1 UNITED STATES COURT OF APPEALS

2

3 FOR THE SECOND CIRCUIT

4

5 August Term, 2002

6

7

8 (Argued: June 11, 2003 Decided: August 26, 2003)

9

10 Docket No. 01-9079

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13

14 BRITISH INTERNATIONAL INSURANCE COMPANY LIMITED,

15 Plaintiff-Appellant,

16 v. 

17

18 SEGUROS LA REPUBLICA, S.A.,

19 Defendant-Appellee. 

20

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23

24 Before: MINER, JACOBS, and CABRANES, Circuit

25 Judges.

26

27

28 Appeal from a final judgment entered on August 13, 2001

29 in the United States District Court for the Southern

30 District of New York (Keenan, J.), ruling as a matter of law

31 that certain facultative certificates of reinsurance require

32 no contribution to the declaratory judgment expenses

33 incurred by the cedent in coverage disputes involving the

34 underlying insurance contracts. Affirmed.

35
2

1 MICHAEL R. O’DONNELL (Shawn L.

2 Kelly, Thomas J. Perry, of

3 counsel), Riker, Danzig,

4 Scherer, Hyland & Perretti LLP,

5 Morristown, NJ, for Plaintiff6 Appellant.

7

8 LAWRENCE W. NEWMAN (Charles B.

9 Cummings, of counsel), Baker &

10 McKenzie, New York, NY, for

11 Defendant-Appellee.

12

13

14 DENNIS JACOBS, Circuit Judge:

15

16 This reinsurance coverage dispute returns to us

17 following a remand. Defendant-Appellee Seguros La

18 Republica, S.A. (“Seguros”) issued 26 facultative

19 certificates reinsuring risks underwritten by American

20 Centennial Insurance Company (“ACIC”). ACIC’s successor,

21 Plaintiff-Appellant British International Insurance Company

22 Limited (“BIIC”), sued Seguros for pro rata reimbursement of

23 sums paid by ACIC on behalf of the underlying insureds and

24 for declaratory judgment expenses incurred by ACIC in

25 coverage disputes over the underlying contracts of

26 insurance. The district court entered a default judgment in

27 favor of BIIC in the amount of $11,801,024.98. We affirmed

28 in part, and in part vacated and remanded. See British

29 Int’l Ins. Co. v. Seguros La Republica, S.A., 212 F.3d 138

30 (2d Cir. 2000) (per curiam); British Int’l Ins. Co. v.
 

1Seguros has not cross-appealed from the portion of the

judgment finding that BIIC presented sufficient evidence of

the disputed $52,987.22, and its decision is unsurprising. 

After the summary judgment proceedings, BIIC informed the

court that the disputed amount was incurred in declaratory

judgment proceedings, and thus Seguros is not obligated to

pay that amount based on the court’s ruling that declaratory

judgment expenses are not covered by the facultative

certificates.

3

1 Seguros La Republica, S.A., No. 99-7721, 2000 U.S. App.

2 LEXIS 8862 (2d Cir. May 4, 2000) (unpublished summary

3 order). The remand contemplated further proceedings on two

4 issues: (1) whether Seguros is liable for the declaratory

5 judgment expenses incurred by ACIC in coverage disputes over

6 the underlying contracts of insurance; and (2) whether BIIC

7 had presented any proof as to a $52,987.22 component of its

8 claim. Id. at *4-*5.

9 On remand, the district court granted summary judgment

10 in favor of Seguros on the issue of declaratory judgment

11 expenses, and entered final judgment on August 13, 2001. 

12 BIIC appeals from so much of the judgment as denies

declaratory judgment expenses.1 13

14

15

16 BACKGROUND

17 Between 1977 to 1980, Seguros issued 26 facultative
 

2For example, one certificate memorialized Seguros’

obligation to indemnify BIIC (up to a specified amount)

“[o]n [BIIC’s] interest as insurer under its Umbrella

liab[ility policy] . . . issued to Dow Chemical Co.”

