UNITED STATES COURT OF APPEALS 1 2 FOR THE SECOND CIRCUIT 3 4 August Term, 2002 5 6 7 (Argued: June 11 , 2003 Decided: August 26, 2003) 8 9 Docket No. 01-9079 10 11 - - - - - - - - - - - - - - - - - - - -x 12 13 BRITISH INTERNATIONAL INSURANCE COMPANY LIMITED, 14 Plaintiff-Appellant , 15
v. 16 17 SEGUROS LA REPUBLICA, S.A., 18 Defendant-Appellee . 19 20 21 - - - - - - - - - - - - - - - - - - - -x 22 23 Before: MINER, JACOBS , and CABRANES, Circuit 24 Judges . 25 26 27 Appeal from a final judgment entered on August 13, 2001 28 in the United States District Court for the Southern 29 District of New York (Keenan, J. ), ruling as a matter of law 30 that certain facultative certificates of reinsurance require 31 no contribution to the declaratory judgment expenses 32 incurred by the cedent in coverage disputes involving the 33 underlying insurance contracts. Affirmed 

### . 34 352 MICHAEL R. O’DONNELL (Shawn L. 1 Kelly, Thomas J. Perry, of 2 counsel), Riker, Danzig, 3 Scherer, Hyland & Perretti LLP, 4 Morristown, NJ, for Plaintiff5 Appellant . 6 7 LAWRENCE W. NEWMAN (Charles B. 8 Cummings, of counsel), Baker & 9 McKenzie, New York, NY, for 10 Defendant-Appellee . 11 12 13 DENNIS JACOBS, Circuit Judge : 14 15 This reinsurance coverage dispute returns to us 16 following a remand. Defendant-Appellee Seguros La 17 Republica, S.A. (“Seguros”) issued 26 facultative 18 certificates reinsuring risks underwritten by American 19 Centennial Insurance Company (“ACIC”). ACIC’s successor, 20 Plaintiff-Appellant British International Insurance Company 21 Limited (“BIIC”), sued Seguros for pro rata reimbursement of 22 sums paid by ACIC on behalf of the underlying insureds and 23 for declaratory judgment expenses incurred by ACIC in 24 coverage disputes over the underlying contracts of 25 insurance. The district court entered a default judgment in 26 favor of BIIC in the amount of $11,801,024.98. We affirmed 27 in part, and in part vacated and remanded. See British 28 Int’l Ins. Co. v. Seguros La Republica, S.A. , 212 F.3d 138 29 (2d Cir. 2000) (per curiam); British Int’l Ins. Co. v. 301 

### Seguros has no t cross-appeal ed from the po rtion of the

judgment findi ng that BIIC p resented suffi cient evidenceof the disputed $52,987.22 

### , and its deci sion is unsurp rising. After the summary judgment p roceedings, BI IC informed th e court that thedisputed 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 Seguros La Republica, S.A. , No. 99-7721, 2000 U.S. App. 1 LEXIS 8862 (2d Cir. May 4, 2000) (unpublished summary 2 order). The remand contemplated further proceedings on two 3 issues: (1) whether Seguros is liable for the declaratory 4 judgment expenses incurred by ACIC in coverage disputes over 5 the underlying contracts of insurance; and (2) whether BIIC 6 had presented any proof as to a $52,987.22 component of its 7 claim. Id. at *4-*5. 8 On remand, the district court granted summary judgment 9 in favor of Seguros on the issue of declaratory judgment 10 expenses, and entered final judgment on August 13, 2001. 11 BIIC appeals from so much of the judgment as denies 12 declaratory judgment expenses. 1 13 14 15 BACKGROUND 16 Between 1977 to 1980, Seguros issued 26 facultative 172 

### For 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 certificates to ACIC, BIIC’s predecessor in interest. 1 Essentially identical language in each certificate provides 2 that Seguros will indemnify BIIC (up to a specified amount) 3 “[o]n [BIIC’s] interest as insurer under” a specified 4 insurance contract issued to a specified insured. 2 

