Opinion ID: 609737
Heading Depth: 2
Heading Rank: 2

Heading: Reinsurance Coverage

Text: 33 The findings of a special master, to the extent they are adopted by the district court, are considered as the findings of the court and cannot be set aside unless clearly erroneous. Fed.R.Civ.P. 52(a). When reviewing a district court's legal conclusions, our scope of review is de novo. Ezekwo v. NYC Health & Hospitals Corp., 940 F.2d 775, 780 (2d Cir.1991) (citing 9 C. Wright & A. Miller, Federal Practice & Procedure § 2588, at 750 (1971)). 34 A finding of fact is clearly erroneous when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed. Anderson v. City of Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 1511, 84 L.Ed.2d 518 (1985) (quoting United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948)). Where there are two permissible views of the evidence, the factfinder's choice between them cannot be clearly erroneous. Id. 470 U.S. at 574, 105 S.Ct. at 1511 (citations omitted). 35 The special master's conclusion that reinsurance coverage exists for Mentor's payment of the Ocean Champion claim is premised on certain findings of fact, including determinations of custom and practice, that he made after nine days of testimony. Although the special master's determination as to the custom and practice in reinsurance and as to the application of the reinsurance policy [u]nder the facts of this case are framed as Conclusions of Law, such determinations are findings of fact which may not be set aside unless clearly erroneous. See, e.g., Erie R. Co. v. The Cornell No. 20, 164 F.2d 763, 766 (2d Cir.1947) (labeling fact findings as conclusions of law is immaterial); See also United States Naval Institute v. Charter Communications, Inc., 875 F.2d 1044, 1048-49 (2d Cir.1989) (determination of custom and practice is a finding of fact).
36 The main coverage issue presented to the finder of fact was whether or not the Ocean Champion loss was a total loss under the total-loss-only reinsurance coverage. We find that the Domestic Reinsurers offer no ground on which the district court or this Court could find that the special master's factual findings are clearly erroneous; nor do they offer any case law, from any jurisdiction, that subverts the special master's legal conclusions. 37 The Deductible Policy unquestionably owed coverage to ODECO for $1 million of hull and machinery loss. The reinsurance undertaking was narrower and was only to cover in respect of Total and/or Constructive and/or Arranged and/or Compromised Total Loss of Unit. No party urges that the Ocean Champion's loss was literally Total within the meaning of the policies. Nor does any party argue for or against the idea that the Ocean Champion's loss was an Arranged Total Loss, whatever that may be. The Domestic Reinsurers argue (and Mentor does not dispute) that the loss could not have been a compromised total loss, because the claims submitted by ODECO and compromised by OIL and Mentor were claims for partial loss. Therefore, the parties agree that the reinsurers pay only if the Ocean Champion was a constructive total loss. 38 On appeal, as below, the Domestic Reinsurers argue (a) that OIL's settlement was in the nature of a partial loss (however it was designated); (b) that there can be no CTL unless the owner tenders abandonment of the vessel to the insurers promptly after the casualty; (c) that OIL's settlement of the loss as a CTL had no bearing upon the Deductible Policy; and (d) that Mentor's final classification of the loss under the Deductible Policy does not bind its reinsurers. We address these arguments separately below. 39 1. Constructive Total Loss. The Domestic Reinsurers assert that, [h]ad the Special Master permitted briefs to be submitted, he would have learned that Oscar L. Aronsen, Inc. v. Compton, 495 F.2d 674 (2d Cir.1974) is directly on point and requires that the adjustment herein be recognized for what it is, namely, a compromise of a partial loss that does not trigger any [total-loss-only] coverage. On the whole, the Aronsen case supports the opposite conclusion. 40 In Aronsen, the vessel ran aground, was refloated, and later scrapped after the owner declined to repair it. The shipowner had submitted a CTL claim to its hull and machinery insurer. The insurer threatened to delay payment until claim proved to satisfaction of underwriters which could take six months or more, unless the shipowner was willing to negotiate a quick payment on a partial loss basis. 