Alabama Municipal Insurance Corporation v. Munich Reinsurance America, Inc.

IN THE DISTRICT COURT OF THE UNITED STATES FOR THE

MIDDLE DISTRICT OF ALABAMA, NORTHERN DIVISION

ALABAMA MUNICIPAL )

INSURANCE CORPORATION, a )

non-profit corporation, )

)

Plaintiff, )

) CIVIL ACTION NO.

v. ) 2:20cv300-MHT

) (WO)

MUNICH REINSURANCE )

AMERICA, INC., a foreign )

corporation, )

)

Defendant. )

OPINION ON AMIC’S HANCEVILLE CLAIM

This litigation involves disputes between plaintiff

Alabama Municipal Insurance Corporation (AMIC) and

defendant Munich Reinsurance America, Inc. over

assertions that each party failed to honor its

obligations to the other under a series of reinsurance

contracts, known as “treaties.” Several of the

disputes also involve competing interpretations of

AMIC’s underlying insurance contracts with its clients,

which bind Munich under the terms of the reinsurance

treaties. AMIC asserts five breach-of-contract claims

and seeks compensatory damages and pre-judgment

interest as remedy. Munich denies it breached any

treaties and asserts six counterclaims, requesting

declaratory judgments from this court as remedy.

Jurisdiction is proper pursuant to 28 U.S.C. § 1332

(diversity).

This lawsuit is now before the court on Munich’s

motion for summary judgment on one of AMIC’s

breach-of-contract claims: the ‘Hanceville claim,’

which arises out of AMIC’s insurance policy with the

Waterworks and Sewer Board of the City of Hanceville,

Alabama. For the reasons below, the court concludes

that it should deny Munich’s request for summary

judgment on this claim.

I. Legal Standard

“A party may move for summary judgment, identifying

each claim or defense--or the part of each claim or

defense--on which summary judgment is sought. The

court shall grant summary judgment if the movant shows

that there is no genuine dispute as to any material

fact and the movant is entitled to judgment as a matter

of law.” Fed. R. Civ. P. 56(a). A genuine dispute of

material fact exists “if the nonmoving party has

produced evidence such that a reasonable factfinder

could return a verdict in its favor.” Waddell v.

Valley Forge Dental Assocs., Inc., 276 F.3d 1275, 1279

(11th Cir. 2001). The court must view the admissible

evidence in the light most favorable to the nonmoving

party and draw all reasonable inferences in favor of

that party. See Matsushita Elec. Indus. Co. v. Zenith

Radio Corp., 475 U.S. 574, 587 (1986).

II. Background

A. Overview of Parties and Treaty Structure

AMIC is a non-profit insurance company wholly owned

by Alabama municipalities and regulated by the Alabama

Department of Insurance. It is chartered to insure

Alabama’s cities, towns, and subsidiary corporate

entities, including bus services and police forces.

Munich is a national provider of property and casualty

reinsurance based in Princeton, New Jersey.

For at least ten years, between May 1, 2005 and

October 31, 2015, AMIC and Munich entered into annual

reinsurance agreements, formally known as “Casualty

Excess of Loss Reinsurance Agreements,” or treaties,

wherein Munich took on a portion of AMIC’s risk in

exchange for a portion of the premiums AMIC received

from its insured clients.1 All of the underlying

incidents at issue in this case occurred during that

ten-year period.

This litigation began in May 2020, when AMIC

accused Munich of five counts of breach of contract

1. The parties do not dispute that Munich and AMIC

were bound by reinsurance agreements during this

approximately ten-year period, which is the time period

relevant to this litigation. Until September 2006,

Munich was incorporated under a different name,

American Re-Insurance Company, which is reflected in

the text of the treaties but not otherwise germane to

this dispute. See American Re to Become Munich Re

America Starting in Sept., Insurance Journal (Aug. 3,

2006),

https://www.insurancejournal.com/news/national/2006/08/

03/71076.htm.

based on five insurance claims that AMIC submitted to

Munich between 2015 and 2018, none of which Munich

agreed to reimburse in full.2 Munich denied that it

breached any of its treaties with AMIC and filed six

counterclaims, seeking declaratory relief regarding the

interpretation of other treaties between Munich and

AMIC and other contracts held by AMIC with its insured

clients.

