*1
768,
461]
NE2d
789 NYS2d
[822
v Fac-
Company
al., Respondents,
et
Ltd.
Excess
Insurance
as Al-
tory
Formerly Known
Company,
Insurance
Company, Appellant.
lendale
Insurance
2004;
Argued
October
decided December
*2
POINTS OF COUNSEL
(Bernard
LLP,
London Fischer
London,
James
New York City
L. Fischer and James
Walsh of
counsel),
for
I. A
appellant.
prop-
erty reinsurance
contract
should not be interpreted
refer
(Bellefonte
ence to liability insurance precedents.
Reins. Co. v
Unigard
Aetna
Co.,
Cas. & Sur.
Co.,
Sec. Ins.
Inc.
903 F2d 910;
v
Co.,
North Riv. Ins.
579 “limit” agreements I. The reinsurance respondents. entire
$7,000,000 plaintiffs-appellants’ caps (West Company. Mutual Insurance defendant-respondent Co., 109; AD2d 250 Mut. Ins. N.Y. v Greater 56th St. Assoc. v Co., 866; Rhodes 68 NY2d Assur. v American Home Sanabria 186 Socy., Assur. Newhall, Bracher v 574; Equitable 126 NY Life Co., Ltd., F Ins. v Excess Ins. Co. 62; Allendale Mut. NY Sys. Data Davidge v 271; Ruttenberg Supp Riv. Ins. Ins. Co. v North 191; Sec. Unigard AD2d Corp., Co., & Sur. v Aetna Cas. Reins. Co. Co., 576; 79 NY2d v Certain Underwriters Cas. & Sur. Co. 910; F2d Travelers Corp. London, 583; Christiania Gen. Lloyd’s 268.) II. The courts below Am. Ins. N.Y. v Great the reinsurance law, determined, as a matter correctly (Mallad Corp. Constr. is unambiguous. at issue agreement *3 v Assn., 285; Unisys Corp. 32 NY2d Fed. Sav. & Loan County West, Mary Bartel v Carter Inc., 365; & 224 AD2d Weir Hercules Corp., Data Co., 535; Davidge Sys. v Ruttenberg Paint Div., Mohawk Niagara Airco Inc. v 191; Alloys AD2d Airco 215 Turner Constr. Steel Co. v 68; AD2d Bethlehem Power 76 Corp., Mut. Ins. Co., Arkwright Fire & Cas. Co. 456; United NY2d Glass, 227; Canusa 898 F Co., 632; Supp F 2d Menke v 53 Supp Lobosco, Inc., 723; Mgrs. Board A v & R Corp. 499.) AD2d II v Federal Yardarm Condominium THE COURT
OPINION OF J. G.B. Smith, respondents’ whether is appeal presented by
The issue adjustment loss for certain sums obligation pay to the subject clause “follow the settlements” from a arising Like the in a reinsurance limit stated indemnification affirm is, and therefore it Division, conclude that we Appellate Division. the order of the Insurance 1990, appellant
In December Insurance Allendale known as (formerly Company Data Systems with Bull into an agreement entered Company) an indemnification with insurance to provide property Inc. risk of against covered Specifically, million. $48 inventory computer Bull Data’s personal damage
loss or turn, Fac Seclin, France. located in a warehouse stored tory Mutual obtained facultative reinsurance1 from various reinsurers which London have severally subscribed to the rein surance agreement at issue in this litigation. The reinsurance states, pertinent part:
“REASSURED: ALLENDALE INSURANCE
COMPANY “ASSURED: BULL DATA CORPORATION
and/or as original. June, “PERIOD: Twelve months at 1st and/or as Both original. days inclusive.
“LOCATIONS: Seclin, Bull Data Corporation,
France as original. “INTEREST: Goods and/or Merchandise incidental
to the Assured’s business consisting principally personal computers and/or as original. 7,000,000
“LIMIT: US$ one occurrence any 13,500,000 US$ one p/o rence occur- any 25,000,000 US$ excess of one occurrence.