4

1 certificates to ACIC, BIIC’s predecessor in interest. 

2 Essentially identical language in each certificate provides

3 that Seguros will indemnify BIIC (up to a specified amount)

4 “[o]n [BIIC’s] interest as insurer under” a specified

insurance contract issued to a specified insured.2 5 The

6 following “Reinsurance Clause” is attached to each

7 certificate:

8 This Certificate of Reinsurance is subject to the

9 same risks, valuations, conditions, endorsements

10 (except changes of location), assignments and

11 adjustments as are or may be assumed, made or

12 adopted by the reinsured, and loss, if any,

13 hereunder is payable pro rata with the reinsured

14 and at the same time and place . . . .

15

16 Following Seguros’ refusal to pay BIIC’s reinsurance

17 claim, BIIC commenced this diversity action in April 1990. 

18 BIIC sought (1) a judgment against Seguros for breach of

19 contract, account stated, and monies due and owing, and (2)

20 a declaration that Seguros is obligated to pay accounts that

21 come due under the facultative certificates in the future. 

22 Seguros failed to post pre-answer security as required under

23 New York Insurance Law § 1213(c)(1)(A), and on May 18, 1999,
5

1 the district court entered a default judgment in favor of

2 BIIC in the amount of $11,801,024.98.

3 On appeal, our opinion rejected Seguros’ argument that

4 section 1213(c)(1)(A) violated constitutional due process. 

5 See British Int’l Ins. Co., 212 F.3d at 141-44. An

6 unpublished summary order, issued simultaneously, directed

7 the district court to address two discrete issues on remand,

8 of which one is contested on this appeal: whether Seguros is

9 obligated to pay a pro rata share--$630,736.46--of

10 declaratory judgment expenses incurred by BIIC in litigating

11 coverage disputes with its policyholders. See British Int’l

12 Ins. Co., 2000 U.S. App. LEXIS 8862, at *4-*5.

13 On remand, the district court granted summary judgment

14 in favor of Seguros. See British Int’l Ins. Co. v. Seguros

15 La Republica, S.A., 2001 U.S. Dist. LEXIS 11453, at *6-*11

16 (S.D.N.Y. Aug. 8, 2001) (unpublished opinion and order). 

17 The court observed that the facultative certificates are

18 silent as to declaratory judgment expenses, and concluded

19 that the provision in the Reinsurance Clause (subjecting

20 Seguros “to the same risks” as BIIC) unambiguously omitted

21 declaratory judgment costs because BIIC’s “underlying

22 insurance policies did not subject [BIIC] to the ‘risk’ of
6

1 having to reimburse its own declaratory-judgment expenses.” 

2 Id. at *7. Concluding that the wording is unambiguous, the

3 court ruled that trade practice as to the reimbursement of

4 declaratory judgment expenses was irrelevant. Id. at *8. 

5 The court nevertheless reviewed two expert affidavits

6 submitted by BIIC to show that at the time the facultative

7 certificates in this case were issued, reinsurers typically

8 reimbursed their reinsureds’ declaratory judgment expenses.

9 The court discounted the affidavits on the (further) basis

10 that they did not show that this practice of reimbursement

11 was “due to an industry-wide interpretation of any

12 particular term [in the certificate], such as ‘risk,’ that

13 was commonly used in reinsurance certificates at that time.” 

14 Id. at *8-*9 & n.2.

15 The district court also rejected BIIC’s argument that

16 the follow-the-fortunes doctrine--which, inter alia, bars a

17 reinsurer’s challenge to a good faith settlement reached by

18 its reinsured on an underlying claim--should be extended to

19 require a reinsurer to pay the reinsured’s expenses in

20 litigation concerning the underlying insurance coverage. 

21 Id. at *9-*11.

22 BIIC now appeals on the grounds (1) that the
 

3BIIC also argues--without basis--that certain language

in the district court’s Opinion and Order “implicitly

acknowledges an ambiguity” in the facultative certificates.