### The 5 

### following “Rei nsurance Claus e” is attached to each 6 

### certificate: 7 

### This Certifica te of Reinsura nce is subjectto the 8 

### same risks, va luations, cond itions, endors ements 9 

### (except change s of location) , assignments and 10 

### adjustments as are or may beassumed, madeor 11 

### adopted by thereinsured, an d loss, if any , 12 

### hereunder is p ayable pro rat a with the rei nsured 13 

### and at the same time and pla ce . . . . 14 15 

### Following Segu ros’ refusal t o pay BIIC’s r einsurance 16 

### claim, BIIC commenced this d iversity actio n in April 199 0. 17 

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

### contract, acco unt stated, an d monies due a nd owing, and (2) 19 

### a declaration that Seguros i s obligated topay accounts that 20 

### come due underthe facultati ve certificate s in the futur e. 21 

### Seguros failed to post pre-a nswer security as required u nder 22 

### New York Insur ance Law § 121 3(c)(1)(A), an d on May 18, 1 999, 235



### the district c ourt entered adefault judgment in favor o f 1 

### BIIC in the amount of $11,80 1,024.98. 2 

### On appeal, ouropinion rejec ted Seguros’ a rgument that 3 

### section 1213(c )(1)(A) violat ed constitutio nal due proces s. 4 

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

### unpublished summary order, i ssued simultan eously, direct ed 6 

### the district c ourt to addres s two discreteissues on remand, 7 

### of which one i s contested onthis appeal: whether Seguro s is 8 

### obligated to p ay a pro rata share--$630,73 6.46--of 9 

### declaratory ju dgment expense s incurred by BIIC in litiga ting 10 

### coverage dispu tes with its p olicyholders. See British Int’l 11 

### Ins. Co. , 2000 U.S. App. LEXIS 8862, at *4-*5. 12 On remand, the district court granted summary judgment 13 in favor of Seguros. See British Int’l Ins. Co. v. Seguros 14 La Republica, S.A. , 2001 U.S. Dist. LEXIS 11453, at *6-*11 15 (S.D.N.Y. Aug. 8, 2001) (unpublished opinion and order). 16 The court observed that the facultative certificates are 17 silent as to declaratory judgment expenses, and concluded 18 that the provision in the Reinsurance Clause (subjecting 19 Seguros “to the same risks” as BIIC) unambiguously omitted 20 declaratory judgment costs because BIIC’s “underlying 21 insurance policies did not subject [BIIC] to the ‘risk’ of 226

having to reimburse its own declaratory-judgment expenses.” 1 Id. at *7. Concluding that the wording is unambiguous, the 2 court ruled that trade practice as to the reimbursement of 3 declaratory judgment expenses was irrelevant. Id. at *8. 4 The court nevertheless reviewed two expert affidavits 5 submitted by BIIC to show that at the time the facultative 6 certificates in this case were issued, reinsurers typically 7 reimbursed their reinsureds’ declaratory judgment expenses. 8 The court discounted the affidavits on the (further) basis 9 that they did not show that this practice of reimbursement 10 was “due to an industry-wide interpretation of any 11 particular term [in the certificate], such as ‘risk,’ that 12 was commonly used in reinsurance certificates at that time.” 13 Id. at *8-*9 & n.2. 14 The district court also rejected BIIC’s argument that 15 the follow-the-fortunes doctrine--which, inter alia , bars a 16 reinsurer’s challenge to a good faith settlement reached by 17 its reinsured on an underlying claim--should be extended to 18 require a reinsurer to pay the reinsured’s expenses in 19 litigation concerning the underlying insurance coverage. 20 Id. at *9-*11. 21 BIIC now appeals on the grounds (1) that the 223 BIIC also argues--without basis--that certain language

in the district court’s Opinion and Order “implicitly acknowledges an ambiguity” in the facultative certificates.

