Utica Mutual Insurance Company v. Munich Reinsurance America, Inc.
Filing
454
ORDER that Utica's request for entry of declaratory judgment is DENIED and that the Clerk is directed to enter judgment in favor of Munich in Utica I, 6:12-cv-196 and that Munich's request for entry of declaratory judgment is DENIED and that the Clerk is directed to enter judgment in favor of Utica in Utica II, 6:13-cv-743. Signed by Judge Brenda K. Sannes on 3/29/2019. (rjb, )
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF NEW YORK
UTICA MUTUAL INSURANCE COMPANY,
Plaintiff,
6:12-cv-00196 (BKS/ATB)
v.
MUNICH REINSURANCE AMERICA, INC.,
Defendant.
MUNICH REINSURANCE AMERICA, INC.,
Plaintiff,
6:13-cv-00743(BKS/ATB)
v.
UTICA MUTUAL INSURANCE COMPANY,
Defendant.
Appearances:
For Utica Mutual Insurance Company:
Syed S. Ahmad
Patrick M. McDermott
Latosha M. Ellis
Hunton & Williams LLP
2200 Pennsylvania Avenue NW
Washington, DC 20037
Mary Beth Forshaw
Christopher G. Lee
Simpson, Thacher & Bartlett LLP
425 Lexington Avenue
New York, NY 10017
For Munich Reinsurance America, Inc.:
Bruce M. Friedman
Crystal D. Monahan
Jason B. Eson
Rubin, Fiorella & Friedman LLP
630 Third Avenue, 3rd Floor
New York, NY 10017
Hon. Brenda K. Sannes, United States District Judge:
MEMORANDUM-DECISION AND ORDER
I.
INTRODUCTION
These related diversity breach-of-contract actions arise from Utica Mutual Insurance
Company’s (“Utica”) billings to Munich Reinsurance America, Inc. 1 (“Munich”) under the terms
of the facultative reinsurance certificates Munich issued to Utica in 1973 (6:12-cv-196) (“Utica
I”) and 1977 (6:13-cv-743) (“Utica II”). 2 In Utica I, Utica claims that Munich violated the 1973
facultative reinsurance certificate (“1973 Certificate”) by failing to pay $2,760,533.96 in
expenses. In Utica II, Munich claims that Utica violated the terms of the 1977 facultative
reinsurance certificate (“1977 Certificate”) by billing it for $789,813.47 in expenses; Munich
paid that expense billing and now seeks reimbursement. 3
Munich has paid the $5 million and $1 million liability limits on the Certificates. At issue
here is Munich’s liability for additional loss expenses—that is, whether Munich is obligated to
pay loss expenses incurred in investigating, adjusting, and litigating claims supplemental to the
liability limits. The resolution of this issue hinges on the interpretation of certificates issued and
umbrella policies reinsured in the 1970s, when neither party likely anticipated the kind of
catastrophic asbestos claims faced by Utica in this case. 4
1
Munich was formerly known as American Re-Insurance Company. (Dkt. No. 360, Section IV.A.2).
2
For convenience, unless otherwise specified, docket citations are to the filings in 6:12-cv-196.
Utica originally sought $3,283,304.55 but has reduced the amount it seeks under the 1973 Certificate to
$2,760,533.96. (Dkt. No. 311, ¶ 20).
3
The facts giving rise to the present actions have led to a number of other actions in this Circuit between Utica and
its reinsurers. See, e.g., Utica Mut. Ins. Co. v. Clearwater Ins. Co., 906 F.3d 12 (2d Cir. 2018); Utica Mut. Ins. Co. v.
Fireman’s Fund Ins. Co., 287 F. Supp. 3d 163 (N.D.N.Y. 2018), appeal docketed, No. 18-828 (2d Cir. Mar. 27,
2018); R & Q Reins. Co. v. Utica Mut. Ins. Co., 18 F. Supp. 3d 389 (S.D.N.Y. 2014).
4
2
In July 2018, the Court held a ten-day bench trial in Syracuse, New York, at which ten
fact witnesses and five expert witnesses testified. Both parties have submitted proposed findings
of fact and conclusions of law. (Dkt. Nos. 429, 430, 431, 431-1, 440–442, 447, 449, 449-1, 450,
450-1). The Court has carefully considered the trial record, the credibility of the witnesses at
trial, and the submissions of the parties. In accordance with Rule 52(a) of the Federal Rules of
Civil Procedure, the Court makes the following findings of fact and conclusions of law.
For the reasons set forth below, the Court finds that, with respect to the 1973 Certificate,
Munich is not liable for any additional monies to Utica. Even assuming that Munich’s liability
under the 1977 Certificate is limited to the $1 million policy limit, the Court finds that the
voluntary payment doctrine bars Munich from recovering the loss and declaratory judgment
expenses it has already paid Utica. The Court therefore finds that Munich is entitled to judgment
in Utica I, and that Utica is entitled to judgment in Utica II. 5
II.
FINDINGS OF FACT 6
A.
The Primary Policies, Umbrella Policies, and Facultative Reinsurance
Certificates
Utica, an insurance company, issued primary general liability insurance policies (the
“primary policies”) to Goulds Pumps, Inc. from 1955 through 1986. (Dkt. No. 360, Section
IV.B.4). Utica also issued umbrella policies to Goulds from 1964 to 1975 and 1977 to 1982.
(Dkt. No. 360, Section IV.B.7). 7 The primary policies, combined, provided $12,300,000 in
liability limits and were expense-supplemental, allowing for expenses in addition to limits. (Ex.
In light of the Court’s rulings interpreting the reinsurance contracts, the Court has not considered the myriad other
arguments raised by the parties.
5
While the Court has endeavored to include all findings of fact in this section, there are additional findings of fact in
the Conclusions of Law. (See infra Section III).
6
The Court cites to the consecutively paginated trial transcripts, (Dkt. Nos. 408–426), as “T.,” Utica’s trial exhibits
as “Ex. P-_,” and Munich’s trial exhibits as “Ex. D-_.” When citing to exhibits admitted into evidence at trial, the
Court cites to the Bates numbering assigned to each document where possible.
7
3
D-346-A, at R-0062463). The umbrella policies, combined, provided $255,000,000 in liability
limits. 8 (Ex. D-346-A, at R-0062463). Utica purchased facultative reinsurance certificates 9 from
Munich on several of its umbrella policies.
At issue in this action are the 1973 Umbrella Policy (“1973 Umbrella”), which provided
$25 million in liability limits, the 1977 Umbrella Policy (“1977 Umbrella”), which provided $3
million in liability limits, and the facultative reinsurance certificates (the 1973 and 1977
Certificates) that Utica purchased from Munich on those policies. (Dkt. No. 360, Sections
IV.A.3, C.10 and 13). 10 The dispute centers on whether the 1973 Umbrella, as allegedly
modified by a midterm defense endorsement (“1973 defense endorsement”), and the 1977
Umbrella required Utica to pay Goulds’ defense expenses supplemental to losses. The 1973
defense endorsement, which Utica asserts changed the 1973 Umbrella from expense-inclusive to
expense-supplemental, was the subject of contention: the parties dispute whether Utica delivered
the endorsement, upon issuance, to Munich; key Utica participants were unaware of the
endorsement during its dealings with Goulds; and Utica, accordingly, took inconsistent positions,
8
As the Second Circuit has explained:
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).
Clearwater Ins. Co., 906 F.3d at 15.
Generally speaking, reinsurance is insurance for insurance companies. (Dkt. No. 360, Section IV.A.3). In that
relationship, Utica is known as the reinsured or the cedent, and Munich is known as the reinsurer. (Dkt. No. 360,
Section IV.A.3).
9
Munich was one of several reinsurers of Utica’s umbrella policies with Goulds. (Ex. D-292, T. 1565–67). Munich
assumed $5 million excess of the $5 million umbrella layer in the 1973 Certificate and $1 million excess of the $2
million umbrella layer in the 1977 Certificate. (Exs. D-4, D-90).
10
4
before and after its settlement with Goulds, on whether Munich’s liability under the 1973
Certificate is expense-supplemental or expense-inclusive.
Alternatively, Utica asserts that, even if the Court disagrees with its interpretation of the
Umbrella Policies, the 1973 and 1977 Certificates obligate Munich to reimburse Utica for
defense expenses, including declaratory judgment expenses, on an expense-supplemental basis.
B.
Asbestos Claims Against Goulds
In the early 1990s, Goulds became the subject of claims by individuals alleging bodily
injury as a result of exposure to asbestos in a Goulds product. (T. 1156; Dkt. No. 450-1, ¶ 4).
Utica was defending and settling those claims under the primary policies. (T. 1158–60). Because
the cost was minimal, Utica was not “really tracking [the claims] to the policies” but would “load
them all in one [policy] year” for “administrative purposes.” (T. 1160–61). It likewise posted “a
nominal reserve for loss and a nominal reserve for expense.” (T. 1160).
In the late 1990s, however, because the number of asbestos claims had increased, (T.
1164–65), and “breached the aggregate limit of the [single] policy” to which Utica had been
allocating claims, Utica began allocating the loss “to the appropriate policy year.” (T. 1161–62).
For example, if a claimant alleged asbestos exposure from 1975 to 1985, and Utica paid $1,000
for the claimant’s loss, Utica would “allocate $100 to the ten policy year files.” (T. 1162). This
enabled Utica to “accurately spread[] the loss to the periods that were impacted.” (T. 1162–63).
Utica “allocate[d] expense evenly across the years in the same method.” (Ex. P-8, at A0003509). Utica set up separate policy year files for each primary and each umbrella policy so
that, if the amounts Utica set aside in reserve for each claim “went over the primaries,” Utica
would then set reserves for “the umbrella for the corresponding year.” (T. 1170).
5
In June 2002, Utica deemed the 1975, 1976, and 1978 primary policies exhausted. (Dkt.
No. 450-1, ¶ 6; Ex. P-336). In October 2002, Utica advised Goulds 11 that these policies had
exhausted and that there was no evidence of an umbrella policy above the primary policy for the
July 2, 1976 to December 31, 1976 time period and requested reimbursement for the indemnity
and expenses it had paid on Goulds’ behalf for that time period. (Ex. P-336, at R-0029305; Ex.
P-8, at A-0003510). 12
Utica determined that Goulds also lacked umbrella coverage over its 1959 to 1963
primary policies and began “to allocate monies” it had paid into these “orphan share periods”—
policy years “above the primaries where Goulds did not have an umbrella policy.” 13 (T. 1175). In
February 2003, Utica notified Goulds that “[t]here was no umbrella coverage purchased from
Utica prior to 1964” and that it would “be billing Goulds” for the orphan share periods. (Ex. P-8,
at A-0003509–10). Utica further advised that: (i) the 1964 to 1976 umbrella policies contained
“ultimate net loss provisions” (“UNL” provisions), meaning that they “included the cost of
expense within the available limit of umbrella coverage” (expense-inclusive) and that “future
payments made for expense associated with defending these claims will erode the policy limits
for these policies”; and (ii) the 1977 to 1987 umbrella policies “had a defense provision in
addition to policy limits” (expense-supplemental), meaning that “[t]he proportionate allocation
of the defense costs allocated to those policies would not erode.” (Ex. P-8, at A-0003510).
At this point, ITT Industries had purchased Goulds. (T. 1166–67). The Court continues to use Goulds for
convenience.
11
12
The 1973 Primary Policy (“1973 Primary”), according to Utica’s records, was exhausted on December 27, 2002.
(T. 409–10). At that point, Utica started allocating payments to the 1973 Umbrella. (T. 409–410; Ex. P-288-39, at R0080514).
13
Munich contends orphan shares also include other amounts Utica paid that were “the responsibility of Goulds or
its other insurers.” (Dkt. No. 450-1, ¶ 7 (Response); T. 78).
6
C.
California and New York Declaratory Judgment Actions
In March 2003, Utica learned that Goulds had filed a lawsuit in California seeking,
among other things, declaratory judgment against a number of its insurers, including Utica. (Ex.
P-57, at F-0307918; T. 1192–93; Ex. P-237). The issues included choice of law (New York or
California), the orphan share allocation, and whether Utica was entitled to control the defense. 14
(T. 1194; Dkt. No. 450-1, ¶ 16). By April 2003, Utica was aware that Goulds was also claiming
that certain primary policies (those issued in 1978, 1979, 1980, and 1982) contained a limit of
liability for each occurrence but no aggregate limit. (Ex. D-279, at D-0014772). Utica believed
the absence of aggregates from the 1978–82 policies was a “mere ‘scrivener’s error’”—“a simple
oversight in policy processing” that neither it nor Goulds “intended.” (Ex. D-76, at R-0040027).
It recognized, however, that if the court were to find that California law applied 15 and that one or
more of the primary policies had no aggregate limit, under the “all sums approach” Goulds could
select a primary policy without an aggregate limit to apply to all asbestos claims. (Ex. D-76, at
R-0040027). Utica further recognized that this would “effectively create an unlimited supply of
coverage” under the primary policies, which would never exhaust or trigger the umbrella layer of
coverage, 16 and “eliminate reinsurance recovery for all of these claims.” (Ex. D-76, at R-
14
Control of defense in connection with the Goulds claims was important to Utica. (T. 1174–75). Having control of
the defense enabled Utica to make decisions concerning litigation strategy, settlement, and motion practice. (T.
1173).
The choice-of-law issue complicated the aggregate-limit issue. New York courts follow a “pro rata” approach that
allows the insurer to spread the loss (and orphan shares) across the applicable policies. (Ex. D-76, at R-0040027; T.
405). In California, by contrast, courts follow “the all sums approach,” which does not allow allocation of orphan
shares and gives the insured the ability to select which policy applies to the claims in question. (Ex. D-76, at R0040027).
15
16
At that time, Utica had deemed most, if not all, primary policies exhausted and was “in the umbrella layers” and
“defending some or all of the claims in the umbrella.” (T. 1195).
7
0040027). With over 80,000 asbestos claims at that point, such a result would be devastating for
Utica. (T. 403; Ex. D-598, at D-0014157–58). 17
In October 2003, Utica filed a declaratory judgment action against Goulds in New York
because it believed New York was “the more appropriate jurisdiction” “for a lawsuit between a
New York insurer, [and] New York based insured, Goulds Pumps,” involving contracts that
“were issued in New York.” (T. 1194). Utica sought a declaration that: (i) it had “exhausted its
obligations under the Primary Utica Policies;” and (ii) it had no duty to pay defense costs or
indemnity attributable to periods of time for which Goulds had no insurance (the orphan share
issue), Goulds was responsible for such amounts, and Goulds must reimburse Utica for amounts
it paid “due to Gould Pumps’ failure to obtain or pursue insurance.” 18 (Ex. P-238, at R-0075798–
99).
D.
