MUNICH REINSURANCE AMERICA, INC. v. TOWER INSURANCE COMPANY OF NEW YORK
Filing
74
OPINION filed. Signed by Judge Freda L. Wolfson on 7/16/2012. (eaj)
*NOT FOR PUBLICATION*
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
____________________________________
:
:
MUNICH REINSURANCE AMERICA,
:
INC.,
:
Plaintiff,
:
:
v.
:
:
TOWER INSURANCE COMPANY OF
:
NEW YORK,
:
:
Defendant.
:
___________________________________ :
Civil Action No.: 09-CV-2598-FLW
OPINION
WOLFSON, United States District Judge:
Plaintiff Munich Reinsurance America, Inc., formerly American Re-Insurance Company,
(“Plaintiff” or “Munich”), and Tower Insurance Co. of New York (“Defendant” and “Tower”), each
present a discrete legal issue in the form of competing motions in limine asking which party bears
the burden of establishing the extent of Tower’s obligation to indemnify Munich for certain lead
claims under the parties’ 1998 retrocessional insurance agreement. Considering the plain language
of the parties’ agreement, along with the applicable canons of insurance contract construction, I
conclude that the burden falls upon Tower.
I.
BACKGROUND
As the parties are familiar with the factual background of this matter, I will recount only
those facts necessary for disposition of the instant motions in limine. Generally, this suit arises out
of multiple reinsurance agreements between Munich and Tower, through which agreements the
parties agreed to indemnify each other against all or a portion of the loss sustained under certain
standard insurance policies. The policy at issue here is a 1988 retrocessional agreement.1
See McNally, Exh. C.
Through the retrocessional agreement, Tower reinsured Munich in connection with Munich’s
role as a reinsurer for Legion Insurance Company—a commercial and residential property insurer.
See id., Exh. F. Legion acted as a “front company” for Munich, which means that Legion’s name
was placed on the front page of certain insurance policies issued, but 100% of the risk underlying
those policies was passed upstream to Munich as Legion’s reinsurer. Fauth Dep. at 15:2 - 16:19.
See generally 2 Ostrager & Newman, Handbook on Insurance Coverage Disputes § 21.04[f] (14th
ed. 2008) (hereinafter “Ostrager”) (describing fronting reinsurance agreements). “In a fronting
arrangement—a well-established and perfectly legal scheme—policies are issued by a state-licensed
insurance company and then immediately reinsured to 100 percent of their face value by the
out-of-state, unlicensed insurer.” Reliance Ins. Co. v. Shriver, Inc., 224 F.3d 641, 643 (7th Cir.
2000). See also Venetsanos v. Zucker, Facher & Zucker, 271 N.J.Super. 459, 463-64 (App. Div.
1994). By virtue of the Munich-Legion agreement, all losses on the policy were payable by Munich
and, consonant with that obligation, Munich took over the administration of all claims presented
under the agreement.
Article II of the retrocessional agreement addresses what claims are covered by the
agreement and the extent to which Tower is obligated to indemnify Munich for claims paid under
the Munich-Legion agreement, which is referred to as the “Underlying Agreement.” As the
following excerpt makes clear, the percentage amount Tower must pay varies depending upon which
1
For a description of retrocessional agreements, see my prior ruling in Munich
Reinsurance America, Inc. v. Tower Ins. Co. of New York, Civil Action No. 09–2598, 2011 WL
6756937, *1 (D.N.J. Dec. 23, 2011).
2
part of Article II applies to a given set of claims. The article, as a whole, provides:
COVER
The limits of cover are provided in three parts, which are set
forth below in the order in which [MUNICH] shall make its
recoveries hereunder.
Part I
[MUNICH] shall cede to TOWER and TOWER shall accept
from [MUNICH] quota share reinsurance participation equal to 100%
of the Aggregate Net Losses paid by [MUNICH] under the
Underlying Agreement with respect to business classified under the
specified categories, risks, hazards, and coverages set forth in
Appendix I of this AGREEMENT.
Part II
TOWER shall be liable for 100% of that amount of the
Aggregate Net Losses paid by [MUNICH] under the Underlying
Agreement in excess of the following amounts, after deducting
recoveries under Part I of this Article:
Casualty
Property
$1,000,000 per policy, per occurrence
$1,000,000 per risk, per occurrence
Part III
[MUNICH] shall cede to TOWER and TOWER shall accept from
[MUNICH] a ten percent (10%) quota share participation in the
Aggregate Net Losses paid by [MUNICH] under the Underlying
Agreement, after deducting any amounts recovered under Parts I and
II of this Article.
