ACE PROPERTY & CASUALTY INSURANCE COMPANY v. GLOBAL REINSURANCE CORPORATION OF AMERICA
MEMORANDUM AND/OR OPINION. SIGNED BY HONORABLE JUAN R. SANCHEZ ON 3/31/2013. 4/1/2013 ENTERED AND COPIES E-MAILED.(kp, )
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
ACE PROPERTY & CASUALTY
CORPORATION OF AMERICA
Juan R. Sánchez, J.
March 31, 2013
Plaintiff ACE Property & Casualty Insurance Company, as successor in interest to Central
National Insurance Company of Omaha (“CNIC”), sues Global Reinsurance Corporation of America
(“Global”) for breach of a facultative reinsurance certificate pursuant to which Global’s predecessor,
Constitution Reinsurance Corporation (“Constitution Re”), agreed to reinsure a portion of an
umbrella liability insurance policy issued by CNIC. The insured under CNIC’s umbrella policy
incurred substantial liability for asbestos bodily injury claims, and, since 2003, CNIC has been
paying a share of the insured’s defense and indemnity costs pursuant to a settlement agreement with
the insured and its other umbrella insurers. When CNIC’s payments under the settlement exceeded
$10 million, the attachment point for Global’s reinsurance certificate, CNIC began billing Global
under the certificate, but Global refused to pay.
Global argues it has no present obligation under the reinsurance certificate because the
certificate requires CNIC to pay two separate $10 million retentions, one for the certificate’s initial
one-year policy period and one for its seven-month extension period, neither of which has been fully
exhausted to date.
Global also argues CNIC’s billings are improper because they seek
reimbursement for CNIC’s payment of defense costs on claims for which no indemnity payment was
made, which payments Global contends are both beyond the scope of the CNIC policy Global agreed
to reinsure and not reimbursable under the terms of Global’s reinsurance certificate. CNIC argues
Global is collaterally estopped from raising the latter two defenses because the same defenses were
litigated and resolved adversely to one of Global’s corporate affiliates in a June 2011 arbitration
involving similarly worded reinsurance certificates Global’s affiliate issued to CNIC. CNIC also
disputes Global’s contention the reinsurance certificate at issue is subject to two $10 million
After a nonjury trial, this Court issues the following findings of fact and conclusions of law
pursuant to Federal Rule of Civil Procedure 52(a).
FINDINGS OF FACT
Beginning in 1975, CNIC issued a series of umbrella liability insurance policies to Wylain,
Inc., now known as Marley-Wylain, Inc. (collectively, “Marley”). The CNIC policies were written
by Cravens Dargan (“Cravens”), an underwriting manager, which also procured reinsurance on the
policies. 1/31/12 Trial Tr. 30-31, 38-39.
Among the policies CNIC issued to Marley was umbrella liability policy CNU 12-48-72 (the
“1976 Policy”), which was originally effective for the policy period December 31, 1976, to
December 31, 1977. Ex. 5. The 1976 Policy is an “ultimate net loss” policy, providing coverage
COVERAGE. The Company hereby agrees, subject to the limitations, terms
and conditions hereinafter mentioned, to indemnify the Insured for all sums
which the Insured shall be obligated to pay by reason of the liability
(a) imposed upon the Insured by law, or
(b) assumed under contract or agreement by the Named Insured
and/or any officer, director, stockholder, partner or employee of the
Named Insured, while acting in his capacity as such,
for damages, direct or consequential and expenses, all as more fully defined
by the term “ultimate net loss” on account of:
(1) personal injuries, including death at any time resulting therefrom,
(2) property damage,
(3) advertising liability,
caused by or arising out of each occurrence happening anywhere in the world.
Ex. 5 at 000224. For purposes of the 1976 Policy, “ultimate net loss” means
the total sum which the Insured, or any company as his insurer, or both, become
obligated to pay by reason of personal injury, property damage or advertising liability
claims, either through adjudication or compromise, and shall also include hospital,
medical and funeral charges and all sums paid as salaries, wages, compensation, fees,
charges and law costs; premiums on attachment or appeal bonds, interest, expenses
for doctors, lawyers, nurses and investigators and other persons, and for 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 the
Insured’s or of any underlying insurer’s permanent employees.
Id. An “occurrence” is
an accident or a happening or event or a continuous or repeated exposure to
conditions which unexpectedly and unintentionally results in personal injury,
property damage or advertising liability during the policy period.
Id. The parties agree the 1976 Policy requires CNIC to pay defense costs as part of ultimate net loss
in some instances; however, they disagree as to the scope of this obligation.
The 1976 Policy also includes several endorsements, two of which are relevant here.
Endorsement No. 3 provides, in relevant part:
IN THE EVENT OF REDUCTION OR EXHAUSTION OF THE AGGREGATE
LIMITS OF LIABILITY UNDER THE UNDERLYING INSURANCES BY
REASON OF PAYMENT OF CLAIMS IN RESPECT OF OCCURRENCES
OCCURRING DURING THE PERIOD OF THIS POLICY, THIS POLICY,
SUBJECT TO ALL THE TERMS, CONDITIONS AND DEFINITIONS HEREOF,
SHALL . . . IN THE EVENT OF EXHAUSTION CONTINUE IN FORCE AS
Id. at 000229. Endorsement No. 4, captioned “DEFENSE COVERAGE ENDORSEMENT,”
AS RESPECTS OCCURRENCES COVERED UNDER THIS POLICY, BUT NOT
COVERED UNDER THE UNDERLYING INSURANCE OR UNDER ANY
OTHER COLLECTIBLE INSURANCE, THE COMPANY SHALL . . . DEFEND
IN HIS NAME AND BEHALF AND SUIT AGAINST THE INSURED ALLEGING
LIABILITY INSURED UNDER THE PROVISIONS OF THIS POLICY AND
SEEKING DAMAGES ON ACCOUNT THEREOF; EVEN IF SUCH SUIT IS
GROUNDLESS, FALSE OR FRAUDULENT . . . .
Id. at 000230.
The 1976 Policy provides $25 million in coverage per occurrence and in the aggregate,
excess of $500,000 underlying insurance. The $25 million aggregate limit applies “with respect to
all ultimate net loss caused by one or more occurrences, during each annual period, while this policy
is in force . . . .” Id. at 000224. The term “annual period” means “each consecutive period of one
year commencing from the inception date of this policy.” Id. As originally written, the 1976 Policy
covered one annual period, from December 31, 1976, to December 31, 1977, and therefore had one
aggregate limit of $25 million.
Because Cravens was not a risk-bearing entity, before issuing the 1976 Policy, it fully
reinsured the Policy through a combination of facultative and treaty reinsurance. 1/31/12 Trial Tr.
38-42; Exs. 41, 48.1 “[R]einsurance is insurance for insurance companies.” Pac. Emp’rs Ins. Co.
v. Global Reins. Corp. of Am., 693 F.3d 417, 421 (3d Cir.2012). Under a contract of reinsurance,
Although the reinsurance placement sheets show a “company retention” of certain portions of the
1976 Policy, see Ex. 41, Judith Harnadek, a Vice President of Resolute, the claim handling
organization that handles the Marley claims for CNIC, explained the retention was “not really a
retention because Cravens Dargan didn’t retain any risk. That was then ceded to a treaty, a Cravens
Dargan treaty.” 1/31/12 Trial Tr. 40.
the insurer “cedes” all or part of a risk it has underwritten to another insurer, along with a portion
of the premium. See N. River Ins. Co. v. CIGNA Reins. Co., 52 F.3d 1194, 1199 (3d Cir. 1995).
Facultative and treaty reinsurance are two different types of reinsurance contracts.
Under a reinsurance treaty, the reinsurer agrees to accept an entire block of business
from the reinsured. Once a treaty is written, a reinsurer is bound to accept all of the
policies under the block of business, including those as yet unwritten. Because a
treaty reinsurer accepts an entire block of business, it does not assess the individual
risks being reinsured; rather, it evaluates the overall risk pool.
Facultative reinsurance entails the ceding of a particular risk or policy.
Unlike a treaty reinsurer who must accept all covered business, the facultative
reinsurer assesses the unique characteristics of each policy to determine whether to
reinsure the risk, and at what price. Thus, a facultative reinsurer retains the faculty,
or option, to accept or reject any risk.
Id. at 1199 (internal quotation marks and citations omitted).
Cravens reinsured the 1976 Policy in four layers: (1) the first $1 million of the Policy, (2) the
next $4 million in excess of $1 million, (3) the next $5 million in excess of $5 million, and (4) the
remaining $15 million in excess of $10 million. See Ex. 41; 1/31/12 Trial Tr. 39-42. Within each
layer, each participating reinsurer received a premium proportionate to the share of the risk ceded
to it. See Ex. 41; 1/31/12 Trial Tr. 40-42.
Global, through its predecessor Constitution Re, was one of the insurers that reinsured the
fourth layer of the 1976 Policy, issuing facultative reinsurance certificate no. 64217 (the “Certificate”
or the “Global Certificate”) in which it agreed to reinsure “$2,000,000 EACH OCCURRENCE AND
IN THE AGGREGATE WHERE APPLICABLE PART OF $15,000,000 WHICH IS EXCESS OF
$10,000,000 WHICH IN TURN IS EXCESS OF UNDERLYING INSURANCE.” Ex. 36 at 016552.
In other words, Global agreed to reinsure two-fifteenths of the $15 million layer of risk after CNIC
paid the first $10 million of coverage. In exchange, Global received a premium of $4,000 (less a
25% ceding commission), an amount equal to two-fifteenths of the $30,000 total premium paid to
all of the reinsurers accepting a portion of the $15 million layer. Exs. 36, 41.
The Certificate is a two-page form document signed by Global underwriter Roger Hughes.
Ex. 36 at 016552; Hughes Dep. 19-20. The first page of the Certificate, typically referred to as the
“declarations” page, includes a number of items that must be completed by the reinsurer to provide
information about the policy being reinsured, the reinsurance accepted, and the basis of the
acceptance (i.e., “excess of loss,” “contributing excess,” and “non-concurrent”). Ex. 36 at 016552;
Hughes Dep. 19-20; 1/31/12 Trial Tr. 47-48. The second page sets forth the standard “reinsuring
agreements and conditions.” Ex. 36 at 016553; Hughes Dep. 21 (stating Global “used the same form
The Certificate includes a “follow the form” clause, providing
[t]he liability of the Reinsurer, as specified in Item 4 of the Declarations, shall follow
that of the Company and shall be subject in all respects to all the terms and
conditions of the Company’s policy except when otherwise specifically provided
herein or designated as non-concurrent reinsurance in the Declarations.
Ex. 36 at 016553. The Certificate was not designated “non-concurrent”2; therefore, pursuant to this
provision, Global agreed its liability would follow CNIC’s liability under the 1976 Policy, “except
when otherwise specifically provided” in the Certificate itself. The Certificate also includes a
“follow the settlements” clause, providing
All loss settlements made by the Company, provided they are within the terms and
conditions of the original policy(ies) and within the terms and conditions of this
Certificate of Reinsurance, shall be binding on the reinsurer. Upon receipt of a
definitive statement of loss, the Reinsurer shall promptly pay its proportion of such
The Certificate instead reflected the reinsurance was accepted on an “excess of loss” basis, meaning
the reinsurance “is participating above other insurance or reinsurance,” i.e., the $10 million retention.
