Utica Mut. Ins. Co. v. Clearwater Ins. Co.

Citation: 906 F.3d 12Docket: 16-2535 (L)

Court: Court of Appeals for the Second Circuit; September 25, 2018; Federal Appellate Court

Original Court Document: View Document

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Utica Mutual Insurance Company and Clearwater Insurance Company are engaged in an appeal concerning obligations under five facultative reinsurance policies. The U.S. District Court for the Northern District of New York granted partial summary judgment to Clearwater, determining it was not responsible for expenses exceeding the reinsurance contracts' liability limits. Conversely, the court later ruled in favor of Utica, finding Clearwater liable to indemnify Utica based on a reasonable and good-faith settlement related to a coverage dispute with its insured. 

Utica contends that Clearwater should cover claim-related expenses without regard to the limits of the reinsurance contracts. Clearwater, on the other hand, asserts it has no obligation to indemnify Utica according to the settlement, claiming the reinsurance agreements do not provide for such payment and that Utica’s settlement allocation is unreasonable.

The appellate court concluded that Clearwater’s obligations under the reinsurance contracts are tied to Utica’s expense-supplemental obligations under the umbrella policies, ruling Clearwater's liability is expense-supplemental. However, the court vacated and remanded the case to the district court to clarify which specific expenses are included in this obligation. The court also vacated and remanded Clearwater’s cross-appeal, as Utica did not sufficiently demonstrate entitlement to indemnification based on its settlement with its insured.

Additionally, the background details reveal that from the 1950s to the 1990s, Utica issued liability insurance to Goulds Pumps, Inc., and Clearwater provided reinsurance for several policies. The emergence of asbestos-related claims significantly impacted Utica financially, particularly due to the absence of aggregate limits in some policies. Following a settlement agreement regarding these liabilities, Utica sought indemnification from Clearwater, which forms the crux of the current legal dispute.

Umbrella policies combine both primary and excess coverage, offering last-resort coverage and filling gaps for claims not covered by primary policies. In the case at hand, Utica Mutual Insurance Company provided both primary and umbrella policies to Goulds. Reinsurance involves a reinsurer covering losses for an insurer, with Clearwater Insurance Company acting as the reinsurer for Utica. Reinsurance contracts can be categorized as facultative or treaty; the former insures specific policies, while the latter covers classes of policies. Clearwater's reinsurance policies in this case are all facultative. Key clauses in facultative reinsurance contracts include:

1. **Follow-the-form clause**: Ensures the reinsurance covers the same risks as the original policy, incorporating its terms except where conflicts arise (e.g., differing premiums or limits).
   
2. **Follow-the-settlements clause**: Requires the reinsurer to indemnify the reinsured for reasonably settled losses, regardless of the reinsured's liability under the original policy. Without this clause, indemnification is contingent upon proof of liability.

3. **Claims-cooperation clause**: Similar to a follow-the-settlements clause, but indemnification is contingent upon prior approval of the settlement by the reinsurer.

The facts indicate that from the 1950s to the 1990s, Utica issued primary and umbrella insurance policies to Goulds, with the background facts being undisputed.

In Utica Mutual Insurance Company v. Clearwater Insurance Company, several key rulings were made regarding liability and coverage disputes between the parties. Clearwater was granted partial summary judgment on the liability cap, while Utica's motion for reconsideration was denied. Subsequently, Utica won summary judgment on liability coverage related to settlements, obligating Utica to defend Goulds and indemnify it for claims related to asbestos personal injury. Notably, Utica's primary insurance policies issued to Goulds from 1978 to 1981 lacked specified aggregate limits of liability, exposing Utica to potentially unlimited liability, which became problematic as claims surged in the mid-1990s. Following a settlement in 2007, which retroactively treated the policies as having aggregate limits, Utica began payments to Goulds. When Utica's payments triggered coverage under its reinsurance contracts, it sought indemnity from Clearwater, which had reinsured certain umbrella policies for Utica. Clearwater's liability was capped at $5 million for the 1978 policy and $2.5 million for the 1979 policy. However, Clearwater argued that the absence of aggregate limits on the primary policies meant the losses did not reach the thresholds needed for indemnity under the reinsured policies. Utica filed suit in 2013 for breach of the reinsurance contracts, while Clearwater counter-sued to recover previously paid amounts. The court noted the standard of reviewing summary judgment motions, emphasizing that each motion must be evaluated on its own merits.

