Opinion
Case No. 01-71057.
August 16, 2004
AMENDED MEMORANDUM AND ORDER GRANTING DEFENDANT'S MOTION FOR PARTIAL SUMMARY JUDGMENT
I. Introduction
This is a reinsurance case. Plaintiff Travelers Casualty and Surety Company (Travelers), formerly known as Aetna Casualty and Surety Company, Insured Dow Chemical Company (Dow) and its affiliate, Dow Coming Corporation (Dow Corning), against various losses. Defendant Constitution Reinsurance Corporation (CRC) reinsured some of the policies. Dow incurred liability based on its silicone breast implant devices and chemical products. Dow and Travelers settled on the insurance amounts due and allocation among the policies. Travelers is now suing CRC to recover the benefits of the reinsurance agreements. Travelers makes four claims: (1) declaratory judgment regarding CRC's reinsurance obligations as to the breast implant claims, (2) breach of contract as to the breast implant claims, (3) declaratory Judgment regarding CRC's reinsurance obligations as to the chemical product claims, and (4) breach of contract as to the chemical product claims.
Before the Court is defendant's motion for partial summary judgment that the limits of its multi-year reinsurance certificates may not be annualized. For the reasons that follow, defendant's motion is GRANTED.
As will be explained, the reinsurance certificates at issue are each for three years and provide specified amounts of coverage "per occurrence." Travelers says that the amounts should be annualized and in effect tripled, while CRC says that coverage is limited to one amount for each occurrence.
II. Factual Background
The following facts are gleaned from the parties' papers.
Travelers issued numerous primary and excess overlayer indemnity policies to Dow in the 1970's. For three of the Dow excess policies, CRC issued facultative reinsurance certificates reinsuring Travelers for specified portions of risk.
A contract of reinsurance is "a contract whereby one insurer [the cedent] for a consideration contracts with another [the reinsurer] to indemnify it against loss or liability by reason of a risk which the latter has assumed under a separate and distinct contract as the insurer of a third person."Michigan Millers Mut. Ins. Co. v. North Am. Reinsurance Corp., 182 Mich. App. 410, 413 (1990); see generally Travelers Casualty Surety Co. v. Lloyd's of London, 96 N.Y.2d 583, 587-88 (2001). Essentially, it is insurance for an insurer.
A. The 72-75 Direct Insurance Policy and the 72-75 Reinsurance Certificate
Travelers policy #01 XN 247 WCA provided coverage to Dow for the period of June 11, 1972 to June 11, 1975 with limits of $4.5 million part of $15 million excess of underlying insurance.
CRC reinsurance certificate #G97-190 provided reinsurance for the same time period for "$1,000,000.00 part of $4,500,000.00 part of $15,000,000.00 excess of underlying insurance per section 3 of the company's policy." The 72-75 reinsurance certificate also reads in relevant part:
The Company [Travelers] warrants to retain for its own account or that of its treaty and/or facultative reinsurers the amount of liability specified in item 3 above, and the liability of the Reinsurer [CRC] specified in item 4 above shall follow that of the Company and, except as otherwise specifically provided herein, shall be subject in all respects to all the terms and conditions of the Company's Policy. . . .
. . .
All claims involving this reinsurance, when settled by the Company, shall be binding on the Reinsurer, who shall be bound to pay its proportion of such settlements . . .
B. The 75-78 Direct Insurance Policy and the 75-78 Reinsurance Certificate
Travelers policy #01 XN 752 WCA provided coverage to Dow for the period of June 11, 1975 to June 11, 1978 with limits of $8 million part of $15 million excess of $24 million.CRC reinsurance certificate #62942 provided reinsurance for the same time period for "$1,000,000 each occurrence and in the aggregate where applicab[l]e part of $4,000,000 part of $8,000,000 part of $15,000,000 which in turn is excess of $24,000,000." The 72-75 reinsurance certificate also reads in relevant part:
. . . The liability of the Reinsurer [CRC], as specified in item 4 of the Declarations, shall follow that of the Company [Travelers] 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 nonconcurrent reinsurance in the Declarations. . . .
. . .
