Opinion
96 Civ. 7113 (MGC)
September 20, 2001
Daniel J. King, Richard F. Hans, King Spalding, New York, NY, Attorneys for plaintiff.
Lawrence J. Kaiser, Ingrid R. Sausjord, Fisher, Fisher Berger, New York, NY, Attorneys for defendant.
OPINION
Eastern Air Lines, Inc. ("Eastern") sues the Insurance Company of Pennsylvania ("ISOP") for breach of the covenant of good faith and fair dealing, breach of fiduciary duty, and breach of contract in connection with ISOP's handling of claims under a 1990-91 workers' compensation insurance policy. Eastern argued in the Joint Pre-Trial Order that ISOP improperly included certain "allocated loss expenses" in the calculation of the final premium due under the policy, although it did not plead this theory in the Complaint, Amended Complaint or in its Reply to ISOP's counterclaims. Eastern moved for declaratory judgment and partial summary judgment on several issues, including the question of allocated loss expenses. At oral argument I denied Eastern's motion with respect to the other issues, reserved judgment on the issue of allocated loss expenses, and gave ISOP an opportunity for discovery and further briefing to cure any prejudice resulting from plaintiff's delay in raising the issue.
Eastern's motion for declaratory judgment and partial summary judgment on the issue of allocated loss expenses is now denied for the reasons that follow.
BACKGROUND
On approximately February 1, 1990, Eastern and ISOP entered into a contract for workers' compensation and employers liability insurance for the one year period from February 1, 1990 through February 1, 1991 (the "Insurance Contract"). At the time, Eastern was a debtor-in-possession under Chapter 11 of the United States Bankruptcy Code. Eastern did not participate directly in the negotiations, but was represented by Philip Rothke of Alexander Alexander ("A A"), Eastern's insurance broker from 1987 through 1992. ISOP was represented in the negotiations primarily by Richard Thomas of ISOP and Needham Smith of AIG Aviation, the managing agent of ISOP.
Unfortunately, Mr. Rothke is now deceased. The parties have submitted the affidavit of Rothke and excerpts of his deposition from a prior litigation between the parties. That litigation dealt primarily with the policy for the prior year, which was nearly identical to the Insurance Contract at issue in this case. The litigation culminated in an opinion of the Second Circuit holding that ISOP was not obligated to refund Eastern's premium overpayment for the 1989-90 policy year until January 31, 1994, the date specified in the Dividend Plan Rating Agreement for that policy year. See In re Ionosphere Clubs, Inc., 85 F.3d 992 (2d Cir. 1996).
The Insurance Contract is comprised of three documents: the Workers' Compensation and Employers Liability Insurance Policy and endorsements thereto (the "Policy"), the Dividend Plan Rating Agreement (the "Rating Agreement") and the Addendum to the Dividend Plan Rating Agreement. Under the Insurance Contract, ISOP assumed the duty to defend and administer all workers' compensation claims against Eastern during the policy period. In return, Eastern agreed to pay an initial "estimated final premium" of $21 million in 18 monthly installments.
The Insurance Contract was a "loss sensitive" or "retrospective" policy, i.e. the actual final premium would be based on the value of claims and certain other costs actually paid by ISOP under the Policy, subject to minimum and maximum premiums specified in the contract. The contract provided for a series of adjustments to the estimated premium over the four years following the policy period and a final adjustment on February 1, 1995 (the "Final Adjustment Date"). The adjusted final premium would be determined according to the following formula in the Rating Agreement:
[(Final Audited Standard Premium x Retention Factor) + (Final Audited Standard Premium x Excess Loss Premium Factor) + (Incurred Losses x Loss Development Factor) + Loss Adjustment Expenses, if any] x Tax and Assessment Multiplier, subject to Minimum and Maximum Premiums.
Incurred losses are defined in the Rating Agreement as "losses paid, Company individual reserves for outstanding losses and Company reserves for incurred-but-not-reported losses, and adjustments in previous Company estimates of losses incurred, less losses in excess of the loss limitation, if any." Loss adjustment expenses are not defined, and the parties disagree about what the term covers. It is undisputed, however, that loss adjustment expenses include at least "un allocated loss expenses" — that is, the general overhead costs associated with the handling of the workers' compensation claims against Eastern that are not attributable to any particular claim.
