UTICA MUTUAL INSURANCE COMPANY, Plaintiff-Counter-Defendant-Appellant-Cross-Appellee,
v.
CLEARWATER INSURANCE COMPANY, Defendant-Counter-Claimant - Appellee-Cross-Appellant.
Argued: October 18, 2017
Utica
Mutual Insurance Company and Clearwater Insurance Company
both appeal from the district court's summary judgment
orders regarding Clearwater's obligations to Utica under
five facultative reinsurance policies. The United States
District Court for the Northern District of New York (Sharpe,
then-C.J.) granted partial summary judgment to
Clearwater, ruling that the reinsurance company need not pay
expenses beyond the limit of liability in the reinsurance
contracts. The district court later granted summary judgment
to Utica, concluding that Clearwater was obligated to
indemnify Utica according to Utica's reasonable and
good-faith settlement of a coverage dispute with its insured.
On
appeal, Utica argues that Clearwater's claim-related
expenses should not be subject to the reinsurance
contracts' limits of liability. On cross-appeal,
Clearwater argues that it is not obligated to indemnify Utica
according to Utica's coverage settlement with its insured
because the reinsurance contracts do not obligate Clearwater
to pay according to that settlement. Clearwater also argues
that Utica's settlement allocation with its insured is,
in any event, unreasonable.
We
conclude that because Clearwater's obligations under the
reinsurance contracts follow Utica's expense-supplemental
obligations under the umbrella policies, Clearwater's
liability is expense-supplemental. But we vacate and remand
for the district court to determine whether this obligation
encompasses certain expenses. We also vacate and remand on
the cross-appeal because Utica has not demonstrated its
entitlement to a judgment that Clearwater was bound to
indemnify Utica according to Utica's settlement with its
insured.
William M. Sneed (Daniel R. Thies, on the brief), Sidley
Austin LLP, Chicago, IL, for Plaintiff -
Appellant-Cross-Appellee.
David
C. Frederick, Kellogg, Hansen, Todd, Figel & Frederick,
P.L.L.C., Washington, D.C. (Jeremy S.B. Newman, Amelia I.P.
Frenkel, Kellogg, Hansen, Todd, Figel & Frederick,
P.L.L.C., Washington, D.C.; John F. Finnegan, Chadbourne
& Parke LLP, New York, NY, on the brief), for Defendant -
Appellee-Cross- Appellant.
Before: Kearse, Cabranes, and Wesley, Circuit Judges.
Wesley, Circuit Judge.
From
the 1950s to the 1990s, Utica Mutual Insurance Company issued
various liability insurance policies to Goulds Pumps, Inc.
Clearwater Insurance Company reinsured several of these
policies. The Utica-Goulds policies proved valuable to Goulds
when it started receiving thousands of asbestos bodily-injury
claims in the 1990s. The policies simultaneously proved
costly to Utica, which had failed to include aggregate limits
in certain years' policies. After Utica and Goulds
reached a settlement agreement regarding Utica's
liability under those policies lacking aggregate limits,
Utica sued Clearwater seeking indemnification pursuant to its
reinsurance contracts.
Utica
now appeals from the district court's grant of
Clearwater's partial motion for summary judgment on the
scope of its coverage under the reinsurance contracts.
Clearwater cross-appeals from the district court's grant
of Utica's motion for summary judgment on
Clearwater's liability under the Utica-Goulds settlement.
BACKGROUND
I.
Insurance and Reinsurance Generally
This
case involves several types of insurance with their own
spheres of coverage; understanding them is essential to
resolution of the case. Primary and excess insurers provide
liability coverage. Primary insurance provides the first
layer of coverage of an insured's liability or loss.
Ali v. Fed. Ins. Co., 719 F.3d 83, 90 (2d Cir.
2013); 1 Steven Plitt et al., Couch on Insurance § 1:4,
at 12 (3d ed. 2009). Excess insurance provides the additional
layer of coverage for an insured's losses exceeding the
primary insurance policy's limits. Ali, 719 F.3d
at 90. Umbrella policies blend primary and excess coverage by
providing last-resort excess coverage as well as gap-filling
primary coverage on claims not otherwise insured by primary
policies. See, e.g., BASF AG v. Great Am.