Upon determining that a contract is ambiguous, a remand to the district court for further findings is necessary. In this diversity action governed by New York law, Clearwater sought partial summary judgment to limit its liability under the Clearwater certificates to specific amounts: $5 million for 1978 and $2.5 million for 1979. Although the certificates indemnify Utica for loss expenses, they do not explicitly state whether these expenses are subject to the liability caps. Clearwater contended that the liability limits function as hard caps, preventing Utica from recovering defense costs beyond those limits. The district court sided with Clearwater, concluding that the liability limit includes expenses.

On appeal, Utica disagreed, asserting that the Clearwater certificates should be interpreted as requiring Clearwater to cover all expenses in addition to the liability limits. The central issue is whether Clearwater's payment of expenses is capped at the liability limit or must be paid on top of it. Contract interpretation principles indicate that New York law does not automatically assume a limitation of liability clause includes all obligations, such as defense costs, without specific language indicating that intention. Courts must ascertain party intent based on the contract wording and surrounding circumstances. The New York Court of Appeals emphasized that, for contracts between sophisticated parties, courts should avoid implying terms not explicitly stated. Clearwater’s reinsurance obligations are thus contingent on the specific terms and conditions outlined in the certificates.

Clearwater’s reinsurance certificates outline liability limits of $5 million and $2.5 million and include General Conditions addressing reinsurer liability, notably a “follow the form” clause. This clause mandates that Clearwater's liability aligns with Utica’s liability unless inconsistencies arise between the insurance policies and the reinsurance certificates. In this case, no inconsistencies exist, as the certificates do not condition Clearwater's reinsurance on these liability amounts being inclusive of expenses. Under New York law, a mere limitation on liability does not inherently cap a reinsurer's liability. Therefore, Clearwater's stated liability limits do not indicate whether they are expense-inclusive or supplemental. 

The underlying umbrella policies require Utica to reimburse expenses in addition to the policy's liability limits, establishing that Clearwater’s obligations must mirror Utica's due to the follow-the-form clause. Consequently, Clearwater's liability under the certificates is deemed expense-supplemental, meaning it must cover expenses in addition to the stated reinsurance limits. However, this interpretation leads to further disputes regarding the interpretation of the umbrella policies themselves.

Certain portions of the appendix have been unsealed to the extent they are referenced in this opinion. The District Court is required to make factual findings to assess Clearwater's liability for Utica's asbestos claims payments, as Clearwater is only liable for loss expenses covered by Utica's umbrella policies. These umbrella policies cover expenses not addressed by primary or other insurance, meaning Utica is responsible for costs exceeding the liability limit only for occurrences not covered by specified underlying policies.

Clearwater contends that "not covered by" indicates that asbestos liabilities were already covered by primary insurance, thus the umbrella policies were not activated, and neither Utica nor Clearwater is obligated to pay additional expenses for these claims. In contrast, Utica interprets "not covered by" to mean expenses are only payable when primary policies are exhausted. The district court has yet to determine whether asbestos-related claims from Goulds fit the "not covered by" definition. 

This determination is crucial because follow-the-form clauses align the liability between the reinsurer and the reinsured without expanding the reinsurer's obligations. If Utica's umbrella policies do not cover asbestos-related expenses, Clearwater's reinsurance certificates will similarly not apply. Utica suggests that the court should defer to its interpretation as the policyholder, asserting that a follow-the-settlements clause exists, but the court clarifies that such deference applies only when the reinsurer is contractually bound to follow the reinsured's settlements.

There is no default rule mandating reinsurance indemnification for a reinsured's settlements, and in ambiguous cases, a "follow the fortunes" clause may obligate a reinsurer to contribute despite exclusions. The district court must first ascertain whether Utica's underlying policies require it to pay for asbestos-related costs. Since the determination of "not covered by" is pivotal, the court vacates the grant of partial summary judgment for Clearwater and remands for further clarification. Additionally, Clearwater's obligations regarding reimbursement for Utica's settlement with Goulds under the TPF&C memoranda and Clearwater certificates are addressed in the cross-appeal.