Under the Insurance Contract, if the actual final premium, as determined under the premium formula, exceeds the estimated premium paid by Eastern, ISOP would bill Eastern for the balance. Conversely, if the estimated premium exceeds the actual final premium, ISOP would refund the excess to Eastern. Rothke explained that the premium for the `88-`89 contract, identical in structure to the `90-`91 contract, "would be based on the amount of losses and other related costs, subject to agreed upon minimum and maximum factors." Rothke Aff. at ¶ 7. According to Rothke, Eastern was essentially "a self-insurer with only two forms of insurance, the maximum premium, that's the only place where insurance starts and under individual claim basis Eastern pays the first million dollars of every occurrence." Rothke Dep. 104:2-8. The National Council on Compensation Insurance ("NCCI") Retrospective Rating Plan Manual ("NCCI Manual") in effect at the time of the Insurance Contract, and on which both parties rely, describes the "cost-plus" nature of a retrospective policy: "The cost-plus characteristics of this plan exist because the retrospective premium for a rating period is based on the incurred losses during that period, so that is in the nature of a dollar for dollar cost method . . . the plan reflects the cost of losses plus the insurance carrier's expenses in providing the insurance." NCCI Manual, Part One, I(A)(4). The NCCI manual also says that incurred losses are "generally . . . the actual losses paid and outstanding, interest on judgments, expenses incurred in obtaining third party recoveries, and allocated loss adjustment expenses for employers liability losses." Id. at II(F). It does not specifically address allocated loss expenses for worker's compensation losses.
ISOP's obligations under the Insurance Contract are described in the Policy. Paragraph B of Part One of the Policy, captioned "We Will Pay," provides that ISOP will pay the benefits required of Eastern under workers compensation law. Paragraph C of that Part, captioned "We Will Defend," states:
We [ISOP] have the right and duty to defend at our expense any claim, proceeding or suit against you for benefits payable by this insurance. We have the right to investigate and settle these claims, proceedings or suits.
The Policy also states that "[a]ll premium for this policy will be determined by our manuals of rules, rates, rating plans and classifications."
AIG Aviation, on behalf of ISOP as its managing agent, retained Alexis, Inc., to be the third party administrator of claims against Eastern during the policy period. At the time the Insurance Contract was executed, Alexis was a wholly owned subsidiary of A A. Alexis and AIG Aviation entered into a Claims Services Agreement ("CSA"), pursuant to which Alexis agreed "to provide all its normal administrative, investigative, and adjustment services to AIG Aviation in connection with [Eastern's] claims." AIG Aviation agreed to pay Alexis an annual fee based on the volume of claims handled by Alexis, as well as all allocated loss expenses incurred by Alexis. The CSA defined "allocated loss expenses" as:
all court costs, fees, and expenses; fees for service of process, fees to attorneys, cost of undercover operative and detective services; cost of employing experts . . .; cost for legal transcripts . . . depositions and court reported or recorded statements; and any other similar fee, cost or expense reasonably chargeable to the investigation, negotiation, settlement, or defense of a claim or loss . . . .
Eastern is not a party to the CSA. Subsequently, however, AIG Aviation, Alexis and Eastern signed Addendum Number 1 to the CSA. Addendum Number 1 provides, in relevant part, that:
all service fees and claims adjustment expenses, except allocated expenses as defined in the contract, shall be unbundled, separate, and distinct from the Worker's Compensation and Employers Liability Premium and shall be paid by Eastern Air Lines, Inc., Debtor in Possession directly to Alexis, Inc.
AIG Aviation and Alexis (but not Eastern) also executed a second addendum to the CSA, which gave Alexis the discretionary settlement authority for all claims the expected value for which was less than $50,000. Settlement of claims exceeding $50,000 required notice to and authorization from an AIG affiliate, AIAC Subcontracted. This addendum also required Alexis to retain defense counsel approved by AIG.