“CONDITIONS: As to same valuation, clauses and conditions as
contained in the original policy but policies cover risks of only All Risks of Physical Loss or Dam- but age excluding Short- Inventory Strikes, Riots, age. Including Civil *4 Commotions and Malicious Damage risks if and as Premium original. inas payable original. Reinsurers to follow the agree settlements of the Reassured in all and to respects bear their of proportion any expen- incurred, ses whether legal otherwise, in the and investigation defence of claim hereunder. Ser- vice of Suit Clause (U.S.A.). In- Clause.” solvency June of a fire that generated a of spate litigation, policy-specific, “Facultative reinsurance is meaning portion all that or a of a specific reinsured’s risk under a coverage contract of direct will be (Travelers indemnified the reinsurer in the event of loss” Cas. & Sur. Co. v [2001]). Lloyd’s London, Certain Underwriters at of Bull abroad, and the warehouse. destroyed the United States and, that suspecting a claim Mutual presented Factory Data refused to arson, Factory Mutual the fire was the result of it. satisfy of France to in the courts recover brought
Bull Data suit an Mutual also commenced Factory under its insurance Bull Data in the United States litigation against unsuccessful Illinois, District of claiming Court for the Northern District and the limit of under arson, that the loss was due million. incurring After ap- insurance was $48 million lawsuits expenses, both proximately litigation $35 the claims with were terminated Mutual settled Factory nearly Bull Data for million. $100 respondent from
Factory sought payment Mutual thereafter and filed an action reinsurers. The reinsurers refused payment the reinsur- England courts of declaration seeking ance dismissed the English contract was invalid. courts Factory case for lack of Mutual jurisdiction. During period, action in the United States declaratory judgment commenced for the Rhode mil- seeking District Court District of Island $7 lion additional million from the reinsurers and an loss $5 adjustment share ex- proportionate expenses, allegedly Factory penses having reinsurers owed Factory defended the Bull Data claim. later discontinued the action and commenced a similar action in upon stipulation for the District of United States District Court Southern New York. Judge granted partial summary
District Shira A. Scheindlin Mutual’s judgment to the reinsurers and dismissed (Allendale Ins. adjustment claim Mut. Co. v for loss Ltd., 1997], [SD Excess Ins. Co. 970 F NY amended Supp 1997]). the pendency NY upon rearg Supp During [SD Mutual’s to the United Court appeal Ap- States Circuit, court decided an unrelated for the Second peals jurisdiction pend- matter case which affected vacatur case, appeal dismissal of ing resulting (Allendale Ins. Co. Excess judgment of the District Court Mut. 1999]). Ltd., [SD 62 F 2d 1116 NY Co. *5 declaratory judg- The thereafter commenced this reinsurers seeking to Court, County, York ment in New Supreme action on nondisclo- based material annul the reinsurance agreement alternative, judgment inor, the sures and misrepresentations awarding Factory counterclaim, Mutual damages.2 interposed seeking million indemnification limit under the reinsur $7 ance as as in adjustment well million loss $5 expenses incurred in the Factory of the claim litigation with Bull Data. Both Mutual and the moved reinsurers partial on summary judgment Factory Mutual’s counter adjustment claims in seeking loss excess of the expenses amount in the stated indemnification limit. Supreme Court denied the motion, granted reinsurers’ Factory Mutual’s cross motion and declared that the reinsurers’ to pay their obligation proportion ate share of the adjustment loss was to the expenses subject not stated limit of indemnity million. $7
The Appellate Division reversed by granting reinsurers’ motion and denying Factory Mutual’s cross motion. Court The (cid:127) thus declared portion adjustment of the loss expenses reinsurers obligated were to bear was to the $7 million limit in stated the reinsurance Appellate Division to granted Factory Mutual leave Court. appeal now affirm We the order Division. Appellate us, the issue before we are resolving mindful contracts, interpreting agreements, reinsurance as with all intention of the should To parties control. discern the parties’ intentions, the court should the agreements construe so as to (see Breed give and effect to the full.meaning provisions material Am., v N. Insurance Co. also [1978]; see 351, 46 NY2d Records, Inc., Philles [2002]; 98 NY2d Greenfield Slatt v Slatt, [1985]).