Utica’s Negotiations and Settlement with Goulds
As part of the litigation effort, Utica attempted to identify all policy documents it had for
the Goulds policies. (T. 425). Utica pieced the policies together from microfiche documents,
archived documents, documents Goulds had kept, and documents from the brokers that placed
the coverage for Goulds with Utica. (T. 425–27). In January 2004, Utica sent Goulds more than
2,500 pages of underwriting material regarding the primary and umbrella policies. (Exs. D-281;
D-584). Among these documents was the 1973 defense endorsement purporting to modify the
1973 Umbrella mid-policy term from an expense-inclusive policy to an expense-supplemental
policy. (Ex. D-584, at UMU 00133–34).
17
These claims involved exposure to asbestos over a number of different years. (T. 405). Utica was “paying for a
hundred percent of the defense” of those claims and paying “a hundred percent of the settlement” of those claims.
(T. 403–04). Utica was “the biggest insurer of Goulds.” (T. 405).
18
Utica also sought a declaration that it “was only obligated to pay for injuries that were ‘caused by accident.’” (Ex.
P-238, at R-0075799). This argument is not at issue in this case.
8
On February 9, 2004, Goulds’ coverage counsel, Michael Horton, wrote a letter to
Utica’s coverage counsel, Ron Robinson, concerning coverage issues. (Ex. D-61, at R-0029475).
Horton wrote that one of the “more pertinent issues” concerning Goulds’ approach to defense
and indemnity costs was the “supplemental duty to defend under some or all of the umbrella
policies by way of endorsement.” (Ex. D-61, at R-0029475). Horton noted that Utica had
“acknowledged” that its 1977 to 1985 umbrella policies “contain a supplemental duty to defend,”
but that Goulds believed “that additional Umbrella Policies, issued prior to January 1, 1977, may
also contain a supplemental defense obligation.” (Ex. D-61, at R-0029478). In a February 20,
2004 letter to Horton, Robinson requested “these endorsements and policies and any other
documentation that supports your positions.” (Ex. D-263, at D-0025871).
Robinson wrote Kristen Martin, a Utica staff attorney, on April 4, 2004, advising her that
he had spoken with Horton about the “alleged [pre-1977] Utica policy endorsement” that Goulds
claimed turned Utica’s “ultimate net loss (wasting limit) umbrella policies into supplementary
defense policies,” but that Horton “appeared to be willing to waive this argument after he
consults with his client.” (Ex. D-14, at R-0028405, -08). There is no evidence that Goulds sent
the defense endorsement to Utica; the virtual policy folio that Utica’s coverage counsel
assembled in 2005 for the 1973 Umbrella, however, contains a copy. (Dkt. No. 449-1, ¶ 7.b; Ex.
P-100, at R-0000164–65).
As noted above, Utica believed it was obligated under the umbrella policies to defend the
Goulds claims and was paying for “a hundred percent of the defense.” (T. 403). Utica had
determined that the umbrella policies issued prior to 1977 were expense-inclusive. (Dkt. No.
449-1, ¶ 4). The 1973 Umbrella, for example, defined the “Ultimate Net Loss” for which Utica
was liable as:
9
the total sum which the Insured, or any company as his insurer,
becomes obligated to pay by reason of personal injury or property
damage claims, either through adjudication or compromise, and all
sums paid for expense, including premiums for attachment or appeal
bonds, in respect to litigation, settlement, adjustment and
investigation of claims and suits which are paid as a consequence of
any occurrence covered hereunder, excluding only the salaries of
employees and office expenses of the named Insured or of any
underlying insurer or any other expenses which are recoverable
through any other valid and collectible insurance.
(Ex. P-100, R-0000152) (emphasis added). In contrast, Utica had determined that it was
obligated to provide a defense and pay defense costs supplemental under the umbrella policies
issued in 1977 and after, based on its interpretation of the “occurrence not covered by language”
in the supplemental defense provisions of those policies. 19 (Dkt. No. 449-1, ¶ 4 (Response); T.
441). This is the same language at issue in the 1973 defense endorsement. 20
At trial, Martin explained that, when Utica “looked at the ‘not covered by’ language,
policy exhaustion to us equaled not covered by, so we believed those policies owed the defense.”
(T. 441). Bernard Turi, a Utica staff attorney and vice president who was involved in the Goulds
claims, testified that he also understood, based on his training at Utica, that Utica’s umbrella
policies provided a defense following exhaustion of the primary policy, and that Utica always
19
The provision in the 1977 Umbrella states:
DEFENSE - DEFENSE COSTS - INVESTIGATION - ASSISTANCE AND COOPERATION
With respect to any occurrence not covered by the policies listed in the schedule of underlying
insurance or any other insurance collectible by the insured, but covered by the terms and conditions
of this policy (including damages wholly or partly within the amount of the retained limit), the
company shall:
(a) defend any suit against the insured alleging personal injury, property damage, or advertising
offense . . . .
(Ex. P-92, at R-0007676).
The parties agree that the language of the 1973 and 1977 Umbrellas is sufficiently similar for purposes of
interpretation. (Dkt. No. 430, at 10–16; Dkt. No. 431, at 21–27). The 1973 defense endorsement also eliminated the
defense-inclusive ultimate net loss provision, and replaced it with a defense-supplemental ultimate loss provision.
(Ex. P-100, R-0000165).
20
10
“handled” its umbrella policies in this manner and viewed them as owing a defense. (T. 1187–
88). John Griffin, who worked at Utica as an underwriter and manager from 1974 to 2015, (Dkt.
No. 350-12, at 4), testified that he understood from his training as an underwriter and experience
with umbrella policies that the umbrella policies Utica issued to Goulds obligated Utica to
defend after the primary policies exhausted. (Dkt. No. 350-12, at 161–62). Griffin further stated
that he understood throughout his career that Utica’s umbrella policies obligated it to provide a
defense. (Dkt. No. 350-12, at 164–65). In addition, Utica believed that, if it disclaimed the
defense obligation under the umbrella policies, the insured (Goulds) would control the defense.
(T. 1189–90).
Utica conducted no research in making this determination and twice declined offers from
coverage counsel to research its obligation to provide a defense under the “occurrence not
covered by language.” (T. 1540 (William Robinson, former Utica coverage counsel, discussed
the “occurrence not covered by” provision with Utica in 2003 but was “told that the decision had
been made and there was no need . . . to research or analyze it.”); T.1651–52 (William Savino,
former Utica coverage counsel, testified that in December 2005 he noted the “not covered by
language” in the umbrella policies issued after 1977 and raised it with Utica as a potential issue,
but “learned that” Utica had already “analyzed the language and had concluded that their
provision of the defense to their policyholder was appropriate.”)). Turi explained that Utica
would not “instruct counsel to do research on something we had already decided and
understood.” (T. 1541).
None of the Utica employees who opined on the meaning of “occurrence not covered by”
provided any further explanation of their interpretation of “occurrence not covered by” within
the context of the umbrella policies, including the provisions concerning retained limits. The
11
Court notes that one of Utica’s experts, Paul Feldsher, who testified in support Utica’s
interpretation of “occurrence not covered by,” did address the retained limit provision. Feldsher
testified that, under his reading of the policy, to access indemnity under the 1973 Umbrella (and
supplemental defense expense coverage), Goulds had to pay a $10,000 self-insured retention for
each claim. (T. 868, 930, 945-947, 961, 1028). There is no evidence that Utica asked Goulds to
pay, or believed Goulds was required to pay, a self-insured retention on any claim under the
1973 Umbrella. (T. 1535–36).
In December 2005, Utica and Goulds engaged in mediation. (Dkt. No. 450-1, ¶ 23). By
then, Utica had paid approximately $12 million in indemnity and $8.8 million in expense under
the primary policies, all of which it had deemed exhausted (a point Goulds disputed based on its
aggregate-limits argument) and $21.7 million in indemnity and $14.4 million in expense under
the umbrella policies. 21 (T. 416; Ex. D-346-A, at R-0062463). It had allocated $25,241,110.80 as
the orphan share. (Ex. D-344, at F-0120699). In total, by the end of December 2005, Utica had
paid more than $80 million on Goulds’ behalf. (T. 416; Ex. D-344, at F-020699). On December
14, 2005, the parties reached a tentative agreement and executed a term sheet specifying that:
there was $325 million in “[a]vailable remaining insurance from Utica”; “defense and indemnity
will erode ‘available insurance’”; “[p]ast expenditures/claims against” Goulds, i.e., orphan
shares, were “waived”; and, with one exception as to a third party, “all primary coverage is
deemed exhausted and all such policies shave [sic] aggregate limits.” (Ex. D-272, at R-0065724).
More specifically, Utica had, as of December 2005, allocated $300,000 in indemnity and $209,411.68 in expense
to the 1973 primary and $1,329,537.37 in indemnity and $873,529.83 in expense to the 1973 Umbrella. (Ex. D-346A, at R-0062463; T. 417). It had allocated $500,000 in indemnity and $327,166.75 in expenses to the 1977 primary
policy (“1977 Primary”) and $1,216,781.98 in indemnity and $755,774.77 in expenses to the 1977 Umbrella. (Ex.
D-346-A, at R-0062463; T. 417). These amounts do not reflect orphan shares. (T. 417).
21
12
After executing the term sheet, the parties worked toward a final settlement and began
circulating a settlement agreement. (See Exs. D-34, D-81). In correspondence, Goulds indicated
that it “would be willing to set aside” its claims that, among other things, Utica “[i]ssued . . .
primary policies that have no aggregate limits” and “seven umbrella policies that provide for an
unlimited supplemental defense” 22 and that “[a]ll of these agreements and concessions were
made by [Goulds] in exchange for the simplicity of Utica making $325,000,000 in limits
available.” (Ex. D-81, at R-0013557–58). According to a draft of the settlement agreement,
Goulds proposed the following provision: “The parties stipulate and agree that as of the Effective
Date, the limits of liability of the Goulds Primary Policies have been exhausted for Product
Liability Claims including (without limitation) the Goulds asbestos suits.” (Ex. D-34, at R0037160). Next to that provision, Turi wrote “i.e. the policies all have agg,” meaning aggregates.
(D-34, at R-0037160; T. 1245). Turi “wanted to make it very clear that the policies weren’t just
exhausted but that they had aggregate limits.” (T. 1245). Turi also circled the word “stipulate”
and wrote “–delete.” (Ex. D-34, at R-0037160). Turi proposed deleting “stipulate” because he
was concerned it would imply that Utica had “bargained for” the exhaustion of the primary
policies and aggregate limits, and he “didn’t want that” because Utica “had aggregate limits” and
Goulds “agree[d] that we did and always had, and there was documentation to support, so [he]
felt like stipulation was almost cheapening the issue.” (T. 1245–46). Although the settlement
agreement indicates that the “primary policies have . . . an aggregate limit of liability,” (Ex. 60,
at F-0058717), the Court does not find credible Turi’s testimony that the aggregate limits were
not “bargained for” as part of the settlement. Not only was his testimony inconsistent on this
Martin explained that there were six umbrella policies—1977 to 1982—that were supplemental and that Goulds
claimed that “there was an endorsement on the pre-1977 policies” that changed them from UNL to supplemental. (T.
451).
22
13
point, (T. 1417 (Turi testifying that Goulds’ agreement to aggregate limits had value to Utica)),
but other evidence in the record demonstrates that a finding that any of the primary policies
lacked aggregate limits would have been devastating for Utica, (Ex. D-598, at D-0014157–58). 23
On February 22, 2007, Goulds and Utica entered a Defense and Indemnity Agreement in
settlement of their claims. (Ex. D-2). The settlement agreement states that Utica had paid defense
and indemnity costs on Goulds’ behalf under the primary and umbrella policies, “and in doing so
has: (i) exhausted the limits of liability . . . of the Goulds Primary Policies; [and] (ii) impaired
certain limits of liability of the Goulds Umbrella Policies.” (Ex. D-2, at F-0080485). The
settlement was structured so that Utica would pay Goulds on a claim-by-claim basis, rather than
a “lump sum.” (T. 479 (Martin explaining that “the claims still needed to come in, they needed to
be defended, they needed to be reviewed, we had to make sure it was an asbestos product and
Utica required board approval for the settlement. (T. 1254). In a memo to Utica’s Board dated February 21, 2007,
Turi advised that Utica had reached an agreement in principle with Goulds and recommended that the settlement be
consummated. (Ex. D-598). In support of this recommendation, under “Benefit of the Settlement,” Turi wrote that
the settlement “ends the uncertainty” over the California and New York litigation over the number of policies that
applied, the remaining limits available, and Goulds’ claim that “four primary policies lacked aggregate limits of
liability.” (Ex. D-598, at D-0014157). Turi further wrote:
23
Of all of Goulds’ allegations, the lack of aggregate limits of liability . . . presented the most
significant downside to Utica. Under California law, an insured gets to select the policy year in
which claims are processed (the “all sums” approach).
If successful there, Goulds could select a policy year in which there was no aggregate limit of
liability and have all asbestos claims handled in that year . . . . The policy would never exhaust and
we would be required to apply a $500,000 limit to every asbestos claim in the primary layer. That
would prevent claims from going into the umbrella layer and the reinsurance recovery that would
follow. With over 140,000 asbestos claims presented, that would be a catastrophic result for Utica.
(Ex. D-598, at D-0014157–58). In a PowerPoint presentation prepared to secure board approval for the settlement,
(T. 1346), Turi wrote:
In addition to the never exhausting nature of that result, the claims (unless and to the extent each
exceeded $500,000) would not reach the umbrella layer, depriving the company of reinsurance
recoveries in those layers.
Benefit of the Agreement—The Defense and Indemnity Agreement acknowledges that each of the
primary policies contain aggregate limits of liability and are exhausted. Thus, the umbrella policies
are triggered and we are able to obtain reinsurance recoveries.
(Ex. D-457, at D-0026093).
14
[Utica] would pay that money out over a long period of time”)). The settlement agreement
contains a chart showing the “umbrella policies of insurance issued by Utica Mutual with the
following combined Aggregate Limits of Liability for Personal Injury and Property Damage”:
(Ex. D-2, at F-0080500). Though Utica had deemed the primary policies exhausted and was
allocating indemnity and expense to the umbrella policies prior to settlement, (T. 416; Ex. D346-A, at R-0062463), for Goulds, Utica reset the umbrella policies’ available limits to zero as of
the effective date of the settlement, January 1, 2006, (Ex. D-2, at F-0080490, F-0080501
(providing that the “Available Limits” of liability “afforded under the Goulds Umbrella Policies”
is $325 million and that these limits were available as of the “Effective Date” of the settlement
agreement, January 1, 2006); T. 716). Goulds did not reimburse Utica for the approximately $25
million in orphan share payments made before January 1, 2006 but reimbursed Utica
15
approximately $7.2 million for orphan shares following the settlement. (T. 590–91). Utica
assigned none of the claims it paid under the $325 million settlement amount to its primary
policies, (T. 705), because “[t]he primary policies had been exhausted by asbestos payments”
and Utica was not “going to pay twice,” (T. 1264).
E.