1/31/12 Trial Tr. 48-49.
loss as set forth in the Declarations. In addition thereto, the Reinsurer shall pay its
proportion of expenses (other than office expenses and payments to any salaried
employee) incurred by the Company in the investigation and its proportion of court
costs and interest on any judgment or award, in the ratio that the Reinsurer’s loss
payment bears to the Company’s gross loss payment. If there is no loss payment, the
Reinsurer shall pay its proportion of such expenses only in respect of business
accepted on a contributing excess basis and then only in the percentage stated in Item
4 of the Declarations in the first layer of participation.
Toward the end of 1977, CNIC issued an endorsement to the 1976 Policy that extended the
Policy’s expiration date by seven months, to August 1, 1978, in consideration of Marley’s payment
of an additional premium.3 Ex. 5 at 000244. The endorsement does not address how the sevenmonth extension period should be treated for purposes of applying the 1976 Policy’s $25 million
aggregate limits, i.e., whether the Policy should be regarded as having a single 19-month annual
period subject to a single $25 million aggregate limit or two separate annual periods of one year and
seven months, respectively, each subject to a separate $25 million aggregate limit.
Before issuing the endorsement extending the 1976 Policy’s expiration date, Cravens sought
agreement from the Policy’s reinsurers to extend their reinsurance coverage so as to ensure the
Policy would continue to be fully reinsured during the seven-month extension period. See 1/31/12
Trial Tr. 115. As part of that effort, on September 22, 1977, Kenneth Mann, the underwriter for
Cravens, sent a telex to Roger Hughes requesting Global’s agreement to extend the expiration date
of the Certificate “AT PRO RATA EXISTING TERMS FROM 12/31/77 TO 8/1/78 TO TRACK
WITH EXPIRATION DATE OF UNDERLYING.” Ex. 44; 1/31/12 Trial Tr. 103, 108-09. Mann
The endorsement was apparently intended to correct a non-concurrency between the policies
underlying CNIC’s coverage, which had August 1 effective dates, and CNIC’s policies, which had
a December 31 effective date. See Ex. 53 at 04222.
also reported there were “NO LOSSES OVER $10,000.” Ex. 44. Hughes responded by telex the
following day, advising, “SUBJECT TO CONF[I]RMATION THAT AGG. COVER IS
REINSTATED OF 12/31/77 WE CAN AGREE TO EXT. TO 8/1/78, IF AGG. PERIOD IS TO BE
12 PLUS 8 MOS.”4 Ex. 45.
There are no further communications between Mann and Hughes in the record; however, on
October 4, 1977, Mann prepared a memo noting Cravens had “received agreement from all present
reinsurers” to extend the expiration date of their certificates from December 31, 1977, to August 1,
1978, and indicating the endorsement was “to be issued on a pro rata basis with 10% additional
premium across the board for all layers.” Ex. 46. Cravens appears to have been authorized to
proceed with the issuance of the endorsement extending the 1976 Policy shortly thereafter. See Ex.
123; 1/31/12 Trial Tr. 117.
On December 29, 1977, Global issued Endorsement No. 1 to the Certificate, effective
December 31, 1977, which provides as follows:
FOR AND IN CONSIDERATION OF AN ADDITIONAL PREMIUM OF [$2,745]
LESS 25% CEDING COMMISSION, IT IS UNDERSTOOD AND AGREED THAT
THE CERTIFICATE OF WHICH THIS ENDORSEMENT FORMS A PART OF
SHALL BE EXTENDED TO EXPIRE ON AUGUST 1, 1978.
IT IS FURTHER UNDERSTOOD AND AGREED THAT EFFECTIVE FOR THE
PERIOD OF 12/31/77 TO 08/01/78 THE UNDERLYING AGGREGATE LIMITS
WHERE APPLICABLE SHALL BE UNIMPAIRED AND FOR THE PURPOSE OF
THIS REINSURANCE ONLY OCCURRENCES TAKING PLACE DURING THE
TERM OF 12/31/77 TO 08/01/78 SHALL BE CONSIDERED IN DETERMINING
THE EXTENT OF ANY EXHAUSTION OF THE UNDERLYING AGGREGATE
Ex. 36 at 016550. The first paragraph of the endorsement reflects the parties’ agreement to extend
In fact the requested extension was for an addition seven, rather than eight, months.
the Certificate by seven months in consideration of an additional premium. The parties disagree
regarding the meaning of the second paragraph. Global asserts by specifying that the underlying
aggregate limits (i.e., CNIC’s $10 million retention) would be “unimpaired” effective for the
Certificate’s seven-month extension period, the endorsement reflects the parties’ agreement that
there would be a separate $10 million retention for the extension period. CNIC maintains the
endorsement did not create a new underlying aggregate limit but merely confirmed that the
Certificate’s single $10 million retention was unimpaired as of the extension period’s effective date
and could be eroded only by occurrences taking place during the extension period.
In addition to the 1976 Policy, CNIC also issued other umbrella liability policies to Marley,
including Policy No. CNU 03-48-63 (the 1979 Policy), which provided coverage for the period from
August 1, 1979, to August 1, 1980. Ex. 8. The terms and conditions of the 1976 and 1979 Policies
appear to be substantially similar. The 1979 Policy, like the 1976 Policy, was written and fully
reinsured by Cravens. 1/31/12 Trial Tr. 31, 38-39. The reinsurers of the 1979 Policy included
Gerling Global Reinsurance Corporation, United States Branch, the predecessor to Global
Reinsurance Corporation, United States Branch (“U.S. Branch”), a Global affiliate. Ex. 37-38.5 U.S.
Branch, through its predecessor, issued two facultative reinsurance certificates (the “U.S. Branch
Certificates”) reinsuring a total of $2 million of the 1979 Policy. One of the U.S. Branch Certificates
reinsured $1 million of the $5 million layer excess of the first $5 million of coverage, Ex. 37; the
other reinsured $1 million of the $15 million layer excess of the first $10 million of coverage, Ex.
38. The U.S. Branch Certificates are similar, but not identical, to the Global Certificate at issue in
Although U.S. Branch and Global are separate corporations, they both fall under the umbrella of
the same German parent company, Globale Beteiligungs GmbH. Exs. 116-117.
this case. For example, the U.S. Branch Certificates contain an arbitration clause, Ex. 37 ¶ 17; Ex.
38 ¶ 17, while the Global Certificate does not. Moreover, the U.S. Branch Certificates were never
extended and thus do not include an endorsement like the one included in the Global Certificate.
In April 2001, Marley notified CNIC it was the subject of asbestos bodily injury claims that
might eventually impact the umbrella liability insurance policies CNIC had issued to Marley.6 Ex.
9. In February 2002, Marley filed a declaratory judgment action against CNIC and its other excess
and umbrella carriers in Indiana state court seeking a declaration regarding the insurers’ obligation
to indemnify Marley with respect to asbestos bodily injury claims and to pay costs incurred by
Marley in defending against such claims. Ex. 11. In March 2002, CNIC notified Marley it was
reserving all rights pending an investigation of Marley’s claims. Ex. 12.
CNIC retained Patrick Shine, Esquire, of Cohn Baughman & Martin to represent it in the
declaratory judgment action. 1/30/12 Trial Tr. 38. As part of the representation, Shine evaluated
various coverage issues under CNIC’s policies, including choice of law, trigger of coverage, number
of occurrences, and allocation. Id. at 43. With respect to choice of law, CNIC was concerned about
the possibility the Indiana court would find the policies were governed by Indiana law, which CNIC
perceived to be generally unfavorable to insurers. Id. at 45, 158. CNIC was also concerned about
the likelihood the Indiana court would apply “all sums” allocation, permitting the insured to select
an insurance policy or policies to respond to its claims, rather than allocating the claims among all
potentially responsible insurers. Id. at 43-44, 155-56. Although an insurer whose policies were
selected for all sums allocation could theoretically seek contribution from other insurers whose
Marley had been faced with such claims for some time, for which its primary insurers were paying
defense and indemnity costs pursuant to a settlement agreement, but the number of claims had more
than doubled in the previous year. Ex. 9.
policies were triggered by the claims, the right to contribution was not clear under Indiana law, and
pursuing contribution could be costly in any event. Id. at 44, 156, 160.
Shine also evaluated the scope of CNIC’s obligation to pay defense costs under its policies.
Id. 44-45. In the declaratory judgment action, Marley took the position its excess and umbrella
insurers had to pay defense costs for all claims, regardless of merit. Id. at 46; see also Ex. 11 at
012959. Shine believed CNIC’s policies limited its defense costs obligation to those claims that
resulted in payment of indemnity. 1/30/12 Trial Tr. 46. Although Holly Hotchkiss, the claim
handler initially assigned to the Marley claims, was skeptical of this potential defense, id. at 49-50,
in December 2002 or January 2003, Shine researched the issue and drafted a memo summarizing the
case law support for the proposition that CNIC’s “duty to reimburse defense costs [should] be
deemed ‘co-extensive with its duty to indemnify’ and [CNIC] [should] only have an obligation to
reimburse defense costs for occurrences to which the policies apply.” Ex. 21 at 013410. Shine did
not find any Indiana cases on point, nor did he cite any contrary authority in his memo. Shine
viewed the defense costs issue as significant because a substantial portion of the asbestos claims
Marley had resolved had been dismissed without an indemnity payment. See id. at 013409. Under
the cases cited in Shine’s memo, CNIC would have no obligation to pay defense costs for such
While the argument Shine identified, if successful, had the potential to reduce CNIC’s
liability for defense costs, it raised other tactical concerns. Casey Johnson, an attorney who worked
on asbestos and environmental claims for CNIC, was concerned taking this position (i.e., that CNIC
did not have to pay defense costs unless and until an indemnity payment was made) would prevent
it from exerting control over Marley’s defense of the underlying claims, leaving Marley free to “roll
over” and make small indemnity payments on non-meritorious claims so as to be able to recoup its
defense costs. Ex. 22; 1/30/12 Trial Tr. 52-55, 162. On Johnson’s recommendation, the question
of how to proceed on the defense costs issue was discussed at a weekly roundtable meeting of claim
managers in February 2003. Ex. 22; 1/30/12 Trial Tr. 53-54. Organized by Resolute Senior Vice
President and manager Ann Siminoff, these roundtable meetings provided a forum in which issues
of interest or concern could be raised to obtain input from other managers. 1/30/12 Trial Tr. 54.
At the meeting, which Shine attended by phone, the participants discussed the concern
Johnson had raised about losing the ability to exert control over the defense of the underlying claims.
Id. at 54-55. In addition, some claim managers were also concerned that CNIC’s policies themselves
could be regarded as having conflicting language and could be found to be ambiguous on the issue
of CNIC’s defense obligation. Id. at 55. In particular, there was concern that endorsements to the
policy could be interpreted to require CNIC to defend underlying asbestos claims in some
circumstances. Shine testified there was concern that Endorsement No. 3 to the 1976 Policy, which
provides the policy will “in the event of . . . exhaustion of the aggregate limits of liability under the
underlying insurances . . . continue in force as underlying insurance,” Ex. 5 at 000229, could be
interpreted to require CNIC to “step in the shoes of the primary [insurer] and tak[e] over the
defense,” 1/30/12 Trial Tr. 128, 139-40. After looking into the issue, Shine personally did not think
this provision applied to asbestos claims; however, “[t]here was concern.” Id. at 128. Shine also
testified there was concern about Endorsement No. 4, which provides that “as respects occurrences
covered under this policy but not covered under the underlying insurance or under other collectible
insurance, the company shall . . . defend in his name and behalf and suit against the insured alleging
liability insured under the provisions of this policy and seeking damages on account thereof; even
if such suit is groundless, false or fraudulent . . . .” Ex. 5 at 000230. According to Shine, there was
concern that this endorsement could be interpreted broadly or viewed as ambiguous as to whether
an occurrence could be considered “not covered” where the underlying policy was exhausted.