All loss settlements made by the Company, provided they are within the terms and conditions of the original polic(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 loss as set forth in the Declarations . . .
The "Non-Concurrent" box on the front page of the 72-75 reinsurance certificate was not checked. The meaning of the "Non-Concurrent" option is explained in the certificate:
Non-Concurrent The reinsurance provided does not apply to any hazards or risks of loss or damage covered under the Company's policy other than those specifically set forth in the Declarations. The retention of the Company and liability of the Reinsurer shall be determined as though the Company's policy applied only to the hazards or risks of loss or damage specifically described in the Declarations.
C. The 78-79 Direct Insurance Policy and the 78-79 Reinsurance Certificate
CRC's motion only relates to the three-year 72-75 and 75-78 reinsurance certificates, not the one-year 78-79 reinsurance certificate.
D. Dow Settlement
In the early 1990's, numerous Individuals claimed bodily injury from breast implant devices manufactured by Dow Corning and chemical products manufactured by Dow. Dow sought insurance coverage from Travelers to cover its liabilities. After a lengthy litigation, Travelers and Dow reached a confidential settlement resolving various insurance coverage disputes. The settlement required Travelers to pay a confidential sum to resolve the breast implant device claims and a separate confidential sum to resolve the chemical product claims. Travelers treated the breast implant claims as arising out of a single occurrence and allocated the breast implant settlement sum by first exhausting the primary policies then exhausting the "lowest attaching" excess policies. Specifically, for the 72-75 policy, which had a per occurrence limit of $4.5 million, Travelers applied the limit on an annual basis and allocated $13.5 million ($4.5 million for three years). Likewise, Travelers allocated $24 million to the 75-78 policy ($8 million per occurrence for three years). Travelers followed a similar allocation for the chemical product claims.
E. CRC's Liability
Travelers then billed CRC for CRC's proportionate share of Travelers' payments to Dow. Travelers again treated the claims as arising out of a single occurrence and annualized the per occurrence limits. Travelers billed CRC for $2,999,700 (22.22% of $4.5 million for three years) for the 72-75 reinsurance certificate and $3,000,000 (12.5% of $8 million for three years) for the 75-78 reinsurance certificate. Travelers also followed a similar procedure for the chemical product claims.
The essential dispute between the parties is whether the $1 million per occurrence limits in the three-year reinsurance certificates may be annualized. Travelers says that they should be annualized and it can therefore obtain reinsurance coverage up to $3 million for each certificate. CRC says that they should not be annualized and reinsurance coverage is limited to $1 million for each certificate.
III. Discussion A. Legal Standard
Summary judgment is appropriate when the moving party demonstrates 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). There is no genuine issue of material fact when "the record taken as a whole could not lead a rational trier of fact to find for the non-moving party." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).
The Court must decide "whether the evidence presents a sufficient disagreement to require submission to a [trier of fact] or whether it is so one-sided that one party must prevail as a matter of law." In re Dollar Corp., 25 F.3d 1320, 1323 (6th Cir. 1994) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52 (1986)). In so doing, the Court "must view the evidence in the light most favorable to the non-moving party."Employers Ins. of Wausau v. Petroleum Specialties, Inc., 69 F.3d 98, 101 (6th Cir. 1995). Only where there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law may summary judgment be granted.Thompson v. Ashe, 250 F.3d 399, 405 (6th Cir. 2001). If a nonmoving party cannot establish a genuine issue for trial on any essential element of her claim, then the moving party is entitled to summary judgment. See Celotex Corp. v. Cartrett, 477 U.S. 317, 322-23 (1986).
B. Contract Interpretation
Under Michigan law, Insurance policies are interpreted the same as any other contract. Auto-Owners Ins. Co. v. Churchman, 440 Mich. 560, 567 (1992). The Court "must look at the contract as a whole and give meaning to all terms." Id. The Court must first determine whether the policy's terms are ambiguous as a matter of law. Kmart Corp. v. Fireman's Fund Ins. Co., 88 F. Supp. 2d 767, 771 (E.D. Mich. 2000). If a policy provision is unambiguous, the language of the policy must be given its ordinary meaning. Farm Bureau Mut. Ins. Co. v. Nikkel, 460 Mich. 558, 566 (1999); Henderson v. State Farm Fire Casualty Co., 460 Mich. 348, 354 (1999) (dictionary definitions may be consulted to determine the common understanding of words in a policy).