Utica’s Notification to Munich
By June 2001, Utica had begun corresponding with Munich about the asbestos claims
being filed against Goulds. (Ex. P-116, at MRAG 0149 (June 27, 2001 letter from Utica claims
attorney to Munich advising that, “[a]s previously reported, reinsurance for the Gould’s [sic]
Pumps’s umbrella policies was procured through your company for certain years” from 1960 to
1987, and that Utica had decided “to distribute asbestos losses evenly across all available years
of confirmed coverage for” Goulds)). At that time, Utica also sent Munich declarations pages
from the 1974 and 1977 Certificates. (Ex. P-116, at MRAG 0150–52). A Utica staff attorney sent
Munich another update in a letter dated February 6, 2002 and advised that Utica was “in the
process of allocating asbestos payments to those claims.” (Ex. P-112, at MRAG 0140). The Utica
staff attorney attached a list of Gould’s umbrella policies, policy years, and each policy’s liability
limit, the same reinsurance declaration pages it had sent previously, and a copy of a page from
the 1975 Certificate. (Ex. P-112, at MRAG 0142–44).
Thomas Miller, a claims handler in Munich’s environmental mass tort claims unit, (T.
1732), first received notice regarding “asbestos” claims involving Utica and Goulds in 2004, (T.
1734). Miller exchanged correspondence with Utica in an effort to obtain “an explanation of the
potential exposure.” (T. 1736). In a letter to Miller dated September 28, 2004, a Utica staff
attorney, Alicia Atik, provided “an update as to the status of asbestos-related liabilities” for
Goulds. (Ex. D-138, at MRAG 0313). Although Atik was aware that Goulds was claiming that
certain primary policies lacked aggregate limits and were therefore not exhausted, (T. 526), she
16
wrote to Munich that Goulds’ primary policy limits ($11.1 million) had “been exhausted by
claim payments,” (Ex. D-138, at MRAG 0313). Atik advised that Goulds had “umbrella
coverage with Utica” and that the “umbrella policies from 1964 to 1976 were written on an
ultimate net loss basis such that loss and expense erode the limits.” (Ex. D-138, at MRAG 0313).
Atik also informed Munich that in March 2003 Goulds had “joined [Utica] in a Declaratory
Judgment action” “against 31 insurers and reinsurers” in California, that the action had been
stayed, and that there were ongoing “negotiations on a Coverage Agreement.” (Ex. D-138, at
MRAG 0313–14). The letter does not mention Goulds’ contention about the absence of
aggregate limits. (Ex. D-138).
In a letter dated July 26, 2005, Kristen Martin, then a Utica associate claims attorney,
advised Miller that Utica had identified four additional Goulds primary policies ($1.2 million)
and that it would reallocate “where required.” (Ex. D-143, at MRA77 123). Martin referenced
the “coverage litigation regarding” Goulds Pumps, informed Miller that there was a “parallel
litigation” in New York, and stated that the issue in both actions concerned “how asbestos bodily
injury settlements and defense costs will be allocated to periods in which Goulds failed to
procure umbrella coverage and the underlying Utica primary policy has been exhausted.” (Ex. D142, at MRA77 124). Miller did not try to find out more about the coverage litigation but relied
on the information Martin provided. (T. 1802–03). Martin acknowledged that she “did not go
into all the specifics as to what was at issue in the lawsuit” in her July letter to Miller but
believed that, if Munich had been interested in information about the coverage action, it should
have asked for more information. (T. 541). Further, Martin viewed the aggregate issue “as
something that Goulds was raising and that it was a dispute, but Utica was confident that they
would resolve the issue with aggregate limits on their policies.” (T. 530). She felt that, because
17
the orphan share issue could have “material impact on billings,” it was important to let Munich
know about that issue. (T. 541).
In an October 25, 2006 letter update to Munich, Martin wrote that the “coverage
action[s]” were still pending, that Utica had “asked that the court declare various Utica policies
exhausted,” and that the parties were engaged in settlement negotiations. (Ex. D-149, at R0039201). Martin advised that Utica had allocated approximately $19 million in indemnity
payments and $15 million in loss adjustment expenses to Goulds and that, though it had not yet
billed those amounts to its reinsurers, depending on the litigation outcome, Utica “may” allocate
those amounts “to years of available/unexhausted Utica coverage and thus will impact the
potential future liabilities of our reinsurers.” (Ex. D-149, at R-0039201).
In a July 10, 2007 letter, Martin notified Munich that Utica and Goulds had reached a
settlement, “in which both parties compromised their respective claims.” (Ex. D-153, at MRA77
021). Martin enclosed a copy of the settlement agreement and indicated that Utica was “in a
position to allocate the remaining unallocated indemnity and [loss adjustment expense] payments
in relation to the Goulds’ asbestos claims” and that Utica would allocate and bill these amounts
to its “reinsurers consistent with the terms of the settlement agreement and the respective
reinsurance agreements.” (Ex. D-153, at MRA77 021).
F.
Utica’s Reinsurance Billings to Munich
In November 2007, Munich received its first bills from Utica under the 1973 and 1977
Certificates. (Ex. D-154, at MRA73 03447). In a letter, Utica notified Munich that it had
“completed the allocation of the indemnity and [loss adjustment expense] payments consistent
with the settlement and order” and that Utica “planned on billing those amounts to our reinsurers
consistent with the terms of the respective reinsurance agreements, the settlement agreement and
court order.” (Ex. D-154, at MRA73 03448). The bill under the 1973 Certificate indicated that
18
Utica had paid, under the 1973 Umbrella, $4,007,347.69 in direct loss and $2,656,812.64 in
direct expense, which, calculated on an expense-inclusive basis, totaled: $6,664,160.33, passing
the $5 million mark that triggered the 1973 Certificate. (Ex. D-154, at MRA73 03449). The bill
indicated the “Total Reinsurance Due” from Munich was $1,664,160.33. (Ex. D-154, at MRA73
03449). The bill under the 1977 Certificate indicated that Utica had paid, under the 1977
Umbrella, calculated on an expense-supplemental basis, $3 million in direct loss and
$2,194,104.63 in direct expense. (Ex. D-154, at MRA73 03450). According to the bill, the “Total
Reinsurance Due” under the 1977 Certificate was $1,731,368.21 ($1,000,000 in loss and
$731,368.21 in expense). 24 (Ex. D-154, at MRA73 03450).
Miller, who had previously established a loss-and-expense reserve in connection with the
1977 Certificate, (T. 1743–45; Ex. D-152, at MRA77 263), was under the “impression” that the
1977 Umbrella covered defense costs in addition to limits based on information from Utica
indicating that “pre–’77 . . . certificates had expense as part of loss, and . . . that post–’77 . . .
policies had expense in addition” to limits. (T. 1744–45). Miller, however, had not seen any
policy documentation confirming his impression. (T. 1745).
1.
Munich’s Requests for Policy Documentation and Payment of Billings
Under the 1977 Certificate
Miller spoke with Martin on December 6, 2007 to obtain clarification on the reinsurance
billings. (Ex. D-157, at MRA73 00065). They discussed “the treatment of expense under the
[settlement] agreement” because the settlement chart, (Ex. D-2, at F-0080500), called for all
umbrella policies to pay on an UNL (expense-inclusive) basis, and it appeared Utica was billing
Munich differently. (Ex. D-157, at MRA73 00065). Martin explained that “as part of the
Since Munich reinsured $1 million out of the $3 million 1977 Umbrella, or 1/3, Munich was, according to Utica,
responsible for 1/3 of $2,194,104.63 expense, or $731,368.21. Utica subsequently billed Munich for $58,445.26 in
declaratory judgment expenses. (Dkt. No. 450-1, ¶ 138).
24
19
settlement, the parties agreed to additional limits under the umbrella policies,”—the available
loss limits under the umbrellas totaled $255 million and the settlement stated there were $325
million “in umbrella limits”—and “[i]n return for the additional limits,” the umbrella policies
would be treated as UNL. (Ex. D-157, at MRA73 00065). Martin further explained that the
settlement agreement, however, had “no effect” on “how reinsurers are billed” and that “Utica
will continue to allocate loss and expense to all triggered policies pursuant to the terms of their
policies and will be [sic] reinsurers pursuant to the terms of their reinsurance contracts.” (Ex. D157, at MRA73 00065). Miller requested “available policy documentation,” “a spreadsheet
showing the allocation across all years,” and the “most current claim statistics so that [Munich
could] update [its] reserve analysis for the additional fac certs.” (Ex. D-157, at MRA73 00065).
Miller believed that, when he asked for “available policy documentation,” Utica would send him
everything that was still available regarding the policies. (T. 1752–53).
Martin was aware that Utica had reconstructed policy files for both the 1973 and 1977
Umbrellas. (T. 560). These files contained the pertinent language concerning defense expenses.
(T. 560; Exs. P-92, P-100). 25 However, rather than going “to the policy folders that the attorney
and other people at Utica had recreated to fully represent the year,” (T. 560), which were in a
“unit where” she “no longer worked,” Martin “grabbed” what she had “on [her] hard drive” and
sent it to Miller via email on December 7, 2007, (T. 560; Ex. D-488). The documents included
what appear to be excerpts from the 1973 Umbrella, (Ex. D-488, at MRA73 03455–58), and
miscellaneous documents concerning 1974, 1975, 1977, and 1978 umbrella policies, (Ex. D-488,
25
They also contained the 1973 defense endorsement that purportedly changed the 1973 Umbrella from expenseinclusive to expense-supplemental. (Ex. P-100, at R-0000164–65).
20
at MRA73 03459–66). None of the documents Martin sent to Miller, however, contained the
pertinent policy language. (See generally D-488). 26
On December 10, 2007, Miller requested a spreadsheet showing the “paid loss and
expense for all of the Utica primary and umbrella policies over all the years.” (Ex. D-160, at
MRA73 03469). Miller explained that he needed the spreadsheet in order “to document our file
that the allocation across all the years is . . . based on the terms of the settlement agreement” and
“to make reserve projections.” (Ex. D-160, at MRA73 03469). Martin forwarded the spreadsheet
on December 11, 2007. (Ex. D-160, at MRA73 03469).
On December 12, 2007, Miller notified Munich’s accounting department that he
anticipated approving a claim to Utica “by the end o [sic] week in the approximate amount of
$1,750,000.” (Ex. D-161, at MRA73 03472).
On December 14, 2007, Miller notified Martin via email that Munich was “in good shape
on the bill for the 1977 policy” and that he had requested management approval to pay the claim.
(Ex. P-162, at R-0074003). The same day, Miller requested authority to pay Utica “a loss of
1,000,000.00 and pay an expense of 731,368.21” as the “payment of facultative share of asbestos
products loss and expense,” which exhausted the $1 million 1977 Certificate limit. (Ex. D-118).
Miller’s supervisor, Thomas O’Kane, approved payment, noting, “We have confirmed paid
claims have properly exhausted the entire 3M umbrella policy limit and our loss and exp
payment is in order.” (Ex. D-118). Though he did not have the specimen terms and conditions
for the 1977 Umbrella 27 and knew Martin’s explanation of coverage was “inconsistent with the
The Court credits Martin’s testimony and does not find any intentional misrepresentation or deliberate
concealment.
26
Miller had not received the terms and conditions of the 1973 Umbrella or endorsement or the 1977 Umbrella. (T.
1767).
27
21
settlement agreement” but “consistent with what [Martin] had explained” to him about “the
intent of the settlement agreement,” Miller accepted Martin’s explanations. (T. 1766–67). Miller
and Munich management felt comfortable paying the 1977 Umbrella. (T. 1771). Munich paid
Utica $1,731,368.21 in connection with the 1977 Certificate.
2.
Utica’s Rediscovery of the 1973 Defense Endorsement and
Withdrawal of the Billings Under the 1973 Certificate
In his December 14, 2007 email, Miller sought more information from Martin about “the
treatment of expense under the policies and the settlement agreement.” (Ex. P-162, at R0074003; T. 1761). Miller informed Martin that he was checking to “make sure we have received
all available documentation from our underwriting files” but that Munich had “requested a full
search when [they] first received these claims” and he doubted they would find additional
support. (Ex. P-162, at R-0074003). Miller asked Martin to send “specimen copies of the
umbrella coverage form that Utica would have been using at the time the 1973 was issued,” as
well as an “explanation of how it was determined that the 1973 policy treated expense as part of
loss.” (Ex. P-162, at R-0074003).
This time, in response to Miller’s request, Martin “pull[ed] the coverage file materials”
for the 1973 Umbrella that had been recreated by coverage counsel. (Ex. D-352, at R-0074340).
In the file, she found the 1973 defense endorsement, which she believed “changed the policy
from an ultimate net loss to defense outside the limits.” (Ex. D-352, at R-0074340). In Martin’s
opinion, this made Utica’s settlement with Goulds “even better” because, if Utica or Goulds had
“realized” that there was another umbrella policy that provided “defense outside the limits,”
Goulds could have asked for “a higher cap” during settlement. (Ex. D-352, at R-0074340; T.
564).
22
In a telephone call on December 19, 2007, Martin told Miller “that [Utica’s] umbrella
policies always included expense as part of loss until the forms were changed in 1976 or 1977,
which is why the settlement was negotiated based on that assumption.” (Ex. D-119, at MRA73
00077). Martin also told Miller that, when she reviewed “the folios that were created by
coverage counsel for each policy, she discovered that the relevant language was actualy [sic]
endorsed off of the 1973 policy that [Munich] reinsure[d], meaning that the policy treats expense
as supplemental.” (Ex. D-119, at MRA73 00077). Martin advised Miller that Utica would be
withdrawing the current bill on the 1973 Certificate and sending a revised billing statement
reflecting treatment of expense as supplemental. (Ex. D-119, at MRA73 00077). Miller asked
Martin to send a copy of that endorsement and expected that she would send it based on her
representation that it “changed the way the policy responded.” (T. 1762). There is no evidence
that Martin sent the endorsement. On December 20, 2007, Miller received a revised billing from
Utica on the 1973 Certificate indicating that current amount due was zero—reflecting that Utica
was billing on an expense-in-addition-to-limits basis. 28 (T. 1763).
In August 2008, Miller emailed Martin to request updates on claim statistics, loss, and
expense for “all the files” and again requested a copy of the 1973 defense endorsement. (Ex. P163, at R-0074036). There is no evidence that Martin sent the 1973 defense endorsement; Martin
testified it was no longer her job at that point—she was “filling in for someone”—and “just
forgot to do it.” (T. 570). The Court credits Martin’s testimony and does not find any intentional
misrepresentation or deliberate concealment. Miller did not receive the 1973 defense
endorsement and left the claims department in October 2008. (T. 1765).
Utica had previously included expenses in the loss calculation ($4,007,347.69 in loss + $2,656,812.64 in expense),
which totaled $6,664,160.33 and therefore passed the $5 million layer that triggered the 1973 Certificate. (Ex. D154, at MRA73 03449). By removing expenses from the calculation, the loss under the 1973 Umbrella was not yet
sufficient to trigger the 1973 Certificate.