1/30/12 Trial Tr. 140-41. It is not clear whether Shine believed this endorsement could apply to
asbestos claims. Id. at 123-24. In addition to the concerns about the endorsements, there was
concern that the assistance and cooperation clause in the policy could be interpreted to prohibit CNIC
from disavowing an obligation to pay defense costs if it exercised its right to associate in the defense
and control of a claim and required Marley to litigate a claim it wished to settle. Id. at 141-43. The
claim managers were also concerned by the fact the coverage litigation was pending in Indiana,
which in their view made it unlikely the defense costs issue would be resolved favorably to CNIC.
Id. at 55.
The consensus at the meeting was that the argument for a more limited defense costs
obligation could be useful to CNIC in negotiating with Marley but was not a position the claim
managers were eager to put before an Indiana court. Id. As summarized in a May 2003 litigation
budget Shine prepared, CNIC’s litigation strategy was to file a summary judgment motion on the
defense costs issue “to exert pressure on Marley to accept responsibility for some share of the
defense and indemnity of its pending asbestos claims under a permanent funding agreement.” Ex.
27 at 013357-58. Although Shine noted there was case law support outside of Indiana for a more
limited defense costs obligation under the 1976 Policy, he stated his belief the trial court would “not
grant [CNIC] complete relief with respect to the payment of defense costs only after coverage is
determined,” noting “Indiana coverage law in general is far to[o] biased toward insureds.” Id. at
In July 2003, the court in the Marley declaratory judgment action granted summary judgment
in favor of Marley on the issues of choice of law, trigger, and allocation. Ex. 28. The court held the
policies were subject to Indiana law, a “continuous trigger,”7 and “all sums” allocation. Id. Shine
viewed the ruling as “tak[ing] away a great deal of leverage [CNIC] may have had in negotiating a
permanent funding agreement.” Id. CNIC did not thereafter file the contemplated summary
Ultimately, CNIC and five other umbrella insurers settled their coverage dispute with Marley
by entering into an “Umbrella Insurer Settlement and Funding Agreement” (the “Settlement and
Funding Agreement”) in which the insurers agreed to pay defense and indemnity costs for asbestos
bodily injury claims against Marley in shares to be determined according to a formula set forth in
the Agreement.8 Ex. 31. The Settlement and Funding Agreement provides for allocation of defense
and indemnity costs for each covered asbestos bodily injury claim on a “pro-rata, time-on-the-risk
basis,” with each participating insurer’s share to be determined based on the number of months of
a claimant’s “injury allocation period” for which the insurer provided coverage. Id. at 000108-10.
Under the Agreement, a claimant’s injury allocation period is the period from the claimant’s first
actual exposure to a Marley asbestos-containing product to the manifestation or diagnosis of an
asbestos-related disease, the claimant’s death, or a default date. Id. at 000107. An insurer’s
Under the “continuous trigger” standard, a policy is triggered if it was in effect at any time between
the claimant’s first exposure to asbestos-containing products and diagnosis of an asbestos-related
disease. See id. at 014677-79.
Although the parties executed the Settlement and Funding Agreement in counterparts between
October 2003 and February 2004, with both CNIC and Marley signing in December 2003, the
Agreement’s effective date was July 1, 2003, the date Marley’s primary layer of coverage was
deemed to have been exhausted. Ex. 31.
contribution percentage of defense and indemnity costs for a particular claim is calculated by
determining the number of months in the claimant’s injury allocation period (excluding any periods
of coverage attributable to insolvent insurers and/or exhausted policies); determining the number of
months during the injury allocation period for which the insurer provided coverage to Marley which
has not been exhausted; and dividing the insurer’s number of months of coverage by the number of
months in the injury allocation period. See id. at 000109.
The Agreement requires the participating insurers to pay indemnity costs for all judgments
against Marley with respect to asbestos bodily injury claims, but requires payment of indemnity for
settlements only when such settlements are authorized and meet certain criteria as to the claimant’s
ability to prove exposure to a Marley asbestos-containing product and injury consistent with asbestos
exposure. Id. at 000106; see also 1/30/12 Tr. 62. The Agreement also requires Marley to consult
with the participating insurers with respect to all significant developments in a claim, and gives the
insurers input as to whether a proposed settlement is authorized for purposes of triggering the
insurers’ obligation to pay indemnity costs. See Ex. 31 at 000112-13. The Agreement requires
participating insurers to pay as defense costs “all reasonable and necessary fees, costs and expenses
incurred in the investigation and defense of [asbestos bodily injury claims],” id. at 000106, and does
not limit the obligation to pay defense costs to those cases in which an indemnity payment is made.
The Settlement and Funding Agreement was accompanied by a contemporaneously executed
Policy Limits Agreement specifying the umbrella policies to which the Settlement and Funding
Agreement applied and listing the policy period, the “annual aggregate occurrence limits,” and the
“total aggregate limits” for each policy. Ex. 30; see also Ex. 31 at 000108 (noting Settlement and
Funding Agreement applies to those policies set forth in the Policy Limits Agreement). The Policy
Limits Agreement lists the 1976 Policy as having a 19-month policy period (from December 31,
1976, to August 1, 1978), annual aggregate occurrence limits of $25 million, and total aggregate
limits of $50 million, reflecting Marley’s position that the 1976 Policy covers two annual
periods—one for the original policy period of December 31, 1976, to December 31, 1977, and
another for the extension period from December 31, 1977, to August 1, 1978. Ex. 30; see 1/30/12
Trial Tr. 47, 65.9
CNIC disagreed with Marley’s position that the 1976 Policy had two $25 million aggregate
limits, and Shine discussed the issue in face-to-face meetings with Marley’s counsel before either
party signed the Settlement and Funding Agreement or the Policy Limits Agreement.10 1/30/12 Trial
Tr. 64. Marley’s counsel agreed CNIC could reserve its rights on the issue of the 1976 Policy’s total
aggregate limits so long as the other insurers did not object. Id. After conferring with counsel for
the other insurers, Shine wrote to Marley’s counsel on November 21, 2003, confirming that, with
no objection from the other parties, CNIC was “reserv[ing] the right to contest Marley’s position that
[the 1976 Policy], in effect from 12-31-76 to 8-1-78, [was] subject to more than one single annual
The Policy Limits Agreement also lists the 1979 Policy as one of the CNIC policies subject to the
Settlement and Funding Agreement. Ex. 30.
Although CNIC ultimately took the position the 1976 Policy had a single $25 million aggregate
limit, Shine appears to have initially assumed the Policy had two aggregate limits. In a November
2002 email to Hotchkiss and Johnson, Shine referred to the one-year and seven-month policy periods
covered by the 1976 Policy separately, each with $25 million limits. Ex. 140. In his May 2003
litigation budget, Shine again listed the policy periods covered by the 1976 Policy separately, each
with limits of “$25 mill [occ] and agg.” Ex. 27 at 013356. In “asbestos task force” (or “ATF”)
documents prepared after CNIC reserved its rights on this issue, CNIC continued to list the 1976
Policy as a one-year policy and a seven-month renewal, each with limits of “$25 mil occ & agg.”
Exs. 143-45; see also 1/30/12 Trial Tr. 171. Because the ATF communications are prepared for use
in connection with actuarial analysis to assess the adequacy of CNIC’s asbestos reserves, however,
such documents are intended to reflect CNIC’s maximum potential exposure rather than its most
likley exposure. 1/30/12 Trial Tr. 201-02, 205.
aggregate limit.” Ex. 29; 1/30/12 Trial Tr. 63-64. Two weeks later, CNIC and Marley signed the
Settlement and Funding Agreement and the Policy Limits Agreement. Although CNIC’s reservation
of rights is not specifically referenced in either agreement, Marley has never taken the position
CNIC’s reservation of rights was not effective, and CNIC and Marley have not yet finally resolved
the issue of whether the 1976 Policy has one or two aggregate limits. 1/30/12 Trial Tr. 66, 146,
Dan Brehm, Senior Vice President and Chief Claims Officer for Resolute, ultimately
authorized CNIC’s participation in the settlement. Id. at 148, 151, 161, 163-64. Brehm authorized
the settlement on the recommendation of Jens Fog (the claims handler then responsible for the
Marley claims), who had reviewed the agreement with Shine and other claims personnel with
experience in asbestos claims,12 all of whom believed CNIC should enter into the Settlement and
Funding Agreement. Ex. 32; 1/30/12 Trial Tr. 166-68. Shine recommended that CNIC enter into
the settlement because it provided protections to CNIC that would be unavailable if the issue were
decided in court, including requiring proof of exposure to a Marley product for payment of indemnity
and a modified pro rata allocation. 1/30/12 Trial Tr. 61. Brehm believe the settlement represented
Although Global argues CNIC’s attempted reservation of rights is ineffective under the express
terms of the Settlement and Funding Agreement, that issue is not for this Court to resolve at this
time. Even if Global’s arguments were meritorious—an issue on which this Court takes no
position—the settlement documents would preclude CNIC from litigating the number of aggregate
limits issue only if Marley were to raise (and prevail on) this defense. There is no indication in the
current record that Marley has disputed the validity of CNIC’s reservation of rights.
In addition to Shine, Fog reviewed the Settlement and Funding Agreement with Jim Hucksima,
an attorney and manager for asbestos and environmental claims, and Krista Glen, an attorney and
claim handler who had worked in asbestos claims at another insurance company and who had a good
understanding of the asbestos disease process, which Brehm viewed as helpful in determining which
asbestos plaintiffs had a legitimate claim of injury. Id. at 167-68.
“the best course to minimize the exposure to my company and to the policies my company was
handling.” Id. at 164. Shine and Brehm both testified the settlement did not require CNIC to pay
any claims that were not at least arguably covered under its policies. Id. at 63, 178. As Brehm
explained, “everything that was compromised was compromised because there was a risk that we
would lose.” Id. at 178.
Pursuant to the Settlement and Funding Agreement, Marley retained PACE (now known as
KCIC, Inc.), a third party claims administrator, to administer the asbestos bodily injury claims in
accordance with the Agreement. 1/31/12 Trial Tr. 183; see also Ex. 31 (requiring Marley to retain
and pay all costs of a third party claims administrator). PACE, on behalf of Marley, generates the
monthly billing summaries submitted to the participating insurers. PACE’s bills list each individual
policy separately and list the indemnity costs, defense costs, and total costs charged to each policy
for the month in question. E.g., Ex. 81 at 017394. The bills also provide subtotals, reflecting the
amount due from each insurer under all of its participating policies. E.g., id. CNIC’s 1976 Policy
appears twice on each of PACE’s billing summaries, once for the original policy period from January
1, 1977, to December 31, 1977 (identified as CNU-12-48-72(A)), and once for the seven-month
extension period from January 1, 1978, to July 31, 1978 (identified as CNU-12-48-72(B)), with
amounts due for indemnity and expense payments listed separately for each policy. E.g., id.
