Petition for Writ of Certiorari — Seven Provinces Insurance v. Commercial Union Insurance

Supreme Court brief2001

Ask Donna

What actually matters in this document.

Text

4 Supreme Court, 0.8

PILED

00-888 NOV 27 200

OFFICE OF FHE CLERK

No.

In the

Supreme Court of the Hnited States

THE SEVEN PROVINCES INSURANCE COMPANY N.V.,

Petitioner,

versus

COMMERCIAL UNION INSURANCE COMPANY, as Successor in

Interest to Employers' Surplus Lines Insurance Company,

Respondent.

On PETITION FOR Writ OF CERTIORARI TO THE

Untrep STaTes CouRT OF APPEALS FOR THE First CIRCUIT

PETITION FOR A WRIT OF CERTIORARI

WILLIAM SHIELDS Mark V. DUGAN

Day, Berry & Howarp LLP Counsel of Record

Twenty First Floor H. FRED NORTHCRAFT

260 Franklin Street BLACKWELL SANDERS PEPER

Boston, Massachusetts 02110 MartTIN LLP

617-345-4600 Two Pershing Square

2300 Main Street, Suite 1000

Kansas City, Missouri 64108

Telephone: 816-983-8000

Attorneys for Petitioner

qaEpP

QUESTIONS PRESENTED FOR REVIEW

1. Whether a federal court sitting in diversity may

expand a principle of state law (here, the centuries-old

reinsurance doctrine of “follow the settlements”) with no

guidance from any source as to how the state courts might rule?

2. Whether the reinsurance doctrine of “follow the

settlements” restricts reinsurers from questioning ceding

(reinsured) companies’ allocations of settlement payments

among pollution sites and insurance policies when the

allocation was not addressed in the settlement?

2 Whether the reinsurance principle of “utmost

good faith” restricts reinsurers from questioning ceding

companies’ allocations of settlement payments among sites and

policies when the allocation was addressed in the settlement?

TABLE OF CONTENTS

(QUES TOCNOR PIRIENIIIEY ids sisscetccsisccitss tecteaminasbtie ait cits diacel i

BARRE OP GOIN a sitsiiiniiiciditi hie cel ES li

RADAR CR PATIO i assitcdsiiiciide Bret eg eae ili

CUE TN caine ee l

PORT siissiscsinipnssinaciiitibliiigldihcail ee l

PREV AEE ARI ica seceshciidiiecihe acd eal eee l

STATEMENT OF TUR CARE sicisicsitiiics ct oe 2

REASONS FOR GRANTING THE WRIT .....eccccsssssssseseoceceseeeesesees, 8

CORRE. UIBIOIN..... ciicinsisniniisthessinscptcciesaeimacaminiata alain 19

APPENDIX

CIRCUIT COURT OPINION ..........csceccccsesessesesesesesesecesesesesece, la

DRSTRICT COURT CHIU icici lee es 25a

ORDER DENYING REHEARING ........s.ccesecsesececseececcececeeess., 70a

RELEVANT CONSTITUTIONAL , STATUTORY,

ORDINANCE PROVISIONS INVOLVED oo .eccccscoceceececeoeoceeees.e. 7la

ili

TABLE OF AUTHORITIES

FEDERAL CASES

AETNA Cas. & Sur. Co. v. HOME INS. Co., 882 F.Supp. 1328,

Se eG ae D cacekeeninienikidiesbsicessiinitshciaines uaa 9,10

AHERN V. SCHOLZ, 85 F.3D 794, 798 (IsT Cir. 1996) ......... 18

BIRCHLER V. GEHL CO., 88 F.3D 518, 521 (7TH Cir. 1996) . 12

BURRIS CHEMICAL, INC. v. USX Corp., 10 F.3D 243, 247 (4TH

pir IPI cits teciiviciahiociscedesinneithenibteicdanibhnanisaisiicc naa nner 11

CHRISTIANIA GENERAL INS. CORP. V. GREAT AMERICAN INS.

Co., 979 F.2D 268, 280 (2D CIR. 1992) .......ccecseees 9, 12, 16

CITY OF PHILADELPHIA V. LEAD INDUS. ASS'N, 994 F.2D 112,

Be CR BO i vtnsetictiecenichitnidhecdeniainniet ae 1]

DOOYANG CorP., 147 F.3D 47 (1ST CIR. 1998)........ccccecceeee 18

ERIE RAILROAD CO. Vv. TOMPKINS, 304 U.S. 64, 78 (1938) .11

FERRARA & DIMERCURIO, INC. Vv. ST. PAUL MERCURY INS. Co.,

PU meas, CBOE CUE, BODO ccs ecciicssctsnsasenastbbesctinttasuakia 18

FRANCE V. NEW ENGLAND REINS. CorpP., 57 F.3D 56, 72 (1ST

ns STE liscabseehtaieniiseiaiitbiteteubionesididcndaciiansiaietiatabiie Nad ace dicots 15

MARTEL V. STAFFORD, 992 F.2D 1244, 1247 (1sT Cir. 1993)11

MENTOR INS. Co. v. BRANNKASSE, 996 F.2D 506, 517 (2D Cir.

ee ae Ne LI mea 9,12

NORTH RIVER INS. Co. v. CIGNA REINSURANCE CO., 52 F.3D

ier Rae COCO, BO iia ssiincitiescckcicsiccenstesssctit 9,10, 12

SOLOMON V. WALGREEN CO., 975 F.2D 1086, 1089 (STH Cir.

RESTS EDS CRM See EY Ue ee ae Se 11

STIPCICH V. METROPOLITAN LIFE INS. Co., 277 U.S. 311, 316

REET ALIENS a cE ar Oe Pa ee 15

UNIGARD SEC. INS. CO. V. NORTH RIVER INS. Co., 4 F.3D 1049,

RENEE oe ena 15

UNITED FIRE & Cas. CO. V. ARKWRIGHT MUT. INS. Co., 53

F.SUPP.2D 632, 642 (S.D.N.Y. 1999) .......ccccccccecesesesescees 16

STATE CASES

ANTHONY'S PIER Four, INC. v. HBC Assocs., 411 Mass. 451,

Pe WO, TE CRO ED icccnencentcsocnscseseecceseseeseczesensonce 18

FEDERAL STATUTES

htc ie ata 3

Asc hs, 5, TINE R

SUPREME COURT PRPN OEM sitiechonenipaicnein So ae l

PETITION FOR A WRIT OF CERTIORARI

Seven Provinces petitions for a writ of certiorari to

review the judgment of the United States Court of Appeals

for the First Circuit.

' OPINIONS BELOW

The opinion of the Court of Appeals for the First

Circuit was published at 217 F.3d 33 (1" Cir. 2000) and is

reprinted in the appendix at la. The opinion of the United

States District Court for the District of Massachusetts was

published at 9 F.Supp.2d 49 (D. Mass. 1998) and is reprinted

in the appendix at 25a.

JURISDICTION

The judgment of the court of appeals was entered on

July 6, 2000 (App. la). Seven Provinces timely filed a

petition for rehearing en banc, or in the alternative, for panel

rehearing, and the court of appeals denied Seven Provinces’

petition on August 28, 2000 (App. 70a). Seven Provinces

filed this petition within the time provided in Supreme Court

Rules 13 and 30. Jurisdiction of this Court is invoked under

28 U.S.C. 1254(1).

STATUTES

The relevant portions of M.G.L. Chapter 93A are set

forth in the appendix at 71a.

STATEMENT OF THE CASE

In August 1993, Commercial Union made a

reinsurance claim against Seven Provinces for $225,000.

Commercial Union alleged that Seven Provinces Lad issued a

facultative certificate of reinsurance to Commercial Union’s

predecessor, Employers Surplus Lines Insurance Company

(“ESLIC”), reinsuring one of several insurance policies that

ESLIC had issued to Teledyne, Inc. for the 1963-1964 policy

period.

Four months earlier, in April 1993, Commercial

Union had entered into a $2.2 million insurance settlement

with Teledyne, Inc. regarding hazardous waste claims.

Commercial Union obtained an environmental release from

Teledyne with respect to all policies issued to Teledyne and

all pollution sites where Teledyne had liability.

In response, Seven Provinces raised questions

regarding two issues. First, it was unclear whether Seven

Provinces had in fact reinsured Commercial Union. Neither

party had a copy of the alleged, 30-year-old facultative

certificate of reinsurance. As proof of the alleged reinsurance

relationship, Commercial Union provided only a single piece

of paper with handwritten notes.

Second, to determine the basis of Commercial

Union's claim against Seven Provinces, Seven Provinces

sought information about Commercial Union ’s allocation of

its $2.2 million settlement with Teledyne among ESLIC

policies, Teledyne pollution sites, and reinsurers. Initially,

Seven Provinces was concerned because it appeared that a

disproportionate amount of the settlement had been allocated

to the 1963-1964 policy year, and thus to the policy that

Seven Provinces had allegedly reinsured. Commercial Union

had allocated its settlement payment among pollution sites,

rather than insurance policies, and in doing so, it had

allocated only to 7 sites, even though it had obtained a release

for all Teledyne sites, and the settlement agreement

specifically listed 22 sites. The effect of limiting the number

of sites was an increase in the amount allocated to each site,

including the Teledyne Semiconductor site in Mountainview,

California, the only site in operation during the period of the

policy that Seven Provinces allegedly reinsured.

Seven Provinces later learned that, several months

before making its reinsurance allocation and billing Seven

Provinces, Commercial Union had prepared intemal

management documents dividing the settlement amount on

an entirely different basis. Seven Provinces also learned that

it was not the only reinsurer to question Commercial Union’s

allocation. Agency Managers, a group of reinsurers of a later

policy, questioned the allocation and convinced Commercial

Union to withdraw its reinsurance billing with respect to that

policy.

In February 1995, a Seven Provinces representative

and a reinsurance claims consultant traveled to Commercial

Union’s offices in Boston to review documents and meet

with Commercial Union officials about the claim.

Commercial Union promised copies of certain documents,

but later refused to provide them, because Seven Provinces

had not acknowledged that it was Commercial Union’s

reinsurer.

Commercial Union sued Seven Provinces in May

1995. Commercial Union filed its action in diversity in the

United States District Court for the District of Massachusetts,

the Honorable Nancy Gertner, United States District Judge.

The District Court assumed jurisdiction pursuant to 28 U.S.C.

§ 1332. In addition to asserting a claim for breach of

contract, Commercial Union sought damages under M.G.L.

Chapter 93A, alleging that Seven Provinces ha’) committed

an “unfair or deceptive act or practice.”

Seven Provinces located the facultative certificate

itself in a third party’s warehouse in California and provided

it to Commercial Union in August 1995. It was now clear

that Seven Provinces had reinsured Commercial Union.

Seven Provinces’ limit of liability under the facultative

certificate was $225,000 part of $450,000 excess of $50,000

primary insurance (combined single limit).

But the facultative certificate raised a new issue. The

certificate required ESLIC to retain $225,000 of the risk

itself, subject to certain reductions, and provided that if it

retained less risk, Seven Provinces’ liability was “to be

proportionately reduced.” Seven Provinces therefore raised

questions regarding Commercial Union’s application of other

reinsurance to the risk that Seven Provinces reinsured. In

July 1996, Commercial Union revealed that it had ceded

$180,000 to other reinsurance and retained for its own

account only $45,000.

After months of dispute over the retention issue and

various procedural issues, and after attempts to mediate or

arbitrate the dispute failed, discovery proceeded in 1997. In

late 1997 both parties filed motions for partial summary

judgment. Commercial Union argued, among other things,

that, pursuant to the reinsurance doctrines of "follow the

fortunes" and "follow the settlements," Seven Provinces was

obligated to pay Commercial Union’s claim.!

On January 5, 1998, the first scheduled day of trial,

the District Court denied both parties’ motions for summary

judgment in order to hear testimony on the net retention and

' For purposes of this petition, the doctrines of “follow the fortunes” and

“follow the settlements” are equivalent.

Chapter 93A issues. Trial proceeded before the Court for six

days over an extended period in January 1998.

Seven Provinces argued at trial that its liability was

only $45,000, the amount of risk Commercial Union retained

for itself. Seven Provinces also argued that it had not

committed an “unfair or deceptive act or practice.” Seven

Provinces presented evidence of its challenge to Commercial

Union’s allocation, but only to defend itself against the unfair

trade practice claim. Seven Provinces did not request that the

District Court invalidate Commercial Union’s allocation.

On June 15, 1998, the District Court ruled in

Commercial Union’s favor on the net retention issue,

although it held that both sides’ interpretations were

plausible. The District Court further held that Seven

Provinces had not committed an unfair trade practice before

it had located a copy of the facultative certificate because

"until the rediscovery of the facultative certificate in August

1995, it had legitimate reasons for concern about the details

of its obligations to [Commercial Union]." 9 F.Supp.2d at

70.

The court ruled, however, that Seven Provinces was

liable under Chapter 93A from August 1995 forward because

it did not then pay Commercial Union’s claim and because its

challenges regarding Commercial Union’s allocation violated

the “follow the settlements” doctrine, which “requires the

reinsurer to follow the reinsured’s good faith and reasonable

allocation of settlement dollars between different sites and

policies.” 9 F.Supp.2d at 67-68. The court further held that

Seven Provinces’ conduct violated the reinsurance principle

of “utmost good faith.” Jd. At 69.

After further proceedings regarding prejudgment

interest and attorneys’ fees, the District Court issued a final

judgment, and Seven Provinces appealed. Seven Provinces

argued in the First Circuit that it was entitled to a reduction in

liability because of Commercial Union’s reduced retention.

Seven Provinces further argued that it had not committed an

“unfair or deceptive act or practice” because it had withheld

payment based on a plausible interpretation of its obligations,

supported by opinions from counsel and a claims expert, and

because it had made offers of payment well in excess of what -

it believed it owed.

Seven. Provinces also argued that its questions

regarding Commercial Union’s allocation were legitimate

and permissible. The “follow the settlements” doctrine,

Seven Provinces asserted, does not preclude reinsurers from

questioning ceding companies’ allocations — like Commercial

Union’s allocation — that are not part of the underlying

settlement, but are made later for purposes of submitting a

reinsurance claim.

On July 6, 2000, the First Circuit affirmed the District

_Court’s ruling on the breach of contract issue and, over Judge

Stahl’s dissent, on the unfair trade practice issue. The court

held that although Seven Provinces’ primary defense,

concerning Commercial Union’s retention of risk, was

plausible, Seven Provinces had avoided payment based on

unacceptable defenses, “foremost” of which was its challenge

to Commercial Union’s allocation. 217 F.3d at 41. The court

adopted the District Court’s “follow the settlements equals

follow the allocations” holding: “under the law of reinsurance

the allocation could only be challenged on grounds of bad

faith or unreasonableness.” Jd. at 42. The court further

found that Seven Provinces had improperly raised questions

regarding a “difference in conditions” policy and the “owned

property” exclusion in the ESLIC policy. /d.

The court also held that the reinsurance doctrine of

“utmost good faith,” like the “follow the settlements”

doctrine, “requires a reinsurer to indemnify its cedent for

losses that are even arguably within the scope of the coverage

reinsured .. ..” 217 F.3d at 43.

Judge Stahl dissented vigorously from the court’s

unfair trade practice finding, arguing that “the majority’s

approach . . . truly has no bounds” because it offers no

guidance in determining when negotiating tactics become

unfair. 217 F.3d at 45-46. Judge Stahl added that “every

commercial litigant appearing in a federal court in

Massachusetts must now fear that if it raises plausible

defenses against a debatable claim,” it will risk being held

liable for an unfair trade practice. Jd. at 46.

Seven Provinces petitioned for rehearing en banc, or,

in the alternative, for panel rehearing, regarding the unfair

trade practice finding. Seven Provinces argued that it had

relied only on plausible defenses, that it had not acted

extortionately, and that the court had overlooked critical

issues. On August 28, 2000, the court denied Seven

Provinces’ petition. App. 70a.

REASONS FOR GRANTING THE PETITION

_ The Supreme Court has never issued a ruling

regarding the “follow the settlements” doctrine. Relatively

few courts, in fact, have addressed this issue, because

reinsurance disputes are far more often arbitrated than

litigated. But now the First Circuit has affirmed, with little

discussion, the ruling of the District Court that the “follow

the settlements” doctrine prohibits . reinsurers from

challenging reinsured companies’ allocations of settlement

payments among pollution sites and insurance policies, even

if the allocation was not addressed in the settlement and was

made several months after the settlement.

Neither the District Court nor the First Circuit cited

any case law in support of this holding, and the District Court

heard no expert testimony to that effect. Contrary to its

obligations under Erie Railroad v. Tompkins, the District

Court expanded a principle of state law with no guidance as

to how the state courts might rule. Moreover, the District

Court’s ruling, and the First Circuit’s ruling affirming the

District Court, create a conflict in principle with all previous

decisions that have addressed the “follow the settlements”

doctrine. In addition, they have created confusion in the

reinsurance industry and tilted the centuries-old balance

between ceding companies and reinsurers in favor of ceding

companies.

I. The “follow the settlements” doctrine does not

restrict reinsurers from questioning or challenging

ceding companies’ post-settlement decisions.

Before the District Court ruled in this case, the law of

“follow the settlements,” a doctrine incorporated into the

Seven Provinces reinsurance contract, was relatively clear.

The doctrine “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.” Mentor Ins. Co. v. Brannkasse, 996 F.2d 506,

517 (2d Cir. 1993); North River Ins. Co. v. CIGNA

Reinsurance Co., 52 F.3d 1194, 1206 (3d Cir. 1995). Under

the doctrine, a reinsurer “cannot second guess the good faith

liability determinations made by its reinsured, or the

reinsured’s good faith decision to waive defenses to which it

may be entitled.” Christiania General Ins. Corp. v. Great

American Ins. Co., 979 F.2d 268, 280 (2d Cir. 1992); see also

Aetna Cas. & Sur. Co. v. Home Ins. Co., 882 F.Supp. 1328,

1346 (S.D.N.Y. 1995).

