Opinion ID: 808087
Heading Depth: 2
Heading Rank: 2

Heading: PEIC’s Duty to Provide a DSOL Promptly

Text: We begin our merits analysis with some common ground. Recall that Paragraph D‘s first sentence provides: ―As a condition precedent, [PEIC] shall promptly provide [Global] with a definitive statement of loss on any claim or occurrence reported to [PEIC] and brought under this Certificate which involves a death, serious injury or lawsuit.‖ Whatever PEIC‘s obligation might be, it clearly only applies to (1) a ―claim or occurrence,‖ (2) that is ―reported to [PEIC],‖ and (3) that ―involves a death, serious injury or lawsuit.‖ Although the Certificate does not define ―claim‖ or ―occurrence,‖ the parties appear to agree on their meaning. A ―claim,‖ at least as relevant here, is generally a demand for payment or relief made against the persons or entities covered by the Excess Policy or a similar demand made against PEIC. An ―occurrence‖ is defined under the Excess Policy as ―an 17 accident, including continuous or repeated exposure to conditions, which results in personal injury or property damage neither expected nor intended from the standpoint of the insured.‖ J.A. 122. The Certificate does not specify who must ―report[] to‖ PEIC the referenced claims or occurrences. But surely the phrase ―claim or occurrence reported to [PEIC]‖ refers to a claim or occurrence that PEIC‘s insureds or their representatives report to it under the Excess Policy. Disagreement begins when we consider when PEIC must remit a DSOL under Paragraph D. Global says it is promptly after an insured reports a claim or occurrence involving a death, serious injury, or lawsuit to PEIC under the Excess Policy. PEIC says it is promptly after it demands payment from Global under the Certificate. The dispute turns, in large part, on the words ―and brought under this Certificate.‖ According to Global, a claim or occurrence is ―brought under this Certificate‖ if it is swept within the general scope of the Certificate‘s reinsurance coverage, or, put differently, if it is among the types of claims or occurrences that the Certificate generally covers. The District Court agreed. See Pac. Emp’rs Ins. Co., 2011 WL 2003359 at  (finding that the phrase ―claim or occurrence . . . brought under this Certificate‖ means ―that which its plain meaning confers upon it, merely those types of claims which fall under Global‘s reinsurance coverage‖). As such, Paragraph D does not require PEIC to provide a DSOL for any claim or occurrence of a type that the Certificate does not cover. For example, two pages of the Certificate are devoted to excluding from reinsurance coverage certain losses and liabilities relating to ―nuclear energy risks.‖ See J.A. 77.2-.3 (clause titled ―NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY – REINSURANCE‖). If a claim or occurrence were reported to PEIC under the Excess Policy that is excluded from the Certificate by the nuclear incident 18 clause, then Paragraph D would not require PEIC to provide Global with a DSOL on that claim or occurrence because it is not ―brought under this Certificate.‖ Importantly, as Global sees it, whether a claim or occurrence is ―brought under this Certificate‖ can and must be determined at the time it is reported to PEIC. PEIC disagrees, and argues that a ―claim or occurrence‖ is ―brought under this Certificate‖ only when it seeks an indemnity payment from Global related to the claim or occurrence. Here, PEIC did not seek payment from Global until September 2009.4 Thus, no claim or occurrence was ―brought under this Certificate‖ before then and PEIC had no duty to provide Global a DSOL. In a brief, unsigned ―summary order,‖ the Court of Appeals for the Second Circuit — examining provisions identical to the first sentence of Paragraph D — held that the ―terms of the reinsurance certificates create ambiguity as to what event triggers the duty to promptly provide a DSOL.‖ Folksamerica Reinsurance Co. v. Republic Ins. Co., No. 042716-CV, 182 Fed. Appx. 63, 64 (2d Cir. May 26, 2006). If we were to isolate Paragraph D‘s first sentence and consider nothing else, we might agree. But when we read that sentence in the context of the Certificate as a whole, examining its structure and other provisions, we are convinced that Global‘s reading is the correct one. But even before we turn to the Certificate‘s other provisions, we see that PEIC‘s reading creates problems within Paragraph D‘s first sentence. As noted, that sentence is not limited to ―claim[s]‖ reported under the Excess Policy, 4 Global neither concedes nor contests that the materials PEIC sent in September 2009 were sufficient to meet the Certificate‘s definition of a DSOL. 19 but rather expressly applies to ―claim[s] or occurrence[s].