In addition to generating monthly bills, PACE also prepares a monthly “policy summary by
insurer,” which tracks the aggregate amount of indemnity and expense costs allocated to each
individual policy against the total aggregate limits of the policy. E.g., id. at 017514. PACE’s
monthly policy summaries also list CNIC’s 1976 Policy twice, and show each as having “total
aggregates” of $25 million, e.g., id., consistent with Marley’s position that the seven-month
extension period constitutes a separate annual period with a separate aggregate limit.
Although PACE is billing the Marley claims against two $25 million aggregate limits,
pursuant to its reservation of rights, CNIC is paying the Marley claims “under a single aggregate.”
1/30 12 Trial Tr. 169-70, 178. As Brehm explained, CNIC is “paying the Marley claims under the
terms of the cost-share agreement and currently under a single aggregate because that’s all we need
to do. . . . Until one aggregate is breached, there’s really no reason to question whether there’s more
than one aggregate.” Id. at 170, 173, 178.13
Since entering into the Settlement and Funding Agreement, CNIC has communicated
regularly with Global and U.S. Branch regarding its payments pursuant to the Agreement. In
December 2004, CNIC sent Global (then known as Constitution Re) an update regarding the Marley
asbestos claims. Ex. 55. CNIC provided Global with copies of the Settlement and Funding
Agreement, the Policy Limits Agreement, Shine’s November 2003 reservation of rights letter, and
the 1976 Policy, explaining that while Marley had taken that position the 1976 Policy was “subject
to more than one single annual aggregate limit, [CNIC] argue[d] that the policy has a single
aggregate limit of $25 million,” and noting it had “reserved its right to contest Marley’s position
regarding the aggregate limit issue.” Id. at 016949. CNIC also provided Global with a breakdown
of its settlement payments under each of its policies and the remaining policy limits, listing the 1976
Policy only once with a 19-month policy period and a single $25 million aggregate limit. Id. CNIC
sent the same update letter to U.S. Branch (then known as Gerling Global Reinsurance Corp., U.S.
Branch), enclosing the 1979 Policy, which U.S. Branch had reinsured, instead of the 1976 Policy.
As of January 2012, Brehm’s understanding was that CNIC was only “about halfway through the
twenty-five million dollars of the first aggregate” after “eight or nine years” of paying claims under
the settlement. Id. at 171.
Ex. 54. Although both letters were directed to the same person—Charlotte North, who served as the
day-to-day claim handler for both Global and U.S. Branch at the time—at the same address, CNIC
nevertheless communicated separately with North regarding the Global and the U.S. Branch
By April 2009, CNIC’s payments under the 1979 Policy had exceeded $5 million, the
attachment point of the lower level U.S. Branch Certificate, which reinsured $1 million of the $5
million layer excess of $5 million. Ex. 57; see also Ex. 37. Accordingly, on April 28, 2009, CNIC
billed U.S. Branch $10,205.72 under the lower layer U.S. Branch Certificate. Ex. 57. CNIC’s
billing included U.S. Branch’s share of indemnity and defense (or “expense”) costs CNIC had paid
as part of ultimate net loss under the 1979 Policy. Ex. 57 at GRC00678; 1/31/12 Trial Tr. 69-70.
The billing also included a small amount of declaratory judgment expense (i.e., expense CNIC
incurred in its coverage litigation with Marley), which was billed to CNIC’s reinsurers
proportionately. Ex. 57 at GRC00678; 1/31/12 Trial Tr. 70-71. CNIC directed its billing, which also
served as an update regarding CNIC’s payment of asbestos claims under the CNIC policies reinsured
by Global as well as by U.S. Branch, to Dennis Annechino, an Assistant Vice President of both
Global and U.S. Branch, who had succeeded North as the day-to-day claim handler for both
companies. Ex. 57.
On May 8, 2009, Annechino objected to the billing on various grounds, including that it did
not comport with language in the U.S. Branch Certificate providing the reinsurer would pay “its
proportion of expenses . . . incurred by the Company in the investigation and settlement of claims
or suits provided loss payment is made by the Company affecting this Certificate, in the ratio that
the Reinsurer’s loss payment bears to the Company’s gross loss payment . . . .” Ex. 60 at 00050
(quoting ¶ 11 of U.S. Branch Certificate). Annechino also requested certain additional information
from CNIC. Although Annechino objected to the billing in his capacity as Assistant Vice President
of U.S. Branch, he wrote to CNIC on Global letterhead.
CNIC billed additional amounts under the lower layer U.S. Branch Certificate in December
2009 and February 2010, to which Annechino continued to object, at least in part. Exs. 65, 68, 69.
Because U.S. Branch failed to pay the amounts billed by CNIC, CNIC demanded arbitration in
March 2010, pursuant to the arbitration clause in the U.S. Branch Certificates. See Ex. 111 at 8.
CNIC thereafter continued to bill the lower level U.S. Branch Certificate.
By December 2010, CNIC’s payments of indemnity and defense costs under the 1976 Policy
had exceeded $10 million, the attachment point of the Global Certificate. Ex. 75. On December 3,
2010, CNIC billed Global $20,039.95 under the Certificate, and also billed additional amounts under
the lower layer U.S. Branch Certificate. This billing, like CNIC’s earlier billings under the U.S.
Branch Certificate, included Global’s share of indemnity and defense costs CNIC had paid as part
of ultimate net loss under the 1976 and 1979 Policies and also included a small amount of
declaratory judgment expense.
On January 11, 2011, Annechino objected to the billing under the Global Certificate on the
basis that it failed to comport with paragraph E of the Certificate, which provided Global would “pay
its proportion of expenses . . . incurred by the Company in the investigation and its proportion of
court costs and interest on any judgment or award, in the ratio that the Reinsurer’s loss payment
bears to the Company’s gross loss payment . . . .” Ex. 77 at 04153 (quoting ¶ E of Global
Certificate). Although his objection pertained only to the Global Certificate and was written on
Global letterhead, Annechino signed his letter in his capacity as Assistant Vice President of U.S.
When Global refused to pay CNIC’s December 2010 billing under the Global Certificate and
an additional billing submitted by CNIC in March 2011, CNIC filed the instant action, which Global
removed to federal court in April 2011.14 CNIC alleges Global has breached its obligations under
the Certificate by failing to pay CNIC’s billings to date, and seeks declaratory relief with respect to
Global’s obligation to pay past, current, and future billings under the Certificate in a timely manner.
In its Answer, Global raised the affirmative defenses that CNIC was paying claims beyond
the scope of the policy Global reinsured and Global therefore had “no obligation to reimburse
[CNIC] for such ex gratia payments,”15 and that CNIC was billing Global for expenses in a manner
inconsistent with paragraph E of the Certificate. Answer, Affirmative Defenses & Countercl. ¶¶ 3334. Global also asserted a counterclaim seeking a declaratory judgment that it has no present
obligation under the Certificate because CNIC has “not properly account[ed] for the exhaustion of
underlying aggregate limits.” Countercl. ¶¶ 12-13.
In the meantime, CNIC and U.S. Branch proceeded with the arbitration regarding U.S.
Branch’s obligations under its Certificates. In its pre-hearing brief and at the June 2011 arbitration
hearing, U.S. Branch, represented by the same outside counsel that represents Global in this action,
raised two defenses to CNIC’s billings under the U.S. Branch Certificate. First, U.S. Branch
Before initiating this action, CNIC sought Global’s agreement to include the parties’ dispute
regarding the Global Certificate in CNIC’s arbitration with U.S. Branch; however, Global declined
the request. See CNIC’s Mem. in Supp. of Mot. for Partial Summ. J. Based on Collateral Estoppel
6 & Ex. S (noting Global decisionmakers “prefer[red] to keep th[e] matters separate”).
“An ex gratia payment is one that is ‘made by one who recognizes no legal obligation to pay but
who makes payment to avoid greater expenses as in the case of a settlement by an insurance
company to avoid costs of a suit.’” Aetna Cas. & Sur. Co. v. Home Ins. Co., 882 F. Supp. 1328,
1346 n.10 (S.D.N.Y. 1995) (quoting Black’s Law Dictionary 514 (5th ed. 1979)).
objected to CNIC’s billings insofar as they sought reimbursement for CNIC’s payment of defense
costs with respect to claims that did not result in payment of indemnity (e.g., claims dismissed
because the claimant could not establish injury or injury resulting from a Marley product), arguing
such costs were not covered by CNIC’s 1979 Policy and were therefore ex gratia payments U.S.
Branch was not required to reimburse. See Ex. 111 at 9-16; Ex. 112 at 31-38. Second, U.S. Branch
argued the plain language of its own Certificates limited reimbursement of defense “expenses” to
those claims for which a loss payment was made, and also specified U.S. Branch would reimburse
CNIC’s expenses “in the ratio that the Reinsurer’s loss payment bears to the Company’s gross loss
payment.” See Ex. 111 at 16-25; Ex. 112 at 38-42. U.S. Branch thus asserted because CNIC’s
billings included amounts paid for defense costs that were outside the scope of both CNIC’s 1979
Policy and U.S. Branch’s Certificates, U.S. Branch was unable to determine what, if any, obligation
it owed to CNIC.
U.S. Branch also presented testimony from its Vice President, Peter Morone, at the
arbitration hearing. Morone oversaw Annechino’s handling of CNIC’s claims under both the U.S.
Branch and the Global Certificates. Morone identified his title as “vice president of APH claims for
form[er] Global U.S. Branch and Constitution Re companies,” 2/1/12 Trial Tr. 187; however, there
is no evidence he testified on behalf of Global at the arbitration hearing.
On June 3, 2011, at the conclusion of the three-day arbitration hearing, the arbitration panel
issued an award in favor of CNIC. By majority vote, the arbitrators ordered U.S. Branch “to pay in
full all outstanding billings under [CNIC’s 1979 Policy] billed to [the lower level U.S. Branch
Certificate]” and to “pay to CNIC the full amount of all future billings under [both U.S. Branch
Certificates] within thirty (30) days of their receipt.” Ex. 115. The arbitrators declined to award
CNIC interest on its past billings and also denied CNIC’s request for attorneys’ fees and costs. Id.
The parties thereafter proceeded with the instant case. Following a period of discovery, the
parties filed a series of cross-motions for summary judgment on the various issues. After hearing
oral argument, this Court reserved ruling on the motions, and the case proceeded to a four-day
nonjury trial. In September 2012, the Court denied the pending dispositive motions, indicating the
issues raised therein would be addressed based on the record developed at trial.
CONCLUSIONS OF LAW
Global raises three objections to CNIC’s billings under the Certificate. First, Global objects
that the billings include payments of defense costs on claims for which no indemnity payment has
been made, which payments are clearly beyond the scope of the 1976 Policy (the “ex gratia
defense”). Second, Global objects that the payment of such defense costs also contravenes paragraph
E of the Certificate, which requires payment of defense costs (or “expenses”) only on claims for
which CNIC has made a “loss” (i.e., indemnity) payment (the “loss ratio defense”). Finally, Global
asserts (by way of its counterclaim) that it has no present obligation to pay any amounts billed by
CNIC because it agreed to provide reinsurance only after CNIC has paid $10 million under the 1976
Policy, a requirement which Global contends applies separately to the initial one-year policy period
and the seven-month extension period. Global thus contends its obligations under the Certificate are
not triggered until CNIC pays out $10 million in at least one of these periods.