Here, there is no dispute set agreements million occurrence. The so-called “fol per $7 low the clause settlements” is thereafter set forth in the section of the policy entitled As provided “CONDITIONS.”3 the reinsurers agreement, requires por- clause their pay 2. Supreme moved Court dismiss the action on the grounds of forum conveniens and non also commenced an action Superior Providence, Supreme granted Factory Court of Rhode Island. Court order, pre- appealed they sought motion. While the reinsurers Mutual’s liminary injunction Supreme enjoin proceeding, Court to the Rhode Island considering which that court While the court Fac- denied. Rhode Island tory partial summary judgment Mutual’s motion for on its for loss claims adjustment limit, excess the indemnification Divi- Supreme Court, sion reversed the order of lawsuit reinstated reinsurers’ enjoined litigation. Island Rhode industry In the reinsurance a “follow settlements” clause “refers to duty adjusting settling follow the actions the cedent in claims” *6 investigation expenses and defense incurred tion agreement. any however, reinsurers, The under the claim subject liability pay to the million to is contend that their $7 Factory policy. By cap negotiated contrast, the under pay expenses argues liability the reinsurers’ to the defense that policy. cap separate apart indemnification on the and from the they agree and hold that cannot be with the reinsurers We adjustment pay expenses required stated in excess to loss paid policy. Once the reinsurers have limit in the reinsurance they policy, in no further amount stated have the maximum adjust- Factory any obligation pay to costs related loss to holding, expenses. of the we follow the decisions ment In so Appeals Circuit as Court of Second United States (903 expressed Co. Aetna & Sur. Co. Reins. Cas. Bellefonte Cir 1990]) Unigard [2d Sec. Inc. v North and (4 [1993]). ceding cases, Riv. F3d 1049 In both Ins. Co. a fortunes” clause claimed that similar “follow the insurers litigation beyond required costs the reinsurers to reimburse policy. concluded that stated limit in the The court in both cases reading meaningless a render the li- such ability of the would negotiated According
cap policy. to the Bellefonte ] court, clause to override to the ‘follow the fortunes’ “allowt liability—would strip the limitation on the limitation clause meaning; obliged other merely all would conditions of reinsurer be paid. . . the insurer for and all funds . reimburse in the certificates are ‘follow the fortunes’ clauses they supplant, with, so rather than structured coexist liability cap. would ef- To construe the certificates otherwise liability fectively the limitation on the reinsurers’ eliminate F2d at the stated amounts” negotiated indemnity parties an here, the $7
Likewise any obligation part per Thus, on the million occurrence. Factory Mutual, for set- whether it be
reinsurers to reimburse tling Bull Data or for loss claim insurance with adjustment protracted litigation incurred by negotiated capped limit under the ensued, must be liability. to limitless Otherwise, the reinsurers would be Factory injustice as an Indeed, this well illustrates such case portion of a with Mutual now to saddle reinsurers seeks Newman, on Insurance Cover- (Barry Ostrager 2 Handbook and Thomas R. R. 2004]). Thus, the will be [b], reinsurers age Disputes § [12th at ed 16.01 they unless agreed by (id.). the cedent by compromise bound the settlement arriving impropriety in settlement can show litigation negotiated policy bill exceeds the limit more permit liability than 70%.4To such a result would render the cap nullity. distinguishable Mutual asserts this case is from Unigard liability that those involved in- cases property According surance while case involves insurance. product normally Mutual, insurance en-
compasses obligation pay legal to defense costs on behalf of the insured as well as of Thus, the cost the loss itself. the risk spread adjust- already to be in reinsurance would include loss expenses. property product ment However, a insurance would only property cover the value of the item to be insured. Under Factory circumstances, those contends, Mutual an insurer would obligation investigation litiga- have no contractual to incur or already tion costs and risk of those costs is not in included product. argument unpersuasive the reinsurance findWe this provide and conclude that this distinction does not a sufficient liability beyond basis to extend the reinsurers’ the limit stated in the reinsurance policy cap