7

1 facultative certificate is ambiguous; (2) that then2 prevailing custom in the industry required the reinsurer to

3 pay a pro rata share of the cedent’s expense in resisting

4 coverage; and (3) that such payment is compelled by the

5 reinsurance doctrine requiring the reinsurer to follow the

fortunes of the cedent.3 6

7

8

9 DISCUSSION

10 “We review a district court’s grant of summary judgment

11 de novo.” Young v. County of Fulton, 160 F.3d 899, 902 (2d

12 Cir. 1998). In doing so, we construe the evidence in the

13 light most favorable to the non-moving party and draw all

14 reasonable inferences in its favor. See Anderson v. Liberty

15 Lobby, Inc., 477 U.S. 242, 255 (1986); Maguire v. Citicorp

16 Retail Servs., Inc., 147 F.3d 232, 235 (2d Cir. 1998). 

17 Summary judgment is appropriate only where “there is no

18 genuine issue as to any material fact and . . . the moving

19 party is entitled to a judgment as a matter of law.” Fed.
8

1 R. Civ. P. 56(c).

2

3 I

4 BIIC does not argue that any provision of the

5 facultative certificates expressly requires pro rata payment

6 of declaratory judgment costs. On appeal, as below, BIIC

7 relies on the provision of the Reinsurance Clause that

8 Seguros is “subject to the same risks, valuations,

9 conditions, and endorsements . . . as may be assumed or

10 adopted by [BIIC], and loss, if any hereunder,” (emphasis

11 added), and identifies the word “risks” as the source of

12 ambiguity that could cover declaratory judgment expenses. 

13 BIIC emphasizes the cumulative force of the word “risks” in

14 the context of the words that follow it: “valuations,

15 conditions, and endorsements . . . as may be assumed or

16 adopted by [BIIC], and loss, if any hereunder.” Arguing

17 that the provision as a whole is ambiguous, BIIC contends

18 that this ambiguity must be resolved by resorting to

19 industry custom. This is an expansion of the argument made

20 in the district court, but we deem that it is within the

21 scope of that argument and is therefore preserved. 

22 The parties agree that New York law governs this
9

1 diversity case; their “consent concludes the choice of law

2 inquiry.” Am. Fuel Corp. v. Utah Energy Dev. Co., 122 F.3d

3 130, 134 (2d Cir. 1997). New York law enforces reinsurance

4 contracts without resort to the contra proferentem rule that

5 is sometimes used in the context of direct insurance. See

6 Unigard Sec. Ins. Co. v. N. River Ins. Co., 4 F.3d 1049,

7 1064-65 (2d Cir. 1993) (“[R]einsurers are so dependent upon

8 ceding insurers for information, that application of a canon

9 construing the reinsurance contract against the reinsurer

10 would be highly anomalous.”). The facultative certificates

11 at issue will therefore be construed as we would construe

12 any ordinary contract. See id.

13 “Under New York law, a written contract is to be

14 interpreted so as to give effect to the intention of the

15 parties as expressed in the unequivocal language they have

16 employed.” Cruden v. Bank of N.Y., 957 F.2d 961, 976 (2d

17 Cir. 1992). “Where . . . the contract is clear and

18 unambiguous on its face, the intent of the parties must be

19 gleaned from within the four corners of the instrument, and

20 not from extrinsic evidence.” Rainbow v. Swisher, 72 N.Y.2d

21 106, 109 (1988). Conversely, “[i]f the court finds that the

22 terms, or the inferences readily drawn from the terms, are
10

1 ambiguous, then the court may accept any available extrinsic

2 evidence to ascertain the meaning intended by the parties

3 during the formation of the contract.” Alexander &

4 Alexander Servs., Inc. v. Certain Underwriters at Lloyd’s,

5 136 F.3d 82, 86 (2d Cir. 1998). “An ambiguity exists where

6 the terms of a contract could suggest ‘more than one meaning

7 when viewed objectively by a reasonably intelligent person

8 who has examined the context of the entire integrated

9 agreement and who is cognizant of the customs, practices,

10 usages and terminology as generally understood in the

11 particular trade or business.’” Id. (quoting Lightfoot v.

