Opinion ID: 148187
Heading Depth: 1
Heading Rank: 11

Heading: The Phase II Ruling

Text: The Phase II trial addressed one particular aspect of Travelers' allocation of the settlementits decision, in allocating the breast implant claims settlement, to treat the per-occurrence limits of the two three-year XN policies reinsured by INA as applying separately to each policy year. INA argued that it was not bound by Travelers' decision to allocate that much of the breast implant claims settlement to those two policies. That was because (according to INA) that allocation enlarged the limits of those policies beyond what INA agreed to reinsure. The District Court agreed, ruling in INA's favor. We affirm. 1. The Policy Language It is well settled that a reinsurer cannot be held liable for a kind of loss that it did not agree to cover. CIGNA, 52 F.3d at 1206-07. This distinction between reinsured and unreinsured risk is particularly important in facultative reinsurance where the reinsurer accepts only specific risks. Id. at 1207. At the same time, however, the `follow the fortunes' doctrine creates an exception to the general rule that contract interpretation is subject to de novo review. Id. at 1206. Thus, to prevail in its challenge, INA had to show more than that, of the different reasonable interpretations of the relevant policy language, its is the most persuasive. Rather, INA was required to show that, under Michigan law (which both parties agree controls interpretation of the XN policies), the underlying policy language... unambiguously provides that the per-occurrence limits are not subject to the treatment Travelers gave them ( i.e., as applying separately to each policy year). Id. at 1207 (internal quotation marks and citation omitted). Under Michigan law, an insurance policy is viewed much the same as any other contract. Auto-Owners Ins. Co. v. Churchman, 440 Mich. 560, 489 N.W.2d 431, 433 (1992). That is, an insurance policy is treated as an agreement between the parties in which a court will determine what the agreement was and effectuate the intent of the parties. Id. Where the terms of the contract are clear, those terms must be enforced as written. Frankenmuth Mut. Ins. Co. v. Masters, 460 Mich. 105, 595 N.W.2d 832, 837 (1999). In interpreting such a contract, a court may not create ambiguity where none exists. Auto-Owners, 489 N.W.2d at 434. The two XN policies at issue here01 XN 247 and 01 XN 752are three-year policies. The language of the two policies is identical, except that the limit provided for the former is $4.5 million, while for the latter it is $8 million. [31] Policy 01 XN 752 reads in pertinent part as follows: LIMITS OF LIABILITY: 53.33% ($8,000,000.MAXIMUM) QUOTA SHARE OF $15,000,000. EACH OCCURRENCE 53% ($8,000,000.MAXIMUM) QUOTE SHARE OF $15,000,000. ANNUAL AGGREGATE As this makes clear, the policy is subject to two separate limitsan aggregate limit and a per-occurrence limit. Travelers concedes that the aggregate limit applied only to products claims. Thus, that limit is not at issue here because the breast implant claims were treated as non-product claims. But the aggregate limit is modified by the word annual, while the each occurrence limit is not. As the District Court noted, that is a strong indication that the aggregate limit was meant to operate annually, while the per-occurrence limit was not. This conclusion is further bolstered by the language of the Indemnity Agreement portion of the XN policies, which provides in pertinent part that [Travelers] will indemnify the INSURED against EXCESS NET LOSS arising out of an accident or occurrence during the policy period. The clear implication, again, is that the term accident or occurrence is linked with the entire policy periodin this case, three yearsrather than being linked separately to each policy year. The XN policies do not contain a definition of the term occurrence. However, each XN policy incorporates the terms and conditions of its underlying controlling policy (except with respect to certain terms not at issue here). These policies were issued by the Home Insurance Company, and define an occurrence as follows: The term occurrence wherever used herein shall mean an accident, or a happening, or event, or a continuous or repeated exposure to conditions which unexpectedly and unintentionally results in personal injury, property damage or advertising liability during the policy period. All such exposure to substantially the same general conditions existing at or emanating from one premise's location shall be deemed one occurrence. This definition clearly contemplates continuous occurrences that are capable of spanning multiple years ( e.g., environmental contamination). Such a definition is inconsistent with treating an occurrence as a separate liability trigger for each policy year. In sum, there is nothing in the relevant policy language to suggest any ambiguity with respect to whether the policies' per-occurrence limits are intended to apply separately to each policy year. On the contrary, the language indicates that the per-occurrence limitsunlike the aggregate limitsare meant to cover the entire policy period. This was the position advanced by INA's expert, who testified (credibly, according to the District Court) that he had never heard of a company interpreting three-year policies like the ones at issue here in the manner Travelers did. Thus, the District Court's conclusion that under Michigan law the three-year XN policies clearly and unambiguously have a single per-occurrence limit for the entire policy period is well founded. (J.A. at 96.) 2. Travelers' Argument On appeal, Travelers does not appear to challenge the details of the District Court's interpretation of the two XN policies (by, for instance, pointing to sources of ambiguity in the policy language overlooked by the Court). Rather, Travelers argues that the kind of analysis performed by the District Courtone that involved applying general rules of contract construction to in effect predict what a Michigan court would do if presented with the issueis insufficient to support a judgment against it. (Travelers' Br. at 32.) According to Travelers, its right to bind INA to its interpretation of the relevant per-occurrence limits follows from the fact that [w]hen Travelers made the annualization decision, there was no Michigan law on the insurance annualization issue, and there was a body of out-of-state law that had reached diametrically different conclusions as to whether a multi-year insurance contract with a per-occurrence limit should be interpreted as having an annual per-occurrence