Munich filed a motion for summary judgment on all

eleven claims and counterclaims. However, only one of

AMIC’s claims is now before the court: as stated, the

Hanceville claim, which is a breach-of-contract claim

arising out of AMIC’s policy with the Waterworks and

Sewer Board of the City of Hanceville.

2. AMIC also asserted bad-faith refusal-to-pay

claims against Munich, but those claims were dismissed

earlier in this litigation. See Alabama Mun. Ins.

Corp. v. Munich Reinsurance Am., Inc., 526 F. Supp. 3d

1133 (M.D. Ala. 2021) (Thompson, J.) (concluding that

Alabama law does not extend the tort of bad faith to

the reinsurance context).

B. Factual Background

The factual allegations underlying the Hanceville

claim, taken in the light most favorable to AMIC, are

as follows. Between July 2005 and July 2010, AMIC held

a commercial general liability policy with the

Waterworks and Sewer Board of the City of Hanceville.

The Hanceville Board’s facility was responsible for

processing sewage and contaminated water throughout

Cullman County, Alabama. At all times relevant to this

litigation, the board had a permit from the Alabama

Department of Environmental Management to discharge

into Mud Creek treated waste that had had pollutants

removed to the required standard.

In July 2008, 12 residents of Cullman County,

Alabama filed a lawsuit against the following

defendants: the Hanceville Water Works and Sewer Board;

Sally Alexander, individually and in her capacity as

co-manager of the board’s facility; and three private

companies alleged to have participated in the operation

and maintenance of the facility. See Complaint (Doc.

90-8) at 4.

The plaintiffs in the lawsuit against the

Hanceville Board and others all resided and owned

property along Mud Creek; they asserted claims for

negligence, private nuisance, trespass, and wanton

conduct in response to the alleged discharge of raw and

untreated sewage, partially treated sewage, and other

contaminants in Mud Creek and on their properties.

They sought bodily injury and property damages, as well

as injunctive relief to prevent any additional release

of raw sewage into Mud Creek.

In 2014, when the parties reached a settlement in

the Mud Creek lawsuit, its terms released the

defendants from all further causes of action, demands,

and claims arising from “the Incidents.” Settlement

Agreement (Doc. 114-4) at 5. The plaintiffs

acknowledged that the defendants were paying “in order

to avoid the costs and uncertainty of further

litigation.” Id. at 6-7.

In return, the defendants agreed to pay plaintiffs

a combined total of $ 1,300,000. The Hanceville Board,

specifically, assumed responsibility for $ 100,000 of

the total cost.3 See id. at 7.

As a result of the Mud Creek litigation, AMIC

reports that it incurred a loss of $ 680,153.70 (which

includes the $ 100,000 plus the costs of the

litigation). AMIC combined these costs into a single

reimbursement request, which it submitted to Munich

under the 2007 reinsurance treaty period, which ran

from November 1, 2007, through November 1, 2008. See

2007 Treaty (Doc. 87-5) at 23. AMIC requested a

reimbursement of $ 330,153.70--the total cost of its

Mud Creek litigation-related loss, $ 680,153.70, less a

$ 350,000 per-occurrence retention mandated by the

terms of the 2007 treaty.4

3. As AMIC explained during oral argument on April

12, 2023, the Hanceville Board’s assumed portion of the

settlement--$ 100,000--is the statutory cap placed by

the State of Alabama for settlements with government

entities “for any damage or loss of property arising

out of a single occurrence.” Ala. Code § 11-93-2.

4. During the approximately ten-year period at

issue in this litigation, the treaties between AMIC and

AMIC explains that it filed all costs accrued

during the Mud Creek litigation under its 2007

reinsurance treaty with Munich because all of the costs

were the result of one inciting “occurrence”--a January

2008 flood involving approximately 2,000,000 gallons of

untreated raw sewage, which was specifically mentioned

in the Mud Creek lawsuit filed in July 2008. AMIC

argues that this flooding incident was the singular

“occurrence” that triggered its insurance policy with

the Hanceville Board, as well as Munich’s obligations

under the corresponding reinsurance treaty.

In response, Munich defends its refusal to

reimburse AMIC, arguing that the plaintiffs in the Mud

Creek litigation experienced varying degrees of

property damage every year from 2005 through 2009.