‖ This confirms that the obligation it imposes comes into play before PEIC demands payment under the Certificate. Occurrences (accidents) exist apart from claims (demands for relief). While some occurrences may ripen into one or more claims, others may not. If (as PEIC suggests) Paragraph D‘s DSOL provision applies only after PEIC demands payment from Global, such a reading becomes nonsensical as applied to occurrences because it would require a DSOL for an occurrence only after it became a claim. In other words, if we accept PEIC‘s reading, the words ―or occurrences‖ in the Certificate would be superfluous. See Capek v. Devito, 767 A.2d 1047, 1050 (Pa. 2001) (―[A]n interpretation will not be given to one part of the contract that will annul another part of it.‖) (quotation marks omitted); Northville Indus. Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 679 N.E.2d 1044, 1047-48 (N.Y. 1997) (―[C]ourts, in interpreting policies, should strive to give meaning to every sentence, clause, and word of a contract of insurance.‖) (quotation marks and alterations omitted). Moving to the second sentence of Paragraph D, we find a second notice obligation that further illuminates the purpose served by the Paragraph‘s first notice obligation, the DSOL provision. This sentence moves beyond the subset of claims or occurrences — those ―involving a death, serious injury or lawsuit‖ — covered in the first sentence, and instead reaches ―any‖ claim or occurrence. It provides that PEIC ―shall also notify [Global] promptly of any claim or occurrence where [PEIC] has created a loss reserve of fifty (50) percent of [PEIC‘s] retention specified in Item 3 of the Declarations.‖ Id. (emphases added). Unlike the first sentence of Paragraph D, the second sentence does not require PEIC to report a subset of claims or occurrences immediately after Buffalo Forge reports them under the Excess Policy. Instead, PEIC must report all claims or 20 occurrences when it creates a loss reserve of 50% ($500,000) of its $1 million retention. Furthermore, when it notifies Global that it has reserved beyond the $500,000 trigger point, PEIC does not have to provide a DSOL. A logical insurance purpose surfaces for the disparate treatment of those claims or occurrences that involve ―a death, serious injury or lawsuit‖ and those that do not. As noted, under the Certificate PEIC retained the first $1 million of exposure on its Excess Policy. Thus, some claims or occurrences reported to PEIC under that policy may be of no concern to Global because they may not reach into Global‘s reinsured layer. If a reinsurer had to determine for itself whether any particular underlying claim or occurrence could potentially affect it, the system of reinsurance would not work efficiently. See Unigard Sec. Ins. Co., Inc. v. N. River Ins. Co., 4 F.3d 1049, 1054 (2d Cir. 1993) (―Reinsurance works only if the sums of reinsurance premiums are less than the original insurance premium. . . . For the reinsurance premiums to be less, reinsurers cannot duplicate the costly but necessary efforts of the primary insurer in evaluating risks and handling claims. Reinsurers may thus not have actuarial expertise, or actively participate in defending ordinary claims.‖) (citation omitted). Paragraph D deals with the disparate treatment issue by setting up for Global the right to divide the labor between it and PEIC. When a claim or occurrence carries certain indicia of potential seriousness — namely, the involvement of ―a death, serious injury or lawsuit‖ — Global contracted for the right to assess for itself whether the matter might develop into something so significant that it could activate its reinsured layer. In the absence of such potentially serious claims or occurrences, Global chose to rely on PEIC‘s judgment, but with the agreement that after PEIC concludes that Global‘s layer is in danger of being breached — by 21 setting reserves for itself of 50% of its retention — it must notify Global of any claim or occurrence reported regardless whether it involves a death, serious injury or lawsuit. Why would a reinsurer want to receive a DSOL on a potentially serious claim or occurrence when it is first reported to its reinsured rather than when its reinsured demands indemnity? We discern two reasons. First, as its definition makes clear, a DSOL allows a reinsurer to ―establish adequate loss reserves and determine the propensities of any loss reported‖ under the Certificate. Allowing PEIC to wait until it actually demands payment under the Certificate undermines this fundamental purpose. ―[E]stablish[ing] adequate loss reserves and determin[ing] the propensities of any loss reported‖ are anticipatory measures that allow a reinsurer to forecast and prepare for future losses and to allocate funds for possible payment. Taking these steps after PEIC demands payment under the Certificate would make little sense.5 Second, Global may wish to 5 PEIC raises a