Before this case, the “follow the settlements” doctrine

had not been applied to a ceding company’s post-settlement

decisions. In fact, as the District Court acknowledged, the

case law provided that the reasonableness of the ceding

company’s judgment “is to be determined as of the time of

settlement.” 9 F.Supp.2d at 66, citing Aetna Cas. & Sur. Co.

v. Home Ins. Co., 882 F.Supp. at 1351.

Seven Provinces’ conduct was entirely in keeping

with “follow the settlements” doctrine as it existed before this

case. Seven Provinces never challenged Commercial

Union’s judgment in paying $2.2 million to its policyholder

or in determining that its policies arguably covered

Teledyne’s losses. Seven Provinces did raise a question — but

not an actual challenge — regarding Commercial Union’s

failure to allocate any part of the settlement payment to a

“difference in conditions” policy. This question was no

different from Seven Provinces’ other inquiries regarding

Commercial Union’s post-settlement allocation. Seven

? The District Court erroneously cited Mentor Ins. Co. v. Brannkasse as

holding that reinsurers must pay if the settlement is even arguably within

the scope of reinsurance coverage. As noted above, the Second Circuit

was referring to insurance coverage, not reinsurance coverage.

Provinces also raised a question at trial regarding the owned-

property exclusion in the policy that Seven Provinces

reinsured. This question, too, was entirely consistent with the

“follow the settlements” doctrine, which does not require

reinsurers to cover losses that are categorically outside the

scope of insurance coverage. North River Ins. Co. v. CIGNA

Reinsurance Co., 52 F.3d at 1206; Aetna: Cas. & Sur. Co. v.

Home Ins. Co., 882 F.Supp. at 1347.

A. The courts below exceeded their Article III

authority in expanding the “follow the

settlements” doctrine with no guidance as

to how the state courts might rule.

Rather than apply the law of “follow the settlements”

as it existed before this case, the District Court decided to

expand the doctrine to cover not only settlement decisions,

but also post-settlement decisions. The Court of Appeals,

with little discussion, affirmed the District Court’s ruling. In

so ruling, the Court of Appeals cited only the District Court

opinion. The District Court, for its part, cited nothing. As

indicated above, before the District Court’s ruling, no case

had applied the doctrine to post-settlement decisions.

Nor did the District Court hear expert testimony on

the expansion of the doctrine to post-settlement decisions.

The only expert testimony the District Court cited, the

statement of Commercial Union’s expert that a reinsurer

“must go along with however the insurer settled the claim,”

fell far short of the District Court’s expansive conclusion.

Nor did the courts below cite any treatise, law review

article, or text of any kind suggesting that courts should

expand the “follow the settlements” doctrine to apply to post-

settlement decisions.

Essentially, the District Court made up the law out of

whole cloth, in a vacuum, as it saw fit. And the Court of

Appeals, with little discussion, and without addressing Seven

Provinces’ argument that the District Court’s “follow the

settlements equals follow the allocations” finding was

incorrect, affirmed the District Court.

These rulings by the District Court and the Court of

Appeals were improper under this Court’s decision in Erie

Railroad Co. v. Tompkins, 304 U.S. 64, 78 (1938), in which

this Court held that the Constitution does not grant federal

courts the power to declare substantive rules of state common

law. The role of a federal court sitting in diversity is not to

decide the law as it wishes, but to predict how the highest

state court would rule. As the Third Circuit held in City of

Philadelphia v. Lead Indus. Ass'n, 994 F.2d 112, 123 (3d Cir.

1993), a federal court sitting in diversity “is not free to shape

common law as it sees fit” and “may not engage in judicial.

activism.” Only state courts may “decide whether and to

what extent they will expand state common law.” /d.

Similarly, the Fourth Circuit held in Burris Chemical,

Inc. v. USX Corp., 10 F.3d 243, 247 (4" Cir. 1993), that,

“[ujnder Erie v. Tompkins, . . . , federal courts sitting in

diversity rule upon state law as it exists and do not surmise or

suggest its expansion.” Likewise, federal courts should not

“steer state law into unprecedented configurations” and

“must take state law as it stands.” Martel v. Stafford, 992

F.2d 1244, 1247 (1" Cir. 1993). See also Solomon v.

Walgreen Co., 975 F.2d 1086, 1089 (5" Cir. 1992)(a federal

court sitting in diversity “is Erie-bound to apply state law as

it currently exists, and may not change that law or adopt

innovative theories of recovery’).

The Seventh Circuit described the cautious approach

a federal court must take: when faced with competing,

plausible interpretations of state law, a federal court should

choose “the narrower interpretation which restricts liability,

rather than the more expansive interpretation which creates

substantially more liability.” Birchler v. Gehl Co., 88 F.3d

518, 521 (7" Cir. 1996).

But the District Court here, and then the Court of

Appeals, chose instead to expand the “follow the settlements”

doctrine, creating substantially greater liability for Seven

Provinces. The lower courts therefore exceeded their Article

Ili authority in ruling that Seven Provinces’ questions

regarding Commercial Union’s post-settlement allocation

were improper.

B. The expansion of the “follow the

settlements” doctrine creates a conflict in

principle with other decisions.

As indicated above, numerous courts have held that

the “follow the settlements” doctrine binds reinsurers to

ceding companies’ good-faith settlement decisions. £.g.,

North River Ins. Co. v. CIGNA Reinsurance Co., 52 F.3d at

1206; Mentor Ins. Co. v. Brannkasse, 996 F.2d at 517;

Christiania General Ins. Corp. v. Great American Ins. Co.,

979 F.2d at 280. Because the District Court and Court of

Appeals here held that the “follow the settlements” doctrine

applies to decisions that are not part of insurance companies’

settlements with their policyholders, these decisions create a

conflict in principle with all previous decisions addressing

the “follow the settlements” doctrine, since those decisions

have applied the doctrine only to settlement decisions.

C. The decisions below unfairly expand the

rights of ceding companies.

Reinsurance has for centuries been based on

handshakes, cooperation between ceding companies and

reinsurers, and the mutually applicable principle of “utmost

good faith.” The rulings of the courts below, if allowed to

stand, will upset the balance between ceding companies and

reinsurers and tilt the balance sharply in favor of ceding

companies.

In the reinsurance world as it existed before this case,

ceding companies generally performed settlement allocations

reasonably, in good faith, and in line with their settlements.

And while reinsurers did not always object, they did have the

right to receive responses to their reasonable inquiries. But

formally restricting reinsurers’ rights to question and

challenge allocations gives ceding companies license to

allocate settlements arbitrarily, unfairly, and in a way

designed to maximize reinsurance coverage. It leaves

reinsurers with recourse only in the most extreme

circumstances. And it unnecessarily erodes the centuries-old

atmosphere of trust and cooperation between ceding

companies and reinsurers.

D. The decisions below regarding the “follow

the settlements” doctrine were incorrect.

1. The opinions below do _ not

distinguish between settlement

decisions and _ post-settlement

decisions.

Not only did the courts below exceed their Article III

authority in expanding the “follow the settlements” doctrine,

those decisions were incorrect, primarily because the

decisions made no distinction between a ceding company’s

settlement decisions and post-settlement decisions. Indeed,

the courts below do not even appear to have contemplated the

question, although it was presented to them.

The basis of the District Court’s decision that Seven

Provinces may not challenge Commercial Union’s allocation

was that allocation among policies “is not much different

from the more general decision that the losses are covered by

the policies.” 9 F.Supp.2d at 67. In the context of latent

insurance claims, though, these determinations are entirely

separate. Insurance coverage settlements are generally based

on at least a potential coverage liability. Most settlements,

however, do not address allocation among policies. That

issue is often left to separate determinations by pclicyholders

and insurers, who may want to allocate differently for

different purposes. A policyholder may want to allocate one

way for purposes of collecting claims from other insurers,

and the insurer may want to allocate another way for

reinsurance purposes. There is no basis for applying the

“follow the settlements” doctrine to this separate, post-

settlement allocation.

2. Allowing reinsurers to challenge

ceding companies’ post-settlement

actions and decisions will not impede

settlements or cause litigation to

proliferate.

In support of its “follow the settlements equals follow the

allocations” holding, the District Court, and by extension, the

Court of Appeals, held that allowing challenges to allocations

would “undermin{e] settlement and foster[] litigation.” 9

F.Supp.2d at 68. This conclusion is groundless. There is no

reason to believe settlements would be undermined if ceding

companies are denied free reign on _post-settlement

allocations. The only settlements the new “follow the

allocations” holding might encourage would be those in

which insurers and policyholders collude to shift the burden

to reinsurers, whose ability to defend themselves would be

limited.

Nor would litigation proliferate, since it did not

proliferate before the District Court applied the “follow the

settlements” doctrine to post-settlement allocations. There is

much litigation involving insurers and policyholders

regarding allocation, but that would not be affected by

imposing new restrictions on reinsurers.

In any event, most reinsurance disputes are arbitrated,

not litigated. There is no reason to believe that restoring the

status quo before the District Court’s ruling would change

this long-time reinsurance practice.

Il. The “utmost good faith” doctrine does not restrict

reinsurers from questioning or challenging ceding

companies’ post-settlement actions and decisions.

“Utmost good faith” is a reinsurance principle that

grew out of marine insurance. Actually, this Court held in

1928 that the principle is implied in all insurance contracts.

Stipcich v. Metropolitan Life Ins. Co., 277 U.S. 311, 316

(1928)(“[iJnsurance policies are traditionally contracts

uberrimae fidei”). But the principle is particularly important

for reinsurers, who must pay reinsurance claims even though

they have no control over the underlying defense, or even

over information regarding the claim. The “utmost good

faith” doctrine is often cited with respect to the sharing of

information between ceding companies and reinsurers.

Compagnie de Reassurance D'Ile de France v. New England

Reins. Corp., 57 F.3d 56, 72 (1* Cir. 1995); Unigard Sec. Ins.

Co. v. North River Ins. Co., 4 F.3d 1049, 1054 (2d Cir. 1993).

As Commercial Union’s expert testified, the

requirement of “utmost good faith” applies to both ceding

companies and reinsurers. Before this case, it had never been

used to favor ceding companies in imposing reinsurance

allocations or in requiring reinsurers to give up defenses

under their contracts.

In holding that Seven Provinces violated the principle

of “utmost good faith,” the Court of Appeals equated that

principle with the “follow the settlements” doctrine:

“utmost good faith . . . requires a

reinsurer to indemnify its cedent for losses

that areeven arguably within the scope of

coverage reinsured, and not to refuse to pay

merely because there may be another

reasonable interpretation of the parties’

obligations under which the reinsurer could

avoid payment.”

217 F.3d at 43, quoting United Fire & Cas. Co. v. Arkwright

Mut. Ins. Co., 53 F.Supp.2d 632, 642 (S.D.N.Y. 1999); see

also Christiania Gen. Ins. Corp. v. Great American Ins. Co.,

supra, 979 F.2d 268, 280-81 (2d Cir. 1992). This language is

the same language often used to describe the “follow the

settlements” doctrine. For the same reasons that the “follow _

the settlements” doctrine should not be expanded, the

principle of “utmost good faith” should not be expanded to

favor ceding companies over reinsurers.

Ill. The decisions below affect reinsurers and other

litigants broadly and unfairly.

As indicated above, the Court of Appeals’ decision

did not just affect Seven Provinces, but it unfairly tilted the

balance in the reinsurance industry against reinsurers and in

favor of ceding companies. Reinsurers must now be wary of

asserting their rights to challenge allocations that appear

unfair or designed to maximize reinsurance coverage.

This upsetting of the balance is likely to have

significant economic effects. Increased reinsurance claims

can result in increased reinsurance premiums and are

ultimately likely to affect policyholders as well. There

remain insurance and reinsurance contracts with open claims

dating from the 1950s or earlier through the present, with

claims still arising from those periods based on pollution,

asbestos, pharmaceutical, and other liabilities, often with

multi-millions, and even billions, of commercial dollars

involved.

In addition, the Court of Appeals’ decision has a

chilling effect on all companies doing business in

Massachusetts, where a company can now be held liable for

committing an “unfair or deceptive act or practice” even

though it withholds payment pursuant to plausible contract

defenses. As Judge Stahl opined, “the majority’s approach . .

truly has no bounds.” 217 F.3d at 45. A company may face

unfair trade practice liability “simply because it chose to fight

and lost.” /d. Indeed, the holding could be expanded beyond

Massachusetts to any state with a statute prohibiting unfair

trade practices.

IV. Based on their misstatements of reinsurance law,

the courts below erroneously concluded that Seven

Provinces had committed an “unfair or deceptive

act or practice.”

Based on their expansion of the “follow the

settlements” doctrine to apply to Commercial Union’s post-

settlement allocation, the courts below held that Seven

Provinces had unfairly delayed payment and raised too many

questions. If the “follow the settlements” doctrine is restored

to its earlier meaning, there will no longer be any basis for

holding Seven Provinces liable for committing an “unfair or

deceptive act or practice.” But if the lower courts’ expansion

of the doctrine is allowed to stand, Seven Provinces will be

forced to pay double damages and Commercial Union’s

attorneys’ fees, even though:

. Seven Provinces withheld payment based on a

defense it believed was strong and the courts

below found to be "plausible";

. Seven Provinces never asserted a defense it

knew to lack merit;

° Seven Provinces withheld payment in reliance

on the advice of counsel and an expert claims

consultant;

° Seven Provinces did not use nonpayment as a

wedge to gain some additional benefit for

itself;

° Seven Provinces did nothing deceptive; and

. Seven Provinces made settlement offers of up

to $125,000, even though it believed it owed

no more than $45,000.

This result is contrary to well-established principles

regarding unfair trade practice liability in Massachusetts. See

Ferrara & DiMercurio, Inc. v. St. Paul Mercury Ins. Co., 169

F.3d 43, 56 (ist Cir. 1999); Arthur D. Little, Inc. v. Dooyang

Corp., 147 F.3d 47 (ist Cir. 1998); Ahern v. Scholz, 85 F.3d

794, 798 (ist Cir. 1996); Anthony’s Pier Four, Inc. v. HBC

Assocs., 411 Mass. 451, 583 N.E.2d 806, 821 (1991). The

Court of Appeals’ decision is therefore fundamentally unfair,

not only to Seven Provinces, but to all similarly situated

litigants.

CONCLUSION

This Court should grant Seven Provinces’ petition and

exercise its supervisory authority to reverse the “follow the

settlements equals follow the allocations” ruling of the courts |

below. This ruling exceeded the courts’ Article II authority

and unfairly affects all reinsurers and a large number of other

litigants. Ultimately, this Court should either reverse the

First Circuit’s finding that Seven Provinces committed an

“unfair or deceptive act or practice” or remand the case to the

First Circuit for further proceedings.

Respectfully submitted,

H. Fred Northcraft

Mark V. Dugan

Blackwell Sanders Peper

Martin LLP

Two Pershing Square

2300 Main Street, Suite 1000

Kansas City, Missouri 64108

Telephone: 816-983-8000

Counsel for Petitioner

William Shields

Day, Berry & Howard LLP

Twenty First Floor

260 Franklin Street

Boston, Massachusetts 02110

Telephone: 617-345-4600

(any footnotes trail end of each document)

No. 99-1258

UNITED STATES COURT OF APPEALS

FOR THE FIRST CIRCUIT

COMMERCIAL UNION INSURANCE COMPANY, as

Successor in Interest to Employers' Surplus Lines Insurance

Company,

Plaintiff, Appellee,

SEVEN PROVINCES INSURANCE COMPANY , LID.

Defendant, Appellant.

July 6, 2000, Decided

COUNSEL:

Mark V. Dugan, with whom H. Fred Northcraft, Blackwell

Sanders Peper Martin LLP, Jason W. Morgan, and Day,

Berry & Howard were on brief, for appellant.

Bruce M. Friedman, with whom Lori M. Meyers, Kroll,

Rubin & Fiorella LLP, Rodney S. Dowell, and Berman &

Dowell were on brief, for appellee.

JUDGES:

Before Selya, Stahl and Lipez, Circuit Judges. STAHL,

Circuit Judge, concurring in part and dissenting in part.

OPINIONBY:

LIPEZ

OPINION:

LIPEZ, Circuit Judge. Seven Provinces Insurance

Company, Ltd., appeals from a judgment in favor of the

Commercial Union Insurance Company. The district court

found for Commercial Union on its claims that Seven

Provinces breached a reinsurance contract and committed an

unfair trade practice in violation of Massachusetts General

Laws Chapter 93A ("93A"). See Commercial Union Ins. Co.

y. Seven Provinces Ins. Co., 9 F. Supp. 2d 49 (D. Mass.

1998). We affirm.

In the 1960s, Employers' Surplus Lines Insurance

Company ("ESLIC") issued several insurance policies to

‘Teledyne, Inc. ("Teledyne"), a California manufacturing

company. ESLIC covered a portion of the risk that it faced

from one of those policies ("the semiconductor policy") by

purchasing a facultative reinsurance certificate from Seven

Provinces.’