Munich generally took effect in the middle or midst of

the calendar year (either on May 1 or Nov. 1, depending

on the year in question). See, e.g., the 2005

Reinsurance Treaty (Doc. 87-2) (in effect from 12:01

A.M. on May 1, 2005 through 12:01 A.M. on May 1, 2006);

the 2013 Reinsurance Treaty (Doc. 87-10) (in effect

from Nov. 1, 2013 through Oct. 31, 2014, “both days

inclusive”). For clarity and convenience, the treaties

Munich argues that the Mud Creek lawsuit itself

referenced improper discharge beginning as early as

2006, and explains that the Mud Creek plaintiffs

acknowledged as much in depositions they gave during

the litigation period. As a result, Munich asserts that

AMIC should have taken at least five retentions of

$ 350,000 each, one for each of the years in which an

insurance policy was triggered by some occurrence of

sewage flooding, and apportioned its costs over that

entire period. These retentions would total at least

$ 1,750,000—an amount greater than the reimbursement

AMIC sought.

III. Analysis

As stated, Munich has moved for summary judgment

against AMIC on the Hanceville claim. The parties

agree that this dispute is governed by Alabama law.

The court must now determine whether Munich has shown

that it is entitled to judgment as a matter of law.

in this opinion are referenced by the calendar year in

This court turns first to basic contract principles

in order to determine whether a genuine issue of

material fact remains to be decided. The inquiry

begins by examining Munich’s obligations to AMIC under

the treaties held between the parties, and AMIC's

obligations to the Hanceville Board under the

underlying insurance policy at issue in this claim.

“Treaty reinsurance” is generally understood as a

contract to reimburse: an agreement that a reinsurer

will provide reimbursement on policies the insurer

issues during a set period of time, even if the insurer

has not yet written or issued those policies when the

treaty is adopted. See, e.g., Graydon Staring et al.,

Law of Reinsurance § 2:4 (2022 ed.).

Alabama law is in line with these general

principles, and, under it, reinsurance treaties are a

form of indemnity contracts to which general contract

principles apply. See Melco System v. Receivers of

Trans-America Ins. Co., 105 So. 2d 43, 47 (Ala. 1958).

which they first took effect.

In accordance with those principles, courts are

required to “enforce an unambiguous, lawful contract,

as it is written.” Ex parte Dan Tucker Auto Sales,

Inc., 718 So. 2d 33, 35 (Ala. 1998). “When

interpreting a contract, a court should give the terms

of the agreement their clear and plain meaning and

should presume that the parties intended what the terms

of the agreement clearly state.” Id. at 36.

However, “if the terms within the contract are

ambiguous in any respect, the determination of the true

meaning of the contract is a question of fact to be

resolved by the jury,” and summary judgment is not

appropriate. McDonald v. U.S. Die Casting &

Development Co., 585 SO.2d 853, 855 (Ala. 1991).

This court, therefore, begins its analysis with the

text of the 2007 treaty. Munich’s obligations with

AMIC under it were as follows:

“The Reinsurer agrees to indemnify the Company,

on an excess of loss basis, for Ultimate Net

Loss paid by the Company as a result of losses

occurring under the Company’s Coverage

Documents attaching during the term of this

Agreement ...

“... The term ‘Coverage Document’ shall mean

the Company’s liability to its insureds under

the agreements between the Company and its

insureds [].”

Parties’ Reinsurance Treaty for 2007 (Doc. 87-5) at

4 (emphasis added).

The above treaty provision establishes that

Munich’s obligations to AMIC were directly tied to

AMIC’s obligations to its insured--in this case, the

Hanceville Board. See Alabama Mun. Ins. Corp. v.

Munich Reinsurance Am., Inc. (The Spanish Fort Claim),

No. 2:20CV300-MHT, 2023 WL 2138904, at *3 (M.D. Ala.

Feb. 21, 2023) (Thompson, J.) (explaining that AMIC’s

dispute with Munich over a similar treaty provision

between the two was directly tied to AMIC’s obligations

under its insurance policy with the insured Spanish

Fort).