12 Union Carbide Corp., 110 F.3d 898, 906 (2d Cir. 1997)). 

13 “The determination of whether a contract term is ambiguous

14 is a threshold question of law for the court.” Walk-In Med.

15 Ctrs., Inc. v. Breuer Capital Corp., 818 F.2d 260, 263 (2d

16 Cir. 1987).

17 BIIC contends that the Reinsurance Clause language--

18 subjecting Seguros “to the same risks, valuations,

19 conditions, and endorsements . . . as may be assumed or

20 adopted by [BIIC], and loss, if any hereunder”--read as a

21 whole, is incapable of being understood without resort to

22 industry custom: “[t]he only way to understand this phrase
 

4We are aware that the question of whether an ambiguity

exists is answered from the point of view of someone who,

inter alia, “is cognizant of the customs, practices, usages

and terminology as generally understood in the particular

trade or business.” Alexander & Alexander Servs., 136 F.3d

at 86 (internal quotation marks omitted); see also Int’l

Multifoods Corp. v. Commercial Union Ins. Co., 309 F.3d 76,

87 n.4 (2d Cir. 2002). But, BIIC fails to link any wording

in the Reinsurance Clause to a custom, practice, or usage in

the reinsurance industry. 

11

1 is to look at the custom and practice of the reinsurance

2 industry at the time [Seguros] drafted the Facultative

3 Certificates.” Appellant’s Br. at 22. A party relying on

4 ambiguity is normally obligated to show that a word, phrase,

5 or provision “could suggest more than one meaning.” 

6 Alexander & Alexander Servs., 136 F.3d at 86 (internal

7 quotation marks omitted); see also Walk-In Med. Ctr., 818

8 F.2d at 264 (“Because the term ‘adverse market conditions’

9 was susceptible of at least two reasonable interpretations,

10 [the district court] correctly determined that the term’s

11 meaning was a genuine issue of fact . . . .). Here, BIIC

12 does not propose multiple meanings of which one favors its

13 claim; instead, BIIC pronounces that the language is so

14 broad as to be impossible to interpret without resort to

15 industry custom. We are not persuaded that this argument

sufficiently establishes an ambiguity useful to BIIC.4 16

17 The leading case on the use of industry custom in a
12

1 reinsurance dispute over declaratory judgment expenses is

2 Affiliated FM Insurance Co. v. Constitution Reinsurance

3 Corp., 416 Mass. 839 (1994). The trial court had granted

4 summary judgment to the reinsurer on the ground that the

5 particular facultative certificates unambiguously failed to

6 require the payment of such expenses. In vacating that

7 ruling, the Supreme Judicial Court of Massachusetts focused

8 on the following provision: “In addition . . . , the

9 Reinsurer shall pay its proportion of expenses [other than

10 office expenses and payments to any salaried employee]

11 incurred by the [Reinsured] in the investigation and

12 settlement of claims or suits . . . .” Id. at 841 n.4

13 (first alteration in original). The court held that the

14 term “expenses” was ambiguous because in context it could

15 include either the expenses covered in the underlying

16 insurance policy, or the expenses incurred by the cedent in

17 coverage disputes with the insured, or both. See id. at

18 844-45. The court therefore ruled that the trial court

19 should have consulted industry custom and practice to

20 determine the scope of the term “expenses.” Id. at 845-6.

21 Affiliated FM is most easily distinguished here on the

22 basis that the word “expenses”--held to be ambiguous in

23 Affiliated FM--does not appear in the Seguros facultative
13

1 certificates. More generally, Affiliated FM supports the

2 view that a party seeking to establish ambiguity must

3 articulate multiple meanings that the contract language will

4 sustain. 