The in limit clause to intended the reinsur- exposure. Although Judge ers’ total risk Scheindlin’s decision binding, reasoning Allendale vacated and was is not find her we persuasive, [the [Factory reinsurers] “Whether reimburse Mutual] property for claims for losses or defense costs no makes property policies difference to of them. Reinsurers insurance controlling exposure have the same interest in their maximum liability policies. as do of Thus, reinsurers insurance Unigard’s holdings limit clauses define the rein- bargained-for exposure liability surers’ maximum to inclusive of expenses applicable underlying all costs and are even where oblige insurance does not the insurer to cover (992 insured’s defense costs” parties type product course,
Of both well aware were of being that reinsured. It would be far from unreasonable expect procuring Factory time of reinsurance, at the anticipate possibility incurring adjustment could ex- loss settling penses Certainly, nothing a claim from Bull Data. prevented insuring Mutual from that risk either expressly stating that the defense costs were excluded from the particularly given Such an would outcome be unfair that the “follow gave management settlements” clause no reinsurers control over litigation against the unsuccessful launched Bull Data limiting litigation expense. and no voice in the $35 million an additional negotiating or otherwise indemnification limit have sepa- that would been for loss adjustment expenses limit on the insured rate and from the apart reinsurers’ on the rely entitled this, the reinsurers were Failing property. risk exposure. as maximum setting limit their be af- Division should the order of the Accordingly, answered firmed, costs, question and the certified with affirmative. plain from the way J. I see no tell (dissenting). Read, intended for certificate whether
language parties in the reinsurance costs and to be included misinter- Further, my majority excluded from it. view has Sur. Reins. Co. v Aetna Cas. & Co. preted Bellefonte 1990]) of its expansion further ways augur [2d Cir much I dissent. holding. Accordingly, debated
I. $13,500,000 of a layer pertains *8 $48,000,000 of a insur ($25,000,000 $38,500,000) property are at ance Mutual. Two is policy by Factory provisions issued 7,000,000 any The first the “LIMIT” is provides “US$ sue. one 13,500,000 any one occurrence occurrence of] [part US$ The second 25,000,000 excess of one occurrence.”1 any US$ “CONDITIONS,” the cer including whereby notes several one valuation, made clauses and condi “subject tificate is to same (a form” “following tions as contained policy” to bear agree and one ... whereby “[Reinsurers provision) (a incurred” “follow the settle their of proportion expenses ments” provision). essence, only
In concludes that reasonable majority contains of these is interpretation provisions occurrence) which is $7,000,000 (any one cost-inclusive. too on the “follow the settlements” heavily This conclusion rests certificate, “following of the and fails to consider provision is that reading par form” An provision. equally plausible “valuation, on the same ties, who “conditioned”2 the certificate policy— exist in the primary property clauses and conditions” as $6,500,000 $13,500,000 remaining of the N.A. reinsured the Sorema paid proportion layer. Excess, up to also its paid its limit and Unlike Sorema of costs. (Second) of not Restatement 2. The word “conditions” is illuminative. occur, event, which as not certain to § 224 a condition “an Contracts defines excused, performance under occur, before must unless its non-occurrence *3 commonly paid where costs are in addition to the limit* —could have intended to create a cost-exclusive parties expressly Moreover, limit. did not state that “subject capped limit was to” the conditions and therefore all li (see ability e.g. Bellefonte). under the certificate Because the may reasonably interpreted ways, certificate