The parties apparently agree that Michigan law applies to this case but do not specifically state why.
If the words in the policy "may reasonably be understood in different ways," however, the contract is ambiguous and different rules apply. Farm Bureau, 460 Mich. at 566. In other words, if "a fair reading of the entire contract of insurance leads one to understand that there is coverage under particular circumstances and another fair reading of it leads one to understand there is no coverage under the same circumstances the contract is ambiguous." Id. Importantly, though, the Court "must enforce an insurance policy in accordance with its terms and may not read ambiguities into the policy where none exist." Sunshine Motors Inc. v. New Hampshire Ins. Co., 209 Mich. App. 58, 59 (1995) (citing Michigan Millers Mut. Ins. Co. v. Bronson Plating Co., 445 Mich. 558, 567 (1994)). If a contract is found to be ambiguous, Its meaning must generally be determined by a trier of fact based on rules of contract interpretation and extrinsic evidence of intent and meaning. Klapp v. United Ins. Group Agency, Inc., 468 Mich. 459, 469 (2003).
C. Analysis 1. Language of the Reinsurance Certificates
The "Reinsurance Accepted" for the 72-75 reinsurance certificate is $1 million "part of" $4.5 million. The "Reinsurance Accepted" for the 75-78 reinsurance certificate is $1 million for "each occurrence and in the aggregate where applicab[l]e part of $8 million. There is nothing in the express language of the certificates stating that the $1 million limits apply "annually" or "each year" or "for each annual period." Rather, they unambiguously grant coverage up to $1 million (not $3 million) for each occurrence during the period of reinsurance coverage. Interpreting "each occurrence" to mean "each occurrence, each year" would require reading in a contract term that is not there.
While the 72-75 reinsurance certificate lacks the "each occurrence" language present in the 75-78 certificate, Travelers acknowledges that both certificates apply on a "per occurrence" basis. See 14 Holmes' Appleman on Insurance Law Practice § 102.5[H] (2d ed. 2004) [hereinafter Appleman on Insurance Law] ("The limits of a reinsurer's liability often are stated as a certain sum `per occurrence.' The use of the occurrence concept is extremely common in third-party liability insurance policies issued from 1972 through the early-1990s, but has been subjected to a variety of judicial interpretations.").
Travelers points to other language in the reinsurance certificates and says that because CRC's liability is expressed in terms of Travelers' liability to Dow, the reinsurance coverage must necessarily follow the terms of the direct policies. Specifically, both certificates state that CRC's liability "shall follow that of [Travelers] and shall be subject in all respects to all the terms and conditions of [Travelers] policy except when otherwise specifically provided herein." The 72-75 and 75-78 reinsurance certificates, however, "specifically provide" limits on reinsurance coverage which are different than those of the direct policies. For example, the 72-75 policy issued to Dow provides coverage for $4.5 million part of $15 million, but reinsurance is only provided for $1 million part of $4.5 million. If Travelers were allowed to recover its full liability to Dow simply because it held some amount of reinsurance, the negotiated coverage limits of the reinsurance certificates would be rendered meaningless. See Michigan Millers, 182 Mich. App. at 414 ("The extent of the liability of the reinsurer is determined by the language of the reinsurance contract, and the reinsurer cannot be held liable beyond the terms of its contract merely because the original insurer has sustained a loss."); see also Unigard Security Ins. Co. v. North River Ins. Co., 4 F.3d 1049, 1070-71 (2d Cir. 1993). As another example, if the direct policies granted coverage for fire damage but the reinsurance certificates "specifically provided" that they did not, Travelers could not obtain reinsurance coverage simply because it provided direct coverage to Dow. A reinsurer cannot be held liable for losses (or amounts of losses) that it did not agree to cover. Here, the 72-75 and 75-78 reinsurance certificates clearly and unambiguously provide coverage up to $1 million per occurrence, not per occurrence annualized.