28
23
3.
Utica’s New Billings Under the 1973 Certificate and Commencement
of Utica I
On June 15, 2011, Utica sent Munich a bill under the 1973 Certificate reflecting
reinsurance due in the amount of $8,310,331.71 ($5,000,000 in loss and $3,310,331.71 in
expense). (Ex. P-280-11, at MRA73 02180). In an August 17, 2011 email from Richard Hill, a
Munich employee, to Michael Evolo, a Utica employee, Hill noted that Utica was treating
expenses as supplemental under the 1973 Umbrella and requested “documentation in support.”
(Ex. D-121, at R0072141). Evolo emailed back on August 18, 2011 and attached the 1973
defense endorsement. (Ex. D-121, at R0072143–44). There is no evidence Munich had received
this endorsement before August 18, 2011. (T. 220). The endorsement was not in Munich’s
underwriting file; Munich believed that Utica had never provided it. (T. 220; Ex. P-460
(underwriting file)).
On September 7, 2011, Hill emailed Evolo: “Since you were able to email me the
documentation to suggest that expenses are supplemental, I will have to reallocate the payments
to reflect expenses as supplemental in our system.” (Ex. P-207, at R-0072175).
Hill notified Leah Spivey, head of Munich’s environmental mass tort group, that there
was a billing “on the Goulds matter” and that Utica was billing beyond Munich’s $5 million
“share of the policy amount.” (T. 218–19). When Spivey read the 1973 defense endorsement, her
opinion was that it “would provide defense coverage only in the case where the underlying
policy did not provide coverage for specific . . . losses that would not be covered under [a]
typical primary policy.” (T. 221). Spivey further believed that the 1973 defense endorsement
changed the “ultimate net loss clause in the policy to . . . indicate that no expenses should be paid
under the policy.” (T. 222). Munich also flagged Utica’s billing for “unallocated expenses,”
which Spivey knew “were often declaratory judgment expenses”; Munich wanted to confirm the
24
nature of those expenses because its “facultative certificates do not respond to declaratory
judgment expenses.” (T. 224).
In a September 15, 2011 email, Hill alerted Evolo that Munich had reviewed the 1973
defense endorsement and found it was “not clear as to the treatment of defense cost.” (Ex. D-17,
at MRA73 02391). He explained that it “appeared that Utica Mutual has a duty to defend with
respect to any occurrence not covered by the underlying policy(ies),” which did “not appear to be
the case in this loss,” and that Munich would need a complete copy of the 1973 Umbrella and
“any coverage opinion that address [sic] the treatment of defense.” (Id.). In addition, Hill
provided a copy of the 1973 Certificate in an effort to obtain an explanation from Utica “as to the
nature of the ‘unallocated expenses’” reflected in the reinsurance billings. (Ex. D-17, at MRA73
02391).
On September 16, 2011, Daniel Hammond, an associate claims attorney at Utica,
responded to Hill, quoting language from the reinsurance certificate, including the provision that
states that the “Reinsurer shall be liable for its proportion of allocated loss expenses incurred by
the Company in the same ratio that the Reinsurer’s share of the settlement or judgment bears to
the total amount of such settlement or judgment under the policy reinsured.” (Ex. D-357, at
MRA73 02403–04). Hammond wrote that the certificate “make[s] clear that Munich Re is
responsible for the Goulds . . . expenses.” (Ex. D-357, at MRA73 02404). Hammond stated that
those expenses “are coverage litigation and expenses for outside counsel” and also “relate to a
declaratory judgment action pending in” California. (Ex. D-357, at MRA73 02404). With respect
to defense costs under the 1973 Umbrella, Hammond asserted that Utica had a duty to defend
under the “occurrence not covered by” provision in the 1973 defense endorsement because “after
exhaustion of the primary coverage, the occurrence is ‘not covered by the underlying
25
policy(ies).’” (Ex. D-357, at MRA73 02405). Hammond cited Zurich Insurance Co. v. Raymark
Industries, Inc., 118 Ill.2d 23, 55–56 (1987), concerning the obligations of a primary insurer
following the exhaustion of primary coverage. 29 (Ex. D-357, at MRA73 02405).
Spivey sent a September 30, 2011 email to Utica indicating that Munich may want to
conduct “an onsite audit of the claim” and repeating Munich’s request for a coverage opinion.
(Ex D-97, at R-0072283). On October 5, 2011, Hammond responded to Spivey’s email with a
specimen copy of the 1973 Umbrella and asked for clarification regarding “what issue of
coverage and time period of [coverage] opinion you are requesting.” (Ex. D-99, at R-0071911).
Spivey replied that Munich was requesting “all of the coverage in chronological order,” but that
the “area of concern” was Utica’s “interpretation and reason for citing the Zurich v. Raymark
case.” (Ex. D-99, at R0071911). On October 10, 2011, Turi responded to Spivey’s email and
asserted that Munich’s request for “every coverage opinion” was “unreasonable” and a delay
tactic but that Munich was “welcome to audit the file on site.” (Ex. P-58, at MRA73 02738). Turi
explained that Utica had cited Zurich Insurance Co. for the “proposition that an insurer does not
have an obligation to defend under a policy after the policy has exhausted” and, since the
primary policy was exhausted, it “no longer covered the outstanding claims” and required the
1973 Umbrella to respond. (Ex. P-58, at MRA73 02738).
In an October 21, 2011 email to Turi, Spivey noted that Munich had consistently
responded to Utica’s “cessions on the 1973–1974 policy under its facultative certificate in
accordance with how the original policy was written, treating expenses as part of ultimate net
loss.” (Ex. D-106, at R-0072330). Spivey informed Turi that Munich had “searched and has not
Spivey credibly testified that she did not “understand why they were referring to” Zurich Insurance Co. because
her “understanding of that case was the fact that, it was referring to just a primary policy, and . . . indicated that
when a primary policy exhausted its loss limits, it no longer had a defense obligation,” and she “didn’t see what that
had to do with the case that we were dealing with here.” (T. 234).
29
26
found any notice of the endorsement, which you recently provided, that changes the expense
treatment,” and requested documentation showing that Munich “had been notified of this major
change in coverage.” (Ex. D-106, at R-0072330). Spivey reiterated that Munich did not interpret
the endorsement “as changing the policy from UNL to supplemental in this instance,” and again
requested the “coverage opinion upon which [Utica] relied in order to change [its] handling of
expense.” (Ex. D-106, at R-0072330). Spivey also requested information on “how the expenses
were allocated to the various layers of coverage in the 1973–1974 policy year” and “a
breakdown of expenses paid under the 1973–1974 policy, when they were paid compared to the
loss dollars paid, to which reinsurance layer they were allocated, and why.” (Ex. D-106, at R0072330).
In an email to Spivey on December 29, 2011, Turi wrote to again dispute Munich’s
reasons for not paying the billings under the 1973 Certificate and also asserted that Munich’s
obligations “are governed by Munich Re’s certificate,” which “provides that Munich Re will pay
‘its proportion of allocated loss expenses incurred by Utica.’” (Ex. P-111, at R-00724391–92).
This, however, did not “make any sense” to Spivey “because the facultative certificate only
provides the coverage that the policy provides . . . . [I]t doesn’t provide any independent or
broader coverage than is provided by the policy itself.” (T. 241). On January 27, 2012, Utica
filed this action. (Dkt. No. 1). Utica seeks judgment in the amount of $2,760,533.96 and entry of
declaratory judgment. (Dkt. No. 1).
4.
Munich’s Commencement of Utica II
Subsequently, Munich’s attorneys “were granted access to Utica Mutual’s underwriting
files for various primary and umbrella policies issued to Goulds,” including the 1977 Umbrella.
(Ex. D-110, at MRA77 1308). There is no evidence that Munich had seen the 1977 Umbrella
policy terms until then. Upon learning that the 1977 Umbrella contained the same “occurrence
27
not covered by” language as the 1973 defense endorsement, Spivey, in a letter to Turi dated
November 27, 2012, requested a refund of $789,813.47—the expenses Munich paid in addition
to the $1 million liability limit under the 1977 Certificate. (Ex. D-110, at MRA77 1308). Spivey
wrote:
Since the asbestos bodily injury claims asserted against Goulds were
covered by Utica Mutual’s January 1, 1977 primary policy issued to
Goulds—and in fact Utica Mutual has represented that its primary
policy limits were exhausted by payments made for those claims—
the defense coverage provision of the 1977 umbrella policy is
inapplicable. Moreover, Utica Mutual has no legal liability to pay
defense costs to or for the benefit of Goulds in excess of its January
1, 1977 umbrella policy limit. Nor, to Munich Re’s knowledge, does
Utica Mutual’s Settlement Agreement with Goulds obligate Utica to
pay defense expenses in addition to the loss limit of its January 1,
1977 umbrella policy.
(Ex. D-110, at MRA77 1308–09). On January 10, 2013, Munich filed Utica II, alleging breach of
contract 30 based on Utica’s alleged billing Munich “for more than the [1977] Certificate’s $1
million limit” and refusal to refund to Munich the amount of its alleged overpayment—
$789,813.47. (Utica II, 6:13-cv-743, Dkt. No. 1). Munich seeks declaratory judgment and
damages in the amount of $789,813.47. (Utica II, 6:13-cv-743, Dkt. No. 1).
G.
General Conditions in the 1973 Certificate 31
In the 1973 Certificate, Munich agreed to reinsure $5 million excess of $5 million on
Utica’s 1973 Umbrella, “subject to” certain general conditions. (Ex. P-4, at MRA 10181). These
included the following:
1. The Reinsurer agrees to indemnify the Company against losses
or damages which the Company is legally obligated to pay under
the policy reinsured, resulting from occurrences taking place
30
In Utica II, Munich also advanced several quasi-contract claims; the Court dismissed those claims at the summary
judgment stage. (Utica II, Dkt. No. 268, at 61).
The Court only considers the provisions of the 1973 Umbrella, 1973 defense endorsement, and 1973 Certificate
because, as described infra Section III.E., Munich is not entitled to reimbursement of its payment under the 1977
Certificate.
31
28
during the period this Certificate is in effect, subject to the
reinsurance limits shown in the Declarations. The Company
warrants the copy of the policy forwarded to the Reinsurer to be
a true copy of the said policy and the whole thereof, and agrees
to notify the Reinsurer promptly of any changes made therein.
2. The Company shall settle all claims under its policy in
accordance with the terms and conditions thereof. If the
reinsurance hereunder is pro rata, the Reinsurer shall be liable
for its pro rata proportion of settlements made by the Company.
If the reinsurance hereunder is excess, the Reinsurer shall be
liable for its excess proportion of settlements made by the
Company after deduction of any recoveries from pro rata
reinsurance inuring to the benefit of the Reinsurer.
3. The Reinsurer shall be liable for its proportion of allocated loss
expenses incurred by the Company in the same ratio that the
Reinsurer’s share of the settlement or judgment bears to the total
amount of such settlement or judgment under the policy
reinsured. The term “allocated loss expense” means all expenses
incurred in the investigation, adjustment and litigation of claims
or suits, but excluding the office expenses of the Company and
the salaries and expenses of all employees of the Company. It
also includes court costs and interest on any judgment or award
provided the Reinsurer’s prior consent to trial court proceedings
has been obtained.
4. The Company shall advise the Reinsurer promptly of any claim
and any subsequent developments pertaining thereto which in
the opinion of the Company may involve the reinsurance
hereunder. The Company has the obligation to investigate and
defend claims or suits affecting this reinsurance and to pursue
such claims or suits to final determination. The Company, when
so requested, will afford the Reinsurer an opportunity to be
associated with the Company at the expense of the Reinsurer in
the defense or control of any claim, suit or proceeding involving
this reinsurance and the Company and the Reinsurer shall
cooperate in every respect in the defense and control of such
claim, suit or proceeding.
....
6. The Company shall furnish proof that payment of a loss and loss
expense has actually been made by the Company and payment
by the Reinsurer of its proportion thereof shall be made promptly
....
29
(Ex. P-125).
III.
CONCLUSIONS OF LAW
A.
Breach of Contract
New York law applies to this diversity action. Utica Mut. Ins. Co. v. Munich Reins. Am.,
Inc., 594 F. App’x 700, 704 (2d Cir. 2014). To establish breach of contract under New York law,
the plaintiff must show: “(i) the formation of a contract between the parties; (ii) performance by
the plaintiff; (iii) failure of defendant to perform; and (iv) damages.” Nick’s Garage, Inc. v.
Progressive Cas. Ins. Co., 875 F.3d 107, 114 (2d Cir. 2017) (quoting Johnson v. Nextel
Commc’ns, Inc., 660 F.3d 131, 142 (2d Cir. 2011)).
B.
Following Provisions
The 1973 Certificate does not contain a follow-the-settlements or a follow-the-fortunes
provision. In its summary judgment ruling, the Court rejected Utica’s argument that the doctrines
should be implied, as a matter of law, into the reinsurance certificates. Utica Mut. Ins. Co. v.
Munich Reins. Am., Inc., No. 6:12-cv-00196, 2018 WL 1737623, at *21–22, 2018 U.S. Dist.
LEXIS 107997, at *63–70 (N.D.N.Y. Mar. 20, 2018). 32 The Court noted that Utica had not
sought to imply the term based upon industry custom and practice, and addressed that issue in a
motion in limine ruling. (Dkt. No. 391). In view of caselaw indicating that a provision may be
implied into a contract in extremely limited circumstances, the Court allowed Utica “to present
evidence at trial as to whether the doctrines of follow the fortunes or follow the settlements were,
32
The Second Circuit subsequently ruled that a follow-the-settlements obligation should not be implied into
reinsurance certificates that do not include a follow-the-settlements clause. Utica Mutual Ins. Co. v. Clearwater Ins.
Co., 906 F.3d 12, 17, 25 (2d Cir. 2018) (“We see no reason to read such a term into the contract by implication.
Instead we follow the New York Court of Appeals’ instruction: where a contract ‘is reasonably susceptible of only
one meaning, a court is not free to alter the contract to reflect its own personal notions of fairness and equity.’”
(quoting Glob. Reins. Corp. of Am. v. Century Indem. Co., 30 N.Y.3d 508, 519 (2017)) (citing Graydon S. Staring &
Dean Hansell, Law of Reinsurance § 18:2, at 423 (2017) (“Early scholarship . . ., the best of modern scholarship, the
judicial history of the subject . . . and the general law of contractual indemnity unite in confirming that there is no
implied general obligation to follow settlements in the absence of an express clause to that purpose.”))).
30
at the time the parties agreed to the Certificates, so ‘fixed and invariable’ in the reinsurance
industry as to be part of the Certificates.” (Dkt. No. 391, at 3). The Court explained,
“[T]he burden of proving a trade usage has generally been placed on
the party benefiting from its existence.” British Int’l Ins. Co. v.