Approximately 2,300 workers compensation claims were filed during the policy period. Throughout the five year period leading up to the Final Adjustment Date, Alexis provided Eastern with monthly reports, known as "loss runs," describing the incurred losses from workers compensation claims. The information was broken down into four categories: Indemnity, Medical, Expenses and Other. The categories were combined under the heading "Total." The categories "Expenses" and "Other" contained allocated loss expenses. Alexis also provided Eastern with Claim Status Reports for individual claims for which incurred losses exceeded $20,000. These reports provided a "Total Incurred" amount for each claim broken down into the same four categories as the monthly loss runs. Eastern never objected to the inclusion of allocated loss expenses in the category "Total Incurred."
In 1992, Eastern retained a new insurance broker, Ronald Morrison of Marsh McLennan, Inc., to replace A A. Shortly after he was retained, Morrison reviewed the Insurance Contract, as well as the policies for other years, to determine the respective financial obligations of Eastern and ISOP. In reviewing the 1990-91 policy, he used the Alexis loss runs to calculate "the total amount due versus what has been paid, et cetera." Morrison Dep. 39:14-15. Morrison did not object to the inclusion of Expense and Other in the loss run total, nor did he identify any overcharge as a result of the inclusion of allocated loss expenses.
On the Final Adjustment Date, ISOP calculated the final premium based on total incurred losses of $15,196,618, which includes over $1.4 million in allocated loss expenses. Under ISOP's calculation, Eastern owes an additional $1,468,008 representing the difference between the $21 million final premium and the actual final premium. Eastern has not paid this additional premium, and ISOP has counterclaimed for the amount it claims it is owed.
Alexis' February 10, 1995 "Interact Detail Claim Report" identifies $1,407,284.90 in allocated loss expenses. However, the combined total of Expenses and Other on its January 31, 1995 Claim Listing is $1,451,646.10.
In the Joint Pre-Trial Order in this action, submitted almost four years after the final premium was calculated, Eastern, for the first time, objected to the inclusion of allocated loss expenses in the premium calculation. In its Amended Complaint, however, Eastern stated that "[t]he premium amount, calculated in accordance with the formula contained in the Rating Plan, includes: (a) the amount of covered losses paid; (b) the amount reserved by AIG AVIATION for future covered loss payments, (c) the amount of expenses incurred to investigate and administer covered claims, and (d) a profit margin or basic premium payable to AIG AVIATION for administering the respective program." Am. Compl. ¶ 6 (emphasis added). Part of Eastern's original theory of recovery was that "AIG AVIATION overpaid claims and incurred inappropriate, unnecessary and excessive expenses." Am. Compl. ¶ 14. After filing this action, Eastern retained Tillinghast-Towers Perrin ("TTP"), an independent consulting firm, to identify overpayments resulting from improper claims handling by ISOP or Alexis. In a report dated June 4, 1998, TTP identified a percentage of Expense and Other costs that it believed were excessive, but did not question Eastern's obligation to pay the costs that were properly incurred. TTP combined the costs for Expense and Other, along with Indemnity and Medical, as "Total Paid." From the deposition of Robert Groves of TTP, it is apparent that "total paid" refers to total paid losses, a subset of incurred losses.
DISCUSSION Standard For Summary Judgment
A motion for summary judgment should be granted when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). The judge's role in summary judgment is not "to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986). In deciding whether a genuine issue exists, a court must "examine the evidence in the light most favorable to the party opposing the motion, and resolve ambiguities and draw reasonable inferences against the moving party." In re Chateaugay Corp., 10 F.3d 944, 957 (2d Cir. 1993). Nonetheless, "Rule 56(c) mandates the entry of summary judgment . . . against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex, 477 U.S. at 322.
Inclusion of Allocated Loss Expenses in the Calculation of the Final Premium
Eastern argues that the allocated loss expenses are unambiguously excluded from the premium in the Insurance Contract and, that even if the contract were deemed to be ambiguous, extrinsic evidence demonstrates that the parties intended to exclude allocated loss expenses from the premium. Both arguments are without merit.
In construing an insurance policy "the court must examine the entire contract to determine its purpose and effect and the apparent intent of the parties." Meyers Sons v. Zurich American Insurance Group, 74 N.Y.2d 301, 303 (N.Y. 1989). Where the terms of the policy are clear and unambiguous, the court should look no further than the language of the policy. Milbin Printing, Inc. v. Lumbermen's Mutual Casualty Ins. Co., 724 N.Y.S.2d 464, 466 (2d Dep't 2001).