McNally Cert., Exh. C at 2.
The Appendix I referred to in Part I of Article II sets forth the categories of claims that are
covered at a 100% participation rate, including title insurance claims, advertising injury claims, and,
relevant here, lead claims. According to paragraph 4 of Appendix I,
4.
All claims arising from lead [are covered] unless
3
(a) such claims arise under policies written on behalf of the
LEGION by the Tower Risk Management Corporation2 under
the LEGION’s Preferred Habitational Insurance Program, in
accordance with the underwriting guidelines for said Program
where said underwriting guidelines have been agreed to by
[MUNICH]; or
(b) such claims arise under policies which have been
individually submitted by TOWER to [MUNICH] for
inclusion hereunder and specially accepted by [MUNICH].
Id. at Appendix I, p.1. So, for those claims that do not fit within the criteria set forth in paragraph
4(a) or (b), the Part I 100% quota share rate applies. But, for those claims do fit within the
paragraph 4(a) or (b) criteria, the Part I 100% quota share rate does not apply.
As noted, the parties bring their dispute before this Court by way of motions in limine. That
is, each party simultaneously filed a moving brief in support of its own motion and, thereafter, filed
an opposition brief responding to the other’s party moving papers. The parties agreed to this method
of presenting their dispute in the Final Pretrial Conference held before the Honorable Lois
Goodman, U.S.M.J., on May 30, 2012. As memorialized in the Final Pretrial Order, the parties
specifically agreed that the motions would be filed in an expedited fashion with a return date of July
16, 2012. Final Pretrial Order at 1. The remaining motions in limine are not due to be filed until
August. Apparently, the reason for the expedited motion schedule is that both parties believed that
an early ruling on the burden of proof issue would be helpful to them. Thus, I have expedited my
review of their arguments in order to issue an Opinion as quickly as possible.
2
I need not explain the role of Tower Risk Management Corporation, as it does not
affect my in limine ruling, but suffice it to say that this corporation is separate from Tower, and it
appears to have served as an intermediary for the Munich-Legion arrangement. See Final Pretrial
Order at 14; see generally Ostrager, supra at §15.04[c] (describing reinsurance intermediaries).
4
II.
DISCUSSION
Interpretation of an insurance contract or policy is a matter of law for the Court. Sealed Air
Corp. v. Royal Indemn. Co., 404 N.J.Super. 363, 375 (App.Div.), certif. denied, 196 N.J. 601
(2008).3 Generally, “[i]nsurance policies are construed in accordance with principles that govern
the interpretation of contracts; the parties’ agreement ‘will be enforced as written when its terms are
clear in order that the expectations of the parties will be fulfilled.’” Memorial Properties, LLC v.
Zurich American Ins. Co., --- N.J. ----, 2012 WL 2428196, *6 (2012) (quoting Flomerfelt v.
Cardiello, 202 N.J. 432, 441, 997 A.2d 991 (2010)). In construing the terms of a policy, courts are
to give the terms their plain and ordinary meaning. Id. It is only where a contract’s language is
ambiguous that a court may rely upon extrinsic or parol evidence to determine the intent of the
parties; where the language of the contract is clear, extrinsic evidence may not be considered.
Chubb Custom Ins. Co. v. Prudential Ins. Co., 195 N.J. 231, 238 (2008) (“If the language is clear,
that is the end of the inquiry.”)
While these general canons of construction may have been developed in the context of direct
insurance contracts, they are equally applicable to reinsurance and retrocessional agreements.
Ostrager, supra at §15.03[b]. That said, “[r]einsurance [agreements] vary considerably in their
language and terms of coverage.” Id. Thus, while my analysis will be guided by the aforesaid
general principles of insurance law, my ultimate determination must rest on the plain language of
the parties’ retrocessional agreement.
3
Munich relies upon both New Jersey and New York law in its briefing, noting that
Tower has suggested that New York law governs the interpretation of the retrocessional agreements.
However, in its moving and opposition papers, Tower cites solely to New Jersey law. Accordingly,
as Tower has not argued for the application of New York law in its papers, the Court will assume
for purposes of this motion that New Jersey law applies.