Seguros La Republica, S.A., 342 F.3d 78, 83 (2d Cir. 2003) (quoting
Putnam Rolling Ladder Co. v. Mfrs. Hanover Tr. Co., 74 N.Y.2d
340, 348 (1989)). “Under New York law . . . custom and usage
evidence must establish that the omitted term is ‘fixed and
invariable’ in the industry in question.” Hutner v. Greene, 734 F.2d
896, 900 (2d Cir. 1984) (quoting Belasco Theatre Corp., v. Jelin
Prods., Inc., 270 A.D. 202, 205 (1st Dep’t 1945)). “One who seeks
to use trade usage to . . . annex a term to a contract must show either
that the other party to the contract is actually aware of the usage, or
that the existence of the usage in the business to which the
transaction relates is so notorious that a person of ordinary prudence
in the exercise of reasonable care would be aware of it.” Reuters Ltd.
v. Dow Jones Telerate, Inc., 231 A.D.2d 337, 343 (1st Dep’t 1997).
“The trade usage must be ‘so well settled, so uniformly acted upon,
and so long continued as to raise a fair presumption that it was
known to both contracting parties and that they contracted in
reference thereto.’” British International, 342 F.3d at 84 (quoting
Reuters, 231 A.D. 2d at 343–44).
(Id. at 5).
Utica argues that a follow-the-fortunes term should be implied into the Reinsurance
Certificates based upon the custom and practice in the industry. The follow-the-fortunes doctrine
“binds a reinsurer to accept the cedent’s good faith decisions on all
things concerning the underlying insurance terms and claims against
the underlying insured: coverage, tactics, lawsuits, compromise,
resistance or capitulation.” This doctrine insulates a reinsured’s
liability determinations from challenge by a reinsurer unless they are
fraudulent, in bad faith, or the payments are “clearly beyond the
scope of the original policy” or “in excess of [the reinsurer’s]
agreed-to exposure.” . . . It is well-established that a follow-thefortunes doctrine applies to all outcomes, including settlements and
judgments.
N. River Ins. Co. v. Ace Am. Reins. Co., 361 F.3d 134, 139–40 (2d Cir. 2004) (alteration in
original) (first quoting British Int’l Ins. Co., 342 F.3d at 85; then quoting Christiania Gen. Ins.
Corp. of N.Y. v. Great Am. Ins. Co., 979 F.2d 268, 280 (2d Cir. 1992)). “‘[F]ollow the
31
settlements doctrine . . . is the follow-the-fortunes doctrine in the settlement context.” Travelers
Cas. & Sur. Co., v. Gerling Global Reins. Corp. of Am., 419 F.3d 181, 186 n.4 (2d Cir. 2005).
“[T]he main rationale for the doctrine is to foster the ‘goals of maximum coverage and
settlement’ and to prevent courts, through ‘de novo review of [the cedent’s] decision-making
process,’ from undermining ‘the foundation of the cedent-reinsurer relationship.’” N. River Ins.
Co., 361 F.3d at 140–41 (alteration in original) (quoting N. River Ins. Co. v. CIGNA Reins. Co.,
52 F.3d 1194, 1206 (3d Cir. 1995)).
While Utica argues that the Court should imply a follow-the-fortunes provision into the
1973 Certificate, Munich argues that if anything, it should be a follow-the-settlements provision,
and the experts generally discussed the two doctrines together. (Dkt. No. 431, at 17; Dkt. No.
430, at 29). The Court has therefore included a discussion and analysis of both concepts. Having
considered all the evidence, the Court concludes that Utica has failed to prove that follow the
fortunes or follow the settlements was so fixed and invariable at the time the parties agreed to the
1973 Certificate that it is implied in their agreement.
At trial, Utica presented expert testimony by Paul Feldsher, Debra Roberts, and Andrew
Maneval, all of whom testified that follow the fortunes and follow the settlements were industrywide concepts that did not need to be stated in reinsurance certificates to apply. (See T. 916
(Feldsher testifying that in the 1970s there was “an industry-wide belief that reinsurers would
follow the claims handling decisions of their cedents” and would not “second-guess the
underwriting process” or “how the claims would be resolved, as long as they were decisions that
were reasonable in terms of determining whether the claim fell within the scope of the policy”);
T. 1611 (Roberts opining that follow the fortunes and follow the settlements are “foundational
concept[s] in the industry” and do not need “to be explicitly stated in the contracts for the
32
industry to follow this concept”); T. 1975–76 (Maneval testifying that, in his opinion, it was the
universal view that reinsurance contracts entered into in the 1970s were governed by the followthe-fortunes and follow-the-settlements concepts and that the “overall purpose” of these concepts
“is to assure that the insurance and reinsurance industry can work effectively and commercially
and prudently by requiring and expecting reinsurers to defer to reasonable good faith settlement
decisions or payment decisions or interpretations of their own policies”)). The Court finds this
testimony credible to the extent that it shows that cedents and their reinsurers, in general,
endeavor to work together and that reinsurers, whenever possible, will defer to reasonable
determinations by cedents in interpreting policies and paying or settling claims.
The testimony by Miller and O’Kane, both Munich employees, in handling Utica’s
billing under the 1977 Certificate—paying the billing promptly, without requiring policy
documents based on the representation by Utica employees—exemplifies this concept. Miller
testified that, when he requested the authority to pay the 1977 billings, he did not have the terms
and conditions of the 1977 Umbrella, but he nevertheless believed that the policy covered
defense in addition to limits based on Martin’s “explanation of coverage” and indicated that even
though the defense expense allocation was “inconsistent with the settlement agreement . . . it was
consistent with what [Martin] explained to [him] and how [Martin] explained the intent of the
settlement agreement.” (T. 1766–77). O’Kane, who approved the payment, stated that Munich
paid the 1977 claim because it believed it “owed a loss and supplemental expense based on
representations to us, or in this case Tom Miller in his management of the case.” (T. 1944).
O’Kane testified that, although there are no following provisions in the certificates, when
Munich handles claims, it has “been supportive” of paying them when it finds that “the claim is
covered” and “the settlement value was reasonable” and made in good faith. (T. 1940). While
33
this is conduct evidencing Munich’s attempt, in this instance, to operate in good faith, implement
the following concepts in handling the 1977 billings, and defer to Utica’s explanations, it does
not establish that Munich considered itself contractually bound to do so absent an express
provision in the reinsurance certificate. 33 Indeed, Munich clearly believed that it was entitled to
challenge Utica’s coverage determinations. After Munich received the June 15, 2011 billings
under the 1973 Certificate and noticed the treatment of expense as supplemental, it decided to
request the defense endorsement rather that defer to Utica’s representations, (Ex. P-280-11, at
MRA73 02180; Ex. D-121, at R0072141), and upon review challenged Utica’s coverage
determination. (Ex. D-18, at MRA73 02391).
While Feldsher, Roberts, and Maneval credibly testified that reinsurers generally
operated under the concepts of follow the settlements and follow the fortunes in their
relationships with the insured, both Feldsher and Maneval acknowledged that not all reinsurers
included these provisions in their reinsurance certificates. Feldsher testified that in the 1970s the
number of reinsurers that included following provisions in their certificates “varied;” “most” did
not include following provisions in the 1970s, but reinsurers “more explicitly did as time went on
through the ‘80s.” (T. 1001). Maneval also opined that there may be reasons a reinsurance
company might not want a follow-the-fortunes or follow-the-settlements provision in its
certificate, including the concern “that the clause itself would create some direct privity of the
reinsurer to the underlying insured” or that the provision might require it to reinsure “some kind
of ex gratia or business risk kind of payment.” (T. 2112, 2114). Munich’s certificates never
contained a follow-the-fortunes or follow-the-settlements provision. (T. 1930). Munich has cited
language in the 1973 Certificate that appears to be inconsistent with a follow-the settlements
33
Like the 1973 Certificate, the 1977 Certificate contained no following provisions.
34
provision. (See Ex. P-125, ¶ 1 (agreeing to indemnify Utica for losses or damages that Utica “is
legally obligated to pay under the policy reinsured”)).
As the Second Circuit recognized in Clearwater Insurance, in declining to imply follow
the settlements into the facultative reinsurance certificates at issue, New York courts have
repeatedly emphasized that a court “should not imply so significant a term into a contract
negotiated between sophisticated parties.” 906 F.3d at 24–25; see Glob. Reins. Corp. of Am., 30
N.Y.3d at 518–19 (“[W]here an agreement is ‘negotiated between sophisticated, counseled
business people negotiating at arm’s length, . . . courts should be extremely reluctant to interpret
an agreement as impliedly stating something which the parties have neglected to specifically
include.’” (quoting Vt. Teddy Bear Co. v. 538 Madison Realty Co., 1 N.Y.3d 470, 475 (2004))).
The Court therefore concludes that Utica has failed to prove that follow the fortunes or follow
the settlements were so “fixed and invariable” in the facultative reinsurance industry as to
warrant importing them into the 1973 Certificate as binding terms. Thus, the Court declines to
imply a follow-the-fortunes or follow-the-settlements obligation into the 1973 Certificate.
Because the Court concludes that follow the settlements and follow the fortunes were not
implied into the 1973 Certificate, Munich “must indemnify Utica according to Utica’s proven
liability on the umbrella policies.” Clearwater Ins. Co., 906 F.3d at 25 (citing Staring & Hansell,
supra, § 20:6, at 534 (“In the absence of a following settlements clause, . . . the reinsured has the
burden of proving that the loss was specifically caused by a risk covered in the reinsurance
contract.”)). Accordingly, the Court considers whether Utica has proved that it was liable for the
defense expenses under the 1973 Umbrella.
35
C.
“Occurrence Not Covered By”
Utica contends that Munich breached the 1973 Certificate by failing to pay its share of
the defense expenses ($2,760,533.96) 34 that Utica incurred in connection with the asbestos
bodily injury claims it paid under the 1973 Umbrella and that it calculated as expensesupplemental in accordance with the 1973 defense endorsement. (Dkt. No. 430, at 11). 35 Munich
argues that Utica had no obligation under the 1973 defense endorsement to provide supplemental
defense expenses.
At the summary judgment stage, the Court found the “occurrence not covered by
language” in the defense endorsement ambiguous and allowed the parties to introduce extrinsic
evidence at trial. Utica Mut. Ins. Co., 2018 WL 1797623, at *23–25, 2018 U.S. Dist. LEXIS
107997, at 70–76. During closing arguments, the Court advised the parties that it was
reconsidering its ambiguity finding. 36 Indeed, having considered the meaning of the phrase
“occurrence not covered by” “when viewed objectively by a reasonably intelligent person who
has examined the context of the entire integrated agreement and who is cognizant of the customs,
Utica’s argument for reimbursement of declaratory judgment expense is based upon the 1973 Certificate and is
discussed infra Section III.D.2.
34
The Court has assumed, for the purpose of this decision, that Utica provided the 1973 defense endorsement to
Munich when issued. There was no direct evidence of this. The endorsement was not in Munich’s underwriting file,
but its file was not complete, (Ex. P-460), and Utica provided some evidence of a practice of providing
endorsements to reinsurers upon issuance, (see T. 364–83).
35
Under Federal Rule of Civil Procedure 54, “any order or other decision, however designated, that adjudicates
fewer than all the claims or the rights and liabilities of fewer than all the parties does not end the action as to any of
the claims or parties and may be revised at any time before the entry of a judgment adjudicating all the claims and
all the parties’ rights and liabilities.” Fed. R. Civ. P. 54(b). “A district court . . . possesses the inherent authority to
sua sponte reconsider its own interlocutory orders before they become final.” Chartis Seguros Mexico, S.A. de C.V.
v. HLI Rail Riggin g, LLC, No. 11-cv-3238, 2015 WL 545565, at *2, 2015 U.S. Dist. LEXIS 15909, at *7 (S.D.N.Y.
Feb. 9, 2015). “Sua sponte reconsideration is appropriate where there is a need to correct a clear error or prevent
manifest injustice, there is an intervening change in the applicable law, or new evidence is available.” Id. (quoting
Benavidez v. Piramides Mayas Inc., No. 09-cv-9574, 2013 WL 2357527, at *3, 2013 U.S. Dist. LEXIS, at *7–8
(S.D.N.Y. May 24, 2013)). “Whether such revision is appropriate in any given case is within the sound discretion of
the trial judge.” Acha v. Beame, 570 F.2d 57, 63 (2d Cir. 1978). Here, having closely examined the trial evidence
and given greater consideration to the meaning of the term “covered” and to this provision in the context of the
whole umbrella policy, including the retained limit provisions, and in light of the strength of the caselaw supporting
Munich’s position, the Court finds reconsideration warranted to correct a clearly erroneous finding of ambiguity.
36
36
practices, usages and terminology as generally understood in the particular trade or business,”
Alexander & Alexander Servs., Inc. v. These Certain Underwriters at Lloyd’s, 136 F.3d 82, 86
(2d Cir. 1998) (quoting Lightfoot v. Union Carbide Corp., 110 F.3d 898, 906 (2d Cir. 1997)), the
Court finds that it is unambiguous and that it does not include exhaustion of the 1973 Primary
here.
“An insurance agreement is subject to the principles of contract interpretation.” Universal
Am. Corp. v. Nat. Union Fire Ins. Co. of Pittsburgh, Pa., 25 N.Y. 3d 675, 680 (2015). Under
New York law, “agreements are construed in accord with the parties’ intent,” and the “best
evidence of that intent is the parties’ writing.” Marin v. Constitution Realty, LLC, 28 N.Y.3d
666, 673 (2017) (quoting Greenfield v. Philles Records, 98 N.Y.2d 562, 569 (2002)). “Where . . .
the contract is clear and unambiguous on its face, the intent of the parties must be gleaned from
within the four corners of the instrument, and not from extrinsic evidence.” Rainbow v. Swisher,
72 N.Y.2d 106, 109 (1988).
“The determination of whether a contract term is ambiguous is a threshold question of
law for the court.” Walk-In Med. Ctrs., Inc. v. Breuer Capital Corp., 818 F.2d 260, 263 (2d Cir.
1987). “If the court finds that the terms, or the inferences readily drawn from the terms, are
ambiguous, then the court may accept any available extrinsic evidence to ascertain the meaning
intended by the parties during the formation of the contract.” Alexander, 136 F.3d at 86. “Parties
may offer evidence of custom or practice [of the reinsurance industry] to interpret the meaning of
a term used in a contract.” Travelers Indem. Co. v. Scor Reins. Co., 62 F.3d 74, 78 (2d Cir. 1995)
(citing Gelb v. Auto. Ins. Co., 168 F.2d 774, 775 (2d Cir. 1948)).
37
The 1973 defense endorsement states: “With respect to any occurrence 37 not covered by
the underlying policy(ies) of insurance described in the schedule of underlying insurance or any
other underlying insurance collectible by the insured, but covered by terms and conditions of this
policy except for the amount of retained limit,” 38 Utica “shall,” among other things, “defend any
suit against the insured” and “pay all expenses incurred by the company.” (P-100, at R0000164). It further states: “and the amounts so incurred, except settlements of claims and suits,
are payable by the company in addition to the applicable limit of liability of this policy.” (P-100,
at R-0000164).