CNIC argues the doctrine of collateral estoppel applies to preclude Global from raising its
ex gratia and loss ratio defenses in this action because both defenses were actively litigated and
resolved adversely to Global’s affiliate, U.S. Branch, in its arbitration with CNIC. CNIC also
contends even if collateral estoppel does not apply, Global’s defenses fail on the merits. Finally,
CNIC disputes Global’s contention that the Certificate is subject to two separate $10 million
Although all of the issues in this case are governed by state law, they are not governed by the
same state’s law. The parties agree New York law governs the preclusive effect of the CNIC-U.S.
Branch arbitration award, as the arbitration took place in New York. The parties further agree
Indiana law governs interpretation the 1976 Policy pursuant to the Indiana court’s summary
judgment ruling in the Marley declaratory judgment action.
The parties disagree as to which state’s law governs interpretation of Global’s Certificate;
CNIC argues Pennsylvania law applies, while Global maintains the Certificate is governed by New
York law. Nevertheless, the parties appear to agree this Court need not undertake a choice of law
analysis because the relevant contract interpretation principles are the same in both jurisdictions.
CNIC’s Proposed Findings ¶¶ 204-05 & n.8; see Global’s Proposed Findings ¶ 263 (citing New York
and Pennsylvania case law regarding contract interpretation).
This Court agrees a choice of law analysis is unnecessary in this case because, as the Third
Circuit Court of Appeals recently recognized, “the basic rules of [contract] interpretation are well
established and do not differ between New York and Pennsylvania.” Pac. Emp’rs Ins. Co., 693 F.3d
at 426, 432 (holding a choice of law analysis is unnecessary if there are no “actual, relevant
differences” between the two jurisdictions’ laws). Under the law of both states, the court first “must
determine (as a matter of law) whether contractual language is ambiguous.” Id. at 426. If the
language of the contract is unambiguous, the court must “follow its plain meaning,” id., so as to
“give effect to the intention of the parties as expressed in the unequivocal language employed,”
Breed v. Ins. Co. of N. Am., 46 N.Y.2d 351, 355 (N.Y. 1978); see also Ins. Adjustment Bureau, Inc.
v. Allstate Ins. Co., 905 A.2d 462, 468 (Pa. 2006) (“The fundamental rule in contract interpretation
is to ascertain the intent of the contracting parties.”). The terms of a commercial contract should be
interpreted as they would be understood by one “who is cognizant of the customs, practices, usages
and terminology as generally understood in the particular trade or business.” Int’l Multifoods Corp.
v. Commercial Union Ins. Co., 309 F.3d 76, 83 (2d Cir. 2002); see also Sunbeam Corp. v. Liberty
Mut. Ins. Co., 781 A.2d 1189, 1193 (Pa. 2001).
Where, however, a contract is ambiguous, extrinsic evidence is admissible, and resolution
of the ambiguity is for the trier of fact, Ins. Adjustment Bureau, 905 A.2d at 468-69; N.Y. v. Home
Indem. Co., 66 N.Y.2d 669, 671 (N.Y. 1985). “A contract is ambiguous only if it is written so
imperfectly that it is susceptible to more than one reasonable interpretation.” Pac. Emp’rs, 693 F.3d
at 426 (internal quotation marks and citation omitted). Moreover, “[t]he mere fact that the parties
do not agree on the proper construction does not make a contract ambiguous.” Id.16
“Collateral estoppel precludes a party from relitigating in a subsequent action or proceeding
Pennsylvania and New York law may arguably differ as to whether the doctrine of contra
proferentem, pursuant to which ambiguities in a contract are construed against the drafter, applies
to contracts between insurance companies. “New York law enforces reinsurance contracts without
resort to the contra proferentem rule that is sometimes used in the context of direct insurance.”
British Int’l Ins. Co. Ltd. v. Seguros La Republica, S.A., 342 F.3d 78, 81 (2d Cir. 2003). While
Pennsylvania courts have applied the contra proferentem doctrine in disputes between insurance
companies, see Erie Ins. Exchange v. Transamerica Ins. Co., 533 A.2d 1363, 1366-67 (Pa. 1987);
Pa. Nat’l Mut. Cas. Ins. Co. v. Traveler’s Ins. Co., 592 A.2d 51, 53 (Pa. Super. Ct. 1991), because
these cases involved disputes between insurers with respect to policies issued to underlying insureds
(rather than to other insurers), it is not clear whether Pennsylvania courts would also apply the
doctrine in the reinsurance context. Nevertheless, even in Pennsylvania, contra proferentem is a
doctrine of last resort, applicable only if the language of the contract is ambiguous and extrinsic
evidence fails to clarify its meaning. See Pa. Dep’t of Transp. v. E-Z Parks, Inc., 620 A.2d 712, 718
(Pa. Commw. Ct. 1993) (citing Burns Mfg. v. Boehm, 356 A.2d 763, 766 n.3 (1976)).
an issue raised in a prior action or proceeding and decided against that party or those in privity.”
Buechel v. Bain, 97 N.Y.2d 295, 303 (N.Y. 2001). Under New York law,
[t]wo requirements must be met before collateral estoppel can be invoked. There
must be an identity of issue which has necessarily been decided in the prior action
and is decisive of the present action, and there must have been a full and fair
opportunity to contest the decision now said to be controlling. The litigant seeking
the benefit of collateral estoppel must demonstrate that the decisive issue was
necessarily decided in the prior action against a party, or one in privity with a party.
The party to be precluded from relitigating the issue bears the burden of
demonstrating the absence of a full and fair opportunity to contest the prior
Id. at 303-04 (citations omitted).
Because Global was not a party to the arbitration between CNIC and U.S. Branch, the key
issue as to the applicability of collateral estoppel is whether Global was in privity with U.S. Branch
with respect to the arbitration.17 In the context of collateral estoppel,
Global also contends the ex gratia and loss ratio defenses raised by U.S. Branch cannot be
regarded as having been “necessarily decided” in the arbitration because the arbitration panel
provided no reasoning for its ultimate decision and rejected significant portions of CNIC’s requested
relief. This argument lacks merit. U.S. Branch’s defenses asserted CNIC’s billings were improper
because CNIC had paid and was seeking reimbursement for amounts not covered by the 1979 Policy
or the U.S. Branch Certificates. Because both defenses were predicated on the notion CNIC’s
billings included amounts for which there was no coverage, had the arbitrators accepted either
argument, they necessarily would not have ordered U.S. Branch to pay the full amount of CNIC’s
billings. Yet this is exactly what the arbitration award did, directing U.S. Branch “to pay in full all
outstanding billings under CNIC policy 03-48-63, billed to [U.S. Branch] Certificate No. 73-30924,”
and to pay “the full amount of all future billings under Certificate Nos. 73-30924 and 73-30925.”
Ex. 115. The decision to award CNIC the full amount of its billings is inconsistent with, and thus
necessarily reflects a majority of the arbitrators’ rejection of, U.S. Branch’s ex gratia and loss ratio
defenses. Although the arbitrators declined to award CNIC certain additional relief it had requested,
including interest and attorneys’ fees and costs, id., such relief was not implicated by U.S. Branch’s
ex gratia and loss ratio defenses, and the failure to grant such relief does not suggest any rejection
of those defenses.
Global also argues its defenses are not identical to the defenses raised by U.S. Branch
because of differences in the certificates at issue in the arbitration and in this case. As to the ex
gratia defense, which concerns the proper interpretation of language in CNIC’s policy, Morone
agreed the issue was the same under the Global and U.S. Branch Certificates, and Global does not
privity is an amorphous concept not easy of application * * * and includes those who
are successors to a property interest, those who control an action although not formal
parties to it, those whose interests are represented by a party to the action, and [those
who are] coparties to a prior action. In addressing privity, courts must carefully
analyze whether the party sought to be bound and the party against whom the
litigated issue was decided have a relationship that would justify preclusion, and
whether preclusion, with its severe consequences, would be fair under the particular
circumstances. Doubts should be resolved against imposing preclusion to ensure that
the party to be bound can be considered to have had a full and fair opportunity to
Buechel, 97 N.Y.2d at 304 (internal quotation marks and citations omitted).
CNIC argues Global and U.S. Branch are in privity with respect to the defenses litigated in
the arbitration because U.S. Branch fully and fairly represented Global’s interests with respect to
those defenses. CNIC emphasizes the companies have functioned as a “single, indistinguishable
entity” with respect to CNIC’s reinsurance claims, noting the same two individuals—Annechino and
Morone—have reviewed and analyzed CNIC’s claims on behalf of both companies and the same
litigation counsel has represented both companies in their disputes with CNIC, raising the same
defenses at least in part through the testimony of the same witness (Morone).
Although the issue is an extremely close one, mindful that “[d]oubts should be resolved
against imposing preclusion,” id., this Court finds Global and U.S. Branch are not in privity in the
circumstances presented here. Privity based on representation exists where “the interests of the
person alleged to be in privity were ‘represented [in the prior proceeding] by another vested with the
authority of representation.’” Stichting Ter Behartiging Van de Belangen Van Oudaandeelhouders
in Het Kapitaal Van Saybolt Int’l B.V. v. Schreiber, 327 F.3d 173, 185 (2d Cir. 2003) (quotation
seriously contend otherwise. While Global does point to differences in the relevant certificate
language regarding the loss ratio defense, because the Court finds Global was not in privity with U.S.
Branch with respect to the arbitration, the Court need not resolve whether the differences identified
by Global are material.
omitted).18 Such authority exists where, for example, “a party to a previous suit was, at the time of
the litigation, acting as either a fiduciary or organizational agent of the person against whom
preclusion is asserted,” Stichting, 327 F.3d at 185, or where the parties share another similar
relationship, see Green v. Santa Fe Indus., 70 N.Y.2d 244, 253 (1987) (recognizing privity based
on representation may exist between an insured and its liability insurer based on the parties’
indemnitor-indemnitee relationship, and between a bankruptcy trustee and a creditor whose interests
the trustee represented in a prior action).
Here, however, there is no evidence U.S. Branch was vested with authority to represent
Global’s interests in the arbitration between U.S. Branch and CNIC. As an initial matter, the
arbitration concerned CNIC’s billings under reinsurance certificates issued by U.S. Branch’s
predecessor with respect to CNIC’s 1979 Policy. Global’s Certificate, pursuant to which Global’s
predecessor agreed to reinsure a portion of an earlier CNIC policy, was not at issue in the
arbitration.19 Indeed, when CNIC sought Global’s agreement to “add the Constitution Re certificate
into this [arbitration] proceeding,” Global declined to do so. CNIC’s Mem. in Supp. of Mot. for
Although the collateral estoppel issue in Stichting concerned the preclusive effect of a federal
criminal conviction and was therefore governed by federal law, id. at 184-86, federal law “uses
privity in a way similar to its use under New York law,” Chase Manhattan Bank, N.A. v. Celotex
Corp., 56 F.3d 343, 346 (2d Cir. 1995); see also Hallinan v. Republic Bank & Tr. Co., 519 F. Supp.
2d 340, 348 n.9, 356-58 (S.D.N.Y. 2007) (rejecting the argument that the concept of privity is
broader under New York law than under federal law), aff’d, 306 F. App’x 626 (3d Cir. 2009).
This case is thus distinguishable from Buechel v. Bain, in which the New York Court of Appeals
held three former law partners were in privity for purposes of litigating the validity of fee
arrangements to which they were all parties and from which their right to receive payments derived.