495 F.2d at 676. The shipowner withdrew its original claim and accepted a partial loss settlement. The charterer of the vessel had also purchased insurance under Anticipated Charter Profit policies that owed coverage only in the event of a total loss (actual, constructive, compromised or arranged). The dispute in Aronsen arose between the charterer and its insurers. However, [i]n determining whether a total loss had occurred, the parties ... agreed that the settlement reached between the owner of the [vessel] and the underwriters of the owner's Hull and Machinery policies would be dispositive of the charterer's claim under the Anticipated Charter Profits policies. Id. at 675 (emphasis in original) (footnote omitted). The charterer argued that the settlement of the owner's hull and machinery claim was a compromise of the original total loss claim and was therefore a compromised total loss. This Court concluded that the proper character of the claim is determined by reference to the settlement ultimately negotiated at arms length rather than by reference to the possibly self-serving characterization of the claim by the owner: 41 In sum, we are of the view that the proper barometer for gauging the bona fide nature of the shipowner's initial claim for constructive total loss is his willingness to press that claim until settlement. Where the owner chooses to abandon his constructive total loss claim as a predicate to negotiation, the charterer, like the hull underwriters and the shipowner himself, is bound by that election. Id. at 677-78. (Footnote omitted.) 42 The present appeal is a partial mirror image of Aronsen in the sense that in each case the claim was submitted on one basis and settled on another. Aronsen thereby supports the view that the loss transaction is defined by the terms of the bona fide settlement, rather than by the designation of the original claim. In other respects as well, Aronsen supports the special master's disposition of the present dispute. Here as in Aronsen the policyholder collected less under the settlement than it would have collected under its original claim. While the Domestic Reinsurers emphasize that the CTL settlement was induced in part by OIL's threat to conduct a time-consuming audit, 1 similar pressure was brought to bear in Aronsen without subverting the commercial reality of the loss basis ultimately negotiated by the parties. Id. at 676. 43 The Domestic Reinsurers also suggest that the settlement was tainted by the inbred corporate relationships among ODECO, Mentor and OIL (an assertion at odds with the Domestic Reinsurers' parallel argument that the settlement was forced on ODECO by OIL). However, the Domestic Reinsurers were aware of those corporate relationships from the outset and point to no evidence contrary to the special master's conclusion that the OIL-ODECO settlement was settlement of an insured risk and was an untainted, arms-length transaction involving no fraud, collusion or bad faith. 44 2. Notice of Abandonment. The Domestic Reinsurers contend that an invariable requirement of a constructive total loss is that the owner give notice of abandonment by offering the vessel to the underwriters promptly after the loss. The special master found that OIL waived notice of abandonment. The Domestic Reinsurers argue that there is no evidence of such a waiver. 45 Notice of abandonment is not the subject of any stipulated fact; the reinsurance contract contains no such clause; while we could not fully examine the Deductible Policy (which has been blurred by excessive photocopying), neither party cites a notice of abandonment clause in the Deductible Policy; the OIL Policy merely references such notice generally. In resolving these issues, the special master had to rely upon testimony and treatises concerning industry custom and practice and upon the parties' prior course of conduct. 46 Case law suggests that notice of abandonment is not an absolute prerequisite to a CTL claim. See Rock Transport Properties Corp. v. Hartford Fire Insurance Co., 312 F.Supp. 341, 347 (S.D.N.Y.), aff'd, 433 F.2d 152 (2d Cir.1970); Fishing Fleet, Inc. v. Trident Insurance Co., 598 F.2d 925, 926 n. 1 (5th Cir.1979). Moreover, there is adequate record support for the findings that notice of abandonment is not treated in the industry as a prerequisite to a claim for total loss; that a policyholder may, with the indulgence of its insurer, defer a decision on abandonment until final settlement occurs; that acceptance of the tender is rare; and that waiver is an accepted practice. Mentor adduced evidence that AIG previously paid a CTL for another rig covered under the same reinsurance contract even though there had been no notice of abandonment, and did so without protest and without compromise. The Domestic Reinsurers' expert, Leslie Buglass, testified that notice of abandonment promptly after the casualty is an indispensable element of such a CTL claim; but Mr. Buglass' own treatise discusses total loss without mentioning notice of abandonment. (Mr. Buglass resolved at trial to put it in the fourth edition.) The Domestic Reinsurers also relied on the testimony of David Seaberg, an AIG claims adjuster at the time of the Ocean Champion loss, who had worked on marine and oil rig claims for various insurers since 1962. However, Mr. Seaberg admitted on cross-examination that he had never demanded notice of abandonment on a reinsurance claim prior to the Ocean Champion, and that the Ocean Champion claim was the first occasion he could recall in which he declined coverage on the ground that the claim was not a valid CTL. 47 The Domestic Reinsurers, relying upon the following passage from Calmar S.S. Corp. v. Scott, 209 F.2d 852, 854 (2d Cir.1954), argue that as a matter of law notice of abandonment cannot be postponed or waived: 48 As we have said, [a CTL] is granted to relieve the owner of the embarrassment of having upon his hands a ship, completely useless as she lies, and being without remedy until such time as she can be recovered and repaired, which may mean an indefinite postponement. For this reason he must invoke the privilege in season: and, as a corollary, his right to do so depends, not upon what the expense turns out in the end to be, but upon what it probably will be, so far as any reasonable calculation can be made, in the highest degree of probability. 