5 Similarly, in Employers Reinsurance Corp. v. Mid6 Continent Casualty Co., 202 F. Supp. 2d 1221 (D. Kan. 2002),

7 the reinsured recovered its declaratory judgment costs on

8 the basis of the phrase “claims expenses” and the contract’s

9 definition of that term, id. at 1235-37--neither of which

10 appears in the Seguros facultative certificates.

11 BIIC argues for the first time on appeal that the word

12 “loss” is ambiguous because it could include declaratory

13 judgment expenses. This argument was not considered by the

14 district court and we decline to exercise discretion to hear

15 it on appeal. See Mattel, Inc. v. Barbie-Club.com, 310 F.3d

16 293, 306 (2d Cir. 2002).

17 We conclude that BIIC has failed to articulate any

18 ambiguity in the terms of these facultative certificates. 

19

20 II

21

22 Seguros contends, and the district court agreed, that

23 the certificates unambiguously limit reinsurance coverage to
 

5We conclude that this issue is properly presented on

appeal, though that is a close question. BIIC argued to the

district court that Seguros is liable for BIIC’s declaratory

judgment expenses because of the purported industry custom

of reinsurers paying these expenses. Although there is no

evidence that BIIC specifically framed the issue for the

court as one of adding contract terms, we determine that the

argument was sufficiently before the district court. 

14

1 the risks specified in BIIC’s policies with its

2 policyholders. BIIC argues that even in the absence of

3 ambiguity on that score, industry custom and practice may be

used to supplement the terms expressed in the contract.5 4

5 BIIC’s brief does not formulate the circumstances in which

6 a term may be thus implied, or why this case requires that

7 result; however, we conclude that the record evidence of

8 custom and practice is insufficient to raise the legal

9 issue.

10 “[T]he burden of proving a trade usage has generally

11 been placed on the party benefiting from its existence.” 

12 Putnam Rolling Ladder Co. v. Mfrs. Hanover Trust Co., 74

13 N.Y.2d 340, 348 (1989). “Under New York law, . . . custom

14 and usage evidence must establish that the omitted term is

15 ‘fixed and invariable’ in the industry in question.” Hutner

16 v. Greene, 734 F.2d 896, 900 (2d Cir. 1984) (quoting Belasco

17 Theatre Corp. v. Jelin Prods., Inc., 59 N.Y.S.2d 42, 45 (1st

18 Dep’t 1945)). Moreover, the advocate of the trade usage
15

1 must establish either that the party sought to be bound was

2 aware of the custom, or that the custom’s existence was “so

3 notorious” that it should have been aware of it. Reuters

4 Ltd. v. Dow Jones Telerate, Inc., 662 N.Y.S.2d 450, 454 (1st

5 Dep’t 1997). The trade usage must be “so well settled, so

6 uniformly acted upon, and so long continued as to raise a

7 fair presumption that it was known to both contracting

8 parties and that they contracted in reference thereto.” Id.

9 (internal quotation marks and citation omitted).

10 BIIC submitted two affidavits in support of its

11 allegation of a trade usage. William N. Edwards, a

12 supervisor and manager in the claims department of the

13 American Re-Insurance Company (“American Re”) from 1974

14 until 1983, testified that: he was “not aware of American Re

15 ever refusing to pay its share of declaratory judgment

16 expenses ceded to it by its reinsureds”; he “never

17 questioned whether declaratory judgment expenses should be

18 treated differently than any other expenses submitted for

19 payment by a cedent under American Re’s reinsurance

20 contracts”; and he was unaware prior to 1983 of anyone

21 holding a contrary view. The practice of one company,

22 however, is generally insufficient to establish a trade

23 usage. See, e.g., Encyclopedia Britannica, Inc. v. SS Hong
16

1 Kong Producer, 422 F.2d 7, 17-18 (2d Cir. 1969); H & W

2 Indus., Inc. v. Occidental Chem. Corp., 911 F.2d 1118, 1122

3 (5th Cir. 1990).

