Arrowood Surplus Lines Ins v. Westport Ins Co

Filing 37

ORDER granting 23 Motion for Judgment on the Pleadings. Signed by Judge Alvin W. Thompson on 1/5/2010. (Lynch, C.)

UNITED STATES DISTRICT COURT DI S T R I C T OF CONNECTICUT

------------------------------x A R R O W O O D SURPLUS LINES I N S U R A N C E COMPANY formerly k n o w n as ROYAL SURPLUS LINES I N S U R A N C E COMPANY as s u c c e s s o r in interest to C O N N E C T I C U T SPECIALTY I N S U R A N C E COMPANY, Plaintiff, v. W E S T P O R T INSURANCE C O R P O R A T I O N formerly known a s EMPLOYERS REINSURANCE CORPORATION, Defendant. ------------------------------x : : : : : : : : : : : : : : : : : : : :

C i v i l No. 3:08CV01393(AWT)

R U LIN G ON MOTION FOR JUDGMENT ON THE PLEADINGS T h e plaintiff, Arrowood Surplus Lines Insurance Company ( " A r r o w o o d " ) , filed this diversity action against Westport I n s u r a n c e Corporation alleging breach of contract. The defendant h a s moved for judgment on the pleadings pursuant to Rule 12(c) of t h e Federal Rules of Civil Procedure. For the reasons set forth

b e l o w , the defendant's motion is being granted. I. F a c t u a l Background F o r purposes of a motion for judgment on the pleadings, c o u r t accepts as true the facts alleged in the complaint. The the

p l a i n t i f f , Arrowood, was formerly known as Royal Surplus Lines I n s u r a n c e Company ("Royal Surplus"). Royal Surplus entered into a

Reinsurance, Assignment and Assumption agreement with Connecticut S p e c i a l t y Insurance Company ("Connecticut Specialty"), pursuant to w h i c h Royal Surplus assumed the liabilities and acquired the r e l a t e d assets of Connecticut Specialty's covered business as of D e c e m b e r 31, 2001. Employers Reinsurance Company ("Employers

R e i n s u r a n c e " ) , a reinsurance company organized under the laws of M i s s o u r i , was merged into Westport Insurance Corporation, effective J a n u a r y 1, 2008, with Westport Insurance Corporation ("Westport") b e i n g the surviving corporation. I n 1999, Connecticut Specialty and Employers Reinsurance e n t e r e d into a Liability Reinsurance Agreement, effective February 1 , 1999 (the "Reinsurance Agreement"). Pursuant to the Reinsurance

A g r e e m e n t , the defendant reinsured, inter alia, a class of i n s u r a n c e policies in a package under which Connecticut Specialty h a d assumed the risk. Included in this package was a one-year

g e n e r a l liability policy issued by Connecticut Specialty to Equity R e s i d e n t i a l ("Equity"), a real estate investment trust that owned a n d managed apartment complexes (the "Equity Policy"). P o l i c y went into effect on December 15, 1999. The Equity

On May 16, 2000,

E m p l o y e r s Reinsurance terminated the Reinsurance Agreement e f f e c t i v e August 18, 2000. I n 2004, Equity filed a complaint in the United States D i s t r i c t Court for the Northern District of Illinois against a n u m b e r of individuals and entities setting forth claims for RICO, b r e a c h of fiduciary duty, fraud, and conspiracy arising out of

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Equity's purchase of insurance from Connecticut Specialty. Subsequently, in its Fourth Amended Complaint, Equity asserted c l a i m s for a declaratory judgment, breach of contract, and r e f o r m a t i o n of contract against Royal Surplus for losses that o c c u r r e d between December 15, 2000 and December 15, 2002. On

D e c e m b e r 27, 2007, Arrowood paid Equity the sum of $4,100,000 to s e t t l e those claims. Additionally, Arrowood has incurred

$ 2 , 6 0 9 , 3 2 5 . 5 5 in claim expense. The parties agree that Arrowood had reinsurance coverage under t h e Equity Policy for losses occurring from December 15, 1999 to D e c e m b e r 15, 2000.1 In this action, Arrowood seeks reimbursement

f o r the settlement payment to Equity and claim expense in c o n n e c t i o n with losses occurring between December 15, 2000 and D e c e m b e r 15, 2002. Arrowood claims that its settlement with Equity

w a s based on the risk that the court would modify, alter, or i n t e r p r e t the Equity Policy to provide an additional two years of c o v e r a g e to Equity. Westport takes the position that it is only

l i a b l e to indemnify Arrowood for losses occurring in the first year o f the Equity Policy and has no liability for losses occurring a f t e r December 15, 2000.

Although the effective date of the Reinsurance Agreement's t e r m i n a t i o n was August 18, 2000, Article XVIII of the Reinsurance A g r e e m e n t (the "Runoff Option") provides that "[t]he REINSURED m a y elect to continue the application of this agreement to loss u n d e r policies becoming effective prior to the termination date o f this agreement . . . ." The parties agree that Arrowood e x e r c i s e d the Runoff Option.