5
It is helpful to clarify at the outset what the parties do not dispute. The parties do not dispute
that Tower is obligated to pay Munich on the Part I lead claims, and that the quota share reinsurance
participation on those claims is typically 100% . They further agree that the only instances in which
Tower is not obligated to pay 100% is where either of the criteria in Appendix I, paragraph 4 apply.
What the parties’ dispute centers upon is which party bears the burden of demonstrating that
either criterion applies. Munich argues that Tower bears the burden of establishing that either
criterion applies by analogizing Tower to an insurer seeking the benefit of a policy exclusion in a
direct insurance policy. “Exclusionary clauses are . . . typically construed narrowly with the onus
on the insurer to bring the case within the exclusion.” Memorial Properties, 2012 WL 2428196 at
*7. Tower advocates an entirely different approach, arguing that the retrocessional agreement is,
at its core, a 10% quota share participation agreement and that, consequently, the lead clause itself
should be treated as an exclusionary clause. Under this view, Munich would bear the burden of
proof as it seeks the benefit of the 100% exclusion.
Tower may be correct that many claims within the scope of the retrocessional agreement
might be paid at a 10% rate. The agreement provides that “[t]he limits of cover are provided in three
parts, which are set forth below in the order in which [MUNICH] shall make its recoveries
hereunder.” Immediately thereafter, Part I sets forth the lead and other specified claims to which
the 100% quota share reinsurance participation rule applies. Part II of the agreement generally
provides that the 100% quota share reinsurance participation rule also applies to large casualty or
property claims exceeding $1,000,000 per policy and per occurrence. Progressing forward, Part III
of the agreement contemplates 10% quota share reinsurance participation for what remains “after
deducting any amounts recovered under Parts I and II ....” McNally Cert., Exh. C at 2. Hence,
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depending on how many claims fall within the bounds of Parts I and II, there could be a significant
amount of payments made under Part’s III 10% rule.
Whatever the rate applicable to the bulk of Munich’s claims under the agreement, all lead
claims clearly fall under Part I unless one of the exceptions found in paragraph 4 of the Appendix
applies. Because paragraph 4 is a definitional provision that specifically designates lead claims as
within the category of claims arising under Part I, I reject Tower’s invitation to treat this lead
provision as some sort of exclusion. Read together, the plain language of both Part I of Article II
and paragraph 4 of Appendix I makes clear that the parties intended for Tower to accept 100% quota
share reinsurance participation from Munich on “[a]ll claims arising from lead, unless” the two
criteria listed in paragraph 4 apply. Id. at Appendix I, p.1. Thus, as Munich argues, the only
provisions in the agreement with an exclusionary effect are the criteria found in paragraph 4(a) and
4(b).
Taking issue with this conception of the policy, Tower further argues in its opposition papers
that paragraph 4(a) and (b) cannot be treated as exclusions because they are found within the
“coverage” section of the agreement. Tower argues that “[t]he term ‘coverage’ . . . connotes a
distinct part of an insurance policy providing the policyholder with insurance as to a defined risk
or risks coming within its terms.” Delcampo v. New Jersey Auto. Full Ins. Underwriting Ass'n, 266
N.J.Super. 687, 700 (Law Div. 1993). Relying on this definition, perhaps inaptly so because this
definition refers to statutory rather than policy language, see id. at 700-01, Tower suggests that Part
I of the agreement and paragraph 4(a) and (b) together comprise a coverage provision and that all
clauses within a coverage provision must be proven by the insured.
The New Jersey Supreme Court has squarely rejected this sort of formalistic approach to
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interpreting insurance policy language. In Carter-Wallace, Inc. v. Admiral Ins. Co., 154 N.J. 312
(1998), the Court explained:
[E]xclusions do not shed their essential character when they are
moved from one section of a policy and are crafted as part of that
policy’s grant of coverage. We therefore decline to adopt a rule of
law governing burden of proof the application of which would
depend merely on the location of a provision in an insurance contract.
Id. at 332.
