Utica Mutual Insurance Co. v. Clearwater Insurance Co.

          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, ...