This type of clause is commonly known as a "follow the form" provision. See 14 Appleman on Insurance Law § 106.2 ("A typical `follow the form' provision `expressly limits the reinsurance to the terms and conditions of the underlying policy and provides that the reinsurance certificate will cover only the kinds of liability covered in the original policy issued to the insured.' . . . [A] `follow the form' emphasizes ab initio that the scope of the reinsurer's undertaking is not broader (or narrower) than that of the ceding insurer.").
Travelers also says that because the "Non-Concurrent" box on the front page of the 75-78 reinsurance certificate was left unchecked, reinsurance coverage is "concurrent" with the coverage provided by Travelers' direct policy to Dow. However, the 75-78 certificate explains that if the "Non-Concurrent" box is checked, CRC's liability is limited to the hazards or risks of loss or damage "specifically set forth in the Declarations." The "Non-Concurrent" option therefore refers to the scope of insurance — what risks are covered. It has nothing to do with the amount of reinsurance provided or whether it may be annualized. The fact that the "Non-Concurrent" box in the 75-78 certificate was left unchecked does not support Travelers' position.
The 72-75 and 75-78 reinsurance certificates are not ambiguous. They provide reinsurance coverage up to $1 million for each occurrence during the relevant time period, not $1 million each year for each occurrence.
2. "Follow the Fortunes" Doctrine
Next, Travelers says that CRC must follow Travelers' decision to settle with Dow and allocate on an annualized basis due to the "follow the fortunes" clauses in the 72-75 and 75-78 reinsurance certificates. The clause in the 72-75 certificate reads:
All claims involving this reinsurance, when settled by the Company, shall be binding on the Reinsurer, who shall be bound to pay its proportion of such settlements . . .
The clause in the 75-78 certificate reads:
All loss settlements made by the Company, provided they are within the terms and conditions of the original pollc(les) and within the terms and conditions of this certificate of reinsurance, shall be binding on the Reinsurer. Upon recelpt of a definitive statement of loss, the Reinsurer shall promptly pay its proportion of such loss as set forth in the Declarations. . . .
Travelers says that because It settled with Dow on an annualized basis, CRC is also bound to pay a "proportion" that is annualized.
Generally, a "reinsurer's obligation to indemnify the ceding insurer `depends on the terms of the policy of reinsurance, and not on the question whether the insured suffered a legal loss on the original policy." Michigan Township Participating Plan v. Federal Ins. Co., 233 Mich. App. 422, 428 (1999) (citation omitted). The parties may, however, include a "follow the fortunes" clause in the reinsurance policy whereby the reinsurer agrees to be bound by a judgment or settlement between the original insured and the reinsured. Id. at 428, 430-31 (holding that a "follow the fortunes" clause will not be read into a contract that does not expressly contain such a clause). In other words, the "reinsurer cannot second guess the good faith liability determinations made by its reinsured."Travelers, 96 N.Y.2d at 596. There are two rationales for the "follow the fortunes" doctrine: "first, it meets the goal of maximizing coverage and settlement and second, it streamlines the reimbursement process and reduces litigation by preventing a reinsurer from continually challenging the propriety of a reinsured's settlement decision." Id.
The "follow the fortunes" doctrine is often called "follow the settlements" when a settlement between the original insured and reinsured impacts the liability of the reinsurer. See North River Ins. Co. v. Employers Reinsurance Corp., 197 F.Supp. 2d 972, 978 n. 1 (S.D. Ohio 2002). The terms are often used interchangeably, but "the term `follow the fortunes' more accurately describes the reinsurer's obligation to follow the reinsured's underwriting fortunes, whereas `follow the settlements' refers to the duty to follow the actions of the reinsured in adjusting and settling claims." Id. Because the parties call the clauses in the reinsurance certificates "follow the fortunes" clauses, the Court will refer to them as "follow the fortunes" clauses as well.