Assurance Co., 522 F.3d 813, 815 (7th Cir. 2008);
Francis M. Gregory Jr. & Nicholas T. Christakos,
Primary, Excess and Reinsurance Problems in Large Loss
Cases, 59 Def. Counsel J. 540, 542 (1992). In this case,
Utica Mutual Insurance Company provided both primary and
umbrella policies to Goulds.
Insurers
have insurance, too. Reinsurance occurs when a carrier (the
"reinsurer") agrees to cover losses experienced by
an insurer for certain covered risks. Here, Clearwater
Insurance Company[1] insured Utica (the "cedent" or
"reinsured") against loss or liability arising from
its policies with Goulds (the "insured"). See
generally Unigard Sec. Ins. Co. v. N. River Ins. Co.
(Unigard), 4 F.3d 1049, 1053 (2d Cir. 1993)
(describing "the business of reinsurance"). These
reinsurance contracts allow the reinsured to distribute its
risk of loss among reinsurers. Id. There are two
types of reinsurance contracts: facultative and treaty. A
facultative reinsurer insures part or all of a single
insurance policy, with underwriting occurring as to each
reinsured policy. Id. at 1054; N. River Ins. Co.
v. CIGNA Reins. Co. (CIGNA), 52 F.3d 1194, 1199
(3d Cir. 1995) ("[A] facultative reinsurer 'retains
the faculty, or option, to accept or reject any
risk.'" (quoting William G. Clark, Facultative
Reinsurance: Reinsuring Individual Policies, in
Reinsurance 117, 121 (Robert W. Strain ed., 1980)). A
treaty reinsurer insures specified classes of a ceding
insurer's policies. Unigard, 4 F.3d at
1054. All five of Clearwater's reinsurance
policies at issue here are facultative.
Several
types of clauses defining the resinsurer's obligations in
relation to the obligations of the reinsured commonly appear
in facultative resinsurance contracts. Three types are
relevant to this case.
The
standard follow-the-form or following-form
clause ensures that the reinsurance contract covers the same
risks as those covered in the reinsured insurance policy. It
provides that all the terms and conditions of the reinsured
insurance policy are incorporated by reference into the
reinsurance contract, except insofar as the reinsurance and
insurance contracts conflict. CIGNA, 52 F.3d at
1199; Graydon S. Staring & Dean Hansell, Law of
Reinsurance § 12:5, 258-63 (2017) (explaining that
differences in premiums, limits, and period are the most
common exceptions to congruence).
Some
reinsurance contracts also contain what is called a
follow-the- settlements,
following-settlements, or loss-settlement
clause.[2] When a reinsurance contract contains a
follow-the-settlements clause, the reinsurer must indemnify
the reinsured for losses settled reasonably and in good
faith, even if the reinsured was not actually liable for
those losses under the reinsured insurance policy. See
Travelers, 419 F.3d at 189; U.S. Fid. & Guar.
Co., 20 N.Y.3d at 418-20. If the contract does not
contain a follow-the-settlements provision, the reinsurer
must indemnify the reinsured only for the reinsured's
proven liability under the reinsurance policy. That
is, under a contract without a follow-the-settlements
provision, "the reinsurer . . . is entitled to insist on
proof"-meaning, ordinarily, a judgment-"of the
reinsured's liability for loss paid." William
Hoffman, Facultative Reinsurance Contract Formation,
Documentation, and Integration, 38 Tort Trial &
Ins. Prac. L.J. 763, 820-21 (2003).
Claims-cooperation
clauses are variants of follow-the-settlement clauses. A
claims-cooperation clause provides that the reinsurer must
indemnify the reinsured for a claim settlement, but only if
the reinsurer approved the settlement. See Ins. Co. of
Afr. v. SCOR (UK) Reins. Co. [1985] 1 Lloyd's Rep.
312 (CA) 334 (Eng.).
II.
Facts[3]
From
the 1950s to the 1990s, Utica issued primary and umbrella
insurance policies to Goulds, a pump manufacturer. The
Goulds-Utica policies provide liability coverage pursuant to
which Utica agreed both to defend Goulds in litigation and to
indemnify it for liability claims resolved in settlement or
judgment. The policies provide coverage for, among other
things, asbestos personal-injury claims.