49 (Footnotes omitted.) This passage establishes what a shipowner must do to preserve its right to assert a total loss vis-a-vis its insurer; it does not imply that an untimely assertion of a CTL claim is impossible even if the insurer is willing to consider it and pay it, or where (as here) the insurer solicits it. This Court has recognized (1) that an insurer may waive defenses at any time after it acquires knowledge that the defense might be applicable, New York v. AMRO Realty Corp., 936 F.2d 1420, 1430 (2d Cir.1991); and (2) that a reinsurer cannot second guess the reinsured's good faith decision to waive defenses. Christiania General Insurance Corp. v. Great American Insurance Co., 979 F.2d 268, 280 (2d Cir.1992) (citing Unigard Security Insurance Co. v. North River Insurance Co., 762 F.Supp. 566, 586 (S.D.N.Y.1991)). See also B. Ostrager & T. Newman, Handbook on Insurance Coverage Disputes § 2.06, at 57 (5th ed. 1992) (waiver has been found where there is direct or circumstantial proof that an insurer intended to abandon a policy defense). OIL's settlement of the claim on the basis of a constructive total loss without notice of abandonment is in itself abundant evidence of waiver, and the special master did not err in reaching that conclusion. 50 3. The Follow the Fortunes Principle. The Domestic Reinsurers' most fundamental challenge to the district court's July 20, 1992 order is their contention that the Special Master's discussion concerning the princip[le] of 'follow the fortunes' is simply inapplicable in the context of this case. The special master recited the following as Conclusions of Law: 51 Custom and practice in reinsurance includes the principle of Follow the Fortunes.... 52 Follow the Fortunes requires reinsurers to follow the insurance fortunes of the reinsured. The insurance fortunes with respect to a claim contemplate a valid, covered insurance claim that is settled in good faith and without fraud in any form or breach of a condition of the reinsurance contract. Simply put in a pure sense, Follow the Fortunes means that when the subject matter of the insurance is settled, such settlement requires the reinsurer to follow the fortunes of the reinsured by paying the portion of the insurance that is ceded under the reinsurance contract to the reinsurer. 53 .... 54 It is clear that settlement under the OIL hull and machinery policy of the OCEAN CHAMPION loss as a CTL total loss automatically actuated the [Deductible] Policy. It necessarily follows that settlement of the OCEAN CHAMPION loss as a CTL total loss under the OIL Policy triggers first the CTL risk assumed by the [Deductible Policy] and thereby triggers the total loss risk ceded to reinsurers.... 55 The Domestic Reinsurers contend that there is no support for the actuating and triggering of coverages that takes place in this passage, and that there is no defensible finding or conclusion that binds them to follow OIL's coverage decision. 56 The parties agree that the reinsurance contract contains a follow the fortunes clause. It recites in part that the total-loss-only reinsurance coverage is [s]ubject to all terms, clauses, conditions and settlements as original. Mentor seizes upon the word settlements, and argues that its reinsurers must pay because: (1) Mentor gave its reinsurers notice that the loss could turn out to be a CTL; (2) Mentor paid its $950,000 limit before OIL made its final determination as to how the loss should be classified; and (3) when OIL and ODECO settled their claim as a CTL, Mentor submitted its Notice of Reinsurance Loss to Leeds on that basis. The Domestic Reinsurers admit that they follow settlements, but emphasize that they do so only as original, and argue that they need not pay because (1) the original policy reinsured is the Deductible Policy; (2) that the Domestic Reinsurers therefore are not bound to follow the settlements of OIL; and (3) the Deductible Policy paid the Ocean Champion loss as a partial loss, and did so more than a year before the OIL settlement of the same loss as a constructive total loss. 57 The Domestic Reinsurers are in part correct. The follow-the-fortunes principle does not change the reinsurance contract; it simply requires payment where the cedent's good-faith payment is at least arguably within the scope of the insurance coverage that was reinsured. See Unigard Security Insurance Co. v. North River Insurance Co., 762 F.Supp. 566, 587 (S.D.N.Y.1991). However, in the reinsurance contract at issue, the phrase settlements as original is not self-executing; and a finder of fact may consider testimony as to how this phrase is properly applied where the ceding insurer covers the deductible portion of another policy that is written and administered by another insurance company, and where the loss under both policies is surveyed and adjusted by the same firm (here, Rush Johnson). 