There are few Michigan cases dealing with "follow the fortunes" clauses, but case law from other jurisdictions is instructive. Numerous courts have held that a "follow the fortunes" clause cannot "alter the terms or override the language of reinsurance policies," including coverage limits. Id. at 596, 597 n. 9 (citing three treatises for the proposition that "a `follow the fortunes' clause does not supersede specific language in a reinsurance contract"); see also North River Ins. Co. v. CIGNA Reinsurance Co., 52 F.3d 1194, 1199 (3d Cir. 1995) ("[W]hile a `follow the fortunes' clause limits a reinsurer's defenses, it does not make a reinsurer liable for risks beyond what was agreed upon in the reinsurance certificate. . . . In that regard, the reinsurer retains the right to question whether the reinsured's liability stems from an unreinsured loss. A loss would be unreinsured if it was not contemplated by the original insurance policy or if it was expressly excluded by terms of the certificate of reinsurance."); Bellefonte Reinsurance Co. v. Aetna Casualty Surety Co., 903 F.2d 910, 913 (2d Cir. 1990) ("The `follow the fortunes' clauses in the certificates are structured so that they coexist with, rather than supplant, the liability cap. To construe the certificates otherwise would effectively eliminate the limitation on the reinsurers' liability to the stated amounts."); Michigan Township, 233 Mich. App. at 428; Michigan Millers, 182 Mich. App. at 414; 14 Holmes' Appleman on Insurance Law Practice § 106.2[B] (2d ed. 2004) ("as a general rule, courts have concluded that the `follow the fortunes' clause does not create liability on the part of the reinsurer in amounts beyond the stated dollar limits of coverage of the reinsurance agreement"). Based on the general rules expressed in Michigan Township and Michigan Millers, as well as general principles of Michigan contract law, the Michigan Supreme Court would likely agree with the many other jurisdictions holding that `follow the fortunes' clauses do not override or alter express coverage limits in a reinsurance certificate.
CRC is not challenging Travelers' Interpretation of any language in the direct insurance policies or Travelers' decision to settle with Dow or the amount of that settlement. Further, CRC is not challenging the payment distribution among the direct insurance policies or the fact that CRC allocated some payment to policies which CRC reinsured. CRC is not even arguing in this motion that Travelers has no right to reinsurance coverage per se. CRC is merely disputing the amount of reinsurance coverage based on the express "per occurrence" limits in the reinsurance certificates (not the direct policies).
While the "follow the fortunes" clauses may apply to Travelers' handling of Dow's claims under the direct insurance policies, they do not apply when interpreting language in the separate and distinct reinsurance certificates. Travelers does not have unilateral authority to code any amount it chooses to its various reinsurers (even if done in good faith) under the "follow the fortunes" doctrine — it must abide by the bargained-for limits in the reinsurance certificates, which are unambiguous.
3. Case Law on the Annualization of Multi-Year Insurance Policies
Finally, CRC points to two Massachusetts cases where courts interpreted similar policy language and held that "per occurrence" reinsurance policies may not be annualized absent express language in the policy authorizing annualization:Commercial Union Ins. Co. v. Swiss Reinsurance Am. Corp., No. 00-12267, 2003 WL 1786863 (D. Mass. Mar. 31, 2003), and American Employers' Ins. Co. v. Swiss Reinsurance Am. Corp., 275 F.Supp. 2d 29 (D. Mass. 2003).
In Commercial Union, the plaintiff CGU insured Grace and obtained three multi-year "per occurrence" facultative reinsurance policies from the defendant Swiss. Commercial Union, 2003 WL 1786863, at *1-*2. Grace suffered various losses and eventually settled with CGU. Id. at *6. CGU then billed Swiss for its share of the settlement under the reinsurance certificates, which contained "follow the form" and "follow the fortunes" clauses similar to those in the 72-75 and 75-78 reinsurance certificates in this case. Id. at *2, *7. Swiss moved for partial summary judgment that the multi-year reinsurance certificates did not require annualized indemnification. Id. at *8. The court first held that the certificates set forth unambiguous "per occurrence" limits with no mention of annualization. Id. at *9-*11. The court then considered the potential conflict between the "follow" clauses and the coverage limits. Id. at *11-*12. After a thorough analysis of case law from Massachusetts and other jurisdictions, the court concluded that "annualized limits should not be read into multi-year reinsurance policies, absent an express statement that the policy coverage is to be calculated on an annual basis." Id. at *16;see Massachusetts Liability insurance Manual §§ 6.5-6.7 (2003); Jeannine W. Chanes, "Once is Never Enough: Annualization of Per Occurrence Limits in Three-Year Policies," 14-27 Mealey's Litigation Report: Insurance (May 16, 2000). Because the reinsurance certificates did not contain such a statement, id. at *12, the court granted Swiss' motion and issued a declaration that Swiss had no obligation to make annualized payments. Id. at *17.
