Utica Mutual Insurance Company v. Clearwater Insurance Company

Filing 54

MEMORANDUM-DECISION and ORDER - That Clearwater's #35 Motion for Partial Summary Judgment is GRANTED. That Clearwater's liability, if any, under the 1978 Certificate and 1979 Certificate cannot exceed $5 million or $2.5 million respectively. That the parties contact Magistrate Judge Therese Wiley Dancks to schedule further proceedings in this matter. Signed by Chief Judge Gary L. Sharpe on 11/20/2014. (jel, )

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF NEW YORK
________________________________
UTICA MUTUAL INSURANCE
COMPANY,
Plaintiff,

6:13-cv-1178
(GLS/TWD)

v.
CLEARWATER INSURANCE
COMPANY,
Defendant.
________________________________
APPEARANCES:
OF COUNSEL:
FOR THE PLAINTIFF:
Cooper, Erving Law Firm
39 North Pearl Street
4th Floor
Albany, NY 12207
Sidley, Austin Law Firm
One South Dearborn Street
Chicago, IL 60603
FOR THE DEFENDANT:
Chadbourne, Parke Law Firm
12000 New Hampshire Avenue, NW
Washington, DC 20036
1301 Avenue of the Americas
New York, NY 10019

PHILLIP G. STECK, ESQ.

WILLIAM M. SNEED, ESQ.

DAVID M. RAIM, ESQ.

JOHN F. FINNEGAN, ESQ.
MELISSA K. DEPETRIS, ESQ.

Gary L. Sharpe
Chief Judge
MEMORANDUM-DECISION AND ORDER

I. Introduction
Plaintiff Utica Mutual Insurance Company commenced this diversity
action against defendant Clearwater Insurance Company, alleging breach
of contract claims and seeking declaratory relief. (Compl., Dkt. No. 1.)
Pending is Clearwater’s motion for partial summary judgment. (Dkt. No.
35.) For the reasons that follow, the motion is granted.
II. Background
Before delving into the relevant facts, it is useful first to provide a
brief overview of the subject matter of this dispute, including definitions of
industry jargon used below. This case involves reinsurance—a transaction
in which “one insurer . . . ‘cedes’ all or part of the risk it underwrites,
pursuant to a policy or group of policies, to another insurer.” Unigard Sec.
Ins. Co. v. N. River Ins. Co. (Unigard II), 4 F.3d 1049, 1053 (2d Cir. 1993)
(citations omitted). In other words, reinsurance is insurance of insurance,
the purpose of which “is to diversify the risk of loss.” Id. The insurance
company that issues a policy to a policyholder—here, Utica—is called the
insurer, the ceding insurer, or the reinsured. See generally id. Logically,
the insurance company that insures the insurer for a share of its liability

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under a policy—here, Clearwater—is called the reinsurer. Id.
As pertinent here, one type of reinsurance policy is a facultative
reinsurance policy, whereby “a[n] . . . insurer purchases reinsurance for a
part, or all, of a single insurance policy.” Id. at 1054. While there are many
types of insurance policies, this case concerns liability insurance policies,
which typically include a duty on the insurer to both defend and indemnify
its policyholder for liability claims. See generally Seaboard Sur. Co. v.
Gillette Co., 64 N.Y.2d 304, 310 (1984). Below, the court refers to amounts
an insurer pays to defend its policyholder as “expenses,” and amounts an
insurer pays to indemnify its policyholder as “losses.”
A.

Facts1
Utica, the insurer, issued a number of primary insurance policies,

including general and commercial general liability insurance policies, to
Goulds Pumps Inc. (Def.’s Statement of Material Facts (SMF) ¶ 5, Dkt. No.
35, Attach. 3.) Utica also issued umbrella policies to Goulds; specifically,
as relevant here, Utica issued an umbrella policy effective during the
calendar year 1978 (the “1978 Umbrella”) and an umbrella policy effective
during the calendar year 1979 (the “1979 Umbrella”). (Id. ¶ 6.) The
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Unless otherwise noted, the facts are not in dispute.

3

umbrella policies each have an indemnity liability limit of $25 million excess
of primary limits, per occurrence and in the aggregate. (Id. ¶ 8.)