In reaching this conclusion, the Court made clear that courts are to focus on “the effect or
character of [a] phrase,” and where the language behaves like “an exclusion of the coverage grant
by the very operation of its terms,” the insurer should bear the burden of proving the phrase’s
application. Id. at 331 (quoting Clemco Indus. v. Commercial Union Ins. Co., 665 F.Supp. 816, 820
(N.D.Cal. 1987), aff'd 848 F.2d 1242 (9th Cir. 1988)).4 Indeed, “[i]f an insurer were able to
distribute provisions limiting liability throughout a policy, with the expectation that its shouldering
of the burden of proof would be limited to the single section entitled, ‘Exclusions,’ this would create
considerable incentive to obfuscation and subterfuge.” Andover Newton Theological School, Inc.
4
For example, in First Trenton Indem. Co. v. River Imaging, P.A., 2009 WL 2431649
(App. Div. Aug. 11, 2009), the Appellate Division relied upon Carter-Wallace in the following
passage addressing a provision with exclusionary effect in a Zurich policy.
General Condition V.C. is in form a coverage provision rather than
an exclusion. However, Zurich invokes this provision as an exclusion
from coverage for any claims arising out of the ‘same wrongful act’
or ‘interrelated wrong act’ as a claim originating in a prior policy
period. Therefore, Condition V.C., like Endorsement 8 and Exclusion
No. IV.A.1, must be treated as an exclusion with respect to which
Zurich has the burden of proof.”
Id. at *4 (citing Carter-Wallace, supra at 332) (emphasis added). While this non-precedential New
Jersey Appellate Court decision is not binding, I consider it persuasive authority for the proposition
that New Jersey courts continue to view Carter-Wallace as binding authority.
8
v. Continental Cas. Co., 964 F.2d 1237 (1st Cir. 1992) cited with approval in Carter-Wallace, 154
N.J. at 331.
Reading the plain language of the parties’ retrocessional agreement with New Jersey’s
practical approach to interpreting language with an exclusionary effect, I conclude that the burden
of proving that the paragraph 4(a) and (b) criteria apply falls upon Tower in its role as reinsurer of
the Munich-Legion agreement. In light of my conclusion that the plain language of the agreement
is clear, I may not consider the extrinsic evidence cited by Tower in its opposition brief. Nor need
I consider Tower’s equitable arguments for why the burden of proof should shift to Munich. As
Tower acknowledges in its papers, I cannot rewrite the parties’ agreement but must enforce its plain
terms. See Tower Opp. at 4 (citing CSFB 2001-CP-4 Princeton Park Corporate Center, LLC v. SB
Rental I, LLC, 410 N.J.Super. 114, 120 (App. Div. 2009)). See also Kampf v. Franklin Life Ins. Co.,
33 N.J. 36, 43 (1960) (“[I]t is the function of a court to enforce it as written and not to make a better
contract for either of the parties”).
Lastly, Tower somewhat confusingly argues that “because the shifting of the burden of proof
to Tower requires the weighing of evidence, it is inappropriate on a motion in limine, and must await
trial.” Tower Opp. at 8. This argument is confusing because, from what I understand of the parties’
discussions with the Magistrate Judge, and in seeing that Tower itself filed papers in support of one
of the instant motions in limine, it appears that Tower not only agreed to proceeding by way of
motion in limine, but went so far as to request that the Court consider this matter in an expedited
fashion. Now, for Tower to argue that the motion in limine vehicle is inappropriate is perplexing
9
if not disingenuous.5 More importantly, as noted, the interpretation of an insurance contract or
policy is a matter of law for the court to decide. Sealed Air Corp., 404 N.J.Super. at 375. And,
because I have concluded that the plain language of the agreement is unambiguous, there is no
“weighing of evidence” that need take place here. Therefore, I disagree with Tower that the motion
in limine vehicle is inappropriate in this case.
III.
CONCLUSION
For the foregoing reasons, Plaintiff’s motion in limine requesting that the Court rule that
Tower bears the burden of proof on the legal issue set forth herein is GRANTED. Defendant’s
motion in limine is DENIED.
DATED:
July 16, 2012
/s/ Freda L. Wolfson
United States District Judge
5
I appreciate that Tower apparently obtained new counsel following the Final Pretrial
Conference. However, rather than seeing this as a justification for Tower’s contradictory positions
before this Court, I presume that new counsel sufficiently apprised itself and was aware of the prior
counsel’s representations to the Magistrate Judge as well as the terms of the Final Pretrial Order.
Certainly, new counsel is bound by the representation of prior counsel.
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