In American Employers, a different court faced a nearly identical situation. The plaintiff AEIC obtained similar multi-year "per occurrence" facultative reinsurance from the defendant Swiss. American Employers, 275 F.Supp. 2d at 31-32. AEIC settled with the insured company and sought annualized indemnification from Swiss. Id. at 34. The court held:
. . . [F]ollow the fortunes does not allow an insured to circumvent the stated limits of an insurance policy. Numerous courts, including one in this district [Commercial Union], have held that "follow the fortunes" is not a tool with which an insured can alter the bargained-for limitation of liability in a reinsurance contract. Follow the fortunes exists to prevent a reinsurer from second-guessing whether a particular type of injury or damage was properly within the cedent's policy with the primary insured, and thus whether a cedent properly settled a claim for which it now seeks Indemnification from the reinsurer.
. . .
. . . Swiss Re's challenge to AEIC's allocation remains a challenge not to the type of claim that AEIC covered, but instead a challenge to how much of that claim Swiss Re is obligated to indemnify. The proper place for this analysis thus remains with the Certificates. . . .Id. at 36-37. The court held that the "follow the fortunes" clauses had no effect on the unambiguous limits on "each occurrence," not "each occurrence each year." Id. at 38-39. The court granted partial summary judgment for Swiss declaring that Swiss was "not responsible for any amount that results from annualization." Id. at 39.
While Travelers is correct that no Michigan court has faced the exact issue addressed in Commercial Union and American Employers (which applied Massachusetts and New York law), the cases are directly on point and further support the plain language reading of the 72-75 and 75-78 reinsurance certificates. Travelers has not offered any reason why a Michigan court would apply "follow the fortunes" to annualize explicit "per occurrence" policy limits. The most that Travelers can offer is to say that the case law was "mixed" because New Jersey courts go the other way. However, in light of the overwhelming weight of authority from other jurisdictions and the well reasoned analysis in the Massachusetts cases, the "follow the fortunes" clauses in the 72-75 and 75-78 reinsurance certificates cannot overcome the unambiguous "per occurrence" (not "per occurrence annualized") $1 million limits.
See, e.g., CSX Transportation, Inc. v. Commercial Union Ins. Co., 82 F.3d 478, 483 (D.C. Cir. 1996) ("We are satisfied that the language setting for the coverage limitations is plain. . . . The coverage limitation is devoid of any language suggesting that `each occurrence' should be read as `each occurrence each year.'"); Society of the Roman Catholic Church v. Interstate Fire Casualty Co., 26 F.3d 1359, 1366 (5th Cir. 1994); Hercules, Inc. v. AIU Ins. Co., 784 A.2d 481, 495-96 (Del. 2001).
IV. Conclusion
The 72-75 and 75-78 reinsurance certificates unambiguously provide "per occurrence" limits and do not contemplate annualization of those limits. Further, the "follow the fortunes" clauses do not overcome the express limits in the certificates. Travelers' allocation of reinsurance coverage to CRC on an annualized basis is therefore improper as a matter of law and CRC is not obligated to make payments on that basis.V. Coda
This Court has adjudicated a number of disagreements between a primary carrier and an excess carrier in which the excess carrier disputes the extent of its liability. In all of these cases the parties have been well established insurance companies which in other venues have railed against the excesses of the tort system and the failure of courts to control them. Yet these same companies rather than resorting to alternate dispute resolution mechanisms under the auspices of their trade organizations vigorously dispute in the very courts in which they express a lack of confidence. As was said by the King of Siam: "is a puzzlement."
Seehttp://www.theatre-musical.com/kingandl/llbretto.html.
SO ORDERED.