4 William Gilmartin, who has 51 years of experience in

5 the insurance and reinsurance industries, affirmed that

6 between 1976 and 1983, “[i]t was the custom and practice for

7 reinsurers to pay [their reinsureds’ declaratory judgment]

8 expenses due to the common interest they shared with their

9 reinsureds arising from the defense or prosecution of a

10 declaratory action.” Gilmartin did not aver, however, that

11 these (unnamed) reinsurers always and invariably paid these

12 costs, see, e.g., Hutner, 734 F.2d at 900 (affidavit stating

13 that a pricing formula is “often used” as a basis for the

14 negotiation of a pricing term is insufficient to establish

15 the omitted term), and his testimony can be read to say that

16 the payments were made ex gratia when reinsurers believed

17 that the coverage litigations advanced the common interest,

18 but not otherwise. Moreover, neither expert testified that

19 any of the reinsurance certificates issued by other

20 reinsurers contained language like the facultative

21 certificates at issue here.

22 BIIC also failed to adduce evidence that Seguros either

23 actually knew of the alleged custom, or that the practice of
 

6By resolving the issue on this ground, we have no need

to consider Seguros’ argument that adding a term to the

certificate requiring the payment of declaratory judgment

expenses would vary and alter the express terms of the

reinsurance contract.

17

1 reinsurers’ paying declaratory judgment expenses was “so

2 notorious” in the industry that Seguros must have been aware

3 of it. See Reuters Ltd., 662 N.Y.S.2d at 454. The Edwards

4 and Gilmartin affidavits make no allegation of actual or

5 constructive knowledge on the part of Seguros, or on the

6 part of all reinsurers in the industry. Similarly, there is

7 no evidence that BIIC itself was aware of the alleged

8 industry custom. Thus BIIC’s submissions fail “to raise a

9 fair presumption that [the alleged industry custom] was

10 known to both contracting parties and that they contracted

11 in reference thereto.” Id. (internal quotation marks and

citation omitted).6 12

13

14 III

15 Finally, BIIC contends that Seguros owes its pro rata

16 share of BIIC’s declaratory judgment expenses by operation

17 of the follow-the-fortunes doctrine. That doctrine binds a

18 reinsurer to accept the cedent’s good faith decisions on all

19 things concerning the underlying insurance terms and claims
18

1 against the underlying insured: coverage, tactics, lawsuits,

2 compromise, resistance or capitulation. “Under the ‘follow

3 the fortunes’ doctrine, a reinsurer is required to indemnify

4 for payments reasonably within the terms of the original

5 policy, even if technically not covered by it. A reinsurer

6 cannot second guess the good faith liability determinations

7 made by its reinsured . . . .” Christiania Gen. Ins. Corp.

8 v. Great Am. Ins. Co., 979 F.2d 268, 280 (2d Cir. 1992)

9 (internal citation omitted).

10 Because the doctrine “simply requires payment where the

11 cedent’s good-faith payment [to its insured] is at least

12 arguably within the scope of the insurance coverage that was

13 reinsured,” Mentor Ins. Co. (U.K.) v. Brannkasse, 996 F.2d

14 506, 517 (2d Cir. 1993) (emphasis added), BIIC’s invocation

15 of the doctrine required a showing that its own declaratory

16 judgment expense in litigating against its policyholders is

17 potentially within the coverage of the underlying policies. 

18 This cannot be done. The policyholders obtained no benefit

19 from the mounting of coverage litigation against their own

20 claims; such an initiative cannot be conceived as any part

21 of the policyholders’ coverage; on the whole, any

22 policyholder would prefer that the insurer forgo the
19

1 contest. The expenses claimed by BIIC are substantial, but

2 on this record and under these facultative certificates,

3 they are not an aspect of coverage owed to the policyholder

4 or a claim against the reinsurer; they are among the claims5 handling expenses that an insurance company incurs in the

6 conduct of its own operations.

7

8

9 CONCLUSION

10 The judgment is affirmed.