Although the particulars are somewhat more complicated,

the facultative reinsurance certificate essentially provided

that if Teledyne filed a valid claim with ESLIC under the

semiconductor policy for up to $ 450,000 in excess of the

first $ 50,000 of loss, Seven Provinces would reimburse

ESLIC for half of the covered amount, up to $ 225,000. The

policy also contained a "net retention" provision that

restricted ESLIC's ability to purchase additional reinsurance

to cover the other half of the potential exposure--that is, the

remaining $ 225,000 of a $ 450,000 loss:

Being a reinsurance of and warranted same NETT rate,

terms and conditions as and to follow the settlements of the

EMPLOYERS' SURPLUS’' LINES INSURANCE

COMPANY and that the local office of the said Company

retains during the currency of this insurance at least $

225,000.00 BEING 50% OF $ 450,000.00 EXCESS $

50,000.00 COMBINED SINGLE LIMIT (subject to

reduction by any general excess loss or excess catastrophe

reinsurance whether effected by the head office or local

office of the Company) on the identical subject matter and

risk and in identically the same proportion on each separate

part thereof, but in the event of the retained line being less

than as above, [ESLIC’s] lines to be proportionally reduced.

In 1982, Teledyne discovered environmental

contamination at several of its plants and filed claims with its

insurers to cover the resulting liability. In 1993, ESLIC's

successor in interest, Commercial Union, settled its share of

these claims for $ 2.2 million.* After concluding that $

843,000 of the $ 2.2 million settlement pertained to

environmental contamination at the site that was covered by

the- semiconductor policy, Commercial Union billed Seven

Provinces for $ 225,000 as its half of the first $ 450,000 of

the loss in excess of $ 50,000. Of the remaining $ 225,000 of

the $ 450,000 portion of the loss, Commercial Union billed $

180,000 to a pool of reinsurers from whom it had purchased

quota share treaty reinsurance.

Because Commercial Union could not produce a copy of

the reinsurance certificate, Seven Provinces initially

questioned whether a reinsurance agreement existed between

them at all. Once proof of a reinsurance relationship was

discovered, Seven Provinces raised other defenses to

coverage, including the argument that by ceding $ 180,000 of

its potential exposure through quota share treaty reinsurance

rather than retaining its entire share of the risk, Commercial

Union violated the net retention provision in the policy.

Frustrated at its inability to obtain redress, Commercial

Union filed this lawsuit in May 1995, alleging that Seven

Provinces was obligated to provide $ 225,000 in reinsurance

coverage and that its conduct constituted an unfair or

deceptive business practice under Chapter 93A. After a bench

trial, the district court ruled in Commercial Union's favor,

finding (1) that Seven Provinces should have provided

coverage; and (2) that its bad-faith conduct in failing to do so

violated 93A and warranted the imposition of double

damages and attorneys' fees. See 9 F. Supp. 2d at 66, 70. This

appeal followed.

Before reaching the merits, we must consider

Commercial Union's claim that Seven Provinces’ appeal is

untimely.

Under Rule 4 of the Federal Rules of Appellate

Procedure, "a notice of appeal in a civil case must be filed

within thirty days of entry of the judgment or order from

which the appeal is taken." See Piazza v. Aponte Roque, 909

F.2d 35, 38 (Ist Cir. 1990). Commercial Union contends that

we lack jurisdiction to hear this case because the district court

ruled in its favor on June 15, 1998, and Seven Provinces

failed to note its appeal until February 24, 1999. See Scola v.

Beaulieu Wielsbeke, N.V., 131 F.3d 1073, 1074 (Ist Cir.

1997) (observing that the "30-day time limit is mandatory

and jurisdictional" (internal quotation marks omitted)).

Generally speaking, appellate review is available only for

"final decisions" from the lower federal courts. 28 U.S.C. §

1291. In all but a few situations, see, e.g., id. § 1292

(granting limited jurisdiction to hear interlocutory appeals);

Fed. R. Civ. P. 23(f) (authorizing discretionary appeals of

class certification orders), a party cannot initiate an appeal

until a "final decision" has been rendered--that is, "one

which ends the litigation on the merits and leaves nothing for

the court to do but execute the judgment.” Budinich v.

Becton Dickinson & Co., 486 U.S. 196, 199, 100 L. Ed. 2d

178, 108 S. Ct. 1717 (1988) (quoting Catlin v. United States,

324 U.S. 229, 233, 89 L. Ed. 911, 65 S. Ct. 631 (1945)). The

timeliness of the instant appeal, therefore, turns on whether

the district court's entry of judgment on June 15, 1998,

constituted a "final decision" within the meaning of § 1291.

We conclude that it did not.

Although the district court's entry of judgment resolved

most of the issues in the case, its opinion and order specified

that there was more to be done before the lawsuit was over.

The court reserved jurisdiction to decide "the appropriate

date and rate for calculating pre-judgment interest" and

ordered the parties to submit further briefs on these issues.

Unlike a collateral calculation of costs or attorneys’ fees at

the end of a case,’ the determination of when pre-judgment

interest began to run required the court to determine when

Seven Provinces should have recognized its contractual

obligation to provide Commercial Union with reinsurance

coverage. Because "these considerations [were] intertwined

in a significant way with the merits of [Commercial Union's]

primary case as well as the extent of [its] damages," the

district court's June 15, 1998 decision to rule in Commercial

Union's favor could not be considered a "final decision," and

an appeal could not be filed, until pre-judgment interest had

been decided. Osterneck v. Ernst & Whinney, 489 U.S. 169

at 176, 103 L. Ed. 2d 146, 109 S. Ct. 987.

It was not until October 16, 1998, that the district court

ruled on the question of pre-judgment interest and issued an

amended judgment that conclusively resolved the merits of

the case. Seven Provinces responded by filing a timely

motion for reconsideration pursuant to Rules 52(b) and 59(e)

of the Federal Rules of Civil Procedure. The court denied that

motion on January 26, 1999, and Seven Provinces noted its

appeal within thirty days thereafter, on February 24, 1999. As

such, the case is properly before us.

iil

On the merits, we must first address the district court's

conclusion that Seven Provinces should have provided

Commercial Union with reinsurance coverage. The district

court's interpretation of the reinsurance agreement requires de

novo review. See Ferrara & DiMercurio, Inc. v. St. Paul

Mercury Ins. Co., 169 F.3d 43, 49 (Ist Cir. 1999). If the

policy is ambiguous, we must consider the intentions of the

parties, see Marston v. American Employers Ins. Co., 439

F.2d 1035, 1040 (Ist Cir. 1971), based on the facts as the

district court found them, see United States Liab. Ins. Co. v.

Selman, 70 F.3d 684, 687 (Ist Cir. 1995). We will defer to

those factual findings unless they were clearly erroneous. See

id.

Under Massachusetts law, Commercial Union had the

initial burden to prove that it had suffered a loss within the

scope of its reinsurance coverage. See id. at 688. This prima

facie case was easily established because (1) Commercial

Union paid Teledyne $ 2.2 million to. settle environmental

contamination claims under a number of different insurance

policies; and (2) at least a portion of the settlement covered

losses under the semiconductor policy that Seven Provinces

had agreed to reinsure. Under these circumstances, a

threshold basis for reinsurance coverage was sufficiently

clear. As a result, Seven Provinces had to raise a valid

defense to coverage by, for example, showing that an

exclusion in the reinsurance agreement applied or that

Commercial Union had failed to fulfill a condition precedent

to its recovery under the terms of the policy. See id.

Seven Provinces claimed that its obligation to provide

coverage should have been reduced because Commercial

Union violated the net retention provision in the reinsurance

agreement by ceding part of its share of the potential

exposure to quota share treaty reinsurers.’ More specifically,

because Commercial Union had obtained additional

reinsurance to cover $ 180,000 of its $ 225,000 share of the

risk from the Teledyne semiconductor policy, Seven

Provinces sought to have its own liability lowered by the

same amount, for a resulting obligation of $ 45,000.

As the district court observed, however, see 9 F. Supp. 2d

at 53-54, the meaning of the net retention provision in the

facultative reinsurance certificate was far from clear.

Although the policy called for Seven Provinces’ liability to be

"proportionally reduced" to the extent that Commercial

Union's “local office" retained less than "$ 225,000.00 [of

risk] BEING 50% OF $ 450,000.00 EXCESS $ 50,000.00

COMBINED SINGLE LIMIT," it permitted Commercial

Union to obtain "general excess loss or excess catastrophe

reinsurance whether effected by the head office or local

office of the Company" without violating the net retention

requirement. In other words, while the policy restricted

Commercial Union from using some forms of reinsurance to

cover its residual share of the risk of loss, other forms of

additional reinsurance were permissible.

The policy attempted to define the types of additional

reinsurance that Commercial Union could have without

violating the net retention provision--that is, "general excess

loss or excess catastrophe reinsurance.” Although "excess of

loss reinsurance" was a term of art that referred to a particular

kind of coverage, the parties acknowledged that "general

excess loss or excess catastrophe reinsurance” apparently was

not a common term in the industry. See, e.g., Ostrager &

Newman, supra, § 15.02-03, at 777-83 (describing various

classes and subclasses of reinsurance, including “excess of

loss" coverage, without mentioning "general excess loss or

excess catastrophe" policies). Under these circumstances, the

facultative reinsurance certificate was ambiguous as to

whether Commercial Union could use quota share treaty

reinsurance to cover its share of the risk of loss or whether

doing so would violate the net retention requirement and

entitle Seven Provinces to a concomitant reduction in its

coverage obligation.

In the face of this ambiguity, the district court properly

considered extrinsic evidence to determine what the parties

meant by the phrase "general excess loss or excess

catastrophe reinsurance." See Affiliated FM Ins. Co. vy.

Constitution Reins. Corp., 416 Mass. 839, 626 N.E.2d 878,

881 (Mass. 1994) ("The primary objective [is] that a contract

is to be construed to reflect the intention of the parties.”).

Because the policy was several decades old, evidence of the

parties’ actual intent was unavailable, but each side proffered

an expert who worked in the insurance business and could

testify to what the terms in the policy must have meant in

light of industry practice. See id. ("Where, as here, the

contract language is ambiguous, evidence of trade usage is

admissible to determine the meaning of the agreement."); cf.

Samuel Hazard's Adm'r v. New England Marine Ins. Co., 33

U.S. 557, 586, 8 L. Ed. 1043 (1834) ("The terms of the

application are to be understood according to the ordinary

sense and usage of those terms . . . unless the underwriter

knows that a different sense and usage prevail . . . [or] that

the [insured] uses the words in a different sense and usage .. .

Seven Provinces’ expert, Austin Thornton, argued that the

phrase "general excess loss or excess catastrophe

reinsurance" probably was meant to prohibit Commercial

Union from using quota share treaty reinsurance and to

permit only the use of additional "excess loss” or "excess

catastrophe" coverage. Thornton admitted, however, that

reasonable minds could differ on this issue, and Commercial

Union's expert, George Gottheimer, took the opposite view of

the policy language. Gottheimer explained (1) that industry

custom long has permitted treaty reinsurance on a risk

insured by a facultative certificate absent unequivocal

language to the contrary; (2) that because the facultative

certificate only imposed a net retention requirement "on the

identical subject matter and risk and in identically the same

proportion,” it did not preclude the use of a qualitatively

different kind of additional coverage such as quota share

treaty insurance; and (3) that while the contract was

ambiguous, it probably was meant to authorize "general" as

well as "excess of loss" reinsurance--in which case the use of

quota share treaty reinsurance would have been permissible

without triggering a reduction in coverage.

Although the district court acknowledged that Seven

Provinces' expert had presented a plausible explanation of

what the net retention requirement meant, it found that

Commercial Union's expert had provided a more credible

interpretation of the relevant language. See 9 F. Supp. 2d at

56. In support of this finding, the court emphasized that

Gottheimer had more extensive experience in the reinsurance

industry than Thornton, that his testimony remained

consistent on direct and cross-examination, and that

Gottheimer explained his reasoning more comprehensively in

light of the language of the policy, the principles behind

underwriting, and the practices of the industry. See id. The

court also explained that Thornton had been involved in this

dispute long before it came to court and therefore might have

developed a bias in favor of Seven Provinces, while

Gottheimer was an outside expert whose relationship with

Commercial Union was less entrenched. See id.

In other words, after recognizing the ambiguous language

of the facultative reinsurance certificate, and after

considering two plausible explanations of what that language

meant, the court chose one explanation over another based on

its assessment of the credibility of the witnesses. Although

Seven Provinces disputes that assessment and has attempted

to clarify what its insurance expert was trying to say, we

cannot say, after a careful review of the record, that the

district court committed clear error in crediting Gottheimer's

views over Thornton's and consequently finding for

Commercial Union on the issue of coverage. "When the

district court's [interpretation of an ambiguous contractual

provision] rests not on plain meaning but on . . . extrinsic

evidence as to the parties’ intent . . . appellate review

proceeds under the ‘clearly erroneous’ standard," United

States Liab., 70 F.3d at 687, and "where there are two

permissible views of the evidence, the factfinder’s choice

between them cannot be clearly erroneous,” Anderson v. City

10a

of Bessemer City, 470 U.S. 564, 574, 84 L. Ed. 2d 518, 105 S.

Ct. 1504 (1985).

We must also determine whether the district court erred

in concluding that Seven Provinces's conduct constituted an

unfair trade practice under Massachusetts law. See Mass.

Gen. Laws ch. 93A, § § 2, 11. The district court's factual

findings are reviewed for clear error and its conclusions of

law are reviewed de novo. See Arthur D. Little, Inc. v.

Dooyang Corp., 147 F.3d 47, 54 (1st Cir. 1998). "Although

whether a particular set of acts, in their factual setting, is

unfair or deceptive is a question of fact, the boundaries of

what may qualify for consideration as a c. 93A violation is a

question of law." Schwanbeck v. Federal-Mogul Corp., 31

Mass. App. Ct. 390, 578 N.E.2d 789, 803-04 (Mass. App. Ct.

1991) (internal citation omitted), rev'd on other grounds, 4/2

Mass. 703, 592 N.E.2d 1289 (Mass. 1992).

Chapter 93A proscribes those engaged in trade or

commerce from employing “unfair methods of competition

and unfair or deceptive acts or practices" in business

transactions. Mass. Gen. Laws ch. 93A, § 2. It was "designed

to encourage more equitable behavior in the marketplace."

Arthur D. Little, 147 F.3d at 55. Even so, it "does not

contemplate an overly precise standard of ethical or moral

behavior. It is the standard of the commercial marketplace."

Ahern v. Scholz, 85 F.3d 774, 798 (1st Cir. 1996). To trigger

liability under 93A, courts have said that the conduct in

question "must attain a level of rascality that would raise an

eyebrow of someone inured to the rough and tumble of the

world of commerce," Quaker State Oil Ref. Corp. v. Garrity

Oil Co., 884 F.2d 1510, 1513 (Ist Cir. 1989); have “an

extortionate quality that gives it the rancid flavor of

unfairness," Atkinson v. Rosenthal, 33 Mass. App. Ct. 219,

598 N.E.2d 666, 670 (Mass. App. Ct. 1992); or fall “within at

least the penumbra of some common-law, statutory, or other

lla

established concept of unfairness’ or [be] ‘immoral, unethical,

oppressive or unscrupulous,” Cambridge Plating Co. v.

Napco, Inc., 85 F.3d 752, 769 (Ist Cir. 1996) (quoting PMP

Assocs., Inc. v. Globe Newspaper Co., 366 Mass. 593, 321

N.E.2d 915, 917 (Mass. 1975)). These traditional

formulations of the stendard for 93A liability are notably

imprecise. Indeed, the Massachusetts Supreme Judicial Court

has now said that "we view as uninstructive phrases such as

‘level of rascality’ and ‘rancid flavor of unfairness’ in deciding

questions of unfairness under G.L. c. 93A. We focus on the

nature of chalienged conduct and on the purpose and effect of

that conduct as the crucial factors in making a G.L. 93A

fairness determination." Massachusetts Employers Ins. Exch.

v. Propac-Mass, Inc., 420 Mass. 39, 648 N.E.2d 435, 438

(Mass. 1995) (internal citations omitted).

A mere breach of contract does not constitute an unfair or

deceptive trade practice under 93A, see Ahern, 85 F.3d at

798, unless it rises to the level of "commercial extortion” or a

similar degree of culpable conduct, Anthony's Pier Four, Inc.

v. HBC Assocs., 411 Mass. 451, 583 N.E.2d 806, 821 (Mass.

1991). For example, we upheld a finding that a defendant

violated 93A by withholding payment and "stringing out the

process" with the intent to “force [the plaintiff] into an

unfavorable settlement.” Arthur D. Little, 147 F.3d at 55-56.

Similarly, the Massachusetts Appeals Court upheld a finding

of 93A liability for extortionate conduct when a defendant

raised "specious defenses" to payment and engaged in "foot

dragging” and "a pattern of stringing [the plaintiff] along.”

Community Builders, Inc. v. Indian Motocycle Assocs., 44

Mass. App. Ct. 537, 692 N.E.2d 964, 978-79 (Mass. App. Ct.

1998).

An insurance carrier "which in good faith denies a claim

of coverage on the basis of a plausible interpretation of its

insurance policy is unlikely to have committed a violation of

G.L. c. 93A." Gulezian v. Lincoln Ins. Co., 399 Mass. 606,

506 N.E.2d 123, 127 (Mass. 1987). But “unlikely” does not

12a

mean "never." The possession of a plausible defense does not

automatically preclude a finding of a 93A violation; the

defense must be clearly articulated and asserted in good

faith. See Arthur D. Little, 147 F.3d at 56.

Commercial Union claimed that Seven Provinces violated

93A by its overall pattern of conduct during the period from

the submission of the $ 225,000 Teledyne reinsurance bill in

August 1993 to the trial in January 1998. The district court

concluded that “although Seven Provinces' objections to

payment bore the hallmarks of bad faith almost from the

outset," 9 F. Supp. 2d at 70, its conduct was only egregious

enough to warrant 93A liability in tue period after the

facultative reinsurance certificate was discovered in August

1995. On appeal, Seven Provinces argues that it did not

violate 93A at any time. Its principal argument is that its

interpretation of the net retention provision, discussed above,

was plausible, and that this plausible defense shields it from

93A liability.” If Seven Provinces had asserted the net

retention defense in good faith as the basis for the denial of

coverage, it might be right. The detailed factual findings of

the district court, however, tell a different story.