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II.

L e g a l Standard W h e n considering a Rule 12(c) motion for judgment on the

p l e a d i n g s , the court uses the same standard as that used to address a Rule 12(b)(6) motion to dismiss for failure to state a claim. J o h n s o n v. Rowley, 569 F.3d 40,43 (2d Cir. 2009); Cleveland v. C a p l a w Enters., 448 F.3d 518, 521 (2d Cir. 2006). Under both

r u l e s , the court "will accept all factual allegations in the c o m p l a i n t as true and draw all reasonable inferences" in favor of t h e non-moving party. Johnson, 569 F.3d at 43; Burnette v. C a r o t h e r s , 192 F.3d 52, 56 (2d Cir. 1999). To survive a Rule 12(c)

m o t i o n , the "`complaint must contain sufficient factual matter, a c c e p t e d as true, to state a claim to relief that is plausible on i t s face.'" Johnson, 569 F.3d at 44 (quoting Ashcroft v. Iqbal, 129 S . C t . 1937, 1949 (2009) (internal quotation marks and citation omitted)). In a diversity case, the court applies the substantive law of t h e forum state, in this instance Connecticut. Omega Eng'g, Inc. v. O m e g a , S.A., 432 F.3d 437, 443 (2d Cir. 2005). Under Connecticut

l a w , the interpretation of an insurance policy is a question of law f o r the court. Pac. Indem. Ins. Co. v. Aetna Cas. & Sur. Co., 688

A . 2 d 319, 321 (Conn. 1997) (citing Hansen v. Ohio Cas. Ins. Co., 6 8 7 A.2d 1262, 1265 (Conn. 1996)). "[T]he mere fact that the

p a r t i e s advance different interpretations of the language in q u e s t i o n does not necessitate a conclusion that the language is a m b i g u o u s . " Hansen, 687 A.2d at 1265. Indeed, insurance policies

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are "interpreted by the same general rules that govern the c o n s t r u c t i o n of any written contract and enforced in accordance w i t h the real intent of the parties as expressed in the language e m p l o y e d in the policy. The policy words must be accorded their

n a t u r a l and ordinary meaning." Id. at 1264 (internal quotation m a r k s and citations omitted). III. Discussion A r r o w o o d argues that the settlement of the Equity litigation w a s covered under the Reinsurance Agreement because, under Article I V of the Reinsurance Agreement, i.e. the "follow the fortunes" c l a u s e , the settlement constituted a modification of the R e i n s u r a n c e Agreement. T h e "follow the fortunes" doctrine, also known as the "follow t h e settlements" doctrine in the context of settlements, Travelers C a s . & Sur. Co. v. Gerling Global Reins. Corp. of Am., 419 F.3d 1 8 1 , 186 n.4 (2d Cir. 2005), is a principle of reinsurance law that b i n d s a reinsurer to accept the cedent's good f a i t h decisions on all things concerning the u n d e r l y i n g insurance terms and claims against t h e underlying insured: coverage, tactics, l a w s u i t s , compromise, resistance or c a p i t u l a t i o n . This doctrine insulates a r e i n s u r e d ' s liability determinations from c h a l l e n g e by a reinsurer unless they are f r a u d u l e n t , in bad faith, or the payments are c l e a r l y beyond the scope of the original p o l i c y or in excess of [the reinsurer's] a g r e e d - t o exposure. Basically, the doctrine b u r d e n s the reinsurer with those risks which t h e direct insurer bears under the direct i n s u r e r ' s policy covering the original insured. N . River Ins. Co. v. Ace Am. Reins. Co., 361 F.3d 134, 139-40 (2d

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Cir. 2004) (alteration in original) (internal quotation marks and c i t a t i o n s omitted). H o w e v e r , the "follow the fortunes" doctrine only applies to l o s s e s that the reinsurer agreed to cover. As the Second Circuit

h a s noted, "[i]t is well-established and not at all surprising that f o l l o w - t h e - f o r t u n e s does not require indemnification for losses not c o v e r e d by the underlying policies." Travelers, 419 F.3d at 193; N. R i v e r Ins. Co. v. CIGNA Reins. Co., 52 F.3d 1194, 1206-07 (3d Cir. 1 9 9 5 ) ("The protection for the reinsurer [under the `follow the f o r t u n e s ' doctrine] is based on contractual intent: a reinsurer c a n n o t be held liable for a kind of loss that it did not agree to cover."). "[W]hile a `follow the fortunes' clause limits a

r e i n s u r e r ' s defenses, it does not make a reinsurer liable for risks b e y o n d what was agreed upon in the reinsurance certificate." Id. at 1 1 9 9 . The reinsurer is bound to accept the good faith settlements o f the reinsured, but not for a class of losses it had not agreed t o cover in the first place. In this case, the losses under the Equity Policy are outside t h e Reinsurance Agreement. Article I of the Reinsurance Agreement

l i m i t s the agreement's scope to "policies. . . becoming effective o n or after the effective date of this agreement as a result of o c c u r r e n c e s taking place prior to the termination date of this a g r e e m e n t , " subject to reinsured's right to maintain coverage on e x i s t i n g policies for a limited time after termination of the R e i n s u r a n c e Agreement pursuant to the Runoff Option. Article I