The
primary policies Utica issued to Goulds from 1978 to 1981 had
a glaring omission: they did not include aggregate limits of
liability. In other words, the policies failed to specify the
maximum amount Utica would pay Goulds. Because that maximum
amount defined the limit of Utica's liability to Goulds
under its primary policies, the omissions exposed Utica to
potentially limitless liability.
The
absence of a specific aggregate-liability limit became a
problem for Utica. In the mid-1990s, Goulds experienced a
rise in the number of claims alleging injuries from the
asbestos in its products; litigation numbers ballooned over
the better part of the next decade. By the early 2000s,
Goulds and Utica had initiated actions against each other in
California and New York seeking declarations regarding the
parties' respective insurance-coverage obligations.
Prompted in part by Utica's staggering potential
liability stemming from the policies' failure to define
Utica's maximum exposure, Goulds and Utica settled in
2007. The settlement treated the primary policies as having
aggregate limits. Utica began paying Goulds pursuant to their
settlement.[4]
Once
Utica's obligations to Goulds reached what Utica regarded
as an amount sufficient to trigger its coverage under its
reinsurance contracts, Utica turned to its reinsurers,
including Clearwater, for indemnity. Clearwater had reinsured
the 1978 and 1979 umbrella policies for Utica through two
near-identical reinsurance certificates (the "Clearwater
certificates"). Each Clearwater certificate lists
"[Clearwater's] Liability and Basis of
Acceptance" as a percentage share of specified
"layer[s]" of the umbrella policies.
Clearwater's liability totaled $5 million for the 1978
policy and $2.5 million for the 1979 policy. Clearwater also
reinsured the 1979, 1980, and 1981 umbrella policies in three
reinsurance contracts (the "TPF&C memoranda")
by its participation in a pool of reinsurers then managed by
Towers, Perrin, Forster & Crosby, Inc.
("TPF&C"). The limits of these five policies
total $7, 712, 500 in coverage by Clearwater.
Clearwater
paid nearly $1 million on Utica's reinsurance billings
before stopping. According to Clearwater, the lack of
aggregate limits on the primary policies meant that
asbestos-related losses never reached-and therefore never
triggered indemnity under-the reinsured umbrella policies.
See, e.g., Utica Resp. 14. Utica filed suit in 2013
seeking recovery for Clearwater's alleged breach of the
five reinsurance contracts spanning 1978 to 1981; Clearwater
denied liability and counter-sued for recovery of the amount
already paid.
DISCUSSION
"We
review a district court's grant of summary judgment
de novo." Sompo Japan Ins. Co. of Am. v.
Norfolk S. Ry. Co., 762 F.3d 165, 174 (2d Cir. 2014)
(quoting Gould v. Winstar Commc'ns, Inc., 692
F.3d 148, 157 (2d Cir. 2012)). "Where, as here,
cross-motions for summary judgment are appealed, 'each
party's motion must be examined on its own merits, and in
each case all reasonable inferences must be drawn against the
party whose motion is under consideration.'"
Id. (quoting Morales v. Quintel Entm't
Inc., 249 F.3d 115, 121 (2d Cir. 2001)). Upon finding a
contract ambiguous, we remand for a district court to make
further findings. See U.S. Fire Ins. Co. v. Gen. Reins.
Corp., 949 F.2d 569, 574 (2d Cir. 1991). The parties
agree that New York law governs this diversity action.
I.
Utica Appeal: Clearwater's Liability for Loss Expenses
Under the Clearwater Certificates
At the
outset of this litigation, Clearwater filed a motion for
partial summary judgment seeking a declaration that any
liability on the Clearwater certificates is capped at their
stated liability limits ($5 million and $2.5 million for 1978
and 1979, respectively). Though the Clearwater certificates
indemnify Utica for loss expenses, they do not clarify
whether this expense liability is capped by the stated
limits. The certificates state that "[u]pon receipt by
[Clearwater] of satisfactory evidence of payment of a loss
for which reinsurance is provided hereunder, [Clearwater]
shall promptly reimburse [Utica] for its share of the loss
and loss expense." Joint App. 66, ...