Opinion ID: 697655
Heading Depth: 3
Heading Rank: 2

Heading: The Intended Meaning of the Term Facultative

Text: 82 We similarly hold clearly erroneous the finding that defendants knew that plaintiffs understood facultative to be limited to risk-by-risk certificate underwriting. There is no evidence of statements or correspondence by plaintiffs or their representatives to defendants, prior to execution of the slips and treaties, informing defendants that the plaintiffs understood the meaning of facultative to be so limited. 83 Of course, if the court properly could have found, on the basis of the evidence, that the term facultative was unambiguous, referring only to individual certificate, risk-by-risk underwriting, then defendants would be charged with knowledge of that ordinary meaning. However, as the evidence clearly showed, that term, both standing alone and as used in the Placing Information, slips, and Treaty Wordings, encompasses a variety of underwriting methods, about the propriety of which the parties and their experts disagree. Whether or not a term as used by parties to a contract is ambiguous is a question of law subject to plenary review. ITT Corp. v. LTX Corp., 926 F.2d 1258, 1261 (1st Cir.1991) (citations omitted); see also In re Navigation Technology Corp., 880 F.2d 1491, 1495 (1st Cir.1989) (Contractual language is considered ambiguous where the contracting parties reasonably differ as to its meaning.). However, where a term is ambiguous, its meaning presents a question of fact, see Commercial Union Ins. Co. v. Boston Edison Co., 412 Mass. 545, 557, 591 N.E.2d 165, 172 (1992) (citations omitted), a finding on which may only be reversed if clearly erroneous. Fed.R.Civ.P. 52(a). 84 As noted, the district court found that the parties understood the meaning of the term facultative in its standard and traditional sense, namely, underwriting on a risk-by-risk certificate basis. If by this finding, and others like it, the district court meant that the term was legally unambiguous, being limited in meaning to only that one type of underwriting, it was wrong as a matter of law. Expert testimony and treatises presented by both sides support the view that the term, as used in the industry today, has been broadened beyond its classic roots, notwithstanding plaintiffs' insistence that the classic method is alone the proper one. 85 Most likely the court did not mean the term was unambiguous as a matter of law, but rather concluded, on the basis of all the evidence, that, as used in the present circumstances, it should be given the limited meaning ascribed. 18 Yet the district court offered no reasons why it gave the term the limited reading it did. Nor did it explain why it believed defendants knew that plaintiffs so restricted the term. On the latter point, it may have been influenced by testimony from defendants' principal, Graves Hewitt, who said he had as good an understanding of the London insurance market as any American. The judge may have felt that, possessing such insight, Hewitt knew that, as some English witnesses testified, facultative would be understood to mean risk-by-risk certificate underwriting in that market. But absent evidence that Hewitt actually knew and believed this, such a leap would be pure speculation given Hewitt's own contrary testimony. 86 Moreover, English treatises introduced into evidence by plaintiffs indicate that, notwithstanding plaintiffs' witnesses, the reinsurance industry in England recognizes types of facultative reinsurance other than the risk-by-risk certificate variety. A leading English writer on reinsurance, Golding, describes in his authoritative treatise (introduced by plaintiffs) various types of facultative reinsurance other than the risk-by-risk certificate variety. One variation Golding describes is the so-called cover in course of post. He states: 87 It will be clear that much of the labour involved in the facultative method is connected with getting the necessary initials on the slips. In modern practice this can be largely avoided by the system of what may be called giving cover in course of post--though the term nowadays extends to the use of telex communications as much as to the mail. The reinsured will arrange facilities with a number of reinsurers, whereby it may issue request notes by post, for one or more lines of a risk to be reinsured, as may be agreed. The reinsurers will then hold covered each up to the amount of its agreed share and remains so bound, unless and until it has signified its declinature in course of post. As a rule a limit is fixed, within which this must be notified say 48 hours after receipt, though sometimes this is extended up to as much as a fortnight to allow for possible delays in transmission. If no declinature is made within the period, the reinsurer is bound in the ordinary way. The system does save a great deal of work, and is much favored by reinsureds accordingly. Yet it may be emphasized that it still remains facultative reinsurance, for the reinsurer is in no way deprived of its power to decline, even though it must accept responsibility in the meantime. 88 C.E. Golding, Golding: The Law and Practice of Reinsurance 42 (K.V. Louw ed., 5th ed. 1987) (emphasis supplied); see also R.L. Carter, Reinsurance 234-35 (2nd ed. 1983) (detailing use of bordereau to report risks bound under the cover in course of post method, which he also classifies as facultative). 19 89 But even ignoring these indications that English custom and practice have gone beyond classic facultative methodology, it is the American, not the English, usage that seems to us key. The underwriters in London and Europe contracted in the slips with defendant NERCO, an American company, for reinsurance classified by the Reassured [NERCO] as Property and Casualty Facultative Assumed Business produced and underwritten by the Graham Watson division of Cameron & Colby, Inc. (Emphasis supplied.) 