In this litigation, Munich has maintained that the “occurrence not covered by” language
means an occurrence that is “not within the scope of coverage provided by underlying policies of
insurance.” (Dkt. No. 300-5, at 8). Utica reads the “occurrence not covered by” language more
broadly as including occurrences that are “not covered” by the primary policy because that
policy has been exhausted. (Dkt. No. 310, at 11).
The Court of Appeals of New York has described “coverage” as “the net total of policy
inclusions minus exclusions.” New York Univ. v. Cont’l Ins. Co., 87 N.Y.2d 308, 323 (1995); see
also In re Joint E. & S. Dist. Asbestos Litig., 993 F.2d 313, 314 (2d Cir. 1993) (“The ‘coverage’
furnished by AEGIS is the amount and extent of the risk it contractually assumed, as specified in
the insuring clause and exclusions.”); Pergament Distribs., Inc. v. Old Republic Ins. Co., 128
A.D.2d 760, 761 (2d Dep’t 1987) (rejecting argument that an umbrella insurer had to “drop
37
“Occurrence” is defined in the 1973 Umbrella as “an accident during the policy period or . . . continuous or
repeated exposure to conditions during or prior to the policy period, if the bodily injury or property damage occurs
during the policy period and is neither expected nor intended by the insured.” (Ex. P-100, at R-0000152).
38
“Retained limit” is defined in the 1973 Umbrella as “the amount, stated as such in the declarations, of ultimate net
loss resulting from any one occurrence if the insurance afforded by the underlying insurance is inapplicable to such
occurrence.” (Ex. P-100, at R-0000152). “Ultimate Net Loss” is defined in the 1973 defense endorsement as “the
sum actually paid in cash in the settlement or satisfaction of losses for which the insured is liable . . . but excludes all
loss expenses and legal expenses (including attorneys’ fees, court costs and interest on any judgment or award)
. . . .” (Ex. P-100, at R-0000165).
38
down” and provide primary coverage after the primary insurer was declared insolvent; “the terms
‘covered’ and ‘not covered’ [in an ultimate loss provision] refer to whether the policy insures
against a certain risk, not whether the insured can collect on an underlying policy”). There is no
basis in law, or in the terms of the Umbrella, for inferring that “occurrence not covered” means
anything other than the type of risk—bodily injury—Utica assumed under primary policies. The
primary policies covered and paid (until the exhaustion of aggregate limits) the asbestos bodily
injury claims filed and asserted against Goulds. 39 (Dkt. No. 449-1, ¶ 37). Further, these bodily
injury claims arose from occurrences during the relevant policy periods: exposure to asbestos.
(Ex. D-598, at D-0014154; Ex. P-11, at A0000007 (1973 Primary defining occurrence to include
“exposure to conditions”); Ex. P-100, at R-0000152 (1973 Umbrella defining occurrence as
“continuous or repeated exposure to conditions” and stating that “[a]ll such bodily injury . . .
caused by continuous or repeated exposure to substantially the same general condition shall be
deemed to be the result of one occurrence”)).
39
The 1973 Primary provides,
COVERAGE A—BODILY INJURY LIABILITY
COVERAGE B—PROPERTY DAMAGE LIABILITY
The Company will pay on behalf of the insured all sums which the insured shall become legally
obligated to pay as damages because of
A. bodily injury or
B. property damage
to which this insurance applies, caused by an occurrence, and the company shall have the right and
duty to defend any suit against the insured seeking damages on account of such bodily injury or
property damage, even if any of the allegations of the suit are groundless, false or fraudulent, and
may make such investigation and settlement of any claims or suits as it deems expedient, but the
company shall not be obligated to pay any claim or judgment or defend any suit after the applicable
limit of the company’s liability has been exhausted by payments of judgment or settlements.
(Ex. P-11, at A0000009). The 1973 Primary states that “occurrence” “means an accident, including injuries or
exposure to conditions, which results during the policy period, in bodily injury or property damage neither expected
nor intended from the standpoint of the insured.” (Ex. P-11, at A0000007).
39
Further, reading the 1973 Umbrella as a whole shows that it functions in two ways—
providing coverage in excess of the 1973 Primary and providing “drop down” coverage for risks
the 1973 Primary does not cover—and that it responds differently depending on whether it is
functioning as an excess or primary coverage provider. See, e.g., Clearwater Ins. Co., 906 F.3d
at 15 (“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.”). For example, in section “III. Underlying Limit—Retained Limit,” the 1973 Umbrella
provides that Utica
shall be liable only for the ultimate net loss resulting from any one
occurrence in excess of either
(a)
the amounts of the applicable limits of liability of the
underlying insurance as stated in the Schedule of Underlying
Insurance Policies less the amount, if any, by which any
aggregate limit of such insurance has been reduced by
payment of loss, hereinafter called the underlying limit, or
(b)
if the insurance afforded by such underlying insurance is
inapplicable to the occurrence, the amount stated in the
declarations as the retained limit.
(Ex. P-100, at R-0000152). Read plainly, section III(a) provides that Utica assumes liability for
loss resulting from an occurrence in excess of the underlying limits of liability of the primary
policy, i.e., after the limits are exhausted, and section III(b) provides “drop down” or “primary”
insurance where “underlying insurance is inapplicable” to the occurrence. 40
The 1973 Umbrella’s use of “inapplicable” in its definition of “retained limit”—“the
amount, stated as such in the declarations, of ultimate net loss resulting from any one occurrence
Here, for example, the 1973 Umbrella provided coverage for types of risk that were not covered by the 1973
Primary. The 1973 Umbrella provided coverage for “personal injury,” which included “mental injury . . . false arrest
. . . [and] libel.” (Ex P-100, at R0000152). The 1973 Primary, in contrast, covered only “bodily injury” or “property
damage.” (Ex. P-11, at A0000006, A0000009).
40
40
if the insurance afforded by the underlying insurance is inapplicable to such occurrence”—is
consistent with its use of “inapplicable” in section III(b)(“[I]f the insurance afforded by such
underlying insurance is inapplicable to the occurrence . . . ”), and both refer to the same concept
as “not covered by.” (Ex. P-100, at R-0000152). If “inapplicable to the occurrence” means
inapplicable because of exhaustion, the drop down provision, section III(b), would have required
Goulds to pay a retained limit (identified in the declarations as $10,000), (Ex. P-100, at R0000155), to access the coverage provided by the 1973 Umbrella. (See T. 930 (Testimony of
Utica’s expert Feldsher)). Such an interpretation would lead to an absurd result, contrary to the
reasonable expectations of parties contracting for excess umbrella coverage. 41 Greenwich
Capital Fin. Prods., Inc. v. Negrin, 74 A.D.3d 413, 415 (1st Dep’t 2010) (explaining that under
New York law, “a contract should not be interpreted to produce a result that is absurd,
commercially unreasonable or contrary to the reasonable expectations of the parties”). The
Court, therefore, rejects it. Thus, the Court finds that Utica’s reading of “occurrence not covered
by” as including exhaustion is untenable.
Further, the majority of courts addressing the “not covered” or “occurrence not covered
by” language have found it unambiguous and that it refers to the type of risk, not exhaustion or
collectability. See Am. Special Risk Ins. Co. v. A-Best Prod., Inc., 975 F. Supp. 1019, 1026 (N.D.
Ohio 1997) (“[T]he phrase ‘not covered’ in the Defense Coverage Endorsement refers to
situations of horizontal coverage where Stonewall acts as a primary carrier, and not to situations
of vertical coverage where Stonewall provides excess insurance after the exhaustion of the
underlying primary insurance.”); Pergament Distribs., Inc., 128 A.D.2d at 761 (“At bar, there is
41
There is no evidence that Utica required or contemplated requiring Goulds to pay a retained limit before providing
a response under the 1973 Umbrella.
41
only one reasonable interpretation of the preceding terms. When used in this context, the terms
‘covered’ and ‘not covered’ refer to whether the policy insures against a certain risk not whether
the insured can collect on an underlying policy.”); R.T. Vanderbilt Co., Inc. v. Hartford Accident
& Indem. Co., 171 Conn. App. 61, 283 (2017) (“Because Continental’s reading of the policy
language is equally plausible on its face and best comports with other specific provisions of the
policy, the overall policy structure, and the conclusions reached by our sister courts, we conclude
that the trial court properly determined that Coverage B unambiguously does not require the
insurer to defend claims that would have been covered by underlying insurance but for its
exhaustion.”); Nooter Corp. v. Allianz Underwriters Ins. Co., 536 S.W.3d 251, 282 (Mo. Ct.
App. 2017) (finding that “occurrence not covered by” language “obligates these excess insurers
to defend Nooter only if the terms of these excess policies cover an occurrence and the terms of
the underlying insurance does not”); but see In re Viking Pump, Inc., 148 A.3d 633, 662 (Del.
2016) (finding that “personal injury . . . covered under this policy . . . but not covered under any
underlying policy” includes not covered because of exhaustion); Hopeman Bros., Inc. v. Cont’l
Cas. Co., 307 F. Supp. 3d 433, 465 (E.D. Va. 2018) (following Viking Pump in interpreting a
defense provision that applies to specified “injury or damage covered under this policy . . . but
not covered under any underlying policy”)). 42
The Court’s research reveals no legal support for Utica’s interpretation of the “occurrence not covered by”
language in its umbrella policies at the time it extended coverage for defense expenses to Goulds in 2003. (Ex. P-8,
at A-0003510). Viking Pump appears to be the first court to find that “not covered” included a loss not covered by
reason of exhaustion. Viking Pump, Inc. v. Century Indem. Co., No. CV10C06141, 2013 WL 7098824, at *24, 2013
Del. Super. LEXIS 615, at *77 (Del. Super. Ct. Oct. 31, 2013) (“Liberty’s policies are clear that ‘covered’ and ‘not
covered’ refer to payments, or money available.”); cf. Pergament Distribs., 128 A.D.2d at 761 (finding in 1987 that
“covered” and “not covered” refer to risk not collectibility); Mission Nat. Ins. Co. v. Duke Transp. Co., 792 F.2d
550, 553 (5th Cir. 1986) (“When an excess insurer uses the term ‘collectible’ or ‘recoverable’ it is agreeing to drop
down in the event the primary coverage becomes uncollectible or unrecoverable; on the other hand, when an excess
insurer uses the term ‘covered’ or ‘not covered,’ it is agreeing to drop down only in the event that the terms of the
underlying policy do not provide coverage for the occurrence or occurrences in question.”); Am. Special Risk Ins.
Co., 975 F. Supp. at 1026 (finding in 1997 that “the phrase ‘not covered’ in this policy refers to a situation different
from the exhaustion of primary insurance”).
42
42
The policy language in Viking Pump is materially different than the policy language here.
The defense provision at issue in Viking Pump does not contain the language “occurrence not
covered by”; instead the provision there applied to “personal injury . . . covered under this policy
. . . but not covered under any underlying policy.” 148 A.3d at 660 (emphasis added). The
Supreme Court of Delaware, applying New York law, and reviewing the policy as a whole,
including a different definition of “retained limit” than the definition here, found that the “plain
language . . . suggests that the policies were intended to provide coverage ‘if any underlying
policy . . . [was] inapplicable by reason of exhaustion.’” 148 A.3d at 662. The court concluded
that “[a] reading of ‘covered’ to refer to whether the primary policy provides coverage, and not
whether it is collectible, distorts the actual purpose of the . . . umbrella policies.” Viking Pump,
148 A.D.3d at 662. Unlike the 1973 Umbrella here, the policy in Viking Pump associated “the
term ‘cover’ both with risks assumed by the insurer and with payment obligations maintained by
the insured.” Viking Pump, 148 A.3d at 662 n.127. Given all of these differences in the policy
language, the Court does not find Viking Pump persuasive in interpreting the 1973 Umbrella and,
in any event, is persuaded by the other caselaw cited in this decision.
The Court concludes that, because the asbestos claims were covered by the 1973 Primary,
the 1973 Umbrella (with the 1973 defense endorsement) did not obligate Utica to pay
supplemental defense expenses upon exhaustion of the 1973 Primary. Accordingly, the Court
turns to Utica’s argument that, even if the 1973 Umbrella did not obligate Munich to pay
expenses supplemental to losses, the 1973 Certificate imposes an independent obligation on
Munich to pay the defense and declaratory judgment expenses billed.
43
D.
Independent Obligation Under the Certificate to Pay Expense 43
Utica argues that the “allocated loss expense” provision in the 1973 Certificate imposes
on Munich an independent obligation to pay Utica’s expenses even if the 1973 Umbrella did not
“legally obligate” Utica to pay expenses on Goulds’ behalf. (Dkt. No. 431, at 10). Utica asserts
that this provision also obligates Munich to pay a portion of its declaratory judgment expenses.
(Dkt. No. 431, at 10–14). Munich responds that the 1973 Certificate covers only what is covered
under the reinsured policy and that Utica’s argument “is clever, but without legal precedent or
support in the reinsurance industry.” (Dkt. No. 430, at 20–23, 43–45).
At the summary judgment stage, the Court found that the “allocated loss expense”
provisions in the Certificates was ambiguous:
Munich argues that the [allocated loss expense] provisions [in
Paragraph 3] cannot be read without reference to Paragraph 1, which
specifies that Munich’s obligation to indemnify Utica for “losses or
damages” is for those “losses or damages” that Utica is “legally
obligated to pay” under the reinsured policy; in other words, Munich
argues that the expenses must have been those Utica was “legally
obligated to pay” under the Umbrellas. But the fact that “losses or
damages” are explicitly subject to the requirement that Utica be
legally obligated to pay them under the terms of the Umbrellas
reasonably implies, as Utica argues, that “allocated loss expenses”
which are not explicitly subject to the same requirement, are not tied
to the Umbrellas. This implication is not strong enough in the
context of the Certificates as a whole to show that such expenses are
not tied to the underlying Umbrella policies; however, it is
Munich previously argued that the 1973 Certificate’s $5 million limitation of liability capped its reinsurance
liability on the 1973 Certificate. This Court found that “the Certificate’s limit of liability unambiguously applies to
expenses” and granted Munich’s motion for summary judgment. See Utica Mut. Ins. Co. v. Munich Reins. Am., Inc.,
976 F. Supp 2d 254, 268 (N.D.N.Y. 2013). The Second Circuit, however, disagreed. The Second Circuit noted that,
while Paragraph one expressly made Munich’s obligation to indemnify Utica for “losses or damages” “subject to”
the Certificate’s limit of liability, the omission of this language from Paragraph three, which describes Munich’s
liability for expenses, rendered the Certificate ambiguous. Utica Mut. Ins. Co. v. Munich Reins. Am., Inc., 594 F.