See 97 N.Y.2d at 304-05. Here, in contrast, CNIC’s claims against Global and U.S. Branch arise
under different reinsurance certificates issued by different predecessor corporations which reinsure
different (albeit substantially similar) CNIC policies. CNIC has not cited any cases finding corporate
affiliates to be in privity with respect to liabilities arising out of separate but similarly worded
contracts with a common third party.
Partial Summ. J. Based on Collateral Estoppel Ex. S. Global’s refusal to include its certificate in
the arbitration suggests U.S. Branch was not authorized to represent Global’s interests in that
Nor is the close functional relationship between the two entities a sufficient basis on which
to conclude that U.S. Branch represented Global’s interests in the arbitration. Usina Costa Pinto
S.A. Acucar e Alcool v. Louis Dreyfus Sugar Co., 933 F. Supp. 1170, 1176 (S.D.N.Y. 1996)
(“Independent corporate affiliation, by itself, does not create a master/servant or principal agent
relationship.”). Although part of the same corporate family, Global and U.S. Branch are separate
entities which do not appear to have a parent-subsidiary relationship. While the companies share
the same officers and claim handling personnel, the decisionmakers with respect to CNIC’s claims
(Annechino and Morone) held equivalent positions with both companies and thus were authorized
to act on behalf of Global with respect to CNIC’s claims under the Global Certificate and on behalf
of U.S. Branch with respect CNIC’s claims under the U.S. Branch Certificates. CNIC notes
Annechino was lax in observing corporate formalities in his communications with CNIC about its
claims, responding to CNIC’s billings on Global letterhead but including his title as Assistant Vice
President of U.S. Branch, regardless of the certificate to which the billing pertained. Annechino’s
sloppiness, however, does not suggest Global and U.S. Branch were functionally the same.
Significantly, Annechino appears to have responded separately to CNIC’s billings under the Global
and U.S. Branch Certificates based on the language of the particular certificate at issue. Compare
Exs. 60 & 68 (responding to CNIC’s billings to lower level U.S. Branch Certificate), with Ex. 77
(responding to CNIC’s billing as to Global Certificate).
While New York courts have in some instances relied on parties’ corporate affiliations,
overlapping officers, and shared counsel to support a finding of privity, those cases also involve
significant additional indicia of privity not present in this case. In Melwani v. Jain, No. 02-1224,
2004 WL 1900356 (S.D.N.Y. Aug. 24, 2004), for example, the district court held two “sister
companies” were in privity with respect to a plaintiff’s successive business tort actions against them.
The plaintiff had initially sued one corporation (RSPI) for improper registration of a website, false
advertising, tortious interference with prospective business relations, and unfair competition. After
the action against RSPI was settled and dismissed, the plaintiff asserted the same claims against
RSPI’s corporate affiliate (DI), and the court dismissed the action based on res judicata. In finding
DI was in privity with RSPI with respect to the earlier action, the court noted the two companies
were sister companies which had the same executive officers and litigation counsel. Id. at *2.
Significantly, however, the court also noted DI’s interest in the case was “virtually identical” to
RSPI’s interest in the prior litigation because the plaintiff sought to hold DI liable for RSPI’s conduct
based on its alleged domination and control of RSPI. Id. at *2-3 (noting under the plaintiff’s theory,
DI’s liability was “entirely derivative of RSPI’s liability”). The court also observed DI had “financed
the prior federal action for RSPI, was the party to be notified in case of a default, and paid the
settlement amount that resolved that action,” demonstrating DI’s control of RSPI’s defense in the
earlier litigation. Id.
In Ruiz v. Commissioner of Department of Transportation, 858 F.2d 898, 903 (2d Cir. 1988),
the court noted the fact that two separate groups of plaintiffs challenging the validity of summonses
issued to them under the same city vehicle weight regulation program were represented by the same
counsel in their successive state and federal lawsuits was of “singular significance” to the court’s
privity analysis. However, the plaintiffs in the later-filed federal court action were not only
represented by the same attorney as the plaintiffs in the earlier-filed state court action, but had by
stipulation authorized their attorney and the state court plaintiffs to include their federal
constitutional claims in the state court action and thus to represent their interests with respect to
those claims. Id.; see also Watts v. Swiss Bank Corp., 27 N.Y.2d 270, 277-78 (N.Y. 1970) (finding
parties’ retention of the same counsel to be “of singular significance” to the question of privity
between widow’s estate and her heirs in successive actions regarding the ownership of a bank
account jointly owned by the widow and her deceased husband, where counsel had been retained in
both actions by one of the estate’s executors who was the husband of one of the heirs and whose
relationship with the law firm was such that he had “practical control of all proceedings”).
Unlike in the foregoing cases, there is no evidence Global controlled U.S. Branch’s defense
of the arbitration because there is no evidence that the relevant U.S. Branch decisionmakers were
acting on behalf of Global in the arbitration. This Court agrees with the analysis of Hartford
Accident & Indemnity Co. v. Columbia Casualty Co., 98 F. Supp. 2d 251 (D. Conn. 2000), in which
the district court held a reinsurer was not collaterally estopped from litigating its coverage defenses
based on an arbitration decision rejecting similar defenses asserted by the reinsurer’s parent
corporation with respect to facultative reinsurance certificates the parent corporation issued to the
same reinsured. In Hartford, as in this case, two affiliated reinsurance companies had issued similar
certificates to the same reinsured for different policy periods. Although the reinsurers were separate
legal entities, the reinsured’s claims under both sets of certificates were managed by the same claim
handling personnel, and, when the claims resulted in litigation, the reinsurers retained the same legal
counsel to represent them and agreed to coordinate discovery between the two proceedings. (The
claims against the parent company proceeded to arbitration pursuant to the arbitration clause in its
certificates; however, the subsidiary’s certificates did not include an arbitration clause.)
In holding the arbitration decision against the parent company did not foreclose the subsidiary
from litigating its coverage defenses, the court found the two companies were not in privity with
respect to the arbitration. The court rejected the argument that the similarity between the parties’
certificates was sufficient to demonstrate they shared the same legal interest, noting “[p]rivity is not
established by the mere fact that persons may be interested in the same question or in proving or
disproving the same set of facts.” Id. at 256 (quotation omitted). The court also rejected the
reinsured’s contention that the close functional relationship between the parties as corporate relatives
and their reliance on the same claim handling personnel and outside counsel were sufficient to
establish privity between the parties. While acknowledging such factors were relevant to the privity
analysis, the court found these considerations were not dispositive given that the subsidiary, a
separate legal entity, was not a party to the arbitration and the arbitration panel had not considered
its certificates. Id. at 256-57. The court also remarked its decision to decline to apply collateral
estoppel “comport[ed] with the reality that [the subsidiary] never agreed to submit its contractual
disputes with [its reinsured] to arbitration,” remarking the reinsured “should not be permitted to
achieve a result through the back door that it would not have been able to achieve through the front
door, particularly where it is clear that the parties had no understanding that either this litigation or
the arbitration would affect the other proceeding.” Id. at 257.
These considerations apply with equal force here. Therefore, for the reasons set forth above,
the Court finds Global and U.S. Branch are not in privity with respect to the U.S. Branch arbitration,
and the Court will proceed to address Global’s ex gratia and loss ratio defenses on their merits.
For its ex gratia defense, Global argues that pursuant to its settlement with Marley, CNIC
is paying defense costs that are clearly beyond the scope of the 1976 Policy. According to Global,
while the Policy requires CNIC to pay defense costs on only those claims that result in liability being
imposed on Marley (by judgment or settlement) for personal injury arising out of an occurrence, in
the Settlement and Funding Agreement, CNIC agreed to pay defense costs for all claims asserted
against Marley, regardless of whether the claim resulted in payment of indemnity. CNIC does not
dispute it is paying defense costs on claims for which no indemnity payment was made. Rather,
CNIC asserts it is making such payments pursuant to a good faith settlement of arguably covered
claims, which settlement Global is obligated to follow.
The parties agree this defense implicates the “follow the fortunes” doctrine, which
“prevent[s] reinsurers from second guessing good-faith settlements and obtaining de novo review
of judgments of the reinsured’s liability to its insured.” N. River, 52 F.3d at 1199; see also Travelers
Cas. & Sur. Co. v. Ins. Co. of N. Am., 609 F.3d 143, 149 (3d Cir. 2010) (noting the doctrine
“significantly restricts a reinsurer’s ability to challenge the coverage decisions that led to its liability
to the insurer”).20 Under the follow the fortunes doctrine, “when an insurer loses—or settles—an
underlying coverage dispute,” the insurer’s payments to its insured are generally binding on the
reinsurer. N. River, 52 F.3d at 1205. The follow the fortunes doctrine “insulates a reinsured’s
liability determinations from challenge by a reinsurer unless they are . . . in bad faith, or the
payments are clearly beyond the scope of the original policy.” Travelers, 609 F.3d at 149 (quotation
Global refers to the “follow the fortunes” doctrine, while CNIC refers to the “follow the
settlements” doctrine. The follow the settlements doctrine has been characterized as “the follow-thefortunes 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). Therefore, for ease of reference, the Court will
refer only to the follow the fortunes doctrine.
omitted). Thus, a reinsurer seeking to avoid making payments pursuant to a settlement by its
reinsured “must show either that the coverage decisions that led to the reinsurer’s liability to the
insurer were made in bad faith, or that the coverage provided clearly fell outside the scope of the
policies the reinsurer agreed to reinsure.” Id.; see also N. River, 52 F.3d at 1207 (holding the
“‘follow the fortunes’ doctrine requires a court to find reinsurance coverage unless the reinsurer
demonstrates the liability to the insured was the result of fraud and collusion or not reasonably within
the scope of the original policy”).21
Global does not contend CNIC’s decision to enter into the Settlement and Funding
Agreement was the product of bad faith. Thus, to avoid reimbursing CNIC for its payments pursuant
to the settlement, Global must show CNIC’s payment of defense costs on claims for which no
indemnity payment is made is not even arguably within the scope of CNIC’s policy. See
Commercial Union Ins. Co. v. Swiss Reins. Am. Corp., 413 F.3d 121, 127 (1st Cir. 2005). Because
the follow the fortunes doctrine requires a reinsurer to indemnify for payments “reasonably within
the terms of the original policy, even if technically not covered by it,” Christiania Gen. Ins. Corp.
of N.Y. v. Great Am. Ins. Co., 979 F.2d 268, 280 (2d Cir. 1992), Global cannot meet its burden by
showing its interpretation of the relevant policy language is the most reasonable or persuasive,
Travelers, 609 F.3d at 165. Rather, Global must show “that the underlying policy language ‘as a
matter of [Indiana] law, unambiguously provides that the polic[y]’” does not pay defense costs for
The follow the fortunes doctrine serves the long-established goals of maximum coverage and
settlement. See N. River, 52 F.3d at 1206. As the Third Circuit Court of Appeals recently explained,
“[i]f the [insurer] knew that its settlement decisions could be challenged by every reinsurer, there
would be little incentive to settle with the insured. The costs and risks of litigation avoided by
settling with the insured would only be revived at the reinsurance stage.” Travelers, 609 F.3d at 149
claims on which no indemnity payment is made. N. River, 52 F.3d at 1207; see also Travelers, 609
F.3d at 165.