limit. Id. at 34. That, Travelers argues, was enough to preclude INA from establishingas it must, under the follow-the-fortunes doctrinethat Travelers' approach was not even arguably authorized by the underlying policies. [32] We are not convinced. Travelers bases its contention on our decision in CIGNA. There, we addressed a reinsurer's argument that the policy it reinsured (which was governed by Ohio law) could not reasonably be interpreted as authorizing coverage of defense costs. CIGNA, 52 F.3d at 1207. We noted that, under the follow-the-fortunes doctrine, the reinsurer bore the burden to prove that Ohio law would not support an interpretation that made the insurer liable for defense costs. Id. at 1209-10. In concluding that the reinsurer had not met that burden, we observed that it ha[d] neither relied on nor cited to any Ohio case directly on point. Nor have we found any. Id. at 1210. Travelers asserts that this language indicates that the absence of any on-point Michigan decision at the time it performed the allocation somehow fully resolves the issue in its favor. Once that language is put in its proper context, however, we believe that it does not support the position Travelers advocates here. Prior to the passage quoted above about the absence of any pertinent Ohio case, the CIGNA Court had already determined that the underlying insurance policy was ambiguous on the question of whether defense costs were covered. Id. at 1208-09. The specific point being made was that, in the face of ambiguity in the underlying insurance contract, a reinsurer cannot prevail simply by citing favorable decisions from non-controlling jurisdictions, but must instead rely on decisions from the state whose law governs the dispute. See id. at 1210. In other words, the analysis endorsed in CIGNA is that, where the policy language is ambiguous with respect to the issue in dispute, a reinsurer can only meet its burden under the follow-the-fortunes doctrine by pointing to a controlling decision definitively resolving the ambiguity in its favor. But that is quite different than the rule Travelers urges us to adopt herenamely, that the absence of an on-point decision from the relevant jurisdiction by some alchemy renders the underlying policy language ambiguous. Because Travelers has not provided any reason for us to doubt the District Court's conclusion that the policy language unambiguously excludes annualizing the per-occurrence policy limits, the absence of any on-point Michigan decision is of no aid to Travelers. Nor are we persuaded by Travelers' citation to Commercial Union Insurance Co. v. Swiss Reinsurance America Corp., 413 F.3d 121 (1st Cir.2005), and American Employers' Insurance Co. v. Swiss Reinsurance America Corp., 413 F.3d 129 (1st Cir.2005). Both those cases, like this one, involved a reinsurer's claim that it was not obligated to follow its reinsured's decision to annualize the per-occurrence of its multi-year policies. Commercial Union, 413 F.3d at 122; Am. Employers', 413 F.3d at 134. In each, the Court vacated the District Court's prior decision in favor of the reinsurer. Commercial Union, 413 F.3d at 129; Am. Employers', 413 F.3d at 139. Travelers contends that these decisions indicate that the approach it took to the per-occurrence limits is sufficiently within the zone of reasonableness to be binding under the follow-the-fortunes standard. Neither of those cases applies, however. In both, the insurer was able to produce what Travelers has been unable to provide heresome reasonable basis for its annualization decision beyond simply the claim that, at the time, such a decision was not ruled out by the applicable body of law. [33] In Commercial Union, while the excess policies provided by Commercial Union contained a definition of an occurrence... hostile to annualization, those policies also included follow-the-form provisions incorporating the underlying primary policies, policies that did explicitly provide that their per-occurrence limits applied on an annual basis. 413 F.3d at 126. Thus, there were grounds for Commercial Union to conclude, prior to billing its reinsurer, that it might be exposed to its insured based on annualization, a possibility that had been explicitly raised by Commercial Union's outside coverage counsel. Id. In American Employers', the insurer's internal assessments of its potential liability assumed annualization. 413 F.3d at 136-37. In addition, there were reasons for American Employers to suspect that any resulting coverage dispute might be governed by New Jersey law, which is arguably pro-annualization. Id. at 137. Again, this provided a basis, prior to its billing of its reinsurer, for American Employers to measure its potential liability based on annualization. There is nothing like that here. Travelers attempts to create something analogous by claiming that, before it entered the picture, Aetna CS had negotiated with Acme based on annualization assumptions. Travelers' evidence for this is a Term Sheet that Aetna CS provided to Acme indicating that the total non-products coverage available under the XN policies for each occurrence was $226.5 million (the figure reached through annualization), not $178.5 million (the figure reached without annualization). But, as noted above, negotiations with Acme started over from scratch after Travelers acquired Aetna CS. Indeed, Travelers concedes that the issue of annualization never came up between Travelers and Acme either prior to, or after, the parties reached a tentative deal in July 1998. [34] Moreover, Acme would not have had any reason to insist that Travelers annualize the per-occurrence limits of the XN policies because, under the settlement they reached, Travelers was only providing $80 million in coverage for the breast implant claims, which meant that there was more than enough coverage available even without annualizing the limits. Thus, Travelers' attempt to explain why it annualized the per-occurrence limits of the three-year XN policies with reference to its interactions with Acme is unconvincing. In sum, Travelers has pointed to nothing in the policy language, its prior assessments of its potential liability, or its interactions with Acme to indicate that, when it performed its allocation, it was reasonable to expect that, had the coverage dispute been litigated, Acme could have successfully pressed the annualization issue against it, or even that it would have had any reason to do so. As such, we affirm the District Court's Phase II ruling that INA is not bound by Travelers' decision to annualize the per-occurrence limits of the policies INA reinsured.