App’x 700, 703 (2d Cir. 2014). There is no presumption of expense-inclusiveness, and “a party is bound by the
terms to which it has agreed.” Id. at 704. The Second Circuit thus held that “interpreting the Certificate requires
consideration of extrinsic evidence” and remanded. Id. at 704–05. Munich, however, subsequently withdrew its
assertion that its liability for loss and expense combined was capped at the limit of reinsurance accepted. (Dkt. No.
180, at 6).
43
44
“sufficient to render the Certificate ambiguous.” Utica Mut. Ins. Co.
v. Munich Reins. Am., Inc., 594 F. App’x 700, 703 (2d Cir. 2014).
Utica Mut. Ins. Co., 2018 WL 1737623, at *20, 2018 U.S. Dist. LEXIS, at 60–61. As the parties
had not fully briefed this issue, the Court proceeded no further and denied the parties’ motions
for summary judgment on this issue. Id. Now, having considered the 1973 Certificate as a whole
and the parties’ arguments, the Court finds that the 1973 Certificate does not contain an
independent requirement obligating Munich to pay defense or the declaratory judgment expenses
billed in this case.
“Reinsurance contracts are governed by the same principles that govern contracts
generally.” Glob. Reins. e Corp. of Am., 30 N.Y.3d at 518. “Reinsurance, like any other contract,
depends upon the intention of the parties, to be gathered from the words used, taking into
account, when the meaning is doubtful, the surrounding circumstances” Id. (quoting London
Assur. Corp. v. Thompson, 170 N.Y. 94, 99 (1902)). Thus, a reinsurance certificate “should be
‘read as whole, and every part will be interpreted with reference to the whole.’” Id. (quoting Beal
Sav. Bank v. Sommer, 8 N.Y.3d 318, 324–25 (2007)). “[S]ingle clauses cannot be construed by
taking them out of their context and giving them an interpretation apart from the contract of
which they are a part.” Analisa Salon, Ltd. v. Elide Properties, LLC, 30 A.D.3d 448, 448–491
(2d Dep’t 2006). A reinsurance certificate, “while serving as written confirmation of a contract,
might not in and of itself constitute the fully integrated agreement”; the underlying reinsured
policy is not extrinsic evidence. Glob. Reins. Corp. of Am., 30 N.Y.3d at 519.
The declarations page of the 1973 Certificate states: “In consideration of the payment of
the net premium and subject to the general conditions set forth on the reverse side hereof the
reinsurer does hereby reinsure.” (Ex. P-4, at MRA 10181). The declarations page identifies the
1973 Umbrella that is the subject of reinsurance. (Ex. P-4, at MRA 10181). Munich argues that,
45
by the very nature of a facultative reinsurance contract, it only agreed to reinsure what Utica
agreed in the first instance to insure. See, e.g., Glob. Reins. Corp. of Am., 30 N.Y.3d at 513 (“[I]n
facultative reinsurance, the reinsurer agrees to indemnify the cedent for all or a portion of the
cedent’s risk under a single policy in the event of a loss.”). 44 Utica, on the other hand, relies on
the conditions on the back of the Certificate, arguing that Munich agreed to reinsure “subject to”
those conditions. (Ex. P-4, at MRA 10181); see, e.g., Clearwater Ins. Co., 906 F.3d at 18 (noting
that a reinsurer’s obligations hinge on the terms and conditions on the certificate when it agreed
to reinsure “subject to” those terms and conditions).
1.
Loss Expenses
Paragraph 3 of the 1973 Certificate states, in relevant part:
The Reinsurer shall be liable for its proportion of allocated loss
expenses incurred by the Company in the same ratio that the
Reinsurer’s share of the settlement or judgment bears to the total
amount of such settlement or judgment under the policy reinsured.
The term “allocated loss expense” means all expenses incurred in
the investigation, adjustment and litigation of claims or suits, but
excluding the office expenses of the Company and the salaries and
expenses of all employees of the Company.
(Ex. P-125). Paragraph 4 further provides: “The Company has the obligation to investigate and
defend claims or suits affecting this reinsurance and to pursue such claims or suits to final
determination.” (Ex. P-125). 45
Maneval, Utica’s own expert, agreed at trial that the “reinsurer reinsures what the policy insures.” (T. 2187–88).
Further, Martin, who was extensively involved in the litigation with Goulds and Utica’s reinsurance billings and is,
at present, Utica’s chief operating officer, (T. 397), was asked at trial whether “[f]acultative reinsurance is
concurrent in nature and [if] facultative reinsurers only reinsurer [sic] what is covered under your policies?” (T.
583–84). She responded: “Yes. They will cover what was covered under the terms and conditions of our policies.”
(Id.). Munich’s employee, Spivey, similarly testified that she understood the 1973 and 1977 Certificates to
“provide[] the coverage that the policy provides” and that there was not “any independent coverage or expansive
coverage beyond what is in the policy itself.” (T. 241–42).
44
Utica now cites Paragraph 4 in support of its argument that Munich is liable for loss expenses outside the scope of
the policy insured. Paragraph 4, by its terms, does not impose any obligation on Munich. Under Paragraph 4, Utica
is required to give Munich notice of claims and subsequent developments that may involve the reinsurance, and “has
the obligation to investigate and defend claims or suits affecting” the reinsurance. The Court notes that Utica did not
45
46
While Paragraph 1 obligates Munich to indemnify Utica “against losses or damages” that
Utica is “legally obligated to pay,” Paragraph 3 obligates Munich to pay its proportion of
allocated loss expenses incurred” by Utica. Under New York law, to “incur” has been defined
for insurance purposes to mean “to become liable or subject to.” Metz v. U.S. Life Ins. Co. in City
of N.Y., 662 F.3d 600, 602 (2d Cir. 2011). Further, “[t]o incur a charge under New York law, an
insured must at some point be legally liable to pay that charge, even if liability is later
extinguished prior to payment by the insured.” Metz, 662 F.3d at 602 (quoting Rubin v. Empire
Mut. Ins. Co., 25 N.Y.2d 426, 429 (1969)). Utica would not be “legally liable to pay” Goulds’
defense expenses unless the Umbrella policy required it.
The parties’ conduct further supports this conclusion. “Only when a contract is
ambiguous can the interpretation placed upon it by the parties, as shown by their conduct, be
considered in determining their intent, and even then, the parties’ practices are ‘merely an
interpretive tool and cannot be used to create a contractual right independent of some express
source in the underlying agreement.’” Adamo v. City of Albany, 156 A.D.3d 1017, 1018 (3d
Dep’t 2017) (quoting Karol v. Polsinello, 127 A.D.3d 1401, 1404 (3d Dep’t 2015)). Here, at all
relevant times, Utica’s conduct indicates that it paid expenses and billed them to Munich based
on its contemporaneous interpretation of the terms of the underlying umbrella policies, rather
than a belief that the reinsurance certificates required Munich to pay defense expenses in all
contexts. (Ex D-154, at MRA73 03448–49; Ex. D-157, at MRA73 00065, T. 406, 508-09).
While Utica cites Employers Insurance Co. of Wausau v. American Reinsurance Co., 256
F Supp. 2d 923 (W.D. Wis. 2003), that case considered a reinsurer’s liability for declaratory
rely on or cite Paragraph 4 in its discussions with Munich before bringing this action, (Ex. P-111), or in its
opposition to Munich’s motion for summary judgment on defense costs, (Dkt. 310), and, in light of the Court’s
analysis of the language in Paragraph 3, the Court declines to read an obligation to pay expenses beyond the policy
based on Paragraph 4.
47
judgment expenses incurred in litigating coverage of the underlying policy, not defense costs
outside the scope of coverage of that policy. 46 Here, interpreting the language of the Certificate
with reference to the nature of facultative insurance—to reinsure a cedent’s risk—and
considering New York’s interpretation of “incurred” in other types of insurance policies to mean
“liable for or subject to,” as well as Utica’s course of conduct, the Court does not find Utica’s
interpretation, which would require Munich to pay for defense expenses beyond the scope of the
coverage under the umbrella policy, to be a reasonable interpretation of the reinsurance contract.
Accordingly, because the 1973 Umbrella did not require Utica to pay Goulds’ defense expenses
as the asbestos claims were occurrences covered by the 1973 Primary, Munich did not breach the
1973 Certificate by refusing to pay expense-supplemental defense costs.
2.
Declaratory Judgment Expenses
Even assuming that Utica was “legally obligated” to pay declaratory judgment expenses
within the meaning of the Certificates, the Court finds that the definition of “allocated loss
expense” is unambiguous and does not include the declaratory judgment expenses here. The
1973 Certificate defines this phrase as “all expenses incurred in the investigation, adjustment and
litigation of claims or suits, but excluding the office expenses of the Company and the salaries
and expenses of all employees of the Company.” (Ex. P-125). Munich argues that word
“allocated” means that the expense is “linked or ‘allocated’ to a particular claimant” and that
declaratory judgment expenses cannot be “allocated” because they “are Utica’s own expenses,
The other case on which Utica relies, Penn Re, Inc. v. Aetna Cas. & Sur. Co., No. 85-cv-385, 1987 WL 909519,
1987 U.S. Dist. LEXIS 15252 (E.D.N.C. June 30, 1987), applied North Carolina law, interpreted different
contractual language, and, in any event, has not been followed. See Bellefonte Reins. Co. v. Aetna Cas. & Sur. Co.,
903 F.2d 910, 914 (2d Cir. 1990) (declining to follow the reasoning of Penn Re); see also Utica Mut. Ins. Co. v.
Munich Reins. Am., Inc., 976 F. Supp. 2d 254, 268 n.15 (N.D.N.Y. 2013); Pac. Emp’rs Ins. Co. v. Global Reins.
Corp. of Am., No. 09-cv-6055, 2010 WL 1659760 at *5 n.5, 2010 U.S. Dist. LEXIS 40605, at *16 n.5 (E.D. Penn.
Apr. 23, 2010).
46
48
not expenses paid on behalf of its policyholder.” (Dkt. No. 430, at 21). Indeed, in its internal
records, Utica labeled declaratory judgment expenses as “unallocated” expense. (Dkt. No. 449-1,
¶ 137; Exs. D-521, D-520, D-1; T. 134–35). Relying on Maneval’s testimony, Utica argues that
the phrase is broad in nature and the use of “claims or suits” in the definition indicates that the
Certificates intended to cover declaratory judgment expenses. (Dkt. No. 431, at 52).
While the Court found ambiguity in the 1973 Certificate as to the larger question of
whether Paragraph 3, which addresses “allocated loss expense,” was a standalone provision
requiring Munich to pay its share of expenses regardless of the underlying 1973 Umbrella, the
Court did not squarely address the meaning of the phrase itself. The Court begins with the
modifiers “allocated loss.” While “loss” is not defined, the term is also used in Paragraph 1,
obligating Munich to indemnify Utica against “losses . . . resulting from occurrences” under the
1973 Umbrella. And Paragraph 3 defines “allocated loss expenses” as “all expenses incurred in
the investigation, adjustment and litigation of claims or suits.” Thus, to be an “allocated loss
expense,” an expense must be allocable to a loss claim that Utica was obligated to pay as a result
of an occurrence under the 1973 Umbrella, i.e., in connection with a particular asbestos claim or
suit. See, e.g., Federal Ins. Co. v. Zurich Am. Ins. Co., 445 F. App’x 405, 408–09 (2d Cir. 2011)
(finding that term “allocated loss expense,” according to the parties’ definitions “broadly include
costs that are related to the insurer’s investigation litigation, or settlement of a claim” and that
“[t]hese definitions . . . reveal that the modifier ‘allocated’ refers to a particular claim or loss, as
opposed to, for example, and insurer’s general office expenses or overhead”). There is no
evidence that Utica incurred declaratory judgment expenses in connection with the investigation,
adjustment, and litigation of an asbestos claim or suit under the 1973 Umbrella—indeed, the
declaratory judgment actions primarily involved issues concerning the primary policies, orphan
49
shares, and control of the defense: such expenses could not be allocated to the payment of a loss
under the 1973 Umbrella. Moreover, Utica itself deemed its declaratory judgment expenses
“unallocated loss expenses” prior to allocating them across the policy years. (Dkt. No. 449-1,
¶ 137; Exs. D-521, D-520, D-1; T. 134–35).
Utica argues that limiting expense in the 1973 Certificate “to expense that the reinsured
policy covered, then excluding certain Utica employee salaries and office expenses . . . is
superfluous since an insurance policy issued to Goulds does not cover Utica employee salaries
and office expenses.” (Dkt. No. 431, at 12). The Court disagrees. There is no question that
Utica’s employees spent time handling claims made under the 1973 Umbrella; to the extent Utica
allocated the time and resources its employees spent handling each claim to the loss it paid on
such a claim, this provision makes it clear that such expenses are not recoverable under the 1973
Certificate. 47
Utica relies on Employers Insurance in support of its argument that 1973 Certificate
requires Munich to pay declaratory judgment expenses. (Dkt. No. 431, at 4, 14). Although
Employers Insurance involved nearly identical reinsurance language, the declaratory judgment
expenses at issue there were incurred “in regard to a claim alleged to be within the policy
provision, namely the claim the policy covered environmental liability.” 256 F. Supp. 2d at 925.
Here, Utica incurred the declaratory judgment expenses at issue litigating, among other things,
issues concerning aggregate limits in primary policies, orphan shares, and control of defense, and
To the extent Utica argues that Paragraph 4 implicitly obligates Munich to pay declaratory judgment expenses
because Utica must “investigate and defend claims or suits affecting this reinsurance and []pursue such claims or
suits to final determination,” the Court notes that Munich only expressly assumed liability for “allocated loss
expenses incurred.” (See supra note 45). Moreover, Paragraph 4 also obligates Utica to advise Munich “promptly of
any claim and subsequent developments,” which “may involve the reinsurance.” Utica notified Munich of the
orphan share issue because it could have “material impact on billings,” but did not notify Munich about the
significant aggregate limit issue. (T. 530, 541).
47
50
does not contend it incurred the expenses litigating an alleged liability within the provisions of
the 1973 Umbrella. Thus, Employers Insurance does not aid Utica in this case. 48
Fireman’s Fund Insurance Co. v. General Reinsurance Corp., No. 03-cv-4406, 2005 WL
1865424, 2005 U.S. Dist. LEXIS 43650 (N.D. Ca. Aug. 5, 2005), and Affiliated FM Insurance
Co. v. Constitution Reinsurance Corp., 416 Mass. 839 (1994), both of which addressed reinsurer
liability for a share of the cedent’s declaratory judgment expenses, do not aid Utica either. In
Affiliated FM Insurance, the court addressed whether the reinsurance certificate, which required
the reinsurer to pay its share of “expenses [other than office expenses and payments to any
salaried employee] incurred by the Company in the investigation and settlement of claims or
suits,” included “legal expenses incurred in defending a declaratory judgment brought by the
insured.” 416 Mass. at 842. The court found the word “expenses” to be ambiguous, explaining:
Expenses is a word of broad import. It has no fixed definition. It is
of varying signification and is dependent for its precise meaning
upon its connection and the purpose to be accomplished by its use.