7facultative certificate is ambiguous; (2) that then1 prevailing custom in the industry required the reinsurer to 2 pay a pro rata share of the cedent’s expense in resisting 3 coverage; and (3) that such payment is compelled by the 4 reinsurance doctrine requiring the reinsurer to follow the 5 fortunes of the cedent. 3 6 7 8 DISCUSSION 9 “We review a district court’s grant of summary judgment 10 de novo .” Young v. County of Fulton , 160 F.3d 899, 902 (2d 11 Cir. 1998). In doing so, we construe the evidence in the 12 light most favorable to the non-moving party and draw all 13 reasonable inferences in its favor. See Anderson v. Liberty 14 Lobby, Inc. , 477 U.S. 242, 255 (1986); Maguire v. Citicorp 15 Retail Servs., Inc. , 147 F.3d 232, 235 (2d Cir. 1998). 16 Summary judgment is appropriate only where “there is no 17 genuine issue as to any material fact and . . . the moving 18 party is entitled to a judgment as a matter of law.” Fed. 198

R. Civ. P. 56(c). 1 2 

### I 3 

### BIIC does not argue that any provision of the 4 

### facultative ce rtificates exp ressly require s pro rata payment 5 

### of declaratory judgment cost s. On appeal, as below, BII C 6 

### relies on the provision of t he ReinsuranceClause that 7 

### Seguros is “subject to the s ame risks , valuations, 8 

### conditions, an d endorsements . . . as may be assumed or 9 

### adopted by [BI IC], and loss, if any hereun der,” (emphasi s 10 

### added), and identifies the w ord “risks” as the source of 11 

### ambiguity thatcould cover declaratory judgment expenses . 12 BIIC emphasizes the cumulative force of the word “risks” in 13 the context of the words that follow it: 