In the post-August 1995 period, the court found that

Seven Provinces never communicated to Commercial Union

a decision to deny coverage. Instead, it engaged in a pattern

of "evasiveness and obstructionism," id. 9 F. Supp. 2d at 63,

without ever refusing to pay. This finding is amply supported

by the record, especially the testimony of Seven Provinces's

Martin Rebisz, who was in charge of handling Commercial

Union's claim. The court specifically found that it "did not

find credible Rebisz's denial that Seven Provinces had

deliberately avoided coming to a decision on whether to pay

CU's bill." Jd. at 64. This avoidance continued through the

trial: "Rebisz evaded the direct issues of whether he believed

Seven Provinces was obligated to CU and, if so, for how

much." Id. Instead, Rebisz said that Commercial Union could

be owed "anything from $ 225,000 to nothing," an answer the

13a

court justifiably found exasperating because "Seven

Provinces had at no time since the fac. cert. had been found

offered any argument that there was a valid defense to the

entire bill." Id. Tne court also found that "the length of time

that has elapsed without Seven Provinces coming to a

decision on whether to pay"--almost two and a half years

from the discovery of the facultative certificate to the trial--

"is far outside normal industry practice," id. at 65, which

Rebisz admitted is to pay reinsurance claims within ninety

days.

The court further found that Seven Provinces pursued its

deliberate avoidance strategy by raising a series of

“constantly shifting defenses and objections to payment." Jd.

at 64. One of these defenses was Seven Provinces's

interpretation of the net retention provision, an interpretation

that the court found "plausible." Jd. at 56. Even under this

interpretation, however, Seven Provinces would have owed

Commercial Union $ 45,000--an amount that it never paid.

Moreover, instead of being asserted as a reason to refuse

coverage, this plausible defense was raised along with three

others which were not plausible. Foremost among these was a

challenge to Commercial Union's allocation of the Teledyne

settlement among various sites and policies. Seven Provinces.

repeatedly demanded explanations of Commercial Union's

allocation decisions even though Commercial Union had

provided a full and convincing explanation from the start and

repeated it consistently. At trial, Seven Provinces devoted

much effort to offering alternative allocations of the

settlement. The court supportably called this effort

"disingenuous," id. at 64, noting that under the law of

reinsurance the allocation could only be challenged on

grounds of bad faith or unreasonableness. Seven Provinces

presented "no evidence" of such grounds. /d. at 60. In the

absence of such evidence, the fact that alternative allocations

were "possible," id. at 59, was legally irrelevant.

l4a

In a variant on its spurious allocation defense, Seven

Provinces challenged Commercial Union's failure to allocate

any of the settlement to a "difference in conditions" policy it

had issued to Teledyne, even thougi: Teledyne had never

made a claim on this policy and it was generally understood

to be inapplicable to hazardous waste claims. Seven

Provinces raised this argument as early as 1995. Despite

Commercial Union's clear explanations, Rebisz continued to

raise it up to and including the time of trial --not, the court's

findings suggest, with any prospect of success (Seven

Provinces's own expert dismissed the argument), but as one

more aspect of the "moving target" strategy. Id. at 64.

Perhaps the most egregious manifestation of this

obstructionist strategy occurred when Seven Provinces

claimed for the first time at trial that coverage for the

underlying hazardous waste claim was barred by the "owned

property" exclusion in the Teledyne policy. This argument

was plainly barred by the "follow the settlements" doctrine

that was written into the facultative certificate. Its use at trial

was further confirmation of Seven Provinces's bad-faith

pattern of constantly shifting objections to payment. On this

point, as on all aspects of the moving target strategy, the

district court's factual findings are well-supported by the

record, including the testimony at trial and the voluminous

correspondence between the parties.°

The district court further found that Seven Provinces's

strategy of constantly shifting defenses was intended to

pressure Commercial Union into a settlement. "I find that

Seven Provinces’ intent in its dealings with CU was to delay

and object to payment so that CU would compromise the

Teledyne bill and agree to a global commutation of all the

business between the parties." Jd. at 65. Since the "global

commutation" was only pressed before August 1995, it could

not be a substantive basis for 93A liability because of the

court's determination that 93A liability was only warranted

for Seven Provinces's conduct after the discovery of the

15a

facultative reinsurance certificate. Nevertheless, the court

was entitled to rely on evidence of Seven Provinces's bad

faith in the period before the facultative certificate was found

in assessing its intentions thereafter. Moreover, Seven

Provinces's attempts to force a settlement of the Teledyne bill

continued after August 1995, even to the time of trial. The

court's findings about Seven Provinces's intent were based in

large part on the testimony of its own witnesses. "Thornton

testified that the purpose of presenting the alternative

allocations to CU was strategic: to lead to a negotiated

compromise." Jd. at 59-60. "Rebisz maintained that Seven

Provinces was not refusing to pay, but merely would prefer to

mediate or arbitrate in an attempt to compromise the bill." /d.

at 64.’

Having concluded that the district court's 93A findings

are nct clearly erroneous, we must next determine if those

findings are legally sufficient to support the imposition of

93A liability. As noted, a 93A fairness determination focuses

on the nature, purpose, and effect of the challenged conduct.

See Mass. Employers Ins. Exch., 648 N.E.2d at 438. Seven

Provinces's conduct was unfair in nature--raising a series of

constantly sizifting defenses while never coming to a decision

about coverage; in purpose--to force a settlement of

Commercial Union's claim regardless of its merits; and in

effect--causing, at great expense to Commercial Union, a

delay of over three years from discovery of the facultative

certificate to final judgment (and over five years from the

initial billing).*

"We emphasize that this case did not involve a good faith

dispute over billing or a simple breach of contract, each of

which is an insufficient basis for 93A liability." Arthur D.

Little, 147 F.3d at 55. We emphasize, too, that this case did

not involve a party whose only miscue was to decide

(incorrectly, as matters turned out) to let the courts resolve a

good faith disagreement or to rely mistakenly on faulty legal

argumentation. Instead, Seven Provinces's conduct--raising

NN OT SEAL VA LRA ete a AEC ES a

l6a

multiple, shifting defenses (many of them insubstantial) in a

lengthy pattern of foot-dragging and stringing Commercial

Union along, with the intent (as its own witnesses admitted)

of pressuring Commercial Union to compromise its claim--

had the extortionate quality that marks a 93A violation.”

Importantly, Seven Provinces's actions also fell within an

"established concept of unfairness." Cambridge Plating Co.,

85 F.3d at 769. As the district court explained, reinsurance

relationships are governed by the traditional principle of

"utmost good faith" ("uberrima fides"). See 9 F. Supp. 2d at

69; see also Compagnie de Reassurance D'Ile de France v.

New England Reins. Corp., 57 F.3d 56, 72 (Ist Cir. 1995).

"Utmost good faith . . . requires a reinsurer to indemnify its

cedent for losses that are even arguably within the scope of

the coverage reinsured, and not to refuse to pay merely

because there may be another reasonable interpretation of the

parties’ obligations under which the reinsurer could avoid

payment." United Fire & Cas. Co. v. Arkwright Mut. Ins.

Co., 53 F. Supp. 2d 632, 642 (S.D.N.Y. 1999) (citing

Christiania Gen. Ins. v. Great Am. Ins. Co., 979 F.2d 268,

280-81 (2d Cir. 1992)); see also White v. Western Title Ins.

Co., 40 Cal. 3d 870, 710 P.2d 309, 316-17, 221 Cal. Rptr.

509 (Cal. 1985) (holding that fiduciary relationship between

insurer and insured does not terminate when litigation

commences). The court noted that Commercial Union's

expert "testified to the traditional mores of the industry: that

reinsurance is ‘an honorable engagement,’ in which

‘gentlemen's agreements’ were secured by a handshake.

Under this view, the reinsurer and the reinsured are ‘partners,’

who owe each other a duty of ‘utmost good faith." 9 F. Supp.

2d at 69. Viewed in light of the exacting standard of uberrima

fides, Seven Provinces's bad faith tactics were wholly alien to

the usual course of dealings between an insurer and a

reinsurer, and thus were even more clearly removed from an

ordinary breach of contract. The district court did not err in

17a

concluding that these tactics to avoid reinsurance liability

were "unfair" within the meaning of 93A.

Affirmed.

CONCURBY:

STAHL (In Part)

DISSENTBY:

STAHL (In Part)

DISSENT:

STAHL, Circuit Judge, concurring in part and

dissenting in part. Although I agree with the majority that

this appeal is properly before us, see ante Part II, and that

Seven Provinces should have provided Commercial Union

with reinsurance coverage, see ante Part ITI, I believe that the

district court erred in finding that Seven Provinces’ conduct

warranted liability under 93A. Thus, with respect to Part IV

of the majority opinion, I respectfully dissent.

Massachusetts courts have held, without fail, that Chapter

93A does not apply to a mere breach of contract. See Ahern

v. Scholz, 85 F.3d 774, 798 (Ist Cir. 1996) (citing Pepsi-Cola

Metro. Bottling Co. v. Checkers, Inc., 754 F.2d 10, 18 (Ist

Cir. 1985)). In the context of insurance, while a carrier may

not stubbornly refuse to pay a claim once liability has

become "reasonably clear," it can continue to deny coverage

based upon a "plausible interpretation” of a policy without

violating 93 A. Ferrara & DiMercurio, Inc. v. St. Paui

Mercury Ins. Co., 169 F.3d 43, 56 & n.23 (Ist Cir. 1999).

The assertion of a reasonable defense to coverage does not

constitute an unfair settlement practice even if the basis for

that defense turns out to be wrong. See Premier Ins. Co. v.

Furtado, 428 Mass. 507, 703 N.E.2d 208, 210 (Mass. 1998).

18a

With these considerations in mind, let us examine the

facts as the district court found them. The court predicated

the imposition of 93A liability on Seven Provinces’ purported

pattern of delay in handling Commercial Union's claim for

coverage. The court observed, for example, that upon

receiving an initial demand for coverage in August, 1993, a

"pattern quickly developed by which [Commercial Union]

would seek payment . . . and Seven Provinces would respond

only after some delay, and then by requesting further

information." Commercial Union Ins. Co. v. Seven Provinces

Ins. Co., 9 F. Supp. 2d 49, 60 (D. Mass. 1998). But then, after

criticizing Seven Provinces’ conduct since August, 1993. the

district court concluded that 93A liability was unwarranted

until after August, 1995. This inconsistency -- between the

period of time for which the court assailed the company's

conduct, see id. at 65 ("Seven Provinces has delayed payment

for over four years after receiving the bill, and over two years

since locating the [facultative reinsurance certificate]."

(emphasis added)), and the period of time for which the court

actually found a 93A violation to have occurred -- requires us

to scrutinize the 93A ruling.

Between August, 1993 and August, 1995, Seven

Provinces was entitled to question its obligation to provide

reinsurance coverage because the very existence of a

reinsurance relationship was unclear. As the district court

acknowledged, Seven Provinces had "legitimate reasons" to

doubt whether a reinsurance relationship actually existed at

all. Jd. at 70. By the time the facultative reinsurance

certificate was found, litigation already was underway and

Seven Provinces was entitled to raise any reasonable defenses

to coverage that emerged from the terms of the policy.

Among these defenses, Seven Provinces argued (1) that

Commercial Union's allocation of liability among _ its

Teledyne policies inflated the amount of loss that this

particular reinsurance agreement covered, and (2) that

Commercial Union's use of quota share treaty reinsurance

19a

violated the net retention requirement in the facultative

reinsurance certificate. The district court conceded that these

defenses were, respectively, "possible," see id. at 59, and

"plausible," see id. at 56.

While it is true that Seven Provinces’ attorney asked

about another defense tu coverage for the first time at trial, he

did so only in the form of a single question about an "owned

property" exclusion in one of the insurance policies. This

question did not delay the proceedings because the court

curtailed the inquiry. When the issue briefly resurfaced later

on in the trial, Commercial Union did not object and the court

did not intervene. There may be litigation strategies that are

so abusive as to warrant 93A liability, but there is no

authority for grounding 93A liability on an attorney's

decision "to test the waters" briefly when a new issue

emerges during the six-day trial of a complicated case.

In any event, Seven Provinces’ insurance expert, Austin

Thornton, was prepared to testify and in fact did testify in

support of the company's defenses to coverage. Armed with

that expert advice, the company proceeded on the reasonable

belief that its liability genuinely was unclear. See Ferrara &

DiMercurio, Inc., 169 F.3d at 56 ("Insurers are both

encouraged and entitled to rely . . . on the advice of expert

consultants in evaluating liability [on a demand for

coverage]."); see also Van Dyke v. St. Paul Fire & Marine

Ins. Co., 388 Mass. 671, 448 N.E.2d 357, 361-62 (Mass.

1983). Although these defenses to coverage may have taken

time to litigate, and although none of these defenses

ultimately prevailed, the record simply does not suggest that

Seven Provinces acted with the kind of culpability that 93A

requires. See Cambridge Plating Co. v. Napco, Inc., 85 F.3d

752, 769 (Ist Cir. 1996).

The majority takes a different view, suggesting that as

soon as the facultative reinsurance certificate was found,

Seven Provinces should have paid Commercial Union's claim

20a

in full rather than continuing .o raise new issues and

questions. In particular, the majority contends that it was

normatively unfair for Seven Provinces to demand additional

documentation and to ask for further explanations once the

existence of a reinsurance relationship was established. But if

anything, the discovery of the facultative reinsurance

certificate reasonably justified some delay on Seven

Provinces’ part because once the certificate was found, the

company was entitled to pause in order to determine whether

any other defenses to coverage appeared from the language

of the certificate or from the factual circumstances

surrounding the claim.

The majority cites no authority -- and I] know of none -- to

support the proposition that a reinsurer must provide

coverage in full, without delay, and without limitation,

simply because some kind of policy has been found. If that

were the law, an insurer could face 93A liability whenever it

assumed coverage pursuant to a "reservation of rights” letter

rather than waiving its defenses from the onset. But that is

not the law. Although the reinsurance industry holds itself to

high standards of conduct that weigh in favor of coverage

under the policy in a doubtful case, those standards do not

justify liability under 93A simply because a reinsurer pauses

to uncover and to raise a variety of "plausible" and "possible"

defenses to coverage. Moreover, while it is true that

Massachusetts courts might permit 93A liability when a

plaintiff initiates litigation solely to burden another, see

Schubach v. Household Fin. Corp., 375 Mass. 133, 376

N.E.2d 140, 142 (Mass. 1978) (suggesting that a finance

company might violate 93A by suing debtors in distant

jurisdictions so that they would be more likely to default),

they have stopped short of saying that a defendant risks 93A

liability simply because it raises a vigorous defense that fails

to succeed on the merits. The district court erred in imposing

liability under 93A.

2la

Setting aside the facts of this particular case, what

troubles me most about the majority's approach is that it truly

has no bounds. Although the majority opinion says that

"there is a line . . . that divides run-of-the-mill negotiating

tactics from those that border upon the extortionate," it offers

no indication of where the line should be drawn when

imposing 93A liability for conduct during litigation. Every

commercial litigant appearing in federal court in

Massachusetts must now fear that if it raises plausible

defenses against a debatable claim rather than agreeing to pay

the claim at the outset, it will risk 93A liability simply

because it chose to fight and lost. Massachusetts law has

never reached that far.

For the foregoing reasons, I respectfully dissent with

respect to Part IV of the majority opinion.

22a

' “Reinsurance is a contractual arrangement whereby one

insurer . . . transfers all or a portion of the risk it underwrites .

.. to another insurer... ." Barry R. Ostrager & Thomas R.

Newman, Handbook on Ins. Coverage Disputes § 15.01[a],

at 776 (9th ed. 1998). Whereas facultative reinsurance covers

the risk that an insurer bears with respect to a specific policy,

treaty reinsurance cedes the risks that an insurer carries on

any number of policies within a designated line of its

underwriting business. See id. § 15.03[a], at 780-81.

> As a matter of convenience, we will refer to

Commercial Union instead of to its predecessor in interest,

ESLIC.

3 In an earlier case, we likened the determination of pre-

judgment interest to the taxation of costs, the award of

attorneys’ fees, and other collateral orders that do not affect

the finality of a judgment for the purposes of appeal. See

Alman v. Taunton Sportswear Mfg. Corp., 857 F.2d 840, 844

n.4 (Ist Cir. 1988). Since then, the Supreme Court has

indicated that pre-judgment interest actually "serves to

‘remedy the injury giving rise to the [underlying] action,’ . . .

and in that sense is part of the merits of the district court's

decision." Osterneck v. Ernst & Whinney, 489 U.S. 169, 176

n.3, 103 L. Ed. 2d 146, 109 S. Ct. 987 (1989) (quoting

Budinich, 486 U.S. at 200) (alteration in original). Even if our

opinion in Alman remains valid in other respects, the

Osterneck decision more closely controls the issue at hand

and makes clear that the district court's June 15, 1998, ruling

was not a "final decision" within the meaning of 28 U.S.C. §

1291.

* Although Seven Provinces raised other defenses to

coverage before the district court, as we explain below in

23a

connection with the 93A claim, it only presses the net

retention issue on appeal.

* Seven Provinces also argues that it cannot be held liable

under 93A because the case was in litigation from May 1995

onwards, i.e., for the entire period after the facultative

certificate was discovered in August 1995. This contention is

without merit. It is settled law that conduct during litigation

can constitute a 93A violation. See Schubach v. Household

Finance Corp., 375 Mass. 133, 376 N.E.2d 140, 141-42

(Mass. 1978); see also Refuse & Envtl. Sys., Inc. v. Industrial

Servs. of America, Inc., 932 F.2d 37, 43 (Ist Cir. 1991)

(stating that "bringing [a] lawsuit in spite of the evidence"

can be a 93A violation).