20 The facultative reinsurance NERCO was to classify covered risks in the American, not the English, market. NERCO was expressly delegated the right to classify the reinsurance. See supra note 20. In exercising that right, NERCO was, of course, held to a standard of reasonable classification. Salem Glass Co. v. Joseph Rugo, Inc., 343 Mass. 103, 106, 176 N.E.2d 30, 32-33 (1961) (where a contract leaves a certain discretion or power in the hands of one party, that party is under a duty to exercise that power reasonably); accord Johnson v. Educational Testing Serv., 754 F.2d 20, 26 (1st Cir.1985), cert. denied, 472 U.S. 1029, 105 S.Ct. 3504, 87 L.Ed.2d 635 (1985). Nonetheless, being an American company operating here, NERCO would obviously be expected to classify its business pursuant to American, not English, terminology. Hence, to the extent there is any difference between the prevailing English and American views of what kind of underwriting the market regards as facultative, the parties would have intended the American interpretation to control, absent evidence of some contrary intent. Cf. Hazard's Adm'r. v. New England Marine Ins. Co., 33 U.S. 557, 564, 8 L.Ed. 1043 (1834) (Underwriters are presumed to know the usages and customs of all of the places from or to which they make insurances.). 90 To be sure, plaintiffs' experts gave testimony tending to show that the American market understood the term facultative reinsurance to mean risk-by-risk certificate underwriting. One might argue that the district judge was entitled to believe plaintiffs' experts over defendants' (who testified to the opposite understanding), 21 and to infer that the ordinary meaning of the term facultative was, therefore, the traditional one of risk-by-risk certificate underwriting. 91 But the evidence that the term facultative, within the American market, embraces more than just the individual risk certificate method is simply too extensive for the court to have rejected. Normally, of course, we are bound by the district court's choice among competing experts. But it is hard to gainsay experts such as defendants' expert James Inzerillo, see supra note 21, when even plaintiffs' experts did not categorically deny the widespread use, within the facultative operations of American reinsurers, of facilities like the semi-automatics and automatics here in issue. Plaintiffs' experts did not, in fact, testify that the ordinary meaning of the term in the American reinsurance industry was limited to individual certificate risk-by-risk underwriting. Rather they intimated that this was what, in their own opinion, the term properly meant or should mean. Yet, the question is not the abstract use of language but whether NERCO--having discretion under the slips and Treaty Wordings--could reasonably classify the semi-automatic and other methods it used in its own operations as facultative and whether it committed fraud when it did so. 92 The best approach to answering this question lies in the realities of industry practice. Cf. Affiliated FM Ins., 416 Mass. at 845, 626 N.E.2d at 881 (Where, as here, the contract language is ambiguous, evidence of trade usage is admissible to determine the meaning of the agreement.). Plaintiffs' expert, Phelan, conceded that American companies commonly used facilities similar to defendants' semi-automatics and automatics within their facultative departments. He regarded this as anomalous, and pointed out practical considerations which had led to that development. But while disapproving, he admitted to the widespread use of facilities of this type within the industry under the facultative designation. 22 93 American treatise writers, moreover, like the English writers from whom we have quoted, acknowledge a substantial, even predominant, modern trend towards use of facultative facilities similar to the semi-automatics here in question. 23 We think it is substantially beyond cavil that, in recent times, the term facultative reinsurance includes methods, in addition to traditional risk-by-risk certificate underwriting, similar in concept to the semi-automatics. 94 Given this body of evidence, including plaintiffs' expert's concession as to the classification, we see no adequate basis, from the term facultative itself, for the judge to infer that defendants necessarily knew that plaintiffs would or should interpret facultative, as used in the slips and Treaty Wordings, as limited solely to risk-by-risk certificate underwriting. While the latter is the original and classic method, see Unigard, 4 F.3d at 1053-54, other streamlined forms are clearly now being utilized within the industry under the rubric of facultative, both here and abroad, including types in which the reinsurer can be bound on individual risks by the reinsured acting pursuant to the terms of a general authorizing contract. Such a contract requires the reinsured to report the placement of the reinsurance to the reinsurer via a bordereau; and it may give the reinsurer the right, within a specified time frame, to reject any particular risk thereafter--but not necessarily ab initio. The semi-automatics in issue here were designed along these lines. Facilities employing this method were developed to offset the paperwork and high costs associated with classic certificate facultative reinsurance individually negotiated in advance on a risk-by-risk basis. 24 The hallmark of facultative reinsurance--evaluation of each risk separately by the reinsurer's underwriter--is sought to be preserved by maintaining the right to cancel after the fact. Although a window of exposure is created during which the reinsurer is bound without his consent on what the latter may later decide is an unacceptable risk, the potential for damage is minimized by the relative shortness of the exposure and by contract conditions which prevent the reinsured from binding the reinsurer to predescribed types of risks the reinsurer does not wish to cover. 25 95 We conclude that there is insufficient support in the record for the court's key fraud finding that defendants knowingly misrepresented to plaintiffs that they would receive one type of reinsurance (the classic risk-by-risk certificate form of facultative), while intending all along to provide another type (semi-automatic and automatic). The evidence does, indeed, support the court's finding that defendants intended to supply reinsurance underwritten by the semi-automatic and (to a minor degree) automatic methods (although not to the complete exclusion of classic facultative, a small amount of which was also produced). But the record does not support the finding that the defendants knew that the plaintiffs expected to receive only the classic risk-by-risk certificate form of facultative reinsurance, nor does it support the finding that defendants made knowing misrepresentations with respect to the term facultative.