Clearwater, the reinsurer, then agreed to issue facultative
reinsurance certificates (the “Certificates”) to Utica, and thereby reinsure a
portion of Utica’s exposure under both the 1978 Umbrella and the 1979
Umbrella. (Id. ¶¶ 9, 10.) The preamble of both of the Certificates provides
that, “[Clearwater],2 in consideration of the payment of premiums,
statements contained in the declarations, and subject to the terms and
General Conditions of this certificate does hereby reinsure [Utica as
follows]”; the Certificates then go on to state the terms and conditions.
(Dkt. No. 35, Attach 2. at 4, 8.) Notably, the Certificates contain a clause
titled “Section D [Clearwater]’s Liability and Basis of Acceptance” (the
“Liability Clause”), which identifies the portion of Utica’s exposure that
Clearwater agreed to reinsure. (Id.) Specifically, for the 1978 Umbrella,
and pursuant to certificate N-21163 (the “1978 Certificate”), Clearwater
agreed to reinsure 100 percent of the $5 million layer that exceeds $20

2

Clearwater was previously known as Skandia America Reinsurance Corporation.
(See generally Dkt. No. 35, Attach. 2 at 4-6.) Utica does not dispute the authenticity of either
certificate.

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million of the underlying policy limit. (Def.’s SMF ¶ 9; Dkt. No. 35, Attach. 2
at 4.) For the 1979 Umbrella, and pursuant to certificate N-22001 (the
“1979 Certificate”), Clearwater agreed to reinsure 16.6 percent (or $2.5
million) of the $15 million layer that exceeds $10 million of the underlying
policy limit. (Def.’s SMF ¶ 10; Dkt. No. 35, Attach. 2 at 8.)
In or about March 2003, Goulds, which had been named as a
defendant in asbestos claims, commenced an action against Utica, seeking
a declaration as to Utica’s coverage obligations. (Def.’s SMF ¶ 14.)
Around February 2007, Goulds and Utica settled the declaratory judgment
action, and, thereafter, Utica began making payments to Goulds, which
continue today. (Id. ¶ 15.) At some point in 2012, Utica began billing
Clearwater. (Id. ¶ 16.)
B.

Procedural History
Utica commenced this action on September 20, 2013, alleging that

Clearwater has breached its contractual obligations to Utica under, among
other contracts, the 1978 and 1979 Certificates. (See generally Compl.)
Following joinder of issue, (Dkt. No. 17), Clearwater filed the now-pending
motion for partial summary judgment, seeking a declaration that its liability,
if any, under the 1978 and 1979 Certificates is capped at $5 million and
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$2.5 million, respectively, (Dkt. No. 35).
III. Standard of Review
The standard of review pursuant to Fed. R. Civ. P. 56 is well
established and will not be repeated here. For a full discussion of the
standard, the court refers the parties to its decision in Wagner v. Swarts,
827 F. Supp. 2d 85, 92 (N.D.N.Y. 2011), aff’d sub nom. Wagner v.
Sprague, 489 F. App’x 500 (2d Cir. 2012).
IV. Discussion3
The sole issue presented by Clearwater’s motion is whether Utica
can recover defense costs and/or other expense payments in excess of the
sums stated in the Liability Clauses in the 1978 and 1979 Certificates—$5
million and $2.5 million, respectively. Relying on Second Circuit and New
York Court of Appeals case law, Clearwater contends that the Liability
Clauses establish absolute “limits” on its liability, and “caps the reinsurer’s

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Clearwater contends, and Utica does not disagree, that New York law governs this
dispute. (Dkt. No. 35, Attach. 1 at 3 & n.1.) The court agrees. Utica is organized under the
laws of New York and has a principal place of business in New York. (Compl. ¶ 2.) Further,
the 1978 and 1979 Certificates were underwritten and issued by Clearwater from its New York
offices, and were then delivered to Utica at its offices in New York. (Def.’s SMF ¶¶ 4, 11.)
Finally, the 1978 and 1979 Certificates reinsure a risk underwritten by Utica for Goulds, which
was, at the time, a New York-domiciled insured. (Id. ¶¶ 6, 7.) Thus, New York has the most
significant relationship to the transactions at issue here, which compels application of New
York law. See St. Paul Fire & Marine Ins. Co. v. Emp’rs Reins. Corp., 919 F. Supp. 133, 136
(S.D.N.Y. 1996); In re Liquidation of Midland Ins. Co., 16 N.Y.3d 536, 543-44 (2011).

