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

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386014_1433%3A1

## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 2001
- **Citation:** 531 U.S. 1146

## 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

i
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?

il
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

2

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.

2

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,

3

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.

4

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.

5

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

6

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

7

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.

8
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

9

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.

10

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.

11

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

12

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.

13

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

14

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

15

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).

16

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

17
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

18

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

19

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

la
(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,

V.

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:

2a

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.

I

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

3a

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

4a

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.

II

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.

Sa

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

6a

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.

7a

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

8a

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 .. .
ge

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.

9a

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).

IV

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 commun

[Text truncated at 120,000 characters. The full text is on the page linked above.]

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386014_1433%3A1. Public record. Not legal advice.