The court turns to the text of the Hanceville

Board’s insurance policy with AMIC during the 2007

Treaty period, which reads in part as follows: “[AMIC]

will pay those sums that the insured becomes legally

obligated to pay as Damages because of Bodily Injury or

Property Damage to which this insurance applies.”

Hanceville 2007 Policy (Doc. 90-5) at 7.5 The 2007

policy then states that the insurance applies to

property damage “only if ... the Bodily Injury or

Property Damage occurs during the policy period.” Id.

(emphasis added). The 2007 policy period was from

around July 2007 through July 2008.

There is extensive Alabama case law to support a

plain-language reading of policies explicitly limiting

coverage for any given property damage to the policy

period in which that damage occurred. See Alabama Mun.

Ins. Corp., 2023 WL 2138904, at *5; see also Liberty

Mut. Ins. Co. v. Wheelwright Trucking Co. Inc., 851 So.

5. As with the reinsurance treaties, the

insurance policies between AMIC and the Hanceville

Board generally took effect in the middle of the

calendar year. AMIC provided general commercial

liability insurance coverage to the Hanceville Board

beginning on July 17, 2005 (Doc. 90-3 at 2), and

subsequent policies and/or policy renewals took effect

annually, always on the same day, through at least July

17, 2009 (Doc. 90-7 at 2). For purposes of clarity,

each insurance policy period is referred to by the year

in which it first took effect.

2d 466, 482 (Ala. 2002). For this reason, if the

record definitively established that the Hanceville

Board was legally obligated to pay for a property

damage occurrence that occurred prior to the July

2007-July 2008 policy period, AMIC would not be

required, under the terms of this specific insurance

policy, to provide coverage for that earlier damage.

Munich would not owe AMIC any reimbursement for costs

outside of the coverage that AMIC was obligated to

provide.

However, the record in this case, and the parties’

briefs on Munich’s motion for summary judgment, do not

definitively establish which specific property damage

triggered the Hanceville Board’s legal obligation to

pay, nor the underlying occurrence or occurrences that

caused the damage for which the board was liable.

To prove that there is no genuine dispute as to any

material fact to support its assertions that AMIC

should have taken at least five retentions of $ 350,000

each, one for each of the years in which an insurance

policy was triggered by some occurrence of sewage

flooding, and should have apportioned its costs over

that entire period, for a total of at least $ 1,750,000

(an amount greater than the reimbursement AMIC sought),

Munich offers the Mud Creek plaintiffs’ original

complaint as well as depositions from them describing

incidents of varying severity that occurred every year

from 2005 to 2009, before and after the January 2008

sewage flood.

Munich notes that the complaint in the underlying

Mud Creek lawsuit asserts that the defendants had been

on notice of improper discharge problems at the

Hanceville Board’s facility “since 2006,” but that the

defendants continued to “perpetuate a pattern of

conduct that ignored known problems.” Complaint (Doc.

90-8) at 5-6. As a result, “before and since January

1, 2008, specifically on January 21st, 30th, and 31st,

the [f]acility discharged approximately two million

(2,000,000) gallons of untreated raw sewage into Mud

Creek.” Id. at 6. The complaint goes on to assert

that “these instances of dumping raw sewage into Mud

Creek are just the most recent in a long history of

such conduct.” Id. (emphasis added).

Subsequent depositions of the Mud Creek lawsuit’s

plaintiffs, excerpted in Munich’s motion for summary

judgment, establish that the plaintiffs did begin

experiencing at least some degree of disruption to

their respective properties as early as 2005.

Plaintiff Jack Howell, for example, testified that “all

this mess” happened “all the time ... [in] 2008 ...

2007, 2006 and 2005.” Munich Brief for Summary

Judgment (Doc. 97) at 27. Plaintiff Oscar Nichols

described tap water smelling like feces beginning

“probably back in 2006,” while plaintiff Mike Cook

testified to the presence of “rubbish,” such as toilet

paper and tampons, on his property beginning in

“probably ... 2007.” Id. at 27-28. Further, plaintiff

James White testified that there was an additional

sewage spill on his property in May 2009, almost a year

after the lawsuit was filed. Id. at 28.