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overall liability for both indemnity and expenses.” (Dkt. No. 35, Attach. 1 at
6-8.) Utica, however, argues that the court should deny Clearwater’s
motion because the case law relied upon by Clearwater is inapposite, and
Utica has presented an alternative and reasonable interpretation of the
Certificates that conflicts with Clearwater’s interpretation. (Dkt. No. 42 at 614.) In the alternative, Utica requests that the court defer ruling on the
motion because the language in the Certificates is ambiguous, thus
necessitating further discovery and consideration of extrinsic evidence. ( Id.
at 14-17.) The court agrees with Clearwater.
Under New York law, if contractual language is clear and
unambiguous, the court, as a matter of law, enforces the provisions in
accordance with their plain and ordinary meaning. See Vintage, LLC v.
Laws Constr. Corp., 13 N.Y.3d 847, 849 (2009). Where ambiguity is
absent from the contract, extrinsic evidence generally cannot be
considered in its interpretation. See W.W.W. Assocs., Inc. v. Giancontieri,
77 N.Y.2d 157, 162 (1990). “Ambiguity is present if language was written
so imperfectly that it is susceptible to more than one reasonable
interpretation.” Brad H. v. City of N.Y., 17 N.Y.3d 180, 186 (2011).
Whether an agreement is ambiguous is a question of law answered by the
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court. See Riverside S. Planning Corp. v. CRP/Extell Riverside, L.P., 13
N.Y.3d 398, 404 (2009). And “[w]hen the interpretation of an ambiguous
contract depends on extrinsic evidence, it presents a question of fact for a
jury.” Arrow Commc’n Labs., Inc. v. Pico Prods., Inc., 219 A.D.2d 859, 860
(4th Dep’t 1995); see Sutton v. E. River Sav. Bank, 55 N.Y.2d 550, 554
(1982). Unlike liability insurance policies, reinsurance contracts are not
construed against the drafter. See British Int’l Ins. Co. v. Seguros La
Republica, S.A., 342 F.3d 78, 81-82 (2d Cir. 2003).
Importantly, the exact question now before the court has been
considered and decided by both the Second Circuit and the New York
Court of Appeals. In Bellefonte Reins. Co. v. Aetna Cas. & Sur. Co., 903
F.2d 910, 914 (2d Cir. 1990), Unigard II, 4 F.3d at 1070-71, and Excess
Ins. Co. v. Factory Mut. Ins. Co., 3 N.Y.3d 577, 583-85 (2004), certificate
limit-of-liability provisions that were silent as to whether they were
expense-inclusive or -exclusive were deemed to be unambiguously
expense-inclusive. In Bellefonte, the Second Circuit reasoned that, where
the certificate contained prefatory language reciting that the reinsurer’s
coverage for losses and expenses was “subject to” the certificate’s stated
limit, “[a]ny other construction of the reinsurance certificate[] would negate
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the . . . subject to” provision. 903 F.2d at 914; accord Unigard II, 4 F.2d at
1070-71. Further, in Excess Insurance, the New York Court of Appeals
held that reinsurers “cannot be required to pay loss adjustment expenses in
excess of the stated limit in the reinsurance policy,” and, in so holding,
“follow[ed] the decisions of the United States Court of Appeals for the
Second Circuit as expressed in [Bellefonte and Unigard II].” 3 N.Y.3d at
583. The New York Court of Appeals went even further than the Second
Circuit, however, and noted that a facultative reinsurance certificate’s
stated limit provides an overall cap on the reinsurer’s liability unless it
expressly states that expenses are excluded from the certificate’s limit. Id.
at 583-84.
Here, as noted above, the preamble of both Certificates provides that
Clearwater would reinsure Utica “subject to the terms and General
Conditions of th[e] certificate.” (Dkt. No. 35, Attach. 2 at 4, 8.) Additionally,
both Certificates then go on to identify their terms and conditions. ( Id.)
Importantly, both Certificates contain a Liability Clause, which identifies the
portion of Utica’s exposure that Clearwater agreed to reinsure—in the 1978
Certificate, “100 [percent] of the layer $5 [million] excess of $20 [million] of
the [underlying policy] limit,” and in the 1979 Certificate, “16.6 [percent]
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($2[.5 million]) of the layer $15 [million] excess of $10 [million] of the
[underlying policy] limit.” (Id.) Further, nowhere in either Certificate does it
state that expenses or other costs are excluded from Clearwater’s liability.
Thus, Clearwater argues, (Dkt. No. 35, Attach. 1 at 6-8), and the court
agrees, that the holdings of Bellefonte, Unigard II, and Excess Insurance
are directly applicable to the language in the 1978 and 1979 Certificates.
See Utica Mut. Ins. Co. v. Munich Reins. Am., Inc., 976 F. Supp. 2d 254,
263-68 (N.D.N.Y. 2013). Nevertheless, the court addresses some of
Utica’s arguments below.
A.