### “valuations, 14 

### conditions, an d endorsements . . . as may be assumed or 15 

### adopted by [BI IC], and loss, if any hereun der.” Arguing 16 

### that the provi sion as a whol e is ambiguous , BIIC contend s 17 

### that this ambi guity must be resolved by re sorting to 18 

### industry custom. This is anexpansion of the argument made 19 

### in the distric t court, but w e deem that itis within the 20 

### scope of that argument and i s therefore pr eserved. 21 

### The parties ag ree that New Y ork law govern s this 229



### diversity case ; their “conse nt concludes t he choice of l aw 1 

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

### 130, 134 (2d C ir. 1997). Ne w York law enf orces reinsura nce 3 

### contracts with out resort to the contra proferentem rule that 4 

### is sometimes u sed in the con text of directinsurance. See 5 

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

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

### ceding insurer s for informat ion, that appl ication of a c anon 8 

### construing thereinsurance c ontract agains t the reinsure r 9 

### would be highl y anomalous.”) . The faculta tive certifica tes 10 

### at issue will therefore be c onstrued as wewould constru e 11 

### any ordinary c ontract. See id. 12 

### “Under New Yor k law, a writt en contract is to be 13 

### interpreted soas to give ef fect to the in tention of the 14 

### parties as exp ressed in the unequivocal la nguage they ha ve 15 

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

### Cir. 1992). “ Where . . . th e contract is clear and 17 

### unambiguous onits face, theintent of theparties must be 18 

### gleaned from w ithin the fourcorners of th e instrument, and 19 

### not from extri nsic evidence. ” Rainbow v. Swi sher , 72 N.Y.2d 20 

### 106, 109 (1988 ). Conversely , “[i]f the co urt finds thatthe 21 

### terms, or the inferences rea dily drawn from the terms, a re 2210



### ambiguous, the n the court ma y accept any a vailable extri nsic 1 

### evidence to as certain the me aning intended by the partie s 2 

### during the formation of the contract.” Alexander & 3 

### Alexander Serv s., Inc. v. Ce rtain Underwri ters at Lloyd’ s , 4 

### 136 F.3d 82, 8 6 (2d Cir. 199 8). “An ambiguity exists wh ere 5 

### the terms of acontract coul d suggest ‘mor e than one mea ning 6 

### when viewed ob jectively by areasonably in telligent pers on 7 

### who has examin ed the contextof the entireintegrated 8 

### agreement and who is cogniza nt of the cust oms, practices , 9 

### usages and terminology as ge nerally unders tood in the 10 

### particular tra de or business .’” Id. (quoting Lightfoot v. 11 

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

### “The determina tion of whethe r a contract t erm is ambiguo us 13 

### is a threshold question of l aw for the cou rt.” Walk-In Med. 14 

### Ctrs., Inc. v. Breuer Capita l Corp. , 818 F.2d 260 , 263 (2d 15 

### Cir. 1987). 16 BIIC contends that the Reinsurance Clause language-- 17 subjecting Seguros “to the same risks, valuations, 18 conditions, and endorsements . . . as may be assumed or 19 adopted by [BIIC], and loss, if any hereunder”--read as a 20 whole, is incapable of being understood without resort to 21 industry custom: “[t]he only way to understand this phrase 224 

### We are aware t hat the questi on of whether an ambiguity

exists is answ ered from the point of view of someone who , inter alia , “is cognizan t of the customs, practices, usages and terminolog y as generally understood inthe particula r trade or busin ess.” Alexander & Al exander Servs. , 136 F.3d at 86 (interna l quotation ma rks omitted); see also Int’l Multifoods Corp. v. Commerci al Union Ins. Co. , 309 F.3d 76, 87 n.4 (2d Cir . 2002). But, BIIC fails tolink any word ing in the Reinsur ance Clause toa custom, pra ctice, or usag e in the reinsuranc e industry. 11 is to look at the custom and practice of the reinsurance 1 industry at the time [Seguros] drafted the Facultative 2 Certificates.” Appellant’s Br. at 22. 

### A party relyin g on 3 

### ambiguity is n ormally obliga ted to show th at a word, phr ase, 4 

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

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

### quotation mark s omitted); see also Walk-In Med. C tr. , 818 7 

### F.2d at 264 (“ Because the te rm ‘adverse ma rket condition s’ 8 

### was susceptibl e of at least two reasonableinterpretatio ns, 9 

### [the district court] correct ly determined that the term’ s 10 

### meaning was a genuine issue of fact . . . .). Here, BIIC 11 does not propose multiple meanings of which one favors its 12 claim; instead, BIIC pronounces that the language is so 13 broad as to be impossible to interpret without resort to 14 industry custom. We are not persuaded that this argument 15 sufficiently establishes an ambiguity useful to BIIC. 4 16 The leading case on the use of industry custom in a 1712

reinsurance dispute over declaratory judgment expenses is 1 Affiliated FM Insurance Co. v. Constitution Reinsurance 2 Corp. , 416 Mass. 839 (1994). The trial court had granted 3 summary judgment to the reinsurer on the ground that the 4 particular facultative certificates unambiguously failed to 5 require the payment of such expenses. In vacating that 6 ruling, the Supreme Judicial Court of Massachusetts focused 7 on the following provision: “In addition . . . , the 8 Reinsurer shall pay its proportion of expenses [other than 9 office expenses and payments to any salaried employee] 10 incurred by the [Reinsured] in the investigation and 11 settlement of claims or suits . . . .” Id. at 841 n.4 12 (first alteration in original). The court held that the 13 term “expenses” was ambiguous because in context it could 14 include either the expenses covered in the underlying 15 insurance policy, or the expenses incurred by the cedent in 16 coverage disputes with the insured, or both. See id. at 17 844-45. The court therefore ruled that the trial court 18 should have consulted industry custom and practice to 19 determine the scope of the term “expenses.” Id. at 845-6. 20 Affiliated FM is most easily distinguished here on the 21 basis that the word “expenses”--held to be ambiguous in 22 Affiliated FM --does not appear in the Seguros facultative 2313

certificates. More generally, Affiliated FM supports the 1 view that a party seeking to establish ambiguity must 2 articulate multiple meanings that the contract language will 3 sustain. 4 Similarly, in Employers Reinsurance Corp. v. Mid5 Continent Casualty Co. , 202 F. Supp. 2d 1221 (D. Kan. 2002), 6 the reinsured recovered its declaratory judgment costs on 7 the basis of the phrase “claims expenses” and the contract’s 8 definition of that term, id. at 1235-37--neither of which 9 appears in the Seguros facultative certificates. 10 