° Nor are the court's findings regarding Seven Provinces's

shifting defenses undermined by the fact that its expert,

Austin Thornton, testified in support of some of those

defenses. As the court pointed out, Thornton's credibility was

suspect because he was involved in the case since early 1995

and hardly qualified as impartial. See 9 F. Supp. 2d at 56. It

is one thing to rely in good faith on the advice of outside

consultants; it is quite another to suggest that an insurer

insulates itself from 93A liability merely because a hired

expert maps its battle plan.

” To be sure, we understand that negotiations are part and

parcel of the settlement of insurance claims. In most

instances, negotiations--even hard-line negotiations--will not

subject a party to 93A liability. There is a line, however, that

divides run-of-the-mill negotiating tactics from those that

border upon the extortionate. The evidence of a pattern of

evasiveness and the district court's well-documented findings

place Seven Provinces's tactics on the "wrong" side of this

line.

* Commercial Union's attorneys’ fees of $ 234,702.08, as

awarded by the district court usuer 93A, exceeded its $

225,000 reinsurance claim. If 93A recovery were denied,

24a

therefore, Commercial Union would suffer a net loss from

having brought a meritorious claim.

* From this discussion it should be clear that we do not

suggest, as the dissent says we do, that Seven Provinces was

obligated to pay Commercial Union's claim in full as soon as

the facultative certificate was found. Seven Provinces was

obligated, however, to deal with Commercial Union in good

faith. The district court supportably found, as detailed above,

that Seven Provinces's course of conduct after August 1995

was marked by bad faith. It is only by ignoring these

findings--in particular, the finding that Seven Provinces never

communicated to Commercial Union a decision to deny

coverage--that the dissent can conclude that the court erred in

imposing 93A liability.

25a

C.A. NO. 95-10894-NG

UNITED STATES DISTRICT COURT FOR THE

DISTRICT OF MASSACHUSETTS

COMMERCIAL UNION INSURANCE COMPANY, As

Successor in Interest to Employers’ Surplus Lines Insurance

Company, Plaintiff,

Vv.

SEVEN PROVINCES INSURANCE COMPANY, LTD.,

Defendant.

June 15, 1998, Decided

DISPOSITION:

Judgment entered for plaintiff in amount of $ 450,000.

COUNSEL:

For COMMERCIAL UNION INSURANCE COMPANY,

Plaintiff: Bruce M. Friedman, Kroll & Tract, New York, NY.

For COMMERCIAL UNION INSURANCE COMPANY,

Plaintiff: Thomas J. Hogan, Kroll, Rubin & Fiorella LLP,

Boston, MA.

For SEVEN PROVINCES INSURANCE COMPANY, LTD,

Defendant: Brian A. Davis, Kurt Wm. Hemr, Choate, Hall &

Stewart, Boston, MA.

For SEVEN PROVINCES INSURANCE COMPANY, LTD,

Defendant: H. Northcraft, Mark V. Dugan, Blackwell,

Sanders, Matheny, Weary & Lobardi P.C., Kansas City, MI.

JUDGES:

26a

NANCY GERTNER, U.S.D.J.

OPINIONBY:

NANCY GERTNER

MEMORANDUM

June 15, 1998

A trial was held in this action to recover on a policy of

reinsurance. The dispute arises out of a reinsurance

arrangement entered into thirty-five years ago between

Employers’ Surplus Lines Insurance Company ("ESLIC") and

defendant Seven Provinces Insurance Company, Ltd. ("Seven

Provinces"). ESLIC insured Teledyne, a California-based

manufacturing company, through a number of different

insurance policies. In 1963, ESLIC ceded a portion of the

Teledyne risk covered by one of those policies to Seven

Provinces.

In 1982, environmental contamination was discovered at

a number of Teledyne sites. The company was faced with

third-party suits and Environmental Protection Agency

("EPA") claims for millions of dollars in clean-up costs. It

submitted a claim to its insurers, including ESLIC's

successor-in-interest, plaintiff Commercial Union ("CU").

CU's obligations to Teledyne under various policies and for

various contaminated sites were litigated in California and

eventually settled. Under the terms of the settlement, CU paid

Teledyne $ 2.2 million and Teledyne released CU from all

future liability for any environmental claims against

Teledyne.

OPINION:

According to CU, one site in particular was the focus of

negotiations: the "semiconductor site," where Teledyne had

carried on manufacturing activity since 1962, and for which

27a

clean-up costs were estimated to be $ 20.93 million. ESLIC

had insured Teledyne the year after the site began operations,

from July 1, 1963 to July 1, 1964, under a general liability

policy that covered losses in excess of $ 50,000 and up to $

1.95 million. CU allocated $ 843,000 of the $ 2.2 million to

that site and billed itr reinsurers accordingly. All loss in

excess of $ 500,000 was covered by a reinsurer not a party to

this case. Of the remaining $ 450,000, CU billed half, or $

225,000, to Seven Provinces. It then billed $ 180,000 of its

half of the risk to a pool of treaty reinsurers, leaving CU itself

to absorb only $ 45,000 of the loss.’

CU brings this suit in order to recover the $ 225,000 it

billed Seven Provinces, as well as damages and attorneys fees

under Mass. Gen. L. ch. 93A, for Seven Provinces' failure to

satisfy this claim for over four years. CU bases its claim for $

225,000 in reinsurance on its internal records of the

reinsurance relationship between the parties and on the

facultative certificate’ ("fac. cert.") formalizing that

relationship. It bases its claim for 93A damages in part on the

unique mores of the industry, notably the obligation of

"uberrimae fidei," the obligation to act with utmost good

faith. See Compagnie de Reassurance de |' /le de France v.

New England Reinsurance Corp., 944 F. Supp. 986, 992-94

(D. Mass. 1996).

Seven Provinces raises several defenses to this claim. (1)

The net retention claim: Seven Provinces argues primarily

that the facultative certificate links its reinsurance obligation

to the amount of risk ESLIC (now Commercial Union)

retained. Because $ 180,000 of ESLIC's $ 225,000 portion of

the Teledyne risk was covered by a pool of treaty reinsurers,

Seven Provinces' obligation was reduced by equal measure,

to $ 45,000. (2) The allocation claim: Seven Provinces has

also raised a range of challenges to CU's decision to allocate

$ 843,000 of the $ 2.2 million Teledyne settlement to the

semiconductor site: that it was not done in good faith; that it

wrongly billed reinsurers for ex gratia payments, not required

28a

by the insurance policies that had been settled, but instead

given voluntarily in order to obtain the general release from

all future claims; that it failed to allocate any payments to a

"difference in conditions" -- essentially, property damage --

policy ESLIC had issued to Teledyne; and that the entirety of

Teledyne's claim against CU was barred by the “owned

property" exclusion in the ESLIC-Teledyne policy reinsured

by Seven Provinces. (3) The 93A Claim: Seven Provinces

argues in part that the mores of the reinsurance industry have

changes and its behavior conforms to 1990s standards.

The Court heard six days of testimony and admitted

numerous pages of exhibits documenting the relationship

between the parties and between CU, ESLIC, and Teledyne.

Specifically, several years of correspondence between the

parties about the Teledyne claim were authenticated and

made part of the record. Each side offered the testimony of

the officers directly involved in this dispute, as well as of an

expert in the customs and practices of the highly specialized

world of reinsurance.

This memoran lum provides my findings of fact and

conclusions of law in my resolution of all of CU's claims

against Seven Provinces.

I. FINDINGS OF FACT

A. The Formation of the Reinsurance Relationship

The background to the formation of the reinsurance

relationship between Seven Provinces and ESLIC is

undisputed. During the early 1960s, both ESLIC and Seven

Provinces operated in California through a managing general

agent, Sayre & Toso. Sayre & Toso was authorized to write

insurance and einsurance business for ESLIC, Seven

Provinces, anc several other insurance companies. On

October 29, 1963, it wrote a policy of reinsurance between

ESLIC and Seven Provinces, memorializing that relationship

29a

in a facultative certificate, # SP016069. The facultative

certificate was made up of a series of numbered, standardized

forms. The first page of the certificate was a Seven Provinces’

form and the number beginning "SP" indicates "Seven

Provinces," making Seven Provinces technically the drafter

of the agreement.

By the terms of the facultative certificat::, the reinsurance

relationship with Seven Provinces covered the ESLIC policy

with Teledyne, policy # E506432, for the same period as the

underlying policy, from July 1, 1963 to July 1, 1964, and on

the same risks. The ESLIC policy with Teledyne was a

general liability policy, covering risks in excess of $ 50,000

and up to $ 1,950,000. As a liability policy, it excluded

coverage for damage to property owned by Teledyne. ESLIC

had obtained reinsurance for all losses above $ 500,000 from

another reinsurer, listed as "Brandt" in CU's records.’ Of the

remaining $ 450, 000 of risk it retained, ESLIC ceded $

225,000 to Seven Provinces. Thus, by the express terms of

the facultative certificate, Seven Provinces agreed that should

Teledyne make a claim against ESLIC for $ 450,0000 under

the ESLIC-Teledyne liability policy, Seven Provinces would

in effect reimburse ESLIC for half its loss.

However, Seven Provinces’ obligation was not

unconditional; it was qualified by a "net retention" provision.

After setting out the amount of reinsurance and the nature of

the risk reinsured, the last page of the certificate contained

the following paragraph 2:

[1] Being a reinsurance of and warranted samc NETT“ rate,

terms and conditions as and to follow the settlements of the

EMPLOYER SURPLUS’ LINES INSURANCE

COMPANY and that the local office of the said Company

retains during the currency of this insurance at least $

225,000.00 BEING 50% OF $ 450,000.00 EXCESS $

50,000.00 COMBINED SINGLE LIMIT ([2] subject to

30a

reduction by any general excess loss or excess catastrophe

reinsurance whether effected by the head office or local

office of the Company) [3] on the identical subject matter and

risk and in identically the same proportion on each separate

part thereof, but [4] in the event of the retained line being less

than as above, Underwriter's lines to be proportionally

reduced.°

This clause, it is agreed, required the "local office" to

retain for ESLIC's account 50% of the Teledyne risk covered

by the ESLIC-Seven Provinces policy, and ceded the other

50% to Seven Provinces. Whether it restricted ESLIC's head

office at all, and if so, in what ways, is at the heart of this

dispute. Seven Provinces claims that this clause required

ESLIC to retain the entirety of its 50% of the Teledyne risk

for its own account. If it reduced its risk by obtaining any

further reinsurance, Seven Provinces’ responsibility under the

contract would be proportionately reduced as well. Because

CU admits that $ 180,000 of the Teledyne risk was covered

by a treaty reinsurance pool, Seven Provinces argues that its

liability is also reduced by $ 180,000. It now owes CU $

45,000, at the most.

CU argues that this clause bound only the "local office"

or its functional equivalent, ESLIC's managing general agent

Sayre & Toso. Only if Sayre & Toso obtained facultative

reinsurance on the ESLIC-Seven Provinces policy, it argues,

would Seven Provinces’ responsibility be reduced. If the

ESLIC's main office obtained facultative reinsurance, or if

either office obtained treaty reinsurance, Seven Provinces’

responsibility would remain the same: the $ 225,000 CU is

seeking in this action.

B. The Net Retention Clause

I find that a reinsurance relationship existed between the

parties. It is documented in the facultative certificate, which

is of undisputed authenticity.

3la

I find that the express terms of the facultative certificate

provided for the cession of $ 225,000 of the Teledyne risk to

Seven Provinces.

I find that the language of paragraph two is ambiguous at

_ several key points:

(1) Does the phrase "being a reinsurance of and warranted

same NETT rate, terms and conditions as and to follow the

settlements of [ESLIC] and that the local office . . . retains . .

. at least $ 225,000 . . ." (phrase [1]) contain a warranty as to

the amount of risk ESLIC agreed to retain, or did the phrase

address something else, namely, that the "NETT rate, terms,

and conditions" of the reinsurance relationship would be the

same as that of the underlying insurance policy between

ESLIC and Teledyne? Put otherwise, does the warranty

clause in any way guarantee the amount of risk ESLIC would

retain?

(2) When the clause refers in phrase [2] to the reinsurance

ESLIC was permitted to obtain, which types of reinsurance

are covered? Do the words "any general excess loss or excess

catastrophe reinsurance" include treaty reinsurance, the kind

ELSIC actually obtained?

(3) Does the parenthetical phrase at [2], that the retained

amount is "subject to reduction," create an exception to the

proportional reduction provision at [4], such that any

reduction in ESLIC's retained risk by means of “general

excess loss or excess catastrophe reinsurance" did not affect

Seven Provinces' obligations? Or, alternatively, does it list

forms of reinsurance that, while they would not constitute a

breach of the net retention warranty, nonetheless, by reducing

the retained line to an amount less than "as above," trigger

the proportional reduction provision?

These ambiguities could not be resolved at trial through

testimony from the parties who entered into the agreement.

Although each party testified to the meaning of the relevant

ORY ae

32a

provisions, neither was able to call or even identify the Sayre

& Toso agent who drafted this agreement thirty-five years

ago. Sayre & Toso itself has since gone out of business.

1 do not find it appropriate to construe all of the

ambiguities in the document against the drafter. Although the

first page of the certificate bears the name of Seven

Provinces, both parties acknowledged that the certificate was

made up of a series of standardized forms routinely used by

Sayre & Toso, who was at the time the agent of each.° As

CU's expert, Dr. Robert Gottheimer, testified, the separate

pages could have been drafted by any one of the several

companies Sayre & Toso represented. Only the sections in

bold and capital letters were completed at the time the

relationship was formed, and they do not contain any of the

language that is in dispute.

Given the ambiguity of the fac. cert. language, and the

lack of any witnesses to the formation of the agreement, each

side offered expert testimony interpreting the agreement in

the light of the custom and practice of the reinsurance

industry. CU offered the testimony of Dr. Robert Gottheimer

("Gottheimer"), a professor at the College of Insurance in

New York who has been working in the insurance industry

since 1953 and in reinsurance since 1964. Seven Provinces

offered that of Austin Thornton ("Thornton"), who has

worked in the insurance industry since 1975 and has

published an article on the perils of CERCLA liability claims.

1. Gottheimer's testimony

Gottheimer testified that the facultative certificate did not

restrict ESLIC's right to obtain treaty reinsurance. The

"warranty" phrase [1], he explained, only warranted the

policy's "rates, terms, and conditions,” not the net retention

figure. With respect to the net retention language ({2] and

[4]), he offered three linguistic explanations of why it did not

provide for the reduction of Seven Provinces’ obligations in

the event that ESLIC obtained treaty reinsurance. First,

33a

because the custom and practice of the industry has long been

for the reinsured to have the right to obtain treaty reinsurance

on a facultatively reinsured risk, industry practice is to use

unequivocal language when an absolute bar on such

additional reinsurance is intended. The customary language

to indicate such an absolute bar would have included the

phrase "absolute net," a statement that "only" a particular

kind of treaty reinsurance, such as excess loss, was allowed,

or a description of the risk as “not reinsured in any other

way." None of that language appears here.

Second, Gottheimer testified that the proportional

reduction provision could only refer to facultative

reinsurance because it refers to insurance "on the identical

subject matter and risk and in identically the same

proportion."[3] Treaty reinsurance by definition covers an

entire class of the reinsured's business, all of its liability

insurance, for example, or all of its earthquake insurance.

Only facultative insurance, which reinsures one particular

risk, can be "on the identical risk."

Third and finally, Gottheimer testified that the

parenthetical at [2] ("general excess loss or excess

Catastrophe reinsurance"), which purports to describe the

allowable types of reinsurance, while unusual, most likely

includes treaty reinsurance. He testified that it reflects British

and European rather than United States usage, according to

which the phrase "general reinsurance" refers to treaty

reinsurance. He acknowledged that the punctuation of the

phrase -- without a comma between "general" and "excess

loss" -- appeared to refer to "general excess loss" and

"general excess catastrophe" reinsurance, not to "general

reinsurance, excess loss reinsurance, and excess catastrophe

reinsurance." Nonetheless, he believed that the reference to

general reinsurance, however configured, could only be a

reference to treaty reinsurance.

EE __E_eeEEee

. 34a

Gottheimer reinforced his textual interpretation with a

policy explanation. A net retention provision, he explained, 1s

meant to create an incentive for the underwriter to investigate

carefully the business it writes. A reinsurer does not itself

evaluate the quality of the risk it is reinsuring. Instead, it

must rely on the reinsured’s underwriting judgment. If the

reinsured could cede all of the risk to reinsurers, it would

have no incentive to exercise that judgment carefully,

because it would bear none of the consequences of

underwriting bad risks. These incentives simply do not apply,

however, when the reinsurance in question is treaty

reinsurance. In that case, the reinsurance covers an entire

class of business and cannot affect the incentives to evaluate

any particular risk carefully.

Finally, Gottheimer testified that the separate functions of

the local agent and the head office raise a practical barrier to

the drafting of a facultative certificate that would reduce the

reinsurers obligation if the head office carried treaty

reinsurance. Neither side to the formation of the facultative

relationship at the local level would be likely to know of or

have control over the conclusion of quota share treaties by

the head office. Neither side, at the local level, would be

likely to know the absolute amount retained. In this case, for

example, it was undisputed that, while the facultative

certificate was issued in October 1963, the relevant treaty

reinsurance was already in effect several years before. I find

it hardly likely that such uncertain obligations would have -

been entered into as a matter of course, using a pre-printed

form such as in this case. Gottheimer’s interpretation makes

sense: the local office only negotiated conceming the

facultative reinsurance that it would obtain, not the treaty

reinsurance the head office entered into.