58 After a review of the evidence on this issue, we are not left with a definite and firm conviction that a mistake has been committed. Jack Akehurst, who was a marine underwriter working at Mentor at the time of the Ocean Champion loss, testified at trial that the follow settlements as original language referred to the deductible policy, but that itself was driven by the OIL policy. Mentor's former Vice President of Claims, Louis Potts, explained how he would determine whether or not a constructive total loss existed for purposes of the reinsurance contract: [S]ince the policy that this reinsures is a deductible policy, first loss policy, we would have to look to the [OIL] policy and what sort of action and determinations they made.... If they said that it was a Total Loss obviously it would be as well on the deductible policy. 59 Once the finder of fact decided that prompt notice of abandonment was waivable, and had in fact ultimately been waived, the designation of the payment at the time it is made is unimportant in deciding whether the loss was partial or total for final classification purposes. Since Mentor's insurance obligation was broader than the reinsurance, and arose regardless of whether the loss was partial or total, Mentor's obligation could well become payable before the repairs were sufficiently advanced for anyone to determine whether or not the casualty was a CTL. OIL had the lead role in monitoring the repairs, and was evidently content to make partial payment along the way without hurrying to conclude its negotiations with ODECO on the classification of the loss. Mentor could not defer payment of an amount then due so that it could await developments on repair and the related negotiations. Certainly, Mentor could not have long delayed payment for reasons related to the collectibility of reinsurance without breaching its obligation to its policyholder. The finder of fact could therefore assume that, until OIL and ODECO agreed on the extent and classification of the loss (with the help of Rush Johnson), Mentor had no basis for deciding whether or not its $950,000 payment was on account of a CTL. 60 4. Final Classification of the Loss. The Domestic Reinsurers complain that Mentor re-classified the claim as one for constructive total loss after the Ocean Champion had returned to service. That anomaly, if it occurred, results from OIL's prolonged negotiation with ODECO, the mounting costs ascribed to the repair, and OIL's willingness to waive notice of abandonment. There is nothing sinister about Mentor's ultimate classification of the loss under the Deductible Policy to conform to OIL's classification of the loss under the hull and machinery policy. Since the special master found that the negotiations between Mentor and OIL were conducted and concluded in good faith, Mentor's final classification of the claim provides no ground for reversal on appeal.C. Liability Under the Cover Note 61 The district court adopted the special master's conclusion that [u]nder the facts of this case, therefore, settlement of the OCEAN CHAMPION loss as a total loss under the hull and machinery insurance contract triggers coverage under the total loss only (TLO) reinsurance cover note contract that provides reinsurance of the TLO risk ceded by plaintiff reinsureds to defendant reinsurers. 62 After a careful review of the record, we are satisfied that there is adequate evidentiary support for that conclusion. We recognize that in arriving at that conclusion, the special master disregarded a number of procedural mandates set forth in the Order of Reference. We also recognize that the district court failed to exercise meaningful review in respect of the special master's findings and conclusions. The special master's procedural errors, however, did not affect any of the Domestic Reinsurers' significant rights. The district court's failure to supervise is likewise harmless because this Court, in reviewing the July 20, 1992 order that adopted the special master's final recommendations, has reviewed the special master's report under the same standards that the district court should have applied. 63 This Court must examine the record without regard to errors or defects which do not affect the substantial rights of the parties. 28 U.S.C. § 2111 (1988). We therefore are bound by the district court's adoption of the special master's determination of liability, which in turn was adequately supported by testimony concerning the specific policies and the prior conduct of Mentor and the Domestic Reinsurers in implementing the reinsurance contract at issue.