policies") to Goulds Pumps, Inc. from 1955 through 1986. (Dkt. No. 360, Section IV.B.4). Utica also issued umbrella policies to Goulds from 1964 to 1975 and 1977 to 1982. (Dkt. No. 360, Section IV.B.7).⁷ The primary policies, combined, provided $ 12,300,000 in liability limits and were expense-supplemental, allowing for expenses in addition to limits. (Ex. D-346-A, at R-0062463). The umbrella policies, combined, provided $ 255,000,000 in liability limits.⁸ (Ex. D-346-A, at R-0062463). Utica purchased facultative reinsurance certificates⁹ from Munich on several of its umbrella policies.

At issue in this action are the 1973 Umbrella Policy ("1973 Umbrella"), which provided $ 25 million in liability limits, the 1977 Umbrella Policy ("1977 Umbrella"), which provided $ 3 million in liability limits, and the facultative reinsurance certificates (the 1973 and 1977 Certificates) that Utica purchased from Munich on those policies. (Dkt. No. 360, Sections IV.A.3, C.10 and 13).¹⁰ The dispute centers on whether the 1973 Umbrella, as allegedly modified by a midterm defense endorsement ("1973 defense endorsement"), and the 1977 Umbrella required Utica to pay Goulds' defense expenses supplemental to losses. The 1973 defense endorsement, which Utica asserts changed the 1973 Umbrella from expense-inclusive to expense-supplemental, was the subject of contention: the parties dispute whether Utica delivered the endorsement, upon issuance, to Munich; key Utica participants were unaware of the endorsement during its dealings with Goulds; and Utica, accordingly, took inconsistent positions, before and after its settlement with Goulds, on whether Munich's liability under the 1973 Certificate is expense-supplemental or expense-inclusive.

Alternatively, Utica asserts that, even if the Court disagrees with its interpretation of the Umbrella Policies, the 1973 and 1977 Certificates obligate Munich to reimburse Utica for defense expenses, including declaratory judgment expenses, on an expense-supplemental basis.

B. Asbestos Claims Against Goulds

In the early 1990s, Goulds became the subject of claims by individuals alleging bodily injury as a result of exposure to asbestos in a Goulds product. (T. 1156; Dkt. No. 450-1, ¶ 4). Utica was defending and settling those claims under the primary policies. (T. 1158–60). Because the cost was minimal, Utica was not "really tracking [the claims] to the policies" but would "load them all in one [policy] year" for "administrative purposes." (T. 1160–61). It likewise posted "a nominal reserve for loss and a nominal reserve for expense." (T. 1160).

In the late 1990s, however, because the number of asbestos claims had increased, (T. 1164–65), and "breached the aggregate limit of the [single] policy" to which Utica had been allocating claims, Utica began allocating the loss "to the appropriate policy year." (T. 1161–62). For example, if a claimant alleged asbestos exposure from 1975 to 1985, and Utica paid $ 1,000 for the claimant's loss, Utica would "allocate $ 100 to the ten policy year files." (T. 1162). This enabled Utica to "accurately spread[ ] the loss to the periods that were impacted." (T. 1162–63). Utica "allocate[d] expense evenly across the years in the same method." (Ex. P-8, at A-0003509). Utica set up separate policy year files for each primary and each umbrella policy so that, if the amounts Utica set aside in reserve for each claim "went over the primaries," Utica would then set reserves for "the umbrella for the corresponding year." (T. 1170).

In June 2002, Utica deemed the 1975, 1976, and 1978 primary policies exhausted. (Dkt. No. 450-1, ¶ 6; Ex. P-336). In October 2002, Utica advised Goulds¹¹ that these policies had exhausted and that there was no evidence of an umbrella policy above the primary policy for the July 2, 1976 to December 31, 1976 time period and requested reimbursement for the indemnity and expenses it had paid on Goulds' behalf for that time period. (Ex. P-336, at R-0029305; Ex. P-8, at A-0003510).¹²

Utica determined that Goulds also lacked umbrella coverage over its 1959 to 1963 primary policies and began "to allocate monies" it had paid into these "orphan share periods"—policy years "above the primaries where Goulds did not have an umbrella policy."¹³ (T. 1175). In February 2003, Utica notified Goulds that "[t]here was no umbrella coverage purchased from Utica prior to 1964" and that it would "be billing Goulds" for the orphan share periods.

(Ex. P-8, at A-0003509–10). Utica further advised that: (i) the 1964 to 1976 umbrella policies contained "ultimate net loss provisions" ("UNL" provisions), meaning that they "included the cost of expense within the available limit of umbrella coverage" (expense-inclusive) and that "future payments made for expense associated with defending these claims will erode the policy limits for these policies"; and (ii) the 1977 to 1987 umbrella policies "had a defense provision in addition to policy limits" (expense-supplemental), meaning that "[t]he proportionate allocation of the defense costs allocated to those policies would not erode." (Ex. P-8, at A-0003510).

C. California and New York Declaratory Judgment Actions

In March 2003, Utica learned that Goulds had filed a lawsuit in California seeking, among other things, declaratory judgment against a number of its insurers, including Utica. (Ex. P-57, at F-0307918; T. 1192–93; Ex. P-237). The issues included choice of law (New York or California), the orphan share allocation, and whether Utica was entitled to control the defense.¹⁴ (T. 1194; Dkt. No. 450-1, ¶ 16). By April 2003, Utica was aware that Goulds was also claiming that certain primary policies (those issued in 1978, 1979, 1980, and 1982) contained a limit of liability for each occurrence but no aggregate limit. (Ex. D-279, at D-0014772). Utica believed the absence of aggregates from the 1978–82 policies was a "mere ‘scrivener's error’ "—"a simple oversight in policy processing" that neither it nor Goulds "intended." (Ex. D-76, at R-0040027). It recognized, however, that if the court were to find that California law applied¹⁵ and that one or more of the primary policies had no aggregate limit, under the "all sums approach" Goulds could select a primary policy without an aggregate limit to apply to all asbestos claims. (Ex. D-76, at R-0040027). Utica further recognized that this would "effectively create an unlimited supply of coverage" under the primary policies, which would never exhaust or trigger the umbrella layer of coverage,¹⁶ and "eliminate reinsurance recovery for all of these claims." (Ex....