Global argues the language of the 1976 Policy unequivocally provides that CNIC is not
required to pay defense costs unless and until a claim results in payment of indemnity.22 Global
argues this limitation is apparent from the following Policy provisions. First, the Policy imposes
only a duty to “indemnify” Marley and specifically provides CNIC “shall not be called upon to
assume charge of the settlement of any claim.” Second, the Policy provides the duty to indemnify
arises only when liability has been imposed upon Marley by law or when Marley has assumed
liability under a contract (e.g., a settlement), and further provides CNIC shall not be liable with
respect to an occurrence under the Policy “unless and until [Marley or its underlying insurer] shall
have paid the amount of the underlying limits on account of such occurrence.” Third, the Policy
provides the liability for which CNIC must indemnify Marley must be liability “for damages” on
account of “personal injuries” (including bodily injury) “arising out of [an] occurrence.” In other
words, Marley must incur liability for a claimant’s bodily injury resulting from an occurrence to
trigger CNIC’s duty to indemnify Marley. Finally, the Policy requires CNIC to indemnify Marley
for “ultimate net loss,” or amounts Marley becomes obligated to pay “by reason of personal injury
. . . as a consequence of any occurrence covered hereunder.” CNIC argues these provisions
Although Global must establish the challenged defense costs are clearly beyond the scope of the
Policy as a matter of Indiana law, Global does not cite any applicable Indiana law. Under Indiana
law, “[i]nsurance contracts are governed by the same rules of construction as any other contracts.
Clear and unambiguous policy language is given its ordinary meaning . . . to determine the intent of
the parties at the time the contract was made as disclosed by the language used to express their rights
and duties.” Holiday Hospitality Franchising, Inc. v. Amco Ins. Co., 983 N.E.2d 574, 577-78 (Ind.
2013) (internal quotation marks and citations omitted). Where contractual language is ambiguous,
however, such ambiguities are generally resolved in favor of the insured, unless “such an
interpretation fails to harmonize the provisions of the contract as a whole.” Id. at 578
unambiguously establish that CNIC has no obligation to reimburse Marley’s defense costs until
Marley becomes liable to pay the underlying claim.
CNIC does not specifically contest Global’s interpretation of any of the policy provisions
described above. Indeed, Shine, who advanced a similar argument in the coverage issue memo he
prepared in December 2002 or January 2003, essentially agreed that Global’s interpretation was the
most plausible interpretation of those provisions. See 1/30/12 Trial Tr. 115-19. Rather, CNIC
argues the 1976 Policy as a whole included provisions, such as Endorsements No. 3 and 4 and the
“assistance and cooperation” clause, that CNIC reasonably believed could have been found by an
Indiana court to be ambiguous and that could have been interpreted to require coverage for defense
costs even on claims for which no indemnity payment was made. The fact the case was pending in
Indiana, a jurisdiction “not viewed by the insurance industry as a good jurisdiction in which to raise
coverage issues,” id. at 158, heightened CNIC’s concerns that the defense costs issue would not be
resolved in its favor.
To the extent that Global disagrees with CNIC’s assessment that an Indiana court could have
viewed the 1976 Policy as ambiguous with respect to CNIC’s defense costs obligation, it must show
that, as a matter of Indiana law, the provisions identified by CNIC are not ambiguous and clearly
would not require CNIC to pay defense costs on a claim unless an indemnity payment was also
made. See Travelers, 609 F.3d at 165; N. River, 52 F.3d at 1210. Global’s only argument with
respect to the ambiguities identified by CNIC is that Shine apparently did not believe the relevant
endorsements applied to asbestos claims, from which Global infers the endorsements could not have
played a meaningful role in CNIC’s analysis of its exposure under the 1976 Policy.23 Although it
is true that Shine does not appear to have believed at least Endorsement No. 3 applied to asbestos
claims (for reasons not explained at trial), see 1/30/12 Trial Tr. 128, both endorsements were a
source of concern for claim managers at CNIC, at least some of whom were attorneys, see id. at 128,
139-41. Moreover, Shine was concerned that the Policy’s “assistance and cooperation” clause could
be interpreted to preclude CNIC from disavowing a defense costs obligation if it exercised its right
to assert control over Marley’s defense of underlying claims. Id. at 142-43. These concerns, along
with the more general concern that Indiana was an unfavorable forum in which to raise coverage
issues, led CNIC to conclude its chances of prevailing on the defense costs issue in Indiana were
“pretty slim.” Id. at 55.
While CNIC may have had a strong legal argument, with some case law support from other
jurisdictions, that the language of the 1976 Policy did not require CNIC to pay defense costs on a
claim unless and until Marley became liable to pay indemnity on the claim, CNIC believed there
were ambiguities in the Policy that could cause this issue to be resolved unfavorably to it. Because
Global has not shown the relevant provisions were, in fact, unambiguous and clearly would not
require CNIC to pay defense costs in the absence of an indemnity payment under Indiana law, Global
has not met its burden to show CNIC’s payment of such costs is not even arguably covered by the
Policy. See Travelers, 609 F.3d at 168 (observing “where the policy language is ambiguous with
respect to the issue in dispute, a reinsurer can only meet its burden under the follow-the-fortunes
doctrine by pointing to a controlling decision definitively resolving the ambiguity in its favor”).
Global also disputes CNIC’s contention that Indiana courts are generally favorable to policyholders
and argues this justification is legally insufficient to support CNIC’s settlement decision with respect
to defense costs in any event.
Accordingly, the Court finds Global has not established its ex gratia defense.
Global’s loss ratio defense is based on paragraph E of the Certificate, which describes the
reinsurer’s obligation to pay “loss” and “expenses” pursuant to “loss settlements” made by the
reinsured as follows:
Upon receipt of a definitive statement of loss, the Reinsurer shall promptly pay its
proportion of such loss as set forth in the Declarations. In addition thereto, the
Reinsurer shall pay its proportion of expenses (other than office expenses and
payments to any salaried employee) incurred by the Company in the investigation and
its proportion of court costs and interest on any judgment or award, in the ratio that
the Reinsurer’s loss payment bears to the Company’s gross loss payment. If there is
no loss payment, the Reinsurer shall pay its proportion of such expenses only in
respect of business accepted on a contributing excess basis and then only in the
percentage stated in Item 4 of the Declarations in the first layer of participation.
Ex. 36 at 016553. Global argues that by requiring the reinsurer to pay “expenses” only when the
reinsured has made a “loss payment,” this provision of its own force limits Global’s obligation to
pay defense costs to those claims on which CNIC has made an indemnity payment. Global argues
this interpretation is reinforced by the last sentence of the provision, which states that if there is no
loss payment, Global will only pay expenses “in respect of business accepted on a contributing
excess basis.” Id. (As noted, the Certificate reflects the reinsurance provided was accepted not on
a “contributing excess” but on an “excess of loss” basis. Id. at 016552.)
CNIC argues in light of the presumption that coverage provided by a reinsurance certificate
is concurrent with the coverage provided by the reinsured policy, and because reinsurance certificates
in general (and the Global Certificate in particular) are standard form contracts used to reinsure
different types of insurance policies, paragraph E must be interpreted with reference to the particular
policy being reinsured. CNIC further argues because the Certificate does not define the term “loss,”
the presumption of concurrency, as well as industry custom and practice, direct the Court to look to
the reinsured policy for a definition. Thus, in the context of the 1976 Policy, which pays defense
costs as part of “ultimate net loss,” “loss,” for purposes of paragraph E, should also be understood
to include defense costs, and “expenses” should be understood to include to those expenses that are
not part of the reinsurance loss, e.g., expenses incurred by CNIC in defending and settling the Marley
declaratory judgment action.
As CNIC notes, where, as here, a “skeleton reinsurance contract” includes a following form
clause,24 “concurrency between the policy of reinsurance and the reinsured policy is presumed, such
that a policy of reinsurance will be construed as offering the same terms, conditions and scope of
coverage as exist in the reinsured policy, i.e., in the absence of explicit language in the policy of
reinsurance to the contrary.” Commercial Union, 413 F.3d at 128 (quotation omitted). Global
argues that by specifying the manner in which the reinsured will pay “loss” and “expenses,”
paragraph E provides such “explicit language . . . to the contrary.” As Global acknowledges,
however, the Certificate does not provide a definition for the term “loss.” Global does not dispute
that where a term used in both a reinsurance certificate and a reinsured policy is defined only in the
policy, the policy definition may also apply to the certificate. See Global’s Proposed Findings at 65
n.3; see also Pac. Emp’rs Ins. Co., 693 F.3d at 426 (noting the parties’ agreement that the reinsured
policy’s definition of the term “occurrence” also applied to the reinsurance certificate, which did not
separately define the term). Rather, Global argues the 1976 Policy does not define the term “loss,”
but instead refers to “ultimate net loss.”
Here, the Certificate provides “[t]he liability of the Reinsurer . . . shall be subject in all respects
to all the terms and conditions of the Company’s policy except when otherwise specifically provided
herein . . . .” See Ex. 36 at 016553.
Based on the parties’ submissions and this Court’s own research, there appears to be scant
authority on point. The parties have cited to competing treatises, but it is not clear either addresses
the precise issue presented here. CNIC cites two unreported decisions in which state trial courts
have interpreted the term “loss” in an “excess of loss” reinsurance certificate to have the same
meaning as “ultimate net loss” in the reinsured policy. See Ace Prop. & Cas. Ins. Co. v. R & Q
Reins. Co., No. 2010-02290, Order & Op. (Pa. Ct. Com. Pl. May 15, 2012); Allstate Ins. Co. v. R &
Q Reins. Co., No. 08-45451, Mem. Op. & Order (Ill. Cir. Ct. Feb. 5, 2010). In both cases, however,
the issue appears to have been whether the insurer had miscalculated its retention by combining
expenses and indemnity. Thus, although these cases provide some indirect support for CNIC’s
position, neither addressed a provision similar to paragraph E of Global’s Certificate. Global, in
turn, relies on Pacific Employers Insurance Co. v. Global Reinsurance Corporation of America, No.
09-6055, 2010 WL 1659760, at *4 (E.D. Pa. Apr. 23, 2010), in which the district court, interpreting
a substantially identical provision in another certificate issued by Global, characterized the provision
as “outlin[ing] the two separate proportions of losses and expenses that Global is obligated to pay
pursuant to the Facultative Certificate.” The issue in Pacific Employers, however, was whether the
certificate’s $1 million cap “encompasse[d] expenses or exclude[d] them.” Id. at *3. The court thus
had no occasion to address whether loss could include defense costs pursuant to an ultimate net loss
In the absence of any clear authority on point, and because the Certificate does not define
“loss” for purposes of the coverage provided therein, this Court is persuaded the presumption of
concurrency requires the Court to interpret loss in a manner consistent with the 1976 Policy.
Although Global’s proferred definition of “loss” as the indemnity payments made by CNIC “might
be plausible in many contexts, here the follow-the-form clause should prevail.” Union Carbide
Corp. v. Affiliated FM Ins. Co., 16 N.Y.3d 419, 424 (N.Y. 2011) (rejecting argument that excess
policy with an “aggregate” limit of liability provided a single aggregate limit where underlying
policy provided an “annual aggregate” and excess policy included a follow the form clause). As the
court in Union Carbide recognized, “[s]uch clauses serve the important purpose of allowing an
insured . . . that deals with many insurers for the same risk to obtain uniform coverage, and to know,
without a minute policy-by-policy analysis, the nature and extent of that coverage.” Id.