The parties disagree as to whether Florida, Georgia or New York law governs the Insurance Contract. Both agree, however, that determination of the choice of law issue will not affect the outcome of this motion. The determination of that issue is left for another day. Since the law regarding interpretation of insurance contracts appears uniform, I will refer to New York authorities.
In this case, however, the language of the Insurance Contract is ambiguous. The formula for calculating the final premium is set out in the Rating Agreement. The premium formula does not expressly include or exclude allocated loss expenses. In fact, the term "allocated loss expenses" does not appear in the Rating Agreement or the Policy. ISOP argues that allocated loss expenses are "losses" and, therefore, included in the premium as part of incurred losses. "Loss" is not defined in the Rating Agreement, and there is no way to determine from the words of the contract alone whether the term was intended to include allocated loss expenses. Alternatively, ISOP argues that allocated loss expenses should be included as loss adjustment expenses. This is a fallback position only, since ISOP's Proposed Finding of Fact 100 in the Joint Pre-Trial Order states that "Loss Adjustment Expense" refers to un allocated loss expenses.
The parties agree that the terms "allocated loss expenses" and "allocated loss adjustment expenses" are synonymous. The latter is used by the NCCI to describe the types of expenses at issue in this case.
Eastern argues that ISOP's promise in the Policy "to defend at our expense any claim, proceeding or suit against you" unambiguously requires ISOP to bear the cost of the allocated loss expenses. It is clear from the structure of the Insurance Contract, however, that this obligation, like ISOP's obligation to pay claim benefits, requires ISOP to bear these costs initially. Eastern has an obligation to reimburse ISOP through payment of the final premium, which is governed by the Rating Agreement. The Policy requires Eastern "to pay all premium when due;" such premium being determined by ISOP's "manuals of rules, rates, rating plans and classifications" — in this case, by the Rating Agreement. ISOP's obligation to pay benefits and defend claims was expressly intended not to supersede Eastern's obligation to pay the premium. At the end of Part One, the Policy states that "[n]othing in these paragraphs relieves you of your duties under this policy." The sole question, then, is whether allocated loss expenses are included in the premium formula. As discussed above, that question is not answered by the language of the Rating Agreement.
Eastern argues, secondly, that any ambiguity in the Insurance Contract should be construed in its favor as a matter of law. Indeed, the general rule in New York is the "contra proferentem" rule — that ambiguities in insurance policies are construed in favor of the insured. It is unsettled under New York law, however, whether this rule applies when the insured is a sophisticated business entity that negotiated the terms of the insurance contract. Morgan Stanley Group Inc. v. New England Ins. Co., 225 F.3d 270, 279-80 (2d. Cir. 2000); Schering Corp. v. Home Ins. Co., 712 F.2d 4, 10 n. 2 (2d Cir. 1984). Since Eastern, through its experienced insurance broker, A A, negotiated the premium formula in the Rating Agreement, the considerations underlying the contra proferentem rule are absent. In any event, "contra proferentem is used only as a matter of last resort, after all aids to construction have been employed but have failed to resolve the ambiguities in the written instrument." Id. In this case, each party has submitted extrinsic evidence to support its interpretation of the Insurance Contract, creating an issue of fact that precludes application of contra proferentem at the summary judgment stage. See Morgan Stanley Group Inc., 225 F.3d at 279-80.
If a court must examine extrinsic evidence to give meaning to ambiguous contract terms, the parties' intent and the meaning of the ambiguous terms are issues of fact that preclude summary judgment. Alexander Alexander Services, Inc. v. Underwriters at Lloyd's, London, 136 F.3d 82, 86 (2d Cir. 1998). In rare cases "the court may resolve ambiguity in contractual language as a matter of law if the evidence presented about the parties' intended meaning [is] so one sided that no reasonable person could decide to the contrary." Compagnie Financiere de Cic et de L'Union Europeenne v. Merril Lynch, Pierce, Fenner Smith Inc., 232 F.3d 153, 158 (2d Cir. 2000) (affirming summary judgment) quoting 3 Com Corp. v. Banco do Brasil, S.A., 171 F.3d 739, 746-47 (2d Cir. 1999). The extrinsic evidence is not so one-sided as to require summary judgment in favor of Eastern. To the contrary, the weight of the evidence presently before me supports the conclusion that the parties intended to include allocated loss expenses in the premium as incurred losses. In any event, there is a genuine issue of fact as to the interpretation of the Insurance Contract that must be resolved at trial.