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continues, providing that a "policy issued for a policy period of m o r e than one year shall be considered as `becoming effective' at e a c h anniversary date of such policy while such policy is in force." T h i s clause limits the coverage period for any reinsurance p r o v i d e d to a year at a time, regardless of the length of the u n d e r l y i n g insurance contract. At the end of one year, if the

R e i n s u r a n c e Agreement has not been terminated, a new year of r e i n s u r a n c e coverage will become effective. If, however, the

R e i n s u r a n c e Agreement has been terminated in the interim, r e i n s u r a n c e coverage ceases on the termination date unless the e x e r c i s e of the Runoff Option keeps it in effect until the a n n i v e r s a r y of the underlying policy. For example, reinsurance on

a three-year insurance policy issued on January 1, 2000 would last u n t i l December 31, 2000. On January 1, 2001, if the reinsurance

a g r e e m e n t remained in effect, that policy would be reinsured for a n o t h e r year, until December 31, 2001. Were the reinsurance

c o n t r a c t terminated in the interim, however, the underlying policy w o u l d continue without reinsurance coverage, beginning on either t h e effective date of termination or, if the Runoff Option were e x e r c i s e d , on January 1, 2001. A r r o w o o d argues that the "follow the fortunes" clause of A r t i c l e IV changes the outcome here. Article IV provides that

" [ a ] l l reinsurance under this agreement shall be subject to. . . t h e same modifications, alterations and interpretations as the

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respective policies of the REINSURED [Arrowood], and the liability o f the CORPORATION [Westport] shall follow that of the REINSURED in e v e r y case." Arrowood claims its settlement with Equity was based

o n the risk that the court hearing Equity's claims against it would " m o d i f y " the policies Arrowood issued to be three-year policies r a t h e r than the one-year policy Arrowood claims that it issued. H o w e v e r , Article IV of the Reinsurance Agreement, the "follow t h e fortunes" clause, by its terms applies only to reinsurance " u n d e r this agreement." Consequently, whether or not a court so

" m o d i f i e d " the Equity Policy and whether or not the Equity Policy w a s initially a three-year policy or a one-year policy, it would s t i l l be governed by the same provisions as every other policy r e i n s u r e d under the Reinsurance Agreement. A three-year policy,

w h e t h e r written as such or modified, is still subject to the " b e c o m i n g effective" provision in Article I, which defines the s c o p e of the Reinsurance Agreement. See Bellefonte Reins. Co. v.

A e t n a Cas. & Sur. Co., 903 F.2d 910, 913 (2d Cir. 1990) ( " [ A ] l l o w i n g the `follow the fortunes' clause to override the l i m i t a t i o n on liability[ ]would strip the . . . limitation . . . of . . . meaning; the reinsurer would be obliged merely to reimburse t h e insurer for any . . . funds paid. [This] would be contrary to t h e parties' express agreement and to the settled law of contract interpretation."). In this case, the initial date of the Equity

P o l i c y was December 15, 1999, so it "became effective" on that d a t e , establishing reinsurance coverage until the Equity Policy's

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next anniversary date, December 15, 2000.

Because Westport

t e r m i n a t e d the Reinsurance Agreement on August 18, 2000, before the E q u i t y Policy's anniversary date of December 15, 2000, only the f i r s t year of the Equity Policy would be covered by the Reinsurance A g r e e m e n t after exercise of the Runoff Option. Losses after that

d a t e would not be covered by the Reinsurance Agreement, because the E q u i t y Policy could not have "become effective" under a reinsurance a g r e e m e n t that had been terminated and was no longer "in force." As a result, all losses occurring after the Equity Policy's a n n i v e r s a r y date, December 15, 2000, were not reinsured, and W e s t p o r t is not liable to Arrowood for those losses. Because

W e s t p o r t has not breached its contract with Arrowood, Arrowood is n o t entitled to relief. Therefore, the defendant's motion for

j u d g m e n t on the pleadings should be granted. IV. Conclusion F o r the reasons set forth above, Westport Insurance C o r p o r a t i o n ' s FRCP 12(c) Motion for Judgment on the Pleadings (Doc. N o . 23) is hereby GRANTED. T h e Clerk shall enter judgment in favor of the defendant and c l o s e this case. I t is so ordered. D a t e d this 5th day of January, 2010, at Hartford, Connecticut.

/s/AWT Alvin W. Thompson U n i t e d States District Judge

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