be in either of two (see ambiguous I conclude that it is Evans Famous Music [2004]).4 Corp., 1 NY3d disagree majority’s apparent reading Moreover, I with the of primary Aetna Bellefonte, issued and excess li- Bellefonte. ability policies to Co., A.H. Robins manufacturer policies Daikon Shield. Aetna reinsured the excess with various “explosion” litigation reinsurers. After an device, over the disputed liability Aetna and Robins the extent of Aetna’s policies, ultimately defense under the excess monetary reached a settlement in excess of the limit stated in policy. the excess Aetna then looked the reinsurers for the paid underlying excess on the The reinsurers refused to pay, arguing liability that their was limited the reinsurance certificate. provided
The certificate stated that reinsurance was “subject liability . . . amount set herein” forth cap F2d at The court concluded that this created a on the through payment expen- reinsurers’ whether reached ses or settlement of claims. The Second Circuit reasoned that “[a]ny other construction of the reinsurance certificates would (id. negate” “subject provision to” 914; Unigard see also Sec. Ins. v North Riv. Co. note, contract due.” becomes As Comments the term “is “condition” used (Restatement variety meanings legal
with a wide
of other
discourse”
*9
a).
[Second]
§
of Contracts
Comment
The
3.
courts
did not
below
determine whether or not this
the case
was
here.
Indeed,
history
ambiguity:
the
of this case betokens
five courts have
interpreted the
varying
Supreme
now
certificate with
results.
Court and the
Superior
Rhode Island
Court concluded that the
does
a
certificate
not contain
(see
cap
and therefore the
limit
cost-exclusive
Mut. Ins. Co. Excess
Co.,
Ct,
Super
Providence, RI, May 22, 2001, Hurst, J.,
[litiga-
Ins.
PC 00-0760
(1st
enjoined
Dept 2001)];
tion
AD2d
285
351
Excess Ins. Co. v
Mut.
Ct,
County,
22, 2002,
J.,
Sup
Aug.
Moskowitz,
NY
Index No. 605759/
99).
majority
joins
Appellate
The
the
the
now
Division and
United States
District,
District Court for the Southern
which found that
the limit is cost-
(see
2003];
Dept
[1st
inclusive
a rule to the in Bellefonte general principle into a a “follow the fortunes” clause supplants policy majority, Ap- never Thus, limit. like the pellate expands it, Division before from a contract- Bellefonte specific holding general applicability. into rule of holding When the the reinsurance certifi- Bellefonte—that specific policy language cate’s controls whether costs are applied easily included or from here, excluded the limit—is it is distinguished. “subject language is no There to” in the reinsur- appeal. ance certificate at on Rather, issue this the certificate provisions—“LIMIT” contains two discrete and “CONDI- any guidance TIONS”—and neither offers toas whether the “CONDITIONS” are to the “LIMIT.” observing practitioners Further, it is worth in the rein- industry consistently Specifi- surance cally, have criticized Bellefonte. ruling solely commentators have noted that in “based on a interpretation language textual certificates,” ignored important industry court extrinsic evidence Bellefonte practice showing underlying custom and that the nature of the policy often controlled whether the reinsurance limit cost- {see Goldstein, inclusive or cost-exclusive Lives Bellefonte (n) [“ otwithstanding industry . . . the for the most Bellefonte part practice has continued to follow the custom and of reinsur- providing coverage expenses ers in addition to where limits limits”]). policy the reinsured also covers addition to applied There was fear “that rule would be language the same certificate but where the reinsured {id.). covered defense costs addition to limits” 6. Our & decision Travelers Cas. Sur. Co. v Certain Underwriters at [2001]) Lloyd’s contrary. There, London NY2d is not to the were we negated obligation whether a asked “follow fortunes” clause an insurer’s apply methodology the allocation contained rejecting argument, agreed we with the “rationale” of Second Circuit follow the fortunes doctrine “does not alter the terms override the (id. language Thus, policies” supports of reinsurance Travelers proposition interpreted according that each reinsurance must be its terms. own
589
There,
realized.
