Princeton Insurance v. Converium Reinsurance (North America) Inc.

Citation: 344 F. App'x 759Docket: No. 08-2136

Court: Court of Appeals for the Third Circuit; September 14, 2009; Federal Appellate Court

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Converium Reinsurance (North America, Inc.) appeals a District Court decision granting summary judgment in favor of Princeton Insurance Co., which determined Converium liable for $1.5 million plus $207,000 in interest under their reinsurance treaty concerning workers’ compensation and employers’ liability (EL) claims. The Reinsurance Treaty, established in 1995, stipulated that Converium would reimburse Princeton for claims exceeding $1 million, capping liability at $1.5 million. Article V of the Treaty included warranties, one of which set the maximum Employers’ Liability limit at $100,000 per accident, later increased to $500,000. Initially applicable only to New Jersey, the treaty was expanded to include New York in 1998.

In August 1998, Princeton issued an EL policy to 1st Choice Metal Steel Co., Inc., which contained a $100,000 limit that was unenforceable under New York law. Following a catastrophic injury to an employee, Xing Zhang, in September 1998, he filed a workers’ compensation claim and subsequently sued the property owner. The New York state court ruled that Zhang could proceed with the lawsuit due to the nature of his injury. Consequently, Princeton became liable under its EL policy, as the unenforceable limit meant it was responsible for the claim. Princeton settled the matter in 2002 for $4.4 million, which resolved both Zhang's workers' compensation claim and the lawsuit, although it allowed for potential future claims against Princeton, provided they would be offset by the settlement amount. The case is remanded for further proceedings, vacating the District Court’s original judgment.

Lawyers advising on the settlement believed future workers’ compensation claims against Zhang were unlikely, indicating that the settlement would terminate further liability before the Workers’ Compensation Board. Princeton's claims against Converium were denied twice, with Converium asserting liability was capped at $500,000 under the treaty and claiming no obligation to Princeton since claims needed to exceed $1 million. Princeton disagreed and initiated a lawsuit in New Jersey state court, which Converium moved to federal court, counterclaiming for a declaratory judgment of no liability. Both parties filed motions for summary judgment; the district court favored Princeton, leading to Converium’s appeal. 

Jurisdiction was established under 28 U.S.C. § 1332 and § 1291. The court reviewed the summary judgment under the same standards applied by the district court, affirming if no genuine factual disputes existed and Princeton was entitled to judgment as a matter of law. A key legal issue was the choice of law, with the district court applying New Jersey law since both New Jersey and New York would yield the same outcome. Both states treat contract ambiguity as a legal question, leaving ambiguous provisions for jury interpretation. The distinction lies in New York's focus on the document's four corners, while New Jersey allows some extrinsic evidence for interpretation. The court concluded the contract was ambiguous and the ambiguity could not be definitively resolved by extrinsic evidence, making this distinction non-determinative.

The key issue in this case is whether the warranty provision in the Treaty limits Converium's liability for Employers' Liability (EL) claims. The District Court determined that the contract was clear and contained no such limitation, asserting that Converium's liability arose from Article III, where it agreed to reimburse Princeton for losses exceeding $1 million, up to a maximum of $1.5 million per occurrence, related to Workers' Compensation and Employers' Liability, contingent on criteria outlined in other articles of the Treaty. The term "ultimate net loss" was defined as the actual sum Princeton pays in settlement of its liabilities. The warranty section (Article V) specified maximum limits for bodily injury claims but did not change Converium's liability framework.

The District Court concluded that the warranty did not limit Converium's coverage, as Princeton complied by providing a policy to 1st Choice Metal with a face limit of $100,000. The court noted that if the parties intended to impose a limit of $500,000 per incident, it would have been explicitly stated in the section detailing liability limitations. The District Court held that the contract clearly did not restrict EL coverage, making Converium liable for the full $1.5 million, plus interest.

However, the District Court's analysis overlooked the "or so deemed" phrase in the warranty section, referred to as the "Deemer Clause." Converium argued that this clause, included at its request, implies that if Princeton fails to establish an enforceable liability limit, one will be deemed included under the Treaty. Conversely, Princeton contended that the clause applies only when no limits are stated at all. In this case, Princeton maintained that the 1st Choice Metal policy had a limit, albeit unenforceable, thus not triggering the Deemer Clause.

The warranty provision cannot be viewed solely as a traditional promise or guarantee, contrary to the District Court's interpretation. A warranty typically entails an obligation to fulfill promises, with breaches resulting in contract violations. However, under the Deemer Clause, the warranty's implications diverge from this norm, allowing circumstances where Princeton's non-compliance may still be deemed compliance. This redefinition limits Converium’s liability under the Treaty, and the District Court's interpretation undermines the significance of the Deemer Clause. Contract interpretation principles mandate that all parts of a contract be given effect, and Converium argued that this clause was intentionally included in the Treaty drafted by Princeton’s agent. 

The Court erred in assuming the warranty clause did not limit Converium’s liability. If the warranty imposes limitations, clarity on its definition is necessary to determine if summary judgment is appropriate or if the matter should go to trial. Both parties claim that their interpretations are the only reasonable ones. Converium's argument hinges on the illogicality of excluding New York policies from a limitation that applies to other states, implying that both parties understood the Treaty to cap EL coverage at $500,000. Evidence from Princeton's internal communications suggests acknowledgment of this limit, but these communications occurred years after the Treaty was signed. Testimony from Paul Curtis, the drafter, indicates he understood the warranty as a coverage limit, but his recollection is questionable due to the time elapsed. Converium also argues for strict interpretation against the drafter, but this is weakened by the fact that Converium insisted on the inclusion of the Deemer Clause.

Princeton argues that the contract's structure is crucial in determining whether there is a blanket limit on Converium’s EL liability. The expectation would be for such a limit to be explicitly stated in the liability section of the Treaty, rather than implied within the warranty section. It is suggested that while Princeton should strive to establish a limit on its EL liability, the risk of any such limit being legally invalidated rests with Converium. Princeton supports its interpretation by citing other Converium contracts that clearly define limits on EL coverage, though the differences in structure can be attributed to the fact that Converium did not draft the Treaty. Notably, one of the referenced contracts also included coverage limitations in the warranty section, indicating that the Treaty’s structure is not unprecedented. The ambiguity in the Treaty allows for multiple interpretations, and extrinsic evidence does not clarify the matter. Consequently, the District Court's summary judgment for either party is deemed inappropriate. The judgment will be vacated and the case remanded for further proceedings, with each party responsible for its own appeal costs. The previously noted limit was later increased to $500,000.