Absence of the Word “Limit”
Utica contends that, because the Certificates do not specifically use

the word “limit,” but instead use the phrase “[Clearwater]’s Liability and
Basis of Acceptance” and describe Clearwater’s liability as a “share,”
Bellefonte, Unigard II, and Excess Insurance do not apply, because, in
each of those cases, the certificates at issue used the word “limit.” (Dkt.
No. 42 at 7-11.) This argument is unpersuasive.
Clearwater’s liability is described as a percentage share of the
underlying policy limit. (Dkt. No. 35, Attach. 2 at 4, 8.) Thus, it logically
follows that a percentage share of a policy limit is itself a limit on liability,
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despite the absence of the word “limit.” At least one other court has
rejected a similar argument to the one advanced by Utica here. In
Continental Casualty Co. v. Midstates Reinsurance Co., the insured argued
that the certificate’s “‘reinsurance assumed’ [provision] represents a share
of losses, but not a limit on expenses,” and that “because there is no
mention of the word ‘limit’ . . . there is no reason to find that a limit on
expenses is clearly and unambiguously provided for in the reinsurance
certificate.” No. 2012-CH-42911, 2013 WL 4807551, at *4-5 (Ill. Cir. Ct.
Aug. 29, 2013). In rejecting the insured’s arguments, the court stated that,
“[i]n the reinsurance certificates in [Bellefonte, Unigard II, and Excess
Insurance] . . . there is a negotiated maximum amount of liability provided
for on the face of the reinsurance certificates,” and describing the
maximum amount of liability in terms of shares of losses, or failing to
specifically use the word “limit” does not alter the conclusion that total
liability is capped. Id. Similarly, the Liability Clauses here, titled
“[Clearwater]’s Liability and Basis of Acceptance,” represent the maximum
amount of liability that Clearwater agreed to insure, and the fact that the
1978 and 1979 Certificates do not specifically use the word “limit” is of no

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moment.4
B.

The Follow-the-Form Clause and the Claims Clause
Next, Utica relies on two clauses set forth in the general conditions

section of the Certificates, and argues that its interpretation of those
clauses “[h]armonizes” all of the provisions in the Certificates. (Dkt. No. 42
at 7-9, 11-14.) The court briefly discusses each clause in turn below.
1.

The Follow-the-Form Clauses

First, Utica argues that limiting Clearwater’s liability ignores the
follow-the-form clauses in the Certificates, “which provide[] the ceding
company with reinsurance coverage that matches its policy obligations.”
(Id. at 11-14.) Because the Second Circuit has already addressed, and
rejected, this same argument, little discussion of this point is warranted.
The follow-the-form clauses state that “[Clearwater]’s liability . . . shall
follow [Utica]’s liability in accordance with the terms and conditions of the
policy reinsured hereunder except with respect to those terms and/or
conditions as may be inconsistent with the terms of this Certificate.” (Dkt.
No. 35, Attach. 2 at 5, 9 (emphasis added).) In Unigard II, the Second

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Notably, Shakespeare succinctly resolved a failure to call by name that which
something is when he penned, “a rose by any other name would smell as sweet.” William
Shakespeare, Romeo and Juliet, act 2, sc. 2.

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Circuit held that a follow-the-form clause—which, like the follow-the-form
clause here, stated that the liability of the reinsurers was subject to all of
the terms and conditions of underlying excess policy, “except as otherwise
provided by th[e] Certificate”—did not override the limitation on liability
provision in the reinsurance certificate; instead, all other contractual
language in the certificate had to be construed in light of the liability cap. 4
F.3d at 1070-71; see Global Reins. Corp. of Am. v. Century Indem. Co.,
No. 13 Civ. 06577, 2014 WL 4054260, at *6 (S.D.N.Y. Aug. 15, 2014)
(noting that follow-the-form clauses are “‘structured so that they co-exist
with, rather than supplant, the liability cap,’” and “‘allowing [these clauses]
to override the limitation on liability . . . would strip the limitation clause . . .
of all meaning’” (quoting Bellefonte, 903 F.2d at 913)). Accordingly, Utica’s
argument fails.
2.