It is comprehensive enough to include a wide range of
disbursements. Standing alone, it is ambiguous.
Id. at 844 (quoting Pittsfield & N. Adams R.R. v. Boston & Albany R.R., 260 Mass. 390, 397
(1927)). It therefore remanded for consideration of evidence of custom and trade practice to
determine the meaning of the agreement. Id. at 846.
Utica asks this Court to revisit its in limine ruling declining to find that Munich is collaterally estopped by
Employers Insurance. (Dkt. No. 431, at 14). Utica argues that there are cogent and compelling reasons not to apply
the law of the case doctrine because the Court erroneously applied New York collateral estoppel law instead of
federal collateral estoppel law. In fact, upon further research, it appears that the preclusive effect of this federal
diversity decision from Wisconsin would not be determined by reference to federal substantive law but rather the
state law of Wisconsin. See Semtek Int’l Inc. v. Lockheed Martin Corp., 531 U.S. 497, 508 (2001). Neither Utica nor
Munich has briefed the applicability of collateral estoppel under Wisconsin law; the Court declines to address that
issue without any briefing and therefore denies Utica’s request. Nevertheless, the Court notes, in passing, that
collateral estoppel would be unwarranted because the declaratory judgment expenses incurred in Employers
Insurance, unlike here, were expended litigating coverage of a coverage claim under the reinsured policy. See
Employers Insurance, 256 F. Supp. 2d at 924; see also DeGuelle v. Camilli, 724 F.3d 933, 937–38 (7th Cir. 2013).
48
51
In Fireman’s Fund, the court, citing Affiliated FM Insurance, also found that the word
“expenses” in the certificates at issue was ambiguous. 2005 WL 1865424, at *11, 2005 U.S.
Dist. LEXIS 43650, at *31. There, the certificates bound the reinsurer to pay “its proportion of
expenses, other than Company [Fireman’s Fund] salaries and office expenses incurred by the
Company [Fireman’s Fund] in the investigation and settlement of claims or suits.” 2005 WL
1865424, at *4, 11, 2005 U.S. Dist. LEXIS 43650, at *15–16. Relying on expert testimony
concerning “the custom and practice in the industry at the time the Certificates were issued,” the
court concluded that “there was a widespread custom and practice among reinsurers, including
Gen Re, of paying DJ expenses under facultative reinsurance certificates containing language
similar to or the same as the language at issue here” and that “the disputed language covers the
DJ expenses sought by Fireman’s Fund in this case.” Id. at *12, 2005 U.S. Dist. LEXIS 43650, at
*33.
Here, the word “expenses” does not stand alone but is preceded by the modifiers
“allocated loss,” which expressly tie the expenses for which Munich is responsible to those Utica
incurred in the investigation, litigation, and settlement of—in this case, asbestos—claims and
suits under the Umbrellas. Thus, Affiliated FM Insurance and Fireman’s Fund, which addressed
certificate language obligating reinsurers to pay “expenses,” are inapposite. The Court concludes
that Munich is not obligated under the Certificates to pay the declaratory judgment expenses at
issue in this case. 49
Having found that the 1973 Certificate does not obligate Munich to pay “allocated loss expense” unless the 1973
Umbrella does, and that the term “allocated loss expense” is unambiguous and does not include the declaratory
judgment expenses at issue in this case, the Court need not consider the expert testimony of Andrew Maneval on the
custom and practice of declaratory judgment expenses in the reinsurance industry. At trial, Maneval, who testified as
an expert witness for Utica, testified that in his opinion, the Certificates obligated the “reinsurer . . . to pay
declaratory judgment expenses.” (T. 2004). Maneval explained that in the 1970s there were “different types of
clauses” and those that contained “broader kinds of terms” that referred to “defending claims and suits” “tend to
support the reinsurer’s obligation to pay [declaratory judgment expenses] as an element of defense expense.” (T.
2005–05). Maneval states that he did not believe there was a “general practice that all fact certs . . . cover
49
52
In any event, the Court finds that Utica has failed to prove what, if any of the declaratory
judgment expenses that it allocated to the 1973 Umbrella, $367,372.52, (T. 92–93; Dkt. No. 4501, ¶ 70), and the share of those expenses that it assigned to Munich, could be attributed to the
reinsured umbrella policy. The evidence at trial showed that the California and New York
declaratory judgment actions concerned, among other things, the absence of aggregate limits in
the primary policies. (Ex. D-279, at D-0014772; Ex. P-238, at UN-00004–5). Utica, however,
assigned no declaratory judgment expenses to the primary policies, but shifted them to the
umbrella policies. (T. 1555–56). Thus, Utica failed to prove that Munich breached the 1973
Certificate by refusing to pay a share of declaratory judgment expenses.
E.
Utica II: 1977 Certificate – Reimbursement
In Utica II, Munich contends that because it had no obligation to pay supplemental
expenses under the 1977 Umbrella Policy, Utica breached the 1977 Certificate by billing Munich
for these expenses; Munich seeks an award of damages against Utica in the amount of its alleged
overpayment—$789,813.47. (Dkt. No. 430, at 53). 50 Utica argues that the 1977 Certificate
contains no right of reimbursement and has raised a number of affirmative defenses, including
account stated, assumption of the risk, and voluntary payment. (Dkt. No. 442, at 32–35). Because
Utica has proved by a preponderance of the evidence that Munich made a voluntary payment, the
Court need not address Utica’s remaining arguments.
[declaratory judgment] expense” but that, in his opinion, there “is a custom regarding the breadth or the narrowness
of the . . . expense obligation that . . . determines how the industry responds.” (T. 2157). Maneval identified “the
operative words” in the 1973 and 1977 Certificates as “claims and suits” and explained that when a certificate refers
“to any kinds of claims or suits, [his] understanding is the normal practice is to cover declaratory judgment
expenses.” (T. 2158). Maneval did not, however, address the impact or meaning of “allocated loss expense.”
The Court assumes, without deciding, that the 1977 Umbrella, which also contains the “occurrence not covered
by” language, did not require to Utica to provide a defense to Goulds. (Ex. P-92, at R-0007676). The Court likewise
assumes that the 1977 Certificate, (Ex. P-113), did not independently obligate Munich to pay defense expenses.
50
53
The voluntary payment doctrine “precludes a plaintiff from recovering payments ‘made
with full knowledge of the facts’ and with a ‘lack of diligence’ in determining his contractual
rights and obligations.” Spagnola v. Chubb Corp., 574 F.3d 64, 72 (2d Cir. 2009) (quoting Dillon
v. U–A Columbia Cablevision of Westchester, Inc., 292 A.D.2d 25, 27 (2d Dep’t 2002), and
Gimbel Bros. v. Brook Shopping Ctrs., Inc., 118 A.D.2d 532, 536 (2d Dep’t 1986)). “The
doctrine does not apply, however, when a plaintiff made payments under a mistake of fact or law
regarding the plaintiff’s contractual duty to pay.” Spagnola, 574 F.3d at 72 (citing Dillon, 292
A.D.2d at 27). As this is an affirmative defense, see Wurtz v. Rawlings Co., LLC, No. 12-cv01182, 2014 WL 4961422, at *6, 2014 U.S. Dist. LEXIS 141869, at *15 (E.D.N.Y. Oct. 3,
2014), Utica bears the burden of proof, see Barton Grp., Inc. v. NCR Corp., 796 F. Supp. 2d 473,
498 (S.D.N.Y. 2011).
In November 2007, Munich received its first bill from Utica under the 1977 Certificate,
for the $1 million liability limit for loss and $731,368.21 in expense. (Ex. D-154, at MRA73
03450). Although he had not seen any policy documentation, Miller, Munich’s claims handler,
had the impression from Utica’s “statements” and “claim analysis” that “some of the umbrella
policies,” including the 1977 Umbrella Policy, “had expense in addition to limits.” (T. 1744–45).
On December 6, 2007, prior to paying the bill, Miller spoke with Martin, then a Utica associate
claims attorney, who explained that Utica was allocating loss and expense to “all triggered
policies pursuant to the terms of their policies.” (Ex. D-157, at MRA73 00065). They discussed
the discrepancy between this expense-supplemental billing to Munich and the settlement’s
expense-inclusive treatment of the 1977 Umbrella policy. (Ex. D-157, at MRA73 00065). Miller
requested that Martin send “available policy documentation.” (Ex. D-157, at MRA73 00065). 51
Munich argues that Miller did not request further documentation on the 1977 Umbrella Policy or how Utica
determined it was expense-supplemental because he believed that Utica had already sent all available policy
51
54
Martin knew that Miller wanted the 1977 Umbrella policy and knew that Utica had reconstructed
that policy, including the provisions governing defense expenses and the “not covered by
language.” (T. 560; Ex. P-92). Because those files were in a “unit where” she “no longer
worked,” however, Martin instead sent Miller what she had “on her hard drive,” none of which
included any pertinent policy language. (T. 560, Ex. D-488). Miller understood that Utica was
claiming that the 1977 Umbrella was expense-supplemental and billing Munich accordingly, and
that none of the documentation Utica had sent revealed any language indicating that the 1977
Umbrella was expense-supplemental; yet he recommended, and his supervisors approved,
payment of the $1,731,368.21 bill. In November 2012, approximately five years later, Munich’s
attorneys obtained the 1977 Umbrella policy and saw the defense expense provisions
(“occurrence not covered by” language) for the first time. (Ex. D-110, at MRA77 1308).
Based on these facts, the Court concludes that Munich was fully aware that Utica was
billing on an expense-supplemental basis. Munich claims mistake of fact and contends that it was
misled by Utica because it did not know until after payment that the 1977 Umbrella did not cover
defense expenses. Munich, however, was fully aware at the time of payment that none of the
policy documentation Utica had provided showed that the 1977 Umbrella was expensesupplemental, and that Utica’s settlement treatment reflected the 1977 Umbrella policy as
documentation in response to his December 6, 2007 request, which concerned both the 1973 and 1977 Umbrellas,
and relied on Utica’s “misrepresentations” in recommending payment. (Dkt. No. 430, at 55–56; D-157, at MRA73
00065; T. 1752–53). However, the Court does not find Miller’s testimony that he believed Utica had sent all
available policy documentation credible because, shortly after receiving that documentation, Miller continued to
press Utica for additional documentation regarding the 1973 Umbrella, including “specimen copies of the umbrella
coverage form that Utica would have been using at the time the 1973 was issued,” and asked for an “explanation of
how it was determined that the 1973 policy treated expense as part of loss.” (Ex. P-162, at R-0074003). Indeed,
Miller requested and received authority to pay the bill under the 1977 Certificate on December 14, 2007, the same
day he requested specimen copies of the 1973 Umbrella. (Ex. P-162, at R-0074003; Ex. P-91, at MRA77 277). The
Court therefore finds Munich’s failure to press Utica for additional documentation, knowing that Utica was billing
Munich in a manner for which there was no documentary support, to be attributable to a lack of diligence—not to
being misled.
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expense-inclusive. Munich paid the reinsurance bill anyway, without obtaining even the
specimen form or further pressing Utica to explain the basis for its determination that the 1977
Umbrella was expense-supplemental. Under these facts, the Court finds that Munich lacked
knowledge of the terms of the policy not because it was misled but because of its lack of
diligence. See, e.g., Spagnola, 574 F.3d at 73 (distinguishing lack of knowledge due to being
misled, which is not barred by the voluntary payment doctrine, from a lack of knowledge due to
a lack of diligence). And under New York law, “the voluntary payment doctrine precludes a
party from recovering voluntary payments ‘made with full knowledge of the facts’ if the party’s
ignorance of its contractual rights and obligations resulted from a ‘lack of diligence.’” United
States ex rel. Feldman v. City of New York, 808 F. Supp. 2d 641, 657 (S.D.N.Y. 2011) (quoting
Spagnola, 574 F.3d at 72); see Gimbel Bros., 118 A.D.2d 532, 535–36 (2d Dep’t 1986) (holding
that tenant was not entitled to recover improper “Sunday charges” that it voluntarily made for
almost a year and a half before questioning them, and that, having “displayed a marked lack of
diligence in determining what its contractual rights were, [it] is therefore not entitled to the
equitable relief of restitution”).
Having full knowledge that it was being billed for expenses on an expense-supplemental
basis and that the documentation Utica had provided did not support its expense-supplemental
position, Munich paid the bill without protest or further inquiry. The Court does not condone
Martin’s failure to send the 1977 Umbrella Policy in response to Miller’s request for policy
documentation. But given the parties’ course of dealing and Miller’s continued requests for
additional information regarding the 1973 Umbrella Policy after Martin’s incomplete response,
the Court finds that Miller accepted the uncertainty surrounding the basis for the expensesupplemental billing and made a calculated decision to pay it rather than request more
56
information. See Chris Albritton Const. Co. v. Pitney Bowes Inc., 304 F.3d 527, 531–32 (5th Cir.
2002) (“Regarding mistake or accident, ‘[u]ncertainty about the facts, irrespective of the reason
for such uncertainty, is not the equivalent of a mistake of fact.’” (quoting Mobile Telecomm.
Techs. Corp. v. Aetna Cas. & Sur. Co., 962 F. Supp. 952, 956 (S.D. Miss. 1997))). As O’Kane,
who approved Miller’s request to pay Utica’s billing under the 1977 Certificate, has
acknowledged: “Munich’s decision to reimburse Utica for expenses in excess of the limit of
liability of the 1977 certificate was a business decision rather than a reflection of contract
language and depended upon a consideration of a number of variables, including: The nature of
the relationship, commercial considerations, the nature of the billed expense, and the benefit to
Munich resulting from Utica having incurred those expenses.” (T. 1948).
Munich therefore cannot rely on receipt of the actual terms of the 1977 Umbrella almost
five years later to defeat the voluntary payment doctrine. See Dillon, 292 A.D.2d at 27–28
(“Having full knowledge of the late fee and the circumstances under which it would be imposed,
the plaintiff cannot rely on her misconception of the actual costs associated with late payments to
defeat application of the voluntary payment doctrine.”); Gimbel Bros, 118 A.D.2d at 536 (“When
a party intends to resort to litigation in order to resist paying an unjust demand, that party should
take its position at the time of the demand, and litigate the issue before, rather than after,
payment is made.”). The Court concludes that Utica has proved by a preponderance of the
evidence that the voluntary payment doctrine bars Munich’s breach of contract claim.
IV.
CONCLUSION
For these reasons, it is
ORDERED that Utica’s request for entry of declaratory judgment is DENIED and that
the Clerk is directed to enter judgment in favor of Munich in Utica I, 6:12-cv-196; and it is
further
57
ORDERED that Munich’s request for entry of declaratory judgment is DENIED and
that the Clerk is directed to enter judgment in favor of Utica in Utica II, 6:13-cv-743; and it is
further
ORDERED that the Clerk is directed to close these cases.
IT IS SO ORDERED.
Dated: March 29, 2019
Syracuse, New York
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