In light of these facts, the burden shifts to the

nonmoving party, AMIC, to produce evidence that a

reasonable factfinder could return a verdict in its

favor, despite the contents of these depositions and

the other evidence that Munich has produced. To meet

its burden, AMIC focuses on the text of the plaintiffs’

Mud Creek complaint again, emphasizing that its

description of damages is vague. AMIC argues that the

complaint’s descriptions of egregious conduct leading

up to the January 2008 sewage flood were merely context

for the flood itself, and that the plaintiffs’ impetus

for the lawsuit was primarily to recover damages for

the severe property damages caused by the 2008 flood

specifically.6

6. In support of its interpretation of the Mud

Creek plaintiffs’ lawsuit, AMIC also offers a 2011

Alabama Supreme Court opinion in which the facts of the

lawsuit are briefly described. See AMIC Brief Opposing

Summary Judgment (Doc. 113) at 34. AMIC offers Ex

parte Novus Utilities, Inc., 85 So. 3d 988, 990 (Ala.

2011), as evidence that “the Alabama Supreme Court

views the Hanceville litigation as focused on January

2008,” and accuses Munich of “second-guess[ing]” the

Alabama Supreme Court. AMIC Brief Opposing Summary

Judgment (Doc. 113) at 112. This court soundly rejects

As explained above, AMIC contends that it correctly

submitted its reimbursement claim for $ 350,153.70

($ 680,153.70 less a retention of $ 350,000) under the

2007 reinsurance treaty because all of the costs for

which the Hanceville Board was legally liable were

triggered by just one inciting “occurrence” under the

2007 policy--the January 2008 sewage flooding--and the

property damage it caused, which arose during that same

policy period. The January 2008 flood and associated

property damage were specifically mentioned in the

original Mud Creek complaint.

The court finds that, even considering the Mud

Creek plaintiffs’ testimonies, the existence of

property damage prior to January 2008 (and whether

there were any other occurrences during or outside of

the 2007 policy period that would trigger additional

AMIC’s characterization of Ex parte Novus, which

focused on a completely separate procedural question

involving the Mud Creek plaintiffs’ ability to add

defendants to their complaint. The Alabama Supreme

Court did not rule on, or even consider, the property

damage question that is central to the instant case.

$ 350,000 retentions), for which the Hanceville Board

was legally liable, remains in dispute.

Beyond the existence of the property damage itself,

Munich also fails to establish that the plaintiffs

brought the Mud Creek lawsuit in order to recover

damages for these earlier occurrences, rather than in

response to the January 2008 flooding, which involved

the release of approximately two million gallons of

untreated raw sewage.

On the other hand, AMIC has not conclusively

established that all of the damages for which the

Hanceville Board was legally liable were restricted to

those caused by the January 2008 flood. The Hanceville

Board was legally obligated to pay $ 100,000 in damages

as a result of the settlement--but neither the text of

the settlement nor the original complaint, as explained

above, concretely define the specific injury for which

the Mud Creek plaintiffs sought relief.

In short, Munich has not conclusively established

The persuasive value of Ex parte Novus’ passing mention

the evidence supports it as a matter of law, and AMAC

has established that a factfinder could find that the

evidence supports it.

As other courts have recognized, “fixing the date

of loss is normally difficult in a hazardous waste

claim.” Com. Union. Ins. Co. v. Seven Provinces Ins.

Co., Ltd., 9 F.Supp.2d 49, 58 (D. Mass. 1998) (Gertner,

J.). “The long-tail toxic and environmental claims of

recent years raise complex problems of allocations of

losses to policies and policy years, and hence to the

reinsurances for those years.” Staring, Law of

Reinsurance § 18:10 (2022 ed.).

Nevertheless, the court's finding of an evidentiary

dispute with regard to the timing of the property

damage at issue here does not conclude the inquiry.

Instead, the court looks back to the text of the treaty

between AMIC and Munich for any provision relating to

the allocation of settlements in circumstances such as

this one. The question before this court is how AMIC

of the alleged property damage is negligible at best.

and Munich are obligated to proceed in situations where

the nature of the period of the relevant property

damage is, as here, unclear.