Further, to the extent the Certificate is ambiguous, this Court credits the testimony of
Resolute Vice President Judith Harnadek and CNIC’s expert Don Salyer that where the term “loss”
is not defined in a reinsurance certificate, the custom and practice in the industry is to look to the
reinsured policy for a definition. At trial, Harnadek stated, based on her 25 years of working with
reinsurance contracts, that “the terms ‘loss’ and ‘expense’ have to be understood and applied . . .
with respect to the particular policy that’s being reinsured in terms of facultative reinsurance,” and
that to determine what constitutes “loss” under the reinsurance contract, “[y]ou need to look at how
does the reinsured policy define ‘loss.’” 2/1/12 Trial Tr. 47. As Harnadek credibly explained, “[i]f
the reinsured policy defines ‘loss’ to include defense expense, then for reinsurance purposes, those
defense expenses are part of ‘loss.’ On the other hand, if there’s a policy that pays defense costs in
addition to its limit or outside of the policy limit, in that case ‘loss’ would be the indemnity payment
only, and ‘expense’ would be the expense in addition to limit.” Id. Based on his 40 years of
experience in the insurance and reinsurance industry, Salyer testified to the same effect. Id. at 98
(stating where a reinsurance certificate does not define the term “loss,” the custom and practice in
1977 would have been to “look at the original policy that’s being reinsured” to determine what “loss”
Because the Court finds indemnity and defense costs paid as ultimate net loss are properly
combined as loss under Global’s Certificate, and because Global does not dispute that CNIC has
properly billed Global for the declaratory judgment expenses CNIC incurred in defending and
settling the Marley declaratory judgment action, the Court rejects Global’s loss ratio defense.
Finally, Global argues it has no present obligation to pay CNIC’s billings because the
endorsement extending the expiration date of its Certificate requires CNIC to satisfy two separate
$10 million retentions—one for the Certificate’s initial one-year policy period (December 31, 1976,
to December 31, 1977) and one for the seven-month extension period (December 31, 1977, to
August 1, 1978)—neither of which has been fully exhausted to date. Global’s argument focuses on
the second paragraph of the endorsement, which provides:
IT IS FURTHER UNDERSTOOD AND AGREED THAT EFFECTIVE FOR THE
PERIOD OF 12/31/77 TO 08/01/78 THE UNDERLYING AGGREGATE LIMITS
WHERE APPLICABLE SHALL BE UNIMPAIRED AND FOR THE PURPOSE OF
THIS REINSURANCE ONLY OCCURRENCES TAKING PLACE DURING THE
TERM OF 12/31/77 TO 08/01/78 SHALL BE CONSIDERED IN DETERMINING
THE EXTENT OF ANY EXHAUSTION OF THE UNDERLYING AGGREGATE
Ex. 36 at 016550.26
Although Salyer did not recall ever handling a claim that required him to apply the language of
paragraph E, given his extensive experience in the insurance and reinsurance industry, including
experience underwriting following form excess policies (which follow the form of the underlying
primary policy in a manner similar to facultative reinsurance certificates), the Court credits his
testimony regarding industry custom and practice for defining an undefined term in a following form
The parties agree the first paragraph of the endorsement simply reflects Global’s agreement to
extend the expiration date of the Certificate in consideration of an additional premium.
Global argues by requiring the “underlying aggregate limits” (i.e., CNIC’s $10 million
retention) to be “unimpaired” effective for the Certificate’s seven-month extension period, the
endorsement requires CNIC to provide a new $10 million retention for the extension period. CNIC
argues the use of the term “unimpaired” does not require a new $10 million retention, but simply
requires that the existing underlying aggregate limits be undiminished as of the Certificate’s effective
date. The parties agree the endorsement contemplated that the underlying aggregate limits available
for the extension period—whether a new $10 million retention or the existing and undiminished $10
million retention—could be eroded only by occurrences during the extension period.
Based on the plain language of the Certificate, the Court finds CNIC has the better argument.
As noted, the presumption of concurrency that flows from a follow the form clause means a
reinsurance certificate “will be construed as offering the same terms, conditions and scope of
coverage as exist in the reinsured policy, i.e., in the absence of explicit language in the policy of
reinsurance to the contrary.” Commercial Union, 413 F.3d at 128 (quotation omitted). This
presumption that reinsurance “dovetails with the underlying liability insurance” can be overridden,
but only “by clear language in the certificate that cuts off liability under the reinsurance policy even
where the cedent is liable to the insured.” Am. Emp’rs Ins. Co. v. Swiss Reins. Am. Corp., 413 F.3d
129, 137 (1st Cir. 2005). Having reserved its rights with respect to the number of aggregate limits
issue with Marley, CNIC is currently paying Marley claims pursuant to the Settlement and Funding
Agreement based on one $25 million aggregate limit. Therefore, Global must follow CNIC’s
settlement unless the Certificate clearly provides to the contrary. See Commercial Union, 413 F.3d
at 128 (“[I]f sufficiently clear, specific limits in the certificate control over the general aim of
concurrence and ordinary ‘follow’ clauses.”); cf. Gerling, 419 F.3d at 186-89 (applying the follow
the fortunes doctrine to an insurer’s post-settlement allocation based on its pre-settlement position
on number of occurrences, which the settlement explicitly declined to resolve).
Read literally, the endorsement requires only that the underlying aggregate limits be
“unimpaired,” i.e., undiminished or having incurred no losses, for the extension period, and that only
occurrences taking place during the extension period be used to exhaust the underlying aggregate
limits. The endorsement does not say a new or separate underlying aggregate limit shall apply during
the extension period, nor does it say the extension period shall constitute a new annual period.
Because the endorsement does not clearly provide that CNIC must exhaust two $10 million
retentions, it is insufficient to overcome the presumption of concurrency.
At best the endorsement is ambiguous as to whether the “unimpaired” underlying aggregate
limits to be available during the extension period are a new $10 million retention or the full amount
of the existing $10 million retention. But even if the endorsement is regarded as ambiguous, the
limited extrinsic evidence in the record does not favor Global’s interpretation.
The evidence produced at trial reflects that as of the Certificate’s December 31, 1977,
effective date, the underlying aggregate limit was, in fact, unimpaired. Indeed, the policies
underlying CNIC’s 1976 Policy (one with a policy period of August 1, 1976, to August 1, 1977, the
other effective from August 1, 1977, to August 1, 1978) were not exhausted until September 1984
and October 1982, respectively. Ex. 53 at 04222. Therefore, the 1976 Policy had not been impacted
by any losses as of December 31, 1977.
CNIC’s expert, Don Salyer, also testified that at the time the endorsement was written, the
generally understood practice for determining the date of loss for bodily injury was the date the
injury manifested itself. 2/1/12 Trial Tr. 98-99. Because the parties would have contemplated a
manifestation trigger at the time the endorsement was written, the fact they agreed that only
occurrences during the seven-month extension period would erode the underlying aggregate limit
does not suggest they contemplated there would be a new underlying aggregate limit for the
extension period. Rather, if the aggregate limit was unimpaired at year’s end, when the initial oneyear policy period was essentially over, it would be expected that any new bodily injury claims
would manifest themselves in the extension period.27 Accordingly, the endorsement is entirely
consistent with CNIC’s theory.
Global relies heavily on the deposition testimony of Roger Hughes, the underwriter who
signed the Certificate and the endorsement. While Hughes testified the intent of the endorsement
was that CNIC would “pay an aggregate limit of the first 12 months and . . . a separate aggregate for
the second 7 months,” he agreed the endorsement itself does not say anything about CNIC taking two
$10 million retentions before it can bill Global. Hughes Dep. 101-02. The only evidence of any
communications between Global and CNIC regarding the endorsement is an exchange of telexes
between Kenneth Mann of Cravens and Hughes, but these tersely worded communications are
themselves at best ambiguous and do not clearly convey a request for two separate retentions.28
It was not until the early 1980s, several years after the endorsement was written, that the theory
of continuous or triple trigger was recognized. Id. at 99. As noted, under a continuous trigger,
bodily injury is deemed to have occurred continuously from the date of the claimant’s first exposure
to asbestos-containing materials through manifestation of an asbestos-related injury, thereby
triggering all policies in effect during this period. See id. at 99-100. The parties thus would not have
contemplated the possibility of a continuous trigger at the time the endorsement was written. Based
on the later-adopted continuous trigger theory, however, for a claimant whose injury period spans
both portions of the 1976 Policy’s 19-month policy period, the injury would be an occurrence in the
first 12 months of the period and is also an occurrence during the seven-month extension period.
When Mann requested Global’s agreement to extend the Certificate’s expiration date to August
1, 1978, Hughes responded the following day, stating “SUBJECT TO CONF[I]RMATION THAT
AGG. COVER IS REINSTATED OF 12/31/77 WE CAN AGREE TO EXT. TO 8/1/78, IF AGG.
Further, Hughes admitted he does not know who drafted the endorsement, does not recall
underwriting the certificate or the endorsement, and does not recall having any discussion with
anyone at CNIC regarding the request to extend the certificate. Hughes Dep. 34, 39, 96, 101. The
Court therefore finds Hughes’s interpretation of the intention and meaning of the endorsement is
entitled to little weight.
Global also asserts an exchange of correspondence between it and Cravens in the mid-1980s
supports its interpretation of the endorsement. In January 1984, after CNIC had placed Global on
notice of approximately $130,000 in product losses under the product aggregate of the 1976 Policy,
a Global claim supervisor wrote to Cravens taking the position that “[w]hen this policy expiration
date was extended it was done with the understanding that any loss between 12/31/77 and 8/1/78
would comprise a new aggregate period,” and requesting confirmation “that the underlying limits
for both aggregates have not been exhausted . . . .” Ex. 125. When Cravens responded in June 1985,
the claim handler noted he had “not attempt[ed] to separate out the 12/31/76 through 12/31/77 claims
and the 12/31/77 through 8/1[/]78 claims,” stating “[t]his will only become an issue if the losses for
either period exceed the $1,000,000 1st layer of coverage.” Ex. 126. Global argues this response
reflects Cravens’s acquiescence in its position; however, the letter can also be regarded as
noncommittal. In any event, this single exchange is not sufficient to make Global’s interpretation
the more plausible.
Finally, Global argues CNIC is in fact paying Marley’s claims pursuant to two aggregate
PERIOD IS TO BE 12 PLUS 8 MOS.” Ex. 45. Although Hughes’s request for confirmation that
“agg. cover” would be “reinstated” for the extension period could arguably be interpreted as
requesting a new set of aggregate limits, any such inference is undercut by Hughes’s reference to a
single aggregate period of “12 plus 8” months.
limits, but this argument, which is based primarily on the Marley settlement documents and bills and
reports prepared by PACE on Marley’s behalf, ignores CNIC’s reservation of rights with Marley on
In sum, the limited extrinsic evidence does not persuade this Court that Global’s
interpretation of the endorsement is correct. Accordingly, this Court finds the language of the
endorsement does not, of its own force, create two separate $10 million underlying aggregate limits.
For the reasons set forth above, the Court finds Global is not collaterally estopped from
raising its “ex gratia” and loss ratio defenses to CNIC’s billings under the Global Certificate;
however, the Court finds those defenses, as well as Global’s defense based on the endorsement to
the Certificate, to be without merit. Accordingly, judgment will be entered in favor of CNIC and
against Global on CNIC’s breach of contract and declaratory judgment claims and on Global’s
An appropriate judgment follows.
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