Eastern has proffered the opinion testimony of Ronald Morrison. Morrison did not participate in the negotiation of the Insurance Contract. Nevertheless, he testified on the basis of 20 years experience in the insurance industry that allocated loss expenses are included in incurred losses only if done so expressly in the contract. ISOP points out that Morrison, himself, reviewed the Insurance Contract and Alexis loss reports as early as 1992, with the specific object of determining Eastern's financial obligation to ISOP, and never objected to the inclusion of allocated loss expenses as part of "total incurred."
Eastern's other extrinsic evidence, its prior workers compensation policies with other insurers, the NCCI Rating Manual and ISOP's Model Dividend Computation Plan filed with the State of Florida, is inconclusive. In all three prior policies for which Eastern offers evidence, allocated losses were either expressly excluded or expressly included. These policies provide no guidance as to the custom or practice where allocated loss expenses are not specifically addressed in the contract.
The NCCI Rating Manual defines "incurred losses" to include allocated losses for employers liability insurance, but the definition does not mention workers compensation insurance. Eastern argues that the omission of workers compensation allocated loss expenses implies their exclusion from incurred losses as an industry practice. That implication is weakened, however, by the comment in the NCCI Manual, relevant to both employers liability and workers compensation insurance, that "the [retrospective] plan reflects the cost of losses plus the insurance carrier's expenses in providing the insurance."
ISOP's Model Dividend Computation Plan, filed with Florida in 1983, separates allocated loss expenses from incurred losses. The Plan is not binding on ISOP. Moreover, it says that allocated loss expenses are among the "charges" taken into account in the dividend calculation, even if separate from incurred losses. Most importantly, it sheds little light on ISOP's practice with respect to allocated loss expenses in February of 1990 or the intent of the parties at that time.
Other extrinsic evidence points to the inclusion of allocated loss expenses in incurred losses. The language of Addendum 1 to the CSA, to which Eastern and AIG Aviation were parties, implies that allocated loss expenses were understood to be included in the premium in some fashion. Pursuant to that agreement, all "claims adjustment expenses, except allocated expenses . . . shall be unbundled, separate, and distinct from the [premium]." Since all expenses, except allocated expenses, were to be "unbundled" from the premium, the reasonable implication is that allocated expenses remained "bundled" in the premium.
The conduct of the parties supports that implication. Eastern received without objection monthly loss runs from Alexis, which combined the amount paid out on claims for indemnity and medical with allocated loss expenses in a single total. Eastern also received without objection periodic Claim Status Reports, in which medical and indemnity payments were aggregated with expenses under the category "Total Incurred." Two separate insurance experts, MM and TTP, reviewed ISOP's performance under the Insurance Contract to try to reduce Eastern's premium obligation, and neither suggested that the inclusion of allocated loss expenses in incurred losses was improper. Eastern continued to interpret the Insurance Contract as including allocated loss expenses through the filing of its Amended Complaint. The parties' conduct for over eight years is persuasive evidence that the parties intended to include allocated loss expenses in incurred losses. See Federal Ins. Co. V. Americas Ins. Co., 691 N.Y.S.2d 508, 512 (1st Dep't 1999). "Generally speaking, the practical interpretation of a contract by the parties to it for any considerable period of time before it comes to be the subject of controversy is deemed of great, if not controlling, influence." Id. quoting Old Colony Trust Co. v. City of Omaha, 230 U.S. 100, 118 (1913); see also Restatement (Second) of Contracts § 202, comment g. Eastern's conduct is also consistent with the opinion of its broker, Rothke, that it was essentially a "self-insurer" up the maximum premium.
Both parties have proffered evidence that supports their respective interpretations of the premium formula in the Rating Agreement. Accordingly, there is a genuine issue of material fact that must be resolved at trial.
CONCLUSION
For the foregoing reasons, Eastern's motion for declaratory judgment and partial summary judgment on the issue of allocated loss expenses is denied.
SO ORDERED.