Utica filed a motion for summary judgment, claiming Clearwater was obligated to pay the Goulds-Utica settlement due to a follow-the-settlements obligation. Clearwater contended that without an explicit clause, such an obligation could not be inferred and argued that Utica's settlement allocation was unreasonable. Clearwater also sought partial summary judgment to declare its liability, asserting it would not be responsible for defense costs incurred by Utica during Goulds's claims, which Clearwater characterized as gratuitous payments. The district court sided with Utica, deeming its settlement allocation reasonable and rejecting Clearwater's claims regarding the TPF&C memoranda and Clearwater certificates.

However, the court concluded that Utica failed to demonstrate Clearwater’s obligation to pay under those documents. The TPF&C memoranda state that authorized settlements bind reinsurers, but Clearwater argued Utica did not seek TPF&C's authorization before settling, thus absolving Clearwater of responsibility. Utica countered that it was excused from this requirement due to TPF&C ceasing management of the reinsurance pool years prior, a situation it attributed to Clearwater.

The parties acknowledged that TPF&C's authorization constituted a condition precedent for Clearwater’s liability. Under New York law, failure to satisfy a condition precedent excuses the other party from performance. Utica's inability to obtain authorization was not excused by impossibility, which under New York law only applies when performance is objectively impossible. The court noted the weakness of using impossibility as a defense when conditions precedent remain unmet.

If a condition precedent to a party's duty to perform in a contract does not occur, that party is generally excused from further performance, even if the nonoccurrence is due to impossibility or impracticability. Clearwater is not obligated to perform if Utica cannot obtain the necessary TPF&C approval, regardless of whether that approval was impossible to obtain. Utica has not demonstrated that obtaining TPF&C's authorization was impossible, as there is no evidence that TPF&C no longer exists. Two exceptions to the impossibility rule do not apply: the condition must not be of minor importance or a mere technicality that would lead to forfeiture, and a party cannot rely on the failure of a condition that they have obstructed. Utica failed to prove that Clearwater hindered obtaining TPF&C’s approval or that the condition was minor. Furthermore, even if Utica established that obtaining the approval was impossible, it did not show that Clearwater's obligation to perform was not also excused due to the unmet condition. Regarding the Clearwater certificates, they do not impose an obligation on Clearwater to reimburse Utica for the settlement with Goulds, as there is no express or implied follow-the-settlements obligation.

The Clearwater Certificates do not explicitly contain follow-the-settlements obligations. The language in the certificates states that Clearwater’s liability follows Utica’s liability according to the terms of the reinsured policy, except where inconsistent with the Certificate. Utica argues that this indicates a follow-the-settlements obligation; however, Clearwater asserts it is merely a follow-the-form clause. A New York appellate court previously ruled that similar language constituted a follow-the-form clause, noting it lacked references to the cedent’s claims-handling decisions or terms typically associated with settlements. The court indicated that follow-the-settlements clauses must explicitly mention claims handling. 

New York law does not imply follow-the-settlements obligations into facultative reinsurance contracts, according to the New York Court of Appeals. The court emphasizes the importance of plain language and suggests that significant terms should not be implied in contracts negotiated by sophisticated parties. This aligns with prior case law distinguishing between follow-the-settlements and follow-the-liabilities clauses, confirming that the latter merely triggers the reinsurer’s indemnity based on the reinsured’s liability for losses. Therefore, the follow-the-liability language in the Clearwater Certificates does not create an express follow-the-settlements obligation.

Utica's argument for an implied follow-the-settlements obligation in reinsurance contracts was found unpersuasive, as the court referenced its earlier decision in North River, which involved express follow-the-settlements clauses that were undisputed by the parties. The North River Court did not need to address implied obligations since the contracts explicitly included such clauses. The Clearwater certificates lack an express follow-the-settlements obligation, leading the court to decline imposing one by implication, adhering to the principle that contracts with a single reasonable interpretation should not be altered by the court's notions of fairness. Consequently, Clearwater is required to indemnify Utica based on its proven liability under umbrella policies, rather than being bound to follow Utica's settlements. The court vacated the district court's summary judgment for Utica and remanded the case to determine Clearwater's actual liability under both the TPF&C memoranda and Clearwater certificates, specifically regarding asbestos-related claims.