### BIIC argues fo r the first ti me on appeal t hat the word 11 

### “loss” is ambi guous because it could inclu de declaratory 12 

### judgment expen ses. This arg ument was not considered by the 13 

### district courtand we declin e to exercise discretion to hear 14 

### it on appeal. See Mattel, Inc. v. Barbie-Club.com , 310 F.3d 15 293, 306 (2d Cir. 2002). 16 We conclude that BIIC has failed to articulate any 17 ambiguity in the terms of these facultative certificates. 18 19
II 20 21 

### Seguros conten ds, and the di strict court a greed, that 22 

### the certificat es unambiguous ly limit reins urance coverag e to 235 

### We conclude th at this issue is properly pr esented on

appeal, thoughthat is a clo se 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 

### the risks spec ified in BIIC’ s policies wit h its 1 

### policyholders. BIIC argues that even in the absence of 2 ambiguity on that score, industry custom and practice may be 3 used to supplement the terms expressed in the contract. 5 4 BIIC’s brief does not formulate the circumstances in which 5 a term may be thus implied, or why this case requires that 6 result; however, we conclude that the record evidence of 7 custom and practice is insufficient to raise the legal 8 issue. 9 “[T]he burden of proving a trade usage has generally 10 been placed on the party benefiting from its existence.” 11 Putnam Rolling Ladder Co. v. Mfrs. Hanover Trust Co. , 74 12 N.Y.2d 340, 348 (1989). “Under New York law, . . . custom 13 and usage evidence must establish that the omitted term is 14 ‘fixed and invariable’ in the industry in question.” Hutner 15 v. Greene , 734 F.2d 896, 900 (2d Cir. 1984) (quoting Belasco 16 Theatre Corp. v. Jelin Prods., Inc. , 59 N.Y.S.2d 42, 45 (1st 17 Dep’t 1945)). Moreover, the advocate of the trade usage 1815

must establish either that the party sought to be bound was 1 aware of the custom, or that the custom’s existence was “so 2 notorious” that it should have been aware of it. Reuters 3 Ltd. v. Dow Jones Telerate, Inc. , 662 N.Y.S.2d 450, 454 (1st 4 Dep’t 1997). The trade usage must be “so well settled, so 5 uniformly acted upon, and so long continued as to raise a 6 fair presumption that it was known to both contracting 7 parties and that they contracted in reference thereto.” Id. 8 (internal quotation marks and citation omitted). 9 BIIC submitted two affidavits in support of its 10 allegation of a trade usage. William N. Edwards, a 11 supervisor and manager in the claims department of the 12 American Re-Insurance Company (“American Re”) from 1974 13 until 1983, testified that: he was “not aware of American Re 14 ever refusing to pay its share of declaratory judgment 15 expenses ceded to it by its reinsureds”; he “never 16 questioned whether declaratory judgment expenses should be 17 treated differently than any other expenses submitted for 18 payment by a cedent under American Re’s reinsurance 19 contracts”; and he was unaware prior to 1983 of anyone 20 holding a contrary view. The practice of one company, 21 however, is generally insufficient to establish a trade 22
usage. See, e.g. , Encyclopedia Britannica, Inc. v. SS Hong 2316