2. Thornton's Testimony Compared

The defendant offered the testimony of Austin Thornton,

a claims director at Munich American Services Corporation

35a

with twenty-three years’ experience in the insurance business.

Thornton acknowledged that reasonable minds could differ as

to the meaning of the retention clause in this case, but his

interpretation was that ESLIC was prohibited from obtaining

quota share reinsurance. "General excess loss or excess

catastrophe reinsurance," he maintained, nieant only "excess

loss" or “excess catastrophe" reinsurance, not treaty

reinsurance. Therefore, treaty reinsurance was barred, or, at a

minimum, if ESLIC obtained treaty reinsurance, Seven

Provinces’ obligations would be reduced accordingly.

Thornton also argued that the phrase "the local office. . .

retains" required Sayre & Toso to maintain $ 225,000 for its

own account. This provision, he testified, was also breached.

Sayre & Toso, it was undisputed, was not a local office of

ESLIC, but a managing general agent. As it was no more

than a broker, it was incapable of retaining risk for its own

account.

This second argument was implausible on its face. As

Gottheimer testified uncontested, for reasons of state law, a

number of insurers, including Seven Provinces itself,

operated through managing general agents during this period

in the development of the American insurance market. To

maintain that this warranty provision required that such

managing general agents act as local offices and maintain

risk for their own account, rather than for the account of the

principles they represented, would make all of the facultative

certificates entered into by Sayre & Toso on this standardized

Seven Provinces form incapable of performance ab initio. I

decline to accept such an absurd result.

I find, moreover, that the policies behind net retention

agreements would not be jeopardized by allowing managing

general agents to enter into facultative reinsurance contracts,

even if they were not legally configured so as to be able to

retain risk for their own account. Acting as ESLIC's agent,

Sayre & Toso retained the risk on behalf of ESLIC. The

36a

probity of its underwriting decision would directly impact

ESLIC's profits. The incentive to underwrite carefully would

be maintained both by its general duties to ESLIC under

agency law and, more particularly, by the industry practice,

testified to by Gottheimer, of linking an agent's commission

to the principal's profits.

On the issue of which types of reinsurance were

permitted by the net retention clause, both Thornton's and

Gottheimer’s explanations were plausible. Overall, 1 found

Gottheimer to be more credible. His explanation of the

relevant language was detailed and consistent on both direct

and cross examination. It accounted for all aspects of

paragraph two, both in terms of the paragraph's internal logic,

and in the context of reinsurance industry custom, practice,

and policy. Thornton's explanation was less comprehensive;

it failed to take into account, for example, the policy reasons

behind treating facultative and treaty reinsurance differently,

or the language referring to insurance on "the identical

subject matter and risk and in identically the same proportion

I also found Gottheimer's testimony more credible

because of the extensive experience on which it was based.

Gottheimer has been writing reinsurance contracts for thirty

years; in fact, he was the only witness in this case who was

active in the industry at the time the contract in question was

formed. Although he worked in America, his experience

encompassed placing business in British and global markets.

He has been teaching principles of reinsurance for over

twenty-five years, and has published two texts and a number

of articles on reinsurance matters. One chapter in one of the

texts he has written is devoted entirely to drafting facultative

certificates. Go:theimer holds numerous degrees in insurance,

beginning with a 1958 B.A. as an insurance major and

including both a PhD in management with a focus on

insurance and a specialized reinsurance degree completed as

recently as 1991. He has held a number of positions in

37a

insurance industry associations over the past fifteen years and

acted as an arbitrator in over 40 insurance disputes.

Austin Thornton's experience in the insurance and

reinsurance industry, although not insubstantial, does not

nearly approach that of Gottheimer. His insurance industry

experience goes back to 1975, two decades after Gottheimer

began in the business. His experience also lies almost

exclusively in claims adjustment, rather than underwriting.

Thus, while Gottheimer has participated for decades in the

drafting of hundreds of contracts such as the one at issue

here, Thornton's experience is less relevant to questions of

contract formation and interpretation. Nor does Thornton

share a fraction of Gottheimer's teaching, writing,

educational, or industry leadership experience.

Finally, I found Gottheimer's testimony credible because

of his impartiality. Although a frequent expert witness on

insurance and reinsurance matters, his only connection to this

dispute is as an outside expert. When questioned on cross-

examination about any possible ties to the plaintiffs, he

acknowledged that he had been involved in litigation with the

plaintiffs counsel before -- but on the opposite side.

Thornton, by contrast, has been intimately involved in this

dispute since early 1995, when he was hired as a consultant

by Martin Rebisz ("Rebisz"), the Seven Provinces officer in

charge of handling this claim. He accompanied Rebisz to

CU's Boston offices to inspect CU's files, and he participated

with him in meetings with CU officers. and employees.

Following that meeting, Thornton drafted critiques of CU's

allocation that Rebisz submitted to CU in an attempt to

persuade it to reduce its claim. As Rebisz testified,

Thornton's employer, Munich American, has an important

ongoing relationship with Seven Provinces’ parent company,

ING Insurance.

3. Summary of Fact-Findings on Net Retention

mmc,

38a

I find that the facultative certificate only provided for

Seven Provinces’ portion of the Teledyne risk to be reduced if

ESLIC obtained facultative reinsurance on its portion of the

risk. I find that the facultative certificate allowed ESLIC to

carry treaty reinsurance that would cover its portion of the

Teledyne risk.

Given my finding that CU was allowed to obtain treaty

reinsurance, I do not need to reach the issue -- vigorously

argued by the parties -- of whether the restrictions in the

facultative certificate covered only Sayre & Toso, leaving

CU the freedom to obtain any type of reinsurance it chose. As

CU was permitted to obtain the type of reinsurance it did,

without any corresponding reduction in Seven Provinces’

obligations, that issue is irrelevant.

| therefore find that Seven Provinces’ obligation under the

reinsurance relationship with ESLIC was not reduced by the

existence of the CU treaty reinsurance pool.

C. Seven Provinces' Challenge to CU's Allocation of

the Teledyne Settlement

1. The Allocation

Seven Provinces also challenges CU's decision to allocate

$ 843,000 of the $ 2.2 million settlement to the

semiconductor site and to the 1963-1964 policy year.

Generally, it argues that other allocations between the various

Teledyne sites and the policies that covered them would have

been "more reasonable.” In addition, it argues that part of the

settlement should have been allocated to a "difference in

conditions” policy between ESLIC and Teledyne, and that

CU should not have paid Teledyne for its environmental

liability because such losses were excluded from coverage by

the underlying Teledyne-ESLIC policy's “owned property

exclusion."

To explain the allocation of the Teledyne settlement

among the ESLIC-Teledyne policies, CU offered the

39a

testimony of the two employees directly responsible for

making that allocation: James J. McKay ("McKay"), an

employee in the ceded (or reinsurance) department and Bryan

Drees ("Drees"), his supervisor. Drees’ handwritten notes,

which he authenticated at trial, show that he had identified

three relevant ESLIC-Teledyne policies’ in CU's records: E-

506432, the 1963-64 policy at issue in this case, E-63854,

which covered the period November 1, 1970 to November 1,

1971, and policy E-61904, which ran from March 15, 1970 to

November 1, 1972. The terms of policy E-506432 have been

described in detail above. On policy E-63854, ESLIC was the

primary insurer, covering the first $ 500,000 in the first year

and the first $ 50,000 in excess of $ 50,000 in the second.

Policy E-61904 covered only losses in excess of $ 1 million

dollars, with ESLIC's total liability limited to the next $ 1

million.

Drees’ notes set out all of the insurers and reinsurers on

each policy. On the 1963 policy, Drees' notes reflect CU

records identifying four reinsurers and distributing the risk as

follows: after the first $ 50,000 was paid by a primary

insurer, the next $ 450,000 would be split equally between

ESLIC and Seven Provinces; the next $ 500,000 in excess of

$ 450,000 (that is, any losses between $ 500,000 and $ |

million) would be paid by Brandt; and the last $ 1 million

between $ 950,000 and ESLIC's ceiling of $ 1.95 million was

divided between two reinsurers, Security Mutual and

Employers Mutual, each of which reinsured $ 500,000. The

notes also reveal that Security Mutual had been "liquidated

years ago." Although CU did not possess the fac. cert.

memorializing the reinsurance relationship with Seven

Provinces, Drees relied on a card in CU's internal records,

which listed the fac. cert. numbers and terms of all the

reinsurance on the Teledyne policy. Drees recognized the

card as a typical Sayre & Toso record.

There was also a “difference in conditions" policy

between Teledyne and ESLIC, but CU did not allocate any

40a

settlement dollars to it because Teledyne had never presented

it to CU for coverage. CU understood it to be inapplicable to

the hazardous waste claim in any case, because it covered

depreciation to Teledyne's property, buildings, or machinery,

not general liability.

McKay and Drees explained in detail how they allocated

the $ 2.2 million settlement between policies E-506432 and

E-63854 according to their standard allocation procedures.

First, Drees wrote to John Frumer ("Frumer"), CU's in-house

counsel who had negotiated the settlement, requesting: "(1)

the settlement amount (2) the allocation of settlement $ $ $ to

the various sites and the logic driving such allocation (3)

explanatory note regarding $$ allocated to ‘buy-back,’ if

applicable." As Drees and McKay explained, they believed

that the only legitimate manner in which to allocate

settlement dollars between policies and sites was to follow

the logic of the actual settlement negotiations with the

insured. |

Frumer responded that seven sites had driven the

settlement and two policies would be impacted. The release,

he reported was a "throw in" for which no money had been

exchanged. Although Drees conceded on cross-examination

that a release "always has value," he added that that value

cannot always be translated into monetary terms. He insisted

that in allocating no settlement dollars to the release he was

following Frumer’s account of the actual value CU and

Teledyne had assigned to the release in the course of

negotiations.

McKay received this information and proceeded to

allocate the entire $ 2.2 million settlement among ESLIC

policies and their reinsurers. Because fixing the date of loss is

normally difficult in a hazardous waste claim, he assumed

that the loss could have occurred in its entirety within any

one-year policy period.’ The total settlement dollars were

then divided between the seven key sites according to the

4la

percentage of Teledyne's total clean-up costs that they

represented. Only one site was in operation in 1963, so only

that site's losses were allocated to the policy that Seven

Provinces had reinsured. That was the semiconductor site, the

most polluted of all Teledyne's sites, with an estimated clean-

up cost of $ 20.93 million. Because this represented 38.32%

of Teledyne's entire clean-up costs, 38.32% of the settlement

amount was allocated to that site, for a total of $ 843,040. Of

that amount, the first $ 450,000 was split between ESLIC and

Seven Provinces under the reinsurance agreement, with the

remaining $ 393,040 allocated to Brandt under the excess of

$ 500,000 reinsurance contract. ESLIC's $ 225,000 was in

turn billed to a quota share treaty pool in which CU retained

20% of the risk. If CU had been able to identify Brandt, it

would have been left with a loss of only $ 45,000 on the

1963-64 policy.

Six other sites had been operating during 1970 and 1971

and were therefore covered by policy E63854. The remaining

$ 1,356,960 of the settlement was divided between those six

sites, again according to the percentage of Teledyne's total

clean-up costs each represented. The calculations were

careful and detailed, with each site accorded a specific value

ranging from $ 100,100 to $ 592,240. The total was billed to

the 100% reinsurer on those sites, Agency Managers.

CU later returned the $ 1.3 million to Agency Managers,

after it pointed out to McKay that if Teledyne's $ 20 million

in losses were spread out evenly over the 20 year period in

question, in no single year would the loss have been in excess

of $ 1 million. Thus, ESLIC's coverage obligations under the

excess of $ 1 million policies would never have been

triggered, and no settlement money should have been

attributed to those policies.”

2. Evidence of Bad Faith or Unreasonableness

CU offered contemporaneous written records of the

allocation decision, reiterated and explained by McKay and

42a

Drees at trial, as evidence that the Teledyne allocation was

done in good faith according to their usual settlement

allocation procedures in hazardous waste claims. Seven

Provinces responded by attempting to draw inferences of bad

faith from discrepancies in CU's records and admissions by

Drees and McKay on the witness stand. It later concluded its

case with Thornton's expert testimony as to alternative

methods of allocation.

Seven Provinces pointed out that CU's records are

inconsistent as to how many sites were involved in the

Teledyne settlement, and at what loss to CU. In his first

notice to reinsurers of the claim in February 1993, Drees

wrote that "I understand that there are approximately twelve

sites in all, two or three of which are of major import." A CU

Senior Executive Claims Advisory, prepared for CU's

management in April 1993, listed the two main sites, the

Semiconductor site and the Wah Chang site, and projected

CU's liability as $ 1.95 million for the first and only $

250,000 for the second.'° The Settlement Agreement itself

lists twenty-two sites.

McKay and Drees, however, explained each of these

discrepancies in a manner consistent with their overall

testimony. Drees' February letter and the Senior Executive

summary, they explained, were merely preliminary and

general descriptions of the claim meant to alert the reinsurers

and CU management, respectively, of pending liability. They

were not meant as detailed accountings. As for the difference

between the twenty-two sites settled and the seven to which

monies were allocated, McKay stated that settlements of

large and complex environmental claims are normally driven

by the few most polluted sites; it was to these key sites that

he allocated the ultimate settlement amount. I found this

testimony to be logical, consistent, and credible.

Seven Provinces’ counsel tried to suggest to McKay and

Drees that the allocation was a bad faith attempt to minimize

43a

CU's exposure by allocating the settlement dollars to policies

on which there was available reinsurance. McKay directly

denied that the allocation was affected by the existence of

solvent reinsurers or the identity of the reinsurer on any

particular policy, and Seven Provinces could offer no

evidence to contradict him. Seven Provinces’ counsel tried to

elicit from both McKay and Drees that, having made a

mistake that required CU to return $ 1.3 million to Agency

Managers, CU was all the more determined to recover the

full $ 225,000 from Seven Provinces. Both men denied such

motivation, which, in any case, would be irrelevant to the

reasonableness or accuracy of the Seven Provinces allocation,

made at the same time as the Agency Managers allocation

and long before the Agency Managers' mistake was

discovered.

Seven Provinces also offered the testimony of Thornton

on alternative allocations, attempting to show that the

allocation was commercially unreasonable. Thornton testified

that the allocation encompassed too few Teledyne sites.

Instead of the twenty-two sites CU and Teledyne mentioned

in their settlement agreement, the allocation should have

taken into account thirty-five sites at which the EPA had

identified Teledyne as a potential polluter. The reason for

going beyond the settlement, he explained, was that CU had

obtained a global release from Teledyne. Hence, all potential

future liability on Teleydne's part should have been

considered.

In addition, Thornton considered the effect on Teledyne's

liability if certain other variables were altered, such as

whether other polluters might have been identified at any of

these sites. Finally, Thornton used a different method for

allocating the total clean-up costs per site per year. In place

of CU's method of apportioning the settlement among the

sites according to their share of Teledyne's total $ 20.93

million clean-up costs, Thornton aggregated all of the clean-

44a

up costs for all of the sites and allocated that total according

to each year of each site's operation.

Although Thornton's testimony established that other

allocations were possible, I did not find it conclusive proof

that CU's allocation was unreasonable. Were the allocation

entirely unacceptabie, Seven Provinces could hav; brought a

declaratory judgment action to establish that fact, but it never

did. Indeed, Thornton testified that the purpose of presenting

the alternative allocations to CU was strategic: to lead to a

negotiated compromise.

3. Summary of Fact-Findings on Allocation Issue

I find that CU's allocation of settlement dollars to the

seven most important sites that drove the settlement was

reasonable. I find that it was also reasonable to allocate the

settlement total according to the percentage of Teledyne's

total clean-up liability that each site represented. I was not

persuaded that CU should have allocated settlement dollars to

sites that were never even discussed in the settlement.

I find that there was no evidence of bad faith or

unreasonableness in CU's allocation of settlement monies

between its policies with Teledyne.

I find that there is no evidence that CU allocated the

settlement among policies so as to maximize its reinsurance

recovery, or that its allocation was in any other way affected

by the existence of reinsurance.

I find that there is no evidence that any portion of the

settlement figure was an ex gratia payment made in exchange

for the environmental release.

I find that CU was not obligated to allocate settlement

dollars to sites identified by the EPA but not within the

settlement CU actually reached with Teledyne.

D. The 93A Claim

1. The History of CU's Claims Submission

45a

a. 1993-1994 Communications

CU's 93A claim is based on Seven Provinces’ protracted

failure to pay the claims submission CU sent it on August 26,

1993. As the correspondence between the parties was

authenticated by both sides and admitted at trial, the

following account draws on that correspondence as well as

on the trial testimony.

On February 4, 1993, Drees wrote to all reinsurers on the

Teledyne policies, alerting them that a hazardous waste claim

had been made by Teledyne and a settlement was being

negotiated. Attached to the letter was a copy of a CU internal

spreadsheet showing the existence of the Seven Provinces

reinsurance.

On August 16, 1993, McKay advised Seven Provinces of

the settlement, and on Drees’ advice he also sent the letter to

Seven Provinces’ counsel, Fred Northcraft ‘“Northcraft"), two

days later. He then sent Northcraft the official bill for the

Teledyne reinsurance on August 26, 1993, accompanied by a

cover letter explaining the legal and mathematical

calculations underlying the allocation as well as charts setting

out the policy numbers for all CU-Teledyne policies, the

Seven Provinces facultative certificate number, and a list of

each of the seven sites and the percentage of the settlement

dollars allocated to that site. The letter also stated that,

according to the counsel who had negotiated the settlement,

the environmental release was a “throw in" for which no

settlement dollars had been paid.