The Claims Clause

Utica also contends that the formula set forth in general condition
three, the claims clause, demonstrates that Clearwater’s liability should not
be capped. (Dkt. No. 42 at 4-5, 7-9.) The claims clauses explain how
Clearwater’s share of losses and expenses are to be calculated. (Dkt. No.
35, Attach. 2 at 5, 9.) Again, Utica’s argument is unavailing.
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First, in support of its argument that Clearwater’s liability should not
be capped at $5 million under the 1978 Certificate, Utica employs an
example, whereby it calculates what Clearwater’s liability would be if there
was a hypothetical $22 million loss. (Dkt. No. 42 at 5.) After performing
various calculations, Utica concludes that, in its fictional scenario,
Clearwater’s total liability would be $3 million, with $2 million representing
its share of loss, and $1 million representing its share of expenses. ( Id.)
The court, however, fails to see how this scenario proves Utica’s point or
otherwise demonstrates that Clearwater’s liability could ever exceed $5
million under the 1978 Certificate. Indeed, the court is enlightened only to
the extent that it now understands how Clearwater’s share of expenses are
to be calculated compared to how its share of loss is to be
calculated—which, frankly, is irrelevant to the question presented.
More importantly, the Second Circuit has already rejected this
argument.
We read the [certificate’s claims clause] merely to
differentiate the obligations for losses and for
expenses. The phrase in no way exempts defense
costs from the overall monetary limitation in the
certificate. This monetary limitation is a cap on all
payments under the certificate. In our view, the . . .
provision merely outlines the different components of
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potential liability under the certificate. It does not
indicate that either component is not within the overall
limitation.
Bellefonte, 903 F.2d at 913. Accordingly, Utica’s argument, again, fails.
C.

Further Discovery
Finally, Utica argues, alternatively, that the court should deny or defer

ruling on Clearwater’s motion pending further discovery, including the
introduction of custom and practice evidence. (Dkt. No. 42 at 14-17.) In
support of its argument, Utica cites out-of-Circuit case law for the
proposition that “[c]ourts have recognized the need for extrinsic evidence to
understand facultative reinsurance contracts, and in particular[,] provisions
similar to [the Liability Clause].” (Id.)
As discussed above, however, when a contract is unambiguous, as
the Certificates are here, extrinsic evidence generally cannot be considered
in its interpretation. See Katel Ltd. Liab. Co. v. AT & T Corp., 607 F.3d 60,
66 (2d Cir. 2010); W.W.W. Assocs., 77 N.Y.2d at 162. Further,
consideration of custom or practice evidence is also inappropriate. Indeed,
Utica offered the same argument in a recent case in this District, which the
court rejected for two reasons. See Munich, 976 F. Supp. 2d at 269. First,
“Bellefonte, Unigard II, and Excess Insurance did not consider evidence of
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custom or practice, thereby suggesting that, at least with respect to a
limit-of-liability provision silent as to its coverage of expenses, such
evidence should not be relied upon.” Id. (citations omitted). And second,
“Utica’s customs-and-practice evidence . . . purports to demonstrate that
Bellefonte, Unigard II, and Excess Insurance were erroneously decided,
because they established a presumption of cost-inclusiveness at odds with
the reinsurance industry’s customs and practices.” Id. However, it is this
court’s obligation to follow, not second-guess, controlling precedent, which
Bellefonte, Unigard II, and Excess Insurance undoubtedly are. See Cowen
& Co. v. Tecnoconsult Holdings Ltd., No. 96 CIV. 3748, 1996 WL 391884,
at *4 n.3 (S.D.N.Y. July 11, 1996). Accordingly, because the Certificates
are unambiguous, the court will not consider extrinsic evidence, or defer
ruling on Clearwater’s motion pending further discovery.
V. Conclusion
WHEREFORE, for the foregoing reasons, it is hereby
ORDERED that Clearwater’s motion for summary judgment (Dkt. No.
35) is GRANTED; and it is further
ORDERED that Clearwater’s liability, if any, under the 1978
Certificate and 1979 Certificate cannot exceed $5 million or $2.5 million,
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respectively; and it is further
ORDERED that the parties contact Magistrate Judge Therèse Wiley
Dancks to schedule further proceedings in this matter; and it is further
ORDERED that the Clerk provide a copy of this MemorandumDecision and Order to the parties.
IT IS SO ORDERED.
November 20, 2014
Albany, New York

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