Some reinsurers have responded to difficulty

presented in circumstances such as these by

incorporating loss-settlement clauses into their

treaties, clearly describing the obligations of both

the insurer and the reinsurer in the face of

prospective or negotiated settlements. See, e.g.,

Fireman's Fund Ins. Co. v. OneBeacon Ins. Co., 49 F.4th

105, 112 (2d Cir. 2022) (describing

“follow-the-settlements” clauses that include insurers’

post-settlement allocation decisions); Staring, Law of

Reinsurance § 18:3 (compiling a list of alternative

clauses adopted in reinsurance treaties).

In the treaty between AMIC and Munich, however,

there is no such clause. The court finds no evidence

of a “follow-the-settlements clause,” which would bind

Munich to AMIC’s allocation decision, nor does it find

evidence that AMIC was obligated to make its

allocations based on deposition testimony that would

support Munich’s reading of the complaint. Moreover,

both the treaty and the underlying insurance coverage

policy appear silent as to which party otherwise has

the right to define the property damage for which

AMIC’s underlying insured was liable in the absence of

such clauses. And the court is without discretion to

fashion and incorporate into the parties’ policies

language that they, for whatever reason, omitted to

include.

Further, although Liberty Mut. Ins. Co. v.

Wheelwright Trucking Co. Inc., 851 So. 2d 466 (Ala.

2002), Commercial Union Ins. Co. v. Sepco Corp., 918

F.2d 920 (11th Cir. 1990), and other cases cited by

Munich do establish that a pro rata apportionment of

costs may be appropriate in certain circumstances, and

particularly where damage occurred over the course of

multiple policy periods, these cases do not support the

conclusion that this court has the authority to fashion

a pro rata scheme that would resolve the factual

disputes presented here.

In Wheelwright Trucking, the state court, unlike

this court, was not confronted with underlying factual

disputes. The state court did not resolve facts on

summary judgment as Munich is asking this court to do.

Meanwhile, a comparison between the instant case

and Sepco is inapposite. There the state trial court

“administratively” fashioned a “pro rata scheme,” but,

in discussing--and, in particular, reviewing the trial

court’s application of--that scheme, the Alabama

Supreme Court carefully noted that, “This

administrative arrangement is not challenged on this

appeal.” 918 F.2d at 922. Munich’s contention that

this court has the authority to fashion and apply such

a scheme finds no support in the Alabama Supreme

Court’s decision in Sepco. Moreover, Sepco involved

factually and legally complex asbestos litigation, with

insurance policy language (including definitions of

such terms as “occurrence” and “injury”) and

court-recognized theories (such as “injurious

exposure”) not applicable here. The Sepco case and the

instant case are apples-to-oranges in many crucial

respects. In short, the Sepco case in no way supports

some broad notion that this court has some independent

authority to do what the parties should have done when

they drafted their treaties: develop and apply a scheme

to address the circumstances presented here. Moreover,

even if this court had such authority, Sepco does not

support the conclusion that this court should develop

and apply a pro rata solution in a way such that Munich

should prevail as a matter of law based on the facts

presented.

Viewing the admissible evidence in the light most

favorable to AMIC, the court holds that the underlying

complaint and settlement between the Hanceville Board

and the Mud Creek plaintiffs, both vaguely written,

could be reasonably interpreted as focusing on the 2008

sewage flood; or on the sewage flood and all subsequent

damage; or on all of the damage the Mud Creek

plaintiffs described in their depositions, beginning as

early as 2005. The facts are in dispute. In turn,

whether one or two or several occurrences, and thus

whether one or two or several $ 350,000 retentions, are

in play is in dispute.

Because whether the settlement of the Mud Creek

lawsuit addressed only damages occurring in 2008 is in

dispute and because the treaty between AMIC and Munich

contains no clauses with regard to the settlement

allocation process, the court finds that there is a

genuine dispute of material fact in the Hanceville

claim. As a result, summary judgment is not

appropriate. Munich’s motion for summary judgment

should be denied, and this case should proceed to jury

trial on the Hanceville claim.

***

However, because there are other claims and

counterclaims between the parties to be resolved, the

court will not yet enter a summary-judgment order with

regard to AMIC’s Hanceville claim. Instead, after the

other claims and counterclaims are resolved, the court

will meet with counsel for the parties to discuss what

the next steps should be on the Hanceville claim.

DONE, this the 26th day of April, 2023.

/s/ Myron H. Thompson

UNITED STATES DISTRICT JUDGE