The initial bill did not include a copy of the facultative

certificate. CU itself did not have a copy of the fac. cert. in its

files, but Drees assumed that Sayre & Toso would have sent a

copy to the reinsurer at the time it was drafted. Drees did not

know whether Sayre and Toso would have also sent a copy to

ESLIC or CU as part of its normal practice. In fact, as Rebisz

testified, Seven Provinces did not have a copy of the fac. cert.

in its files, nor was this reinsurance relationship listed in its

46a

partial index of business written by Sayre & Toso. This was

not surprising, as Rebisz testified that only 200-300 of the

estimated 5,000-30,000 policies Sayre & Toso had written for

Seven Provinces were listed in the index. In fact, it was more

likely than not, he testified, that Seven Provinces would not

have a copy of the fac. cert. when a Sayre & Toso claim was

filed.

McKay followed up with several phone calls to

Northcraft. On August 30, 1993, Seven Provinces responded

by requesting more information. A pattern quickly developed

by which CU would seek payment from Seven Provinces and

Seven Provinces would respond only after some delay, and

then by requesting further information. Once CU provided

that information, Seven Provinces would come back with a

new and different question.

In September of 1993, Norihcraft told McKay he would

get back to CU soon about the billing, and that his client

might seek a commutation of all outstanding reinsurance

relationships with CU. In October, McKay left a series of

messages for Northcraft, which Northcraft did not return.

Frustrated by what he saw as an unusual reluctance to pay,

McKay referred the matter to Drees, his supervisor. McKay

testified that he had never dealt with a reinsurer who was so

reluctant for so long to acknowledge the existence of a

reinsurance relatiorship.

In November of 1993, Northcraft requested another copy

of the August billing and supporting documentation. McKay

sent that information again, along with a copy of CU's

evidence of the reinsurance relationship, a Sayre & Toso

record listing the Teledyne policy number (E506432), and the

amount of reinsurance and the facultative certificate number

for each reinsurance relationship. The relevant line clearly

lists both the amount of reinsurance ($ 225,000) and the

facultative certificate number "SP016069." The "% of

47a

reinsurance" column has some information scratched out, but

"50% of 450" is clearly legible.

In early December, after several months of messages and

brief and inconclusive conversations with Northcraft, Drees

called Seven Provinces in the Hague directly. He was told

that Martin Rebisz was the person familiar with the claim,

and that Rebisz would call him back within a few days.

Instead, the next communication from Seven Provinces was a

letter from Northcraft, asking for more information on the

existence of the reinsurance relationship and justification for

the allocation decision. He stated that Seven Provinces could

find no evidence in their own files of the relationship. He also

protested on several grounds that Seven Provinces was being

asked to pay 25% of the total settlement allocated to the

semi-conductor site, pointing out that Seven Provinces had

covered only one year out of thirty years of Teledyne

operations and CU had other, later policies with Teledyne.

This response neither acknowledged nor responded to the

detailed explanation of the allocation that McKay had already

provided in August. As he had in September, Northcraft

raised an unrelated matter, Seven Provinces’ desire to settle

all of its reinsurance relationships with CU, most of them

involving workers compensation claims. He suggested that

all of these matters be settled together.

McKay wrote to Seven Provinces again in January,

explaining that if the $ 20 million clean-up cost for the

semiconductor site was spread out over 20 years, the annual

exposure would be $ 1 million dollars. As CU had issued one

year of coverage that could have been impacted by the

semiconductor site, it could fairly have expected to pay at

least $ 1 million towards the 20 year clean-up costs. It

therefore felt that $ 843,000 represented a fair settlement.

Northcraft responded with more questions. He misdescribed

the allocation explanation he had been given, treating the $

2.2 million settlement as a settlement between Teledyne and

all of its insurers, rather than just with CU, and treating the

48a

settlement figure as if it were Teledyne's actual loss figure.

He then raised two new questions: how had the settlement

been allocated among the 20 years of coverage, and was

Seven Provinces the only reinsurer in 1963-64. He also

mischaracterized the evidence of the reinsurance relationship

that CU had sent from its files as merely CU's "statement

about the policy and its terms," and reported that Seven

Provinces was "hesitant" to make the payment without

further proof. He concluded by again asking for a global

commutation of all CU-Seven Provinces business.

b. The February 1995 Visit

In February 1995, Rebisz and Thornton visited CU's

Boston offices to examine the files and meet with CU officers

about the claim. Rebisz and Thornton were provided with all

of CU's relevant files and with a room in which to inspect

them unsupervised. They inspected them for approximately

four hours, but, relying on CU's promise to provide them

with any copies they needed, they did not take the time to

read all of the documents in detail. Instead, they tabbed

several documents which CU agreed to copy and send them.

One fact made an impression on Rebisz and reinforced his

doubts as to whether the reinsurance relationship described in

the Sayre & Toso records was still in force: the fac. cert.

number in the Sayre and Toso records was "SP016069,” but

CU's copy of the Teledyne pol:zy carried a handwritten note,

"C/R [carries reinsurance] SP015949."

The two sides then met to discuss the claim, with Rebisz

and Thornton representing Seven Provinces and McKay,

Drees, Harvey Lewis ("Lewis"), and Frumer from CU.

Frumer was there to explain the settlement to Rebisz and

Thornton, as he had personally finalized the deal. Although

Drees described the meeting as "cordial," McKay left the

meeting early, angry at what seemed to him to be another

Seven Provinces delaying tactic.

49a

In the course of the discussion, Lewis mentioned that CU

had retrieved a number of Sayre & Toso documents from a

warehouse in California. On this point, the parties’

recollections differ sharply. Rebisz remembers that Lewis

refused to tell him where the warehouse was, but Drees and

McKay testified that Lewis told him that to the best of his

knowledge, that warehouse had been shut down. Drees added

that Rebisz and Lewis discussed the possibility of joint

efforts to locate where any remaining files might have been

moved, and Drees asked Rebisz to let CU know if Seven

Provinces discovered the location of another warehouse with

Sayre & Toso records. I found Drees and McKay» more

credible on this point. By February 1995, it was in CU's

interest to give Seven Provinces all the information it meeded

to decide to pay their bill. That, indeed, was the purpose of

Rebisz' visit to Boston, during which, both sides agreed,

Rebisz and Thornton had unrestricted access to CU files.

Towards the end of the meeting, CU requested a signed

confidentiality agreement from Rebisz in exchange for copies

of the documents. As Drees and McKay explained, although

they would have had a duty to provide any relevant evidence

to a reinsurer, Seven Provinces had not yet acknowledged

that it was a reinsurer. Rebisz testified that he assented in

principle to the confidentiality agreement, and left Boston

believing the documents would soon be sent to him.

A week after the Boston meeting, however, McKay wrote

to Northcraft, explaining that absent some acknowledgement

from Seven Provinces that it was, in fact, the reinsurer, it

would not release the claims documents from Teledyne

without a signed confidentiality agreement. Although CU

recognized its fiduciary duty to release all ¢ocuments to a

reinsurer, it did not have such a duty to someone who was not

a reinsurer, With that letter, McKay sent copies of all of CU's

underwriting materials regarding the Teledyne risk, including

several Sayre & Toso forms, the facultative certificates with

the other reinsurers, Employer's Mutual and Security Mutual,

50a

and the underlying policy between Teledyne and ESLIC."'

McKay testified that CU was not concerned that their

demand for a confidentiality agreement would delay Seven

Provinces’ investigation, as payment had already been

delayed for two years.

McKay and Northcraft spoke a few days later. Northcraft

was still reluctant to acknowledge the reinsurance

relationship; the closest he would come was an offer to state

that Seven Provinces was "more likely than not" the

reinsurer. Rebisz testified that this reflected his belief at the

time. Northcraft's next offer was to recognize the reinsurance

relationship in exchange for information about the location of

the Sayre & Toso warehouse. McKay responded that CU

believed that Seven Provinces already had sufficient

information to determine whether the relationship existed and

that, as to the warehouse, Lewis had already told Rebisz that

the warehouse to which he had referred at the meeting was no

longer in existence.

Over the next few months, the parties continued in a

stalemate. CU demanded an acknowledgment of the

reinsurance relationship and stated that until it had that

acknowledgment it would not hand over claims information,

which it believed was in any case irrelevant to Seven

Provinces’ obligation to pay. Seven Provinces responded that

there was a "good possibility" that Seven Provinces was the

reinsurer, yet at the same time it decried the sparsity of CU's

records and refused to acknowledge the relationship until it

had obtained all "reasonably available information." Seven

Provinces continued to demand the claims information

(which would not have revealed anything about the existence

of the relationship) and the location of the warehouse (which

CU had already stated was closed). In May 1995, CU filed

this suit.

c. August 1995: Locating the Certificate

Sla

By August 11, 1995, Seven Provinces had finally located

the fac. cert. It contained exactly the terms, and the policy

number, listed in the Sayre & Toso records CU had sent to

Seven Provinces two years before. Yet rather than

acknowledging that the reinsurance relationship had been

proven and settling the litigation, Seven Provinces continued

to raise new issues and questions. In October 1995, for

example, Rebisz wrote to Drees, asking why the quota share

treaty "does not apply . . . and why part of the Teledyne

settlement would not be recoverable from your Quota Share

reinsurers." He also questioned why no money was allocated

to the difference in conditions policy. He even raised, at that

late date, the issue of CU's initial decision that its policies

with Teledyne covered hazardous waste claims, although

conceding that "it would appear that under the terms of the

policy, denial of coverage for the environmental claims

would be hard to justify."

Drees refused to respond to these questions, except by

demanding payment. He testified that he was "baffled" by

these requests, because he believed that Seven Provinces had

enough information to decide whether to pay the bill. He

could see no relevance in the actual quota share treaty, or in

the difference in conditions policy.

Seven Provinces’ next step was to offer $ 25,000, which

Rebisz described in one sentence as "a fair resolution of your

claim" and in the next as an "interim payment, pending

receipt of further documentation." After consulting with CU's

litigation counsel, Drees wrote to Rebisz rejecting this offer

and demanding full payment.

Drees explained, and Rebisz concurred, that it was not

unusual in the industry for a reinsurer to pay the full amount

billed, reserving rights to recover it should the bill turn out to

be incorrect. Drees also felt $ 25,000 was "woefully

inadequate” even as an interim payment, given that over two

years had passed since the billing. Instead, he took the

52a

Opportunity to demand that Seven Provinces identify which

issues were still unresolved. Not surprisingly, given the

confusion caused by Seven Provinces’ constantly shifting

questions, Drees misunderstood Seven Provinces’ remaining

objections: he failed to mention the dispute over allocation

which took up several days of trial testimony, because in

October 1995 he thought it had already been resolved.

In 1996, Seven Provinces began taking a new approach.

Now in possession of proof of the reinsurance relationship, it

demanded a host of documentation, including a "certified

copy" of the quota share treaty, further justification of the

allocation decisions, accounts receivable documenting all

other amounts CU had been paid by any other insurers on the

Teledyne claim, "documentation" of why the quota share

treaty and the difference on conditions policy were not

applicable, and “all in/external reinsurance ‘lay-offs'," a

demand it acknowledged would have to be negotiated before

it would be reasonable or workable. It repeatedly demanded

further explanations of the allocation decision, which it now

characterized as "a departure from and in contradiction to the

underlying ‘global settlement’ with Teledyne." It also began

to offer alternative allocation "models" developed by

Thornton.

2. Summary of Conclusions on 93A

CU, through the testimony of McKay and Drees,

described this history as one of its sincere and dogged

attempts to collect on its August 1993 claims submission, and

Seven Provinces' evasiveness and obstructionism. On behalf

of Seven Provinces, Rebisz described it as at worst an

unfortunate cross-cultural misunderstanding. At first, he

explained, Seven Provinces was merely concerned about

finding more evidence of the reinsurance relationship before

paying such a large claim on such an old agreement. Rebisz

testified that he had only once paid a claim without finding

the fac. cert., and then only under court order. He also

53a

expressed concerns about whether the relationship had been

cancelled between 1963 and 1993, an issue he had not raised

in his correspondence with CU prior to trial and which does

not seem to be related to the absence of the fac. cert. but

merely the age of the claim.

After the fac. cert. was found, Rebisz explained, Seven

Provinces’ further requests for information and challenges to

the coverage, settlement, and allocation decisions were

merely the normal investigations that every reinsurer is

entitled to conduct. At all times, he maintained, Seven

Provinces was willing to compromise the claim. It was CU

that was withholding documents and the location of the Sayre

& Toso warehouse.

I found McKay and Drees credible. They described in

consistent detail an allocation and collection procedure that

was reasonable and customary. They openly admitted that

they became increasingly frustrated with Seven Provinces

and distrustful of its purpose in requesting ever new and

different information from their files. I found credible their

explanation of the occasions on which they hesitated or

refused to provide further documentation or justifications of

their bill.

I did not find Rebisz credible. He was evasive on the

stand, often refusing to answer direct questions about the

facts of the case, responding instead with generalized

assertions about his usual behavior in handling reinsurance

claims or explanations of his understanding of reinsurance

industry practice in general. On the central fact of when he

saw the fac. cert. for the first time, Rebisz could not

remember a single date or detail.

I did not find credible Rebisz's denial that Seven

Provinces had deliberately avoided coming to a decision on

whether to pay CU's bill. Disingenuously, Rebisz attempted

to disclaim any responsibility for the delay in responding to

CU's bill by stating that the first billing sent to the Hague

54a

must have been lost in the mail, so that he had not found out

about CU's billing or seen any proof of the reinsurance

relationship until July 1994. He acted as if he could not be

charged with the knowledge of his lawyers, who had received

the bill and supporting documentation immediately in early

August 1993. In a similarly evasive vein, Rebisz repeatedly

complained of the few instances on which CU had withheld

information (the Teledyne claims documents and the location

of the defunct warehouse) as if this excused all of Seven

Provinces’ own logically and factually unrelated dilatory

tactics.

Throughout his testimony, Rebisz evaded the direct issues

of whether he believed Seven Provinces was obligated to CU

and, if so, for how much. When I asked him how much he

believed Seven Provinces owed CU, now that he had

obtained the fac. cert. that proved the existence of the

reinsurance obligation, he replied, anywhere from the full

amount of $ 225,000 to $ 45,000, the figure that would reflect

his interpretation of the net retention clause. He then

corrected his answer, to anything from $ 225,000 to nothing,

even though Seven Provinces had at no time since the fac.

cert. had been found offered any argument that there was a

valid defense to the entire bill. Yet at the same time Rebisz

maintained that Seven Provinces was not refusing to pay, but

merely would prefer to mediate or arbitrate in an attempt to

compromise the bill. Companies of the stature of CU and

Seven Provinces’ parent company ING, he stated, should be

able to work out some fair commercial settlement of the

claim without recourse to litigation.

Rebisz pointed to two circumstances that would have

given a reinsurer some concern about the CU billing: first,

the apparent non-existence of the fac. cert., and second, the

discrepancy between the fac. cert. number in the Sayre &

Toso records and the number handwritten on CU's copy of

the Teledyne policy. Nonetheless, these two facts cannot

account for the variety and multiplicity of Seven Provinces'

55a

objections to the billing. Rebisz's own testimony at trial

presented a moving target in keeping with the Seven

Provinces' record of constantly shifting defenses and

objections to payment. One moment, he testified that he had

never reached a decision on whether CU's allocation was

unreasonable. The next moment, he testified that the

allocation was not up to generally accepted standards, indeed,

"way out of line," because it allocated no money to the

release and considered too few Teledyne sites. At trial, he

expressed an ongoing concern that the reinsurance

relationship might have been cancelled or amended some

time after 1963, a concern that he did not express in any of

his correspondence with CU prior to trial and which his

counsel did not introduce into this litigation.

Likewise, Rebisz raised again on the stand defenses to

payment that had long been resolved and that were, in any

case, ineffective as a mater of law. For example, he expressed

continuing doubts about Seven Provinces’ duty to pay CU,

based on CU's failure to allocate settlement dollars to the

difference in conditions policy, in spite of CU's clear

statement, supported by documentation, that Teledyne had

made no claim on that policy and it was considered

inapplicable to hazardous waste claims under United States

insurance law. He expressed doubts on the stand that the

underlying CU policy even covered Teledyne's hazardous

waste liability, because of the "owned property" exclusion, in

spite of having written to CU in October 1995 that "under the

terms of the policy, denial of coverage for the environmental

problem at issue might be hard to justify," and in spite of the

fact that such challenges to the basic coverage decision are

barred, as Rebisz acknowledged, by the doctrine of "follow

the settlements,"'? a doctrine which is expressly incorporated

into the fac. cert.

Seven Provinces’ counsel participated in this "moving

target" strategy even at trial, raising the "owned property

exclusion" issue on the second day of trial, without ever

56a

having raised it at any time during the two years of litigation.

I found Seven Provinces' considerable evidence of alternative

possible allocations equally disingenuous. After conceding

on the first day of trial that the law barred any challenges to

allocation except those based on bad faith or ex gratia

payments, Seven Provinces endeavored at length to convince

the Court that the CU allocation was unreasonable.

I find that the length of time that has elapsed without

Seven Provinces coming to a decision on whether to pay is

far outside normal industry practice. Rebisz admitted on the

stand that he was aware of American rules penalizing a

reinsured if it does not collect on a claims submission within

ninety days by reducing the amount of surplus available to

write new business. Yet Seven Provinces has delayed

payment for over four years after receiving the bill, and over

two years since locating the fac. cert.

I find that Seven Provinces' numerous and constantly

shifting requests for information from CU represented an

attempt to evade payment of its reinsurance obligations. Not

only does the record of correspondence between the parties

reflect that Seven Provinces’ objections to payment were

frequently changing, but Seven Provinces' behavior at trial

continued in this pattern.