side issue about the definition of a DSOL. It argues that the DSOL requirement is an ―illusory‖ promise. To be sure, the information required in a DSOL includes a discretionary element — the information PEIC submits must be ―in the judgment of [Global] . . . wholly sufficient‖ for Global to set reserves. But the inclusion of a discretionary element in a standard of performance does not render the standard meaningless or unenforceable: PEIC and Global must exercise their judgment reasonably and in good faith, and their determinations are subject to review in any subsequent litigation. See Dalton v. Educ. Testing Serv., 663 N.E.2d 289, 291 (N.Y. 1995) (―Where the contract contemplates the exercise of discretion, this pledge includes a promise not to act arbitrarily or irrationally in exercising that 22 exercise its ―right to associate,‖ as guaranteed by the third sentence of Paragraph D. Permitting PEIC to submit a DSOL only after it actually demands payment under the Certificate could wipe out Global‘s contractual right to associate in the defense and control of claims as they develop. In that case, Global may not receive notice of a claim until PEIC has already handled it, depending on whether PEIC created a 50%-of-retention reserve and notified Global accordingly. Paragraph E imposes another DSOL obligation that, contrary to PEIC‘s suggestion, fails to undermine Global‘s interpretation. That Paragraph provides that [a]ll loss settlements made by [PEIC], provided they are within the terms and conditions of the original policy(ies) and within the terms and conditions of this Certificate of Reinsurance, shall be binding on [Global]. Upon receipt of a definitive statement of loss, [Global] shall promptly pay its proportion of such loss as set forth in the Declarations. As PEIC acknowledges, under this provision it must remit a DSOL when it demands that Global pay the latter‘s proportion of losses under the Certificate, regardless whether the underlying claim involved a death, serious injury, or lawsuit. But this begs the question: If Paragraph E requires PEIC to send Global a DSOL when PEIC demands any indemnity for loss payments under the Certificate, then why does Paragraph D also require a DSOL for a subset of discretion.‖); Germantown Mfg. Co. v. Rawlinson, 491 A.2d 138, 148 (Pa. Super. 1985). 23 particularly serious underlying claims? The only reasonable interpretation is that the paragraphs impose two different obligations that arise at different times. Thus, under Paragraph D, PEIC must first promptly provide Global with a DSOL on a subset of claims or occurrences — those involving ―a death, serious injury or lawsuit‖ — promptly after they are reported. Then, under Paragraph E, PEIC must later submit a DSOL when it demands any payment from Global under the Certificate. If, at that time, PEIC is demanding payment related to an underlying claim that involves a death, serious injury, or lawsuit, then it should be submitting a DSOL for the second time. If the Certificate only required PEIC to submit a DSOL when it seeks payment under the Certificate, the first sentence of Paragraph D would simply be surplusage. To interpret the contract that way would violate a cardinal rule of contractual interpretation that counsels against rendering words or provisions meaningless. See Beal Sav. Bank v. Sommer, 865 N.E.2d 1210, 1213 (N.Y. 2007); Morris v. Am. Liab. & Sur. Co., 185 A. 201, 202 (Pa. 1936). After a close examination of the Certificate‘s other provisions, a big-picture look at the Paragraph D DSOL provision‘s place in the Certificate‘s overall structure confirms our interpretation. The Certificate‘s terms and conditions move sequentially through the life of the reinsurance relationship. First, Paragraphs A, B, and C establish the reinsurance relationship itself. Next, Paragraph D describes PEIC‘s duties and obligations from the moment it receives notice of a claim or occurrence under the Excess Policy through the investigation of such a claim and the defense of any lawsuit. Then, Paragraph E details how, if an underlying claim is resolved by PEIC, it presents reinsurance bills to Global and how Global pays them. This structure suggests that the first sentence of Paragraph D — because it appears in Paragraph D (which addresses the notice and 24 development of claims) and not Paragraph E (which addresses the presentation and payment of reinsurance bills) — must create an obligation that is triggered at the time PEIC receives notice of an underlying claim or occurrence. After considering every provision of the Certificate and how they fit together, we conclude that Paragraph D unambiguously requires PEIC to provide Global with a DSOL on any claim or occurrence that involves a death, serious injury or lawsuit promptly after such a claim or occurrence is reported to it under the Excess Policy.