decided,
fear was
Unigard was
When
that
identical
to
nearly
was
language
certificate
Bellefonte.
reinsur-
evidence that
extrinsic
rejected
The Second Circuit
instead
limit,
in addition to
policy
ers covered
similar cer-
and the
holding
to
on its
choosing
rely
Bellefonte
(4 F3d at
language
tificate
Mut. Ins. Co.
similarly faulted Allendale
Commentators have
(970
1997], rearg
F
[SD
Ins. Co. Ltd.
265
NY
Supp
v Excess
[1997],
F
to 992
271
Supp
and
decision adhered
granted
[table,
55313,
at
1999 US App
II. parties summary judgment, arguing Here, both moved unambiguous. Although party that the certificate was neither argued ambiguous, ambiguity that the certificate was is an is- (Greenfield, sue of law for the courts 98 NY2d at opposed summary judgment the reinsurers’ motion for industry practice, with extrinsic evidence of thereby custom and and question concerning parties’ a created of fact intent (Mallad Corp. County Assn., Constr. v Fed. &Sav. Loan [1973]). precedent 285, 290-293 Our establishes where ambiguity surrounding certificate, there is in a reinsurance judgment. fonte, Death Much Finding Brady, Updating pears faced with unless it is shown that gard, and dence of extrinsic evidence to Mealey’s Litig Rep Come not tion question”]). even court Co. v panels those unambiguous Off, at least in some Ado About showing cover Hartford sidestepped Allendale’’ and genuine placed a 63 Def Couns J sitting will not Handshake, Bellefonte addition, that reinsurers Reinsurance Law a Nothing: Acc. & Indem. Co. issue of Reinsurance 16 cap on follow the Second Bellefonte question, its face.” in addition arbitrators cases on it was reveal 61 Def suggesting those A fact, {see Response Regarding clearly commonly Couns which it avoided by applying Accordingly, 223 decisions or “latent the court denied the motion for Circuit, Developments: Monin have [1998] that “most [Apr. was not the cedent’s and reinsurer’s intention J 529, apparently ambiguity” and pay expenses are free to 1996]; [stating California 538 n 22 the court reviewed extrinsic evi- any timely Brady, properly The Gloves are 2d see also generalized that “arbitration Bellefonte’s holding declined to 348, in a raised. In TIG Premier ignore Reinsurance [Oct. law, in addition to limits. 350 [SD NY constituted arbitra- contract Wilker the certificate in 1994]; which allows that whether the Bellefonte, Beginning follow Reach, and Monin Disputes: summary panels, 1999]), Lenci, Belle- Uni- 9-10 “ap- rule and use
591 should practice, custom and circumstances, including industry (see v Thomp Assur. Corp. London be taken into consideration son, NY [1902] ;9 see also Christiania Gen. Ins. Corp. [citing 1992] Cir Am. Ins. [2d N.Y. Great 9-53). 9:15, Assur.]; Couch on § Insurance 3d London Divi- modify I the order of Accordingly, would matter for fur- motions, remand the both and by denying sion this opinion. ther consistent with proceedings Kaye Judge Judges Ciparick, Rosenblatt, Chief Graffeo Read dis- Judge Judge and R.S. concur with Smith; G.B. Smith summary motions for modify by denying sents and votes both in a separate opinion. judgment affirmed, etc.
Order “Reinsurance, contract, depends upon the intention like other account, used, gathered taking into when the parties, from the words to be usage surrounding is meaning doubtful, Custom circumstances. fact, only that presumed it is found as a not to enter into the intention when settled, existed, uniform, known to and well either it but was reasonable made, generally as to raise parties the contract or so known when *13 presumption they it at the time” NY at had in mind