I find that Seven Provinces' intent in its dealings with CU

was to delay and object to payment so that CU would

compromise the Teledyne bill and agree to a global

commutation of all of the business between the parties.

II. CONCLUSIONS OF LAW

A. Seven Provinces' Obligations Under The

Facultative Certificate

1. The Terms of the Facultative Certificate

Unambiguous contracts must be enforced according to

their terms, Somerset Sav. Bank v. Chicago Title Ins. Co., 420

57a

Mass. 422, 649 N.E.2d 1123, 1127 (Mass. 1995), yet here I

found the terms of the fac. cert. to be ambiguous. In

construing this ambiguous language, I must view the fac.

cert. as a coherent whole, considering "every phrase and

clause . . . [in light of] all the other phraseology contained in

the instrument, which must be considered as a workable and

harmonious means for carrying out and effectuating the intent

of the parties." Boston Edison Co. v. F.E.R.C., 856 F.2d 361,

365 (Ist Cir. 1988) (quoting J.A. Sullivan Corp. v.

Commonwealth, 397 Mass. 789, 494 N.E.2d 374, 378

(1986)). Custom and usage may “aid in policy interpretation,

not as tending to contradict or vary a contract, but on the

theory that usage forms part of the contract.” Id.; citing

Affiliated FM Ins. Co. v. Constitution Reinsurance Corp., 416

Mass. 839, 626 N£E.2d 878, 881-82 (Mass. 1994);

Restatement (Second) of Contracts § 222 comment (b) 882

(1981).

Having found that the language of the fac. cert. was

ambiguous, I heard testimony from experts on both sides as

to its best interpretation in light of custom and practice in the

reinsurance industry. As explained more fully above, I found

the explanation advanced by Gottheimer more credible and

persuasive, both because of his greater knowledge of and in

depth explanation of industry custom and practice and

because his interpretation made compelling sense of the

disputed provision as a whole. Therefore, I conclude that,

under the terms of the fac. cert., Seven Provinces had an

obligation to reimburse CU for $ 225,000 of its loss on the

Teledyne claim. I also conclude that that obligation was not

reduced by the existence of treaty reinsurance. I conclude that

Seven Provinces’ liability under the terms of the contract

between the parties is $ 225,000.

2. CU's Allocation of the Teledyne Settlement

Two separate but related doctrines govern the legal effect

of Seven Provinces' challenges to CU's allocation of the

58a

Teledyne settlement. The “follow the fortunes" doctrine

requires reinsurers to accept a reinsured's good faith decision

that a particular loss is covered by the terms of the underlying

policy, while the "follow the settlements" doctrine requires

reinsurers to abide by a reinsured's good faith decision to

settle, rather than litigate, claims on that policy. As

Gottheimer testified, the reinsurer "must go along with

however the insurer settles the claim." Both doctrines have

been long established by law in the reinsurance industry, and

the "follow the settlements" doctrine is, in addition,

incorporated explicitly into the fac. cert. in this case.

a. Seven Provinces' Challenges to CU's Coverage and

Settlement Decisions

The "follow the settlements" doctrine requires the

reinsurer to cover settlements made by the reinsured, as long

as they are not fraudulent, collusive, or made in bad faith.

Aetna Casualty & Sur. Co. v. Home Ins. Co., 882 F. Supp.

1328, 1346 (S.D.N.Y. 1995). Tne reinsurer bears the burden

of showing bad faith on the reinsurer’s part. The standard is a

high one: the reinsurer must show "gross negligence or

recklessness," North River Ins. Co. v. CIGNA Reinsurance

Co., 52 F.3d 1194 (3d Cir. 1995), or that the settlement was

not even "arguably" within the scope of the reinsurance

coverage. Mentor Ins. Co. (U.K.) v. Norges Brannkasse, 996

F.2d 506 (2d Cir. 1993). The reinsurer cannot dispute good

faith determinations that a risk was covered by the underlying

insurance policy, Christiania Gen. Ins. Corp. v. Great Am.

Ins. Co., 979 F.2d 268, 280 (2d Cir. 1993), or good faith

interpretations of policy terms. International Surplus Lines

Ins. Co. v. Fireman's Fund Co., 998 F.2d 504 (7th Cir.

1993); Aetna, 882 F. Supp. at 1347. The reasonableness of

the reinsured's judgment is to be determined as of the time of

settlement. Aetna, 882 F. Supp. at 1351.

The purpose of the "follow the settlements” doctrine is to

prevent the reinsurer from second-guessing the good faith

59a

settlement decisions of the ceding company. Aetna, 882 F.

Supp. at 1346. If the ceding company knew that its settlement

decisions could be challenged by every reinsurer, there would

be little incentive to settle with the insured. The costs and

risks of litigation avoided by settling with the insured would

only be revived at the reinsurance stage. "The goals of

maximum coverage and settlement that have been long

established would give way to a proliferation of litigation."

International Surplus Lines Ins. Co. v. Certain Underwriters

& Underwriting Syndicates at Lloyd's of London, 868 F.

Supp. 917, 921 (S.D. Ohio 1994).

Seven Provinces has been unable to produce any evidence

of bad faith or fraud on CU's part in its decisions about

whether Teledyne's environmental liability was covered by

the general liability policy E-506432, in spite of the "owned

property" exclusion emphasized by Seven Provinces’ counsel,

and whether and for how much to settle such liability. Nor

did it produce any such evidence with regard to CU's

assessment that Teledyne's losses were not covered by the

difference in conditions policy.

In fact, Seven Provinces did not offer any testimony from

the officers or agents of CU who made these decisions.

McKay and Drees both testified unrebutted that they

allocated CU's liability between sites, policies, and reinsurers

after the coverage and settlement decisions had been made.

This is not surprising, as both are employed in CU's

reinsurance (or "ceded") department; Seven Provinces called

no witnesses from CU's claims department who might have

been able to testify to the bona fides of the claims decisions.

Indeed, when confronted with Seven Provinces' “owned

property exclusion" argument, Drees replied that such

matters of claims interpretation were outside his area of

expertise. He suggested that Seven Provinces should have

raised that issue with the claims people they met during their

February 1995 visit to CU's offices. Thus, I conclude that

Seven Provinces’ challenge to CU's coverage and settlement

60a

decisions fails for lack of any evidence of the required

elements of bad faith, fraud, or unreasonableness.

In addition, I conclude that Seven Provinces' challenge to

the coverage decision based on the "owned property

exclusion" is meritless as a matter of law.'? "Owned

property" exclusions are meant to exclude coverage for

damage to the insured's property, a kind of loss that is

normally covered by a property insurance policy, not a

liability policy. They have been raised numerous times as

defenses to insurance coverage of liability for releases of

hazardous waste by the insured onto its own property. The

vast majority of courts that have considered the issue,

however, have rejected the argument that Seven Provinces is

making here on the grounds that contamination of the

environment should be understood as damage to the rights of

the public, the sovereign, and other third parties, rather than

as damage to the particular insured property on which the

contamination first occurs. More pragmatically, the losses for

which an environmental contaminator seeks insurance

coverage are rarely the depreciation in value of the property;

it is almost always, as here, the costs of clean-up demanded

by the government -- on its face more like liability than

property damage. See /ntel Corp. v. Hartford Accident and

Indem. Co., 952 F.2d 1551, 1565 (9th Cir. 1991); Patz v. St.

Paul Fire & Marine Ins. Co., 15 F.3d 699, 704 (7th Cir.

1994); Chemical Applications Co. v. Home Indem. Co., 425

F. Supp. 777, 779 (D.Mass. 1977); Township of Gloucester

v. Maryland Casualty Co., 668 F. Supp. 394, 400 (D.N.J.

1987); AIU Ins. Co. v. Superior Court, 51 Cal. 3d 807, 799

P.2d 1253, 1279-1289, 274 Cal. Rptr. 820 (Cal. 1990); 4

Susan M. Cooke & Christopher P. Davis, The Law of

Hazardous Waste: Management, Cleanup, Liability, and

Litigation § § 19.05 [3][d], 19-140 (1994 and 1997 Supp.).

b. Seven Provinces' Challenge to the Allocation

6la

Seven Provinces attempts to avoid the effect of the

"follow the settlements" doctrine by arguing that what it is

challenging is the good faith of the allocation, rather than of

the settlement. This is a distinction without a difference. In

the first place, a number of attacks it launches on CU's

allocation are in actuality attacks on the settlement. CU's

judgment that the loss was not excluded by the “owned

property exclusion" or covered by the “difference in

conditions" policy goes to the heart of its decisions on which

policies covered the loss and should be settled rather than

litigated.

Secondly, the attempt to distinguish settlement from

allocation would undermine the entire “follow the

settlements" doctrine. In practical terms, the determination of

which among several policies covers which particular loss

among many is not much different from the more general

decision that the losses are covered by the policies. Both are

issues of judgment that the reinsured must be allowed to

make for the sake of encouraging settlement. Review of

either type of decision has an equal likelihood of

undermining settlement and fostering litigation.

Most settlements of complex environmental claims

necessarily involve a number of sites, a range of years in

which the exposure could have occurred, and -- if the

reinsured and the insured have an ongoing relationship --

more than one policy of insurance. If a reinsured could be

forced into litigation over its good faith judgment as to which

policies covered which losses, it would be impossible for it to

come tc any settlement of such complex claims. When

several reinsurers are involved, there would be a risk of

successive litigations, in which each reinsurer offered an

alternative allocation model that would reduce its own

liability.

This conclusion is bolstered by the flexible state of the

law in this area. One recent analysis identifies four major

62a

theories of when environmental damage triggers insurance

coverage, and four methods of allocating losses among

policies. See Michael J. Brady and Lawrence O. Monin,

Reinsurance Disputes: Death of the Handshake, 61 Def.

Couns. J. 529 (1994); see also David O. Larson, ¢t al.,

Review of Recent Developments in Excess, Surplus Lines,

and Reinsurance Law, 32 Tort & Ins. L.J. 359, 363-64 (1997)

(describing the range of permissible allocation methods). A

ceding insurer could, in good faith, select any one of sixteen

options, only to have its various reinsurers each propose an

alternative formula. If the "follow th settlements" principle

did not apply to the allocation of those settlements, litigation

would surely proliferate. See Lawrence O. Monin and

Michael J. Brady, Updating Reinsurance Law Developments:

The Gloves Are Beginning to Come Off, 63 Def. Couns. J

219 (1997) (concluding that "the courts, with rare

exceptions, are favoring good-faith reasonable allocations by

the ceding companies").

I therefore conclude that the doctrine of “follow the

settlements” requires the reinsurer to follow the reinsured's

good faith and reasonable allocation of settlement dollars

between different policies and sites. Therefore, my

conclusion as to the reasonableness and good faith of CU's

allocation of the Teledyne settlement dispenses with Seven

Provinces’ challenges to payment on this front.

B. CU's 93A Claim

Chapter 93A allows one business to sue another over

conduct that is "unfair," Mass. Gen. L. ch. 93A, § § 2(a), 11,

including acts that are associated with the breach of a

contract. The plaintiff must prove both that the act was

unfair, and that it suffered a loss as a result. Mass. Gen. L. ch.

93A, § 11. CU has shown the loss it suffered: an over four

year delay in payment and significant legal costs in collecting

the amount it is owed. See Refuse & Envil. Sys., Inc. v.

Industrial Svcs., 932 F.2d 37, 43 (Ist Cir. 1991) (litigating a

63a

meritless claim may constitute a 93A violation). The more

difficult question is whether Seven Provinces’ conduct was

sufficiently unfair so as to rise to the level of “rascality"

required by chapter 93A. See Levings v. Forbes & Wallace,

Inc., 8 Mass. App. Ct. 498, 396 N.E.2d 149, 153 (Mass. App.

Ct. 1979); Quaker State Oil Refining v. Garrity Oil Co., 884

F.2d 1510, 1513 (1st Cir. 1989) (adopting Levings standard);

accord Ahern v. Scholz, 85 F.3d 774, 798 (1st Cir. 196).

Although "mere breaches of contract, without more, do

not violate chapter 93A," Pepsi-Cola Metro. Bottling Co. v.

Checkers, Inc., 754 F.2d 10, 18 (Ist Cir.1985) (citing

Whitinsville Plaza, Inc. v. Kotseas, 378 Mass. 85, 390 N.E.2d

243, 251 (Mass. 1979); Bradley v. Dean Witter Realty, 967

F. Supp. 19, 29 (D. Mass. 1997), a 93A claim can

nonetheless arise out of a breach of contract, if the breach is

"in disregard of known contractual arrangements" and

"intended to secure benefits for the breaching party... .”

Anthony's Pier Four v. HBC Assocs., 411 Mass. 451, 583

N.E.2d 806, 821 (Mass. 1991); Wang Labs., Inc. v. Business

Incentives, Inc., 398 Mass. 854, 501 N.E.2d 1163, 1165

(Mass. 1986).

As the Massachusetts Supreme Judicial Court has

clarified, the theme of the cases in which a breach of contract

has amounted to a 93A violation is “the use of a breach of

contract as a lever to obtain advantage for the party

committing the breach in relation to the other party; i.e., the

breach of contract has an extortionate quality that gives it the

rancid flavor of unfairness." Atkinson v. Rosenthal, 33 Mass.

App. Ct. 219, 598 N.E.2d 666, 670 (Mass. App. Ct. 1992);

accord NASCO, Inc. v. Public Storage, Inc., 29 F.3d 28, 33

(Ist Cir. 1994) (citing Atkinson and suggesting that 93A

liability would arise where a “defendant knowingly breached

a contract in order to secure additional benefits to itself to the

detriment of a plaintiff"). Often, the defendant withheld

performance without justification in an attempt to renegotiate

the terms of the parties’ relationship. See Anthony's Pier

64a

Four, 583 N.E.2d at 814-815 (arbitrary withholding of

architectural approval in order to extort renegotiation of the

financial terms of a joint development project found to be a

93A violation); Pepsi, 754 F.2d at 18 (customer withheld —

payment due distributor as leverage in bargaining to receive

more product in the future). The breaching party's aim is to

"force . . . [the other party to the contract] to do what

otherwise it could not be legally required to do." Id.

From the outset, Seven Provinces avoided payment on

CU's claims submission while seeking to renegotiate the

terms of the parties’ relationship. At first, Seven Provinces’

questions about the claim were linked to its request to come

to a global commutation of all business between the two

companies. As CU continued to insist on payment of the

Teledyne claim before any such commutation would be

discussed, Seven Provinces began insisting on a compromise

of the Teledyne claim amount, either through mediation or

reallocation of the entire Teledyne settlement. Rebisz

reiterated at trial that what he was seeking was @

compromise, and in apparent pursuit of that goal, he refused

to express an opinion about how much Seven Provinces owed

on the claim. Thus, Seven Provinces’ behavior fits within the

93A framework outlined by the Supreme Judicial Court: it

withheld performance due under the contract in order to

renegotiate the bargain between the parties and force CU to

do what it otherwise was not legally obliged to do, namely,

compromise a valid claim.

Seven Provinces’ behavior was particularly egregious

when seen in the context of the mores of the reinsurance

industry, an industry which has operated for centuries on the

principle of “utmost good faith" (“uberrimae fidei").

Gottheimer testified to the traditional mores of the industry:

that reinsurance is "an honorable engagement," in which

"gentlemen's agreements" were secured by a handshake.

Under this view, the reinsurer and the reinsured are

"partners," who owe each other a duty of “utmost good faith."

65a

Admittedly, these traditions of trust and mutual reliance came

under strain in the 1980s. Because of high interests rates,

Gottheimer testified, insurers paid less attention to the risks

they insured, and the quality of the underwriting began to

suffer. At the same time, environmental and asbestos liability

began to upset the calculations on which many insurance

relationship had been founded. See Compagnie de

Reassurance, 944 F. Supp. at 993. Trade publications are

beginning to note the change in tone, speaking of the "death

of the handshake." Brady & Monin, supra.

Seven Provinces’ conduct is more in keeping with this

new climate. It seems to believe that delaying payment on a

bill cannot be a violation of industry practice as long as the

reinsured and the reinsurer ultimately reach some

compromise. Although relying on the principle of utmost

good faith when complaining of CU's refusal to turn over

Teledyne underwriting documents, they suggest that it did

not govern their own obligations to settle the CU claim, for

example by offering full payment with a reservation of rights.

In spite of the strain on the doctrine of uberrimae fidei,

however, it continues to be a controlling legal principle in the

reinsurance industry. See Compagnie de Reassurance de |' J/e

de France v. New England Reinsurance Corp., 57 F.3d 56,

72 (Ist Cir. 1995), cert. denied, 516 U.S. 1109 (1995); North

River, 52 F.3d at 1212; Unigard Sec. Ins. Co. v. North River

Ins. Co., 4 F.3d 1049, 1066 (2d Cir. 1993); Christiana, 979

F.2d at 278; Allendale Mut. Ins. Co. v. Excess Ins. Co., 992

F. Supp. 278, 1998 WL 59411, *2 (S.D.N.Y.); Compagnie,

944 F. Supp. at 994; Employers Reinsurance Corp. v.

Admiral Ins. Co., 1990 U.S. Dist. LEXTS 14580, 1990 WL

169756, *3 (D.N.J.). By violating this established principle,

Seven Provinces’ actions fell “within . . . the penumbra of

some common-law, statutory, or other established concept of

unfairness.". PMP Associates, Inc. v. Globe Newspaper Co.,

366 Mass. 593, 321 N.E.2d 915, 917 (Mass. 1975).

66a

Although Seven Provinces’ objections to payment bore

the hallmarks of bad faith almost from the outset, until the

rediscovery of the facultative certificate in August 1995, it

had legitimate reasons for concern about the details of its

obligations to CU. As Drees hi

This text is long and has been trimmed here. Open the source document for the complete record.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.