Kong Producer , 422 F.2d 7, 17-18 (2d Cir. 1969); H & W 1 Indus., Inc. v. Occidental Chem. Corp. , 911 F.2d 1118, 1122 2 (5th Cir. 1990) . 3 William Gilmartin, who has 51 years of experience in 4 the insurance and reinsurance industries, affirmed that 5 between 1976 and 1983, “[i]t was the custom and practice for 6 reinsurers to pay [their reinsureds’ declaratory judgment] 7 expenses due to the common interest they shared with their 8 reinsureds arising from the defense or prosecution of a 9 declaratory action.” Gilmartin did not aver, however, that 10 these (unnamed) reinsurers always and invariably paid these 11 costs, see, e.g. , Hutner , 734 F.2d at 900 (affidavit stating 12 that a pricing formula is “often used” as a basis for the 13 negotiation of a pricing term is insufficient to establish 14 the omitted term), and his testimony can be read to say that 15 the payments were made ex gratia when reinsurers believed 16 that the coverage litigations advanced the common interest, 17 but not otherwise. Moreover, neither expert testified that 18 any of the reinsurance certificates issued by other 19 reinsurers contained language like the facultative 20 certificates at issue here. 21 BIIC also failed to adduce evidence that Seguros either 22 actually knew of the alleged custom, or that the practice of 236 

### By resolving t he issue on th is ground, we have no need

to consider Se guros’ argumen t that adding a term to the certificate re quiring the pa yment of decla ratory judgmen t expenses would

vary and alte r the express terms of the reinsurance co ntract. 17 reinsurers’ paying declaratory judgment expenses was “so 1 notorious” in the industry that Seguros must have been aware 2 of it. See Reuters Ltd. , 662 N.Y.S.2d at 454. The Edwards 3 and Gilmartin affidavits make no allegation of actual or 4 constructive knowledge on the part of Seguros, or on the 5 part of all reinsurers in the industry. Similarly, there is 6 no evidence that BIIC itself was aware of the alleged 7 industry custom. Thus BIIC’s submissions fail “to raise a 8 fair presumption that [the alleged industry custom] was 9 known to both contracting parties and that they contracted 10 in reference thereto.” Id. 

### (internal quot ation marks an d 11 

### citation omitt ed). 6 12 13 

### III 14 

### Finally, BIIC contends that Seguros owes i ts pro rata 15 

### share of BIIC’ s declaratory judgment expen ses by operati on 16 

### of the follow- the-fortunes d octrine. Thatdoctrine bind s a 17 

### reinsurer to a ccept the cede nt’s good fait h decisions onall 18 

### things concern ing the underl ying insuranceterms and cla ims 1918



### against the un derlying insur ed: coverage, tactics, lawsu its, 1 

### compromise, re sistance or capitulation. “U nder the ‘foll ow 2 

### the fortunes’ doctrine, a re insurer is required to indemnify 3 

### for payments r easonably with in the terms o f the original 4 

### policy, even i f technically not covered by it. A reinsu rer 5 

### cannot second guess the good faith liabili ty determinati ons 6 

### made by its re insured . . . .” Christiania Ge n. Ins. Corp. 7 

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

### (internal cita tion omitted). 9 

### Because the do ctrine “simply requires payment where the 10 

### cedent’s good- faith payment [to its insure d] is at least 11 

### arguably withi n the scope ofthe insurancecoverage thatwas 12 

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

### 506, 517 (2d C ir. 1993) (emp hasis added), BIIC’s invocat ion 14 

### of the doctrin e required a s howing that it s own declarat ory 15 

### judgment expen se in litigati ng against its policyholders is 16 

### potentially wi thin the cover age of the underlying polici es. 17 

### This cannot bedone. The po licyholders ob tained no bene fit 18 

### from the mount ing of coverag e litigation a gainst their o wn 19 

### claims; such a n initiative c annot be conce ived as any pa rt 20 

### of the policyh olders’ covera ge; on the who le, any 21 

### policyholder w ould prefer th at the insurerforgo the 2219



### contest. The expenses claimed by BIIC aresubstantial, but 1 

### on this record and under the se facultativecertificates, 2 

### they are not a n aspect of co verage owed tothe policyhol der 3 

### or a claim aga inst the reins urer; they areamong the cla ims4 

### handling expen ses that an in surance compan y incurs in th e 5 

### conduct of its own operation s. 6 7 8 CONCLUSION 9 The judgment is affirmed. 10