Opinion ID: 164354
Heading Depth: 2
Heading Rank: 1

Heading: Description of Reinsurance Agreement

Text: 7 Reinsurance is essentially insurance for insurance companies. Spreading part of the risk to the reinsurer can prevent a catastrophic loss from falling upon the insurance company and enable the insurance company to serve more clients. See, e.g., Unigard Sec. Ins. Co., Inc. v. North River Ins. Co., 4 F.3d 1049, 1053 (2d Cir.1993). Unlike typical insurance contracts that are offered on a take-it-or-leave-it basis, reinsureds ordinarily negotiate the terms, conditions, and rates in their reinsurance contracts. 8 For nearly 30 years MCCC purchased reinsurance coverage from ERC. From January 1, 1994, until April 1, 2000, ERC and MCCC operated under the Agreement whose meaning is at issue in this appeal. 9 The Agreement required ERC to reimburse MCCC for all loss in excess of $300,000 for each occurrence, with a reinsurance limit of $1,000,000 for each occurrence. Additionally, the Agreement required ERC to reimburse MCCC for claim expenses at a rate equal to the fraction of the loss for which ERC was responsible. If, for example, MCCC had to pay a loss of $500,000, ERC would have to reimburse MCCC for $200,000 of that loss ($500,000-$300,000). Because ERC thus paid 40% of the total loss ($200,000/$500,000 = 40%), ERC would reimburse MCCC for 40% of the claim expenses MCCC incurred. 10 The parties dispute the meaning of the terms loss and claim expenses in the Agreement. Article VIII of the Agreement defines loss: 11 The word loss shall mean only such amounts: 12 (a) within applicable policy limits as are actually paid by [MCCC] in settlement of claims or in satisfaction of awards or judgments (including prejudgment interest and plaintiff's costs included in the judgment and subject with the judgment to the applicable policy limit); 13 (b) equal to 80% of the amount paid by [MCCC] in excess of applicable third party liability coverage policy limits occasioned by liability imposed upon [MCCC] on account of the failure of [MCCC] to settle a claim for an amount within such policy limits; 14 (c)(1) equal to 80% of the amount paid by [MCCC] for punitive, exemplary, or compensatory damages awarded to the insured and arising out of the conduct of [MCCC] in the investigation, trial or settlement of any claim or failure to pay or delay in payment of any benefits under any policy if [ERC] has not, in advance of any such conduct by [MCCC] counseled with [MCCC] and concurred in [MCCC's] course of conduct; or 15 (c)(2) equal to 100% of the amount paid by [MCCC] for punitive, exemplary, or compensatory damages awarded to the insured and arising out of the conduct of [MCCC] in the investigation, trial or settlement of any claim or failure to pay or delay in payment of any benefits under any policy if [ERC] has, in advance of any such conduct by [MCCC] counseled with [MCCC] and concurred in [MCCC's] course of conduct. 16 App. 600. For the dispute before us, the relevant part of the definition appears in paragraphs (c)(1) and (c)(2), which require ERC to reimburse MCCC for compensatory damages ... arising out of the conduct of [MCCC] in the investigation, trial or settlement of any claim or failure to pay or delay in payment of any benefits under any policy. (A subsidiary dispute concerns whether it is (c)(1) or (c)(2) that applies.) 17 Claim expenses are defined in Article VIII of the Agreement as follows: 18 The term claim expenses shall mean all payment under the supplementary payments provisions of the [MCCC] policy, including court costs, interest upon judgments, and allocated investigation, adjustment and legal expenses. App. 601. As presented to the district court, the pertinent part of the supplementary payments provisions incorporated by reference from insurance policies issued by MCCC states: SUPPLEMENTARY PAYMENTS — COVERAGES A AND B 19 We will pay, with respect to any claim we investigate or settle or suit against an insured we defend: 20
21 .... 22 e. All costs taxed against the insured in the suit. 23 f. Prejudgment interest awarded against the insured on that part of the judgment we pay. If we make an offer to pay the applicable limit of insurance, we will not pay any prejudgment interest based on that period of time after the offer. 24 g. All interest on the full amount of any judgment that accrues after entry of the judgment and before we have paid, offered to pay, or deposited in court the part of the judgment that is within the applicable limit of insurance. 25 These payments will not reduce the limits of insurance. 26 App. 526-27.