ALLENDALE MUTUAL INSURANCE COMPANY, Plaintiff,
against
EXCESS INSURANCE COMPANY, LTD. et al., Defendants.
95 Civ. 10970 (SAS)
United States District Court For The Southern District Of New York
970 F. Supp. 265, 1997 U.S. Dist. Decision
July 8, 1997, Decided
- Appearances -
For Plaintiff: Bernard London, James L. Fischer, James Walsh, London &
Fischer, New York, N.Y.
For Defendants: Richard A. Walker, Jeffrey E. Margulis, Kaplan, Begy & Von
Ohlen, Chicago, Illinois. Robert J. Brown, Chalos & Brown, New York, N.Y.
Shira A. Scheindlin, United State District Judge
[F. Supp. 266] OPINION AND ORDER
SHIRA A. SCHEINDLIN, U.S.D.J.:
This law suit, brought under diversity jurisdiction, rises from the ashes of
a fire that destroyed a warehouse in Seclin, France during the summer of
1991. Plaintiff Allendale Mutual Insurance Company ("Allendale") seeks to
recover $ 7,000,000 in unpaid reinsurance, $ 5,000,000 in "loss adjustment
expenses" and interest, and an unspecified amount for legal fees and expenses
incurred in the defense of a prior action for declaratory relief brought by
defendants against Allendale in England. Defendants, all British reinsurers,
now move for partial summary judgment pursuant to Rule 56 of the Federal
Rules of Civil Procedure.1 For the reasons set forth below, defendants' motion
is granted in part.
I. Applicable Legal Standard
A party is entitled to summary judgment when there is "no genuine issue of
material fact" and the undisputed facts warrant judgment [F. Supp. 267] for
the moving party as a matter of law. See Fed. R. Civ. P. 56(c); Celotex v.
Catrett, 477 U.S. 317, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986); Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986).
The burden of demonstrating the absence of a material factual dispute rests
on the moving party. See Gallo v. Prudential Residential Svcs., Ltd., 22 F.3d
1219, 1223 (2d Cir. 1994). Once that burden is met, the non-moving party must
present "significant probative supporting evidence" that a factual dispute
exists. Fed. R. Civ. P. 56(e); Anderson, 477 U.S. at 249.
The court's role is not to try issues of fact, but rather to determine
whether issues exist to be tried. See Balderman v. United States Veterans
Admin., 870 F.2d 57, 60 (2d Cir. 1989); Donahue v. Windsor Locks Bd. of Fire
Comm'rs, 834 F.2d 54, 58 (2d Cir. 1987). All ambiguities must be resolved and
all inferences drawn in favor of the party against whom summary judgment is
sought. See Anderson, 477 U.S. at 255; Donahue, 834 F.2d at 57, 60. If there
is any evidence in the record from which a reasonable inference could be
drawn in favor of the non-moving party on a material issue of fact, summary
judgment is improper. See Chambers v. TRM Copy Centers Corp., 43 F.3d 29, 37
(2d Cir. 1994).
II. Factual and Procedural Background
The following facts are not in dispute. In December of 1990, Allendale
insured the contents of a warehouse leased to Bull Data Systems ("Bull Data")
in Seclin, France. This policy was replaced on January 1, 1991, by a policy
issued by FM Insurance Company Ltd. ("FMI"), an insurer partially-owned and
entirely controlled by Allendale (the "direct insurance policy"). Allendale
then reinsured 100% of FMI's policy.2 The limit of FMI's liability and
Allendale's under these policies was $ 48,000,000.
In turn, Allendale arranged for the placement of facultative reinsurance3 of
100% of the fronting cession. The disputes in this case relate to Allendale's
reinsurance agreement with defendants in the amount of $ 7,000,000 for the
portion of the reinsurance layer between $ 25,000,000 and $ 38,500,000.4 The
reinsurance agreement was initially issued on January 1, 1991, and was
renewed for the year commencing June 1, 1991. In pertinent part, the
reinsurance agreement stated as follows:
REASSURED : ALLENDALE INSURANCE COMPANY
ASSURED : BULL DATA CORPORATION and/or as original.
PERIOD : Twelve months at 1st June, 1991 and/or as original. Both days
inclusive.
LOCATIONS : Bull Data Corporation, Seclin, France as original.
INTEREST : Goods and/or Merchandise incidental to the Assured's business
consisting principally of personal computers and/or as original.
LIMIT : US$ 7,000,000 any one occurrence p/o US$ 13,500,000 any one [F. Supp.
268] occurrence excess of US$ 25,000,000 any one occurrence.
CONDITIONS : As original and subject to the same valuation, clauses and
conditions as contained in the original policy or policies but only to cover
risks of All Risks of Physical Loss or Damage but excluding Inventory
Shortage.
Including Strikes, Riots, Civil Commotions and Malicious Damage risks and as
original.
Premium payable as in original.
Reinsurers agree to follow the settlements of the Reassured in all respects
and to bear their proportion of any expenses incurred, whether legal or
otherwise, in the investigation and defense of any claim hereunder.
Service of Suit Clause (U.S.A.).
Insolvency Clause.
Affidavit of Bernard London, Counsel for Plaintiff ("London Aff."), dated May
5, 1997, Ex. E (emphasis added).5
In June of 1991, a fire completely destroyed Bull Data's warehouse. When Bull
Data subsequently presented a claim to FMI and Allendale, they refused
payment on the grounds that the fire was the result of arson. Bull Data and
its affiliates commenced an action before the courts of France to recover
under the direct insurance policies (the "French action"). Allendale and FMI
also commenced an action against Bull Data in the United States District
Court for the Northern District of Illinois. Specifically, defendants sought
a declaration that they were not liable to the insured (the "Illinois
action"). Ultimately, Allendale agreed to pay Bull Data's claim up to the
limits of the direct insurance policies plus interest thereon.
After Allendale agreed to pay Bull Data, it put its reinsurers on notice and
requested that the reinsurers make payment. In March of 1992, before any
other lawsuit between Allendale and defendants had been filed or served in
the United States or elsewhere, defendants commenced an action against
Allendale in the Commercial Court of the High Court of Justice, Queen's Bench
Division (the "UK action"), seeking a declaration that they were not liable
to Allendale under the reinsurance agreement on the grounds that Allendale's
alleged misrepresentations and non-disclosures had rendered the reinsurance
agreement void ab initio. The UK action was eventually dismissed on appeal
for lack of jurisdiction.6
Allendale commenced this action on December 28, 1995 against defendants to
recover $ 7,000,000 in allegedly unpaid reinsurance, an additional $
5,000,000 for defendants' alleged proportionate share7 of "loss adjustment
expenses" incurred in the course of the French and Illinois actions, and
unspecified damages arising from defendants' alleged breach of the "service
of suit" clause in the reinsurance contract inflicted by pursuing the UK
action.
III. Discussion
A. Allendale's Claim for Loss Adjustment Expenses in Excess of $ 7,000,000
Turning now to the substance of defendants' motion, I address first their
argument that Allendale's claim for $ 5,000,000 in loss adjustment expenses
is precluded by the reinsurance agreement, or more precisely by two clauses
of that contract. The first [F. Supp. 269] clause, which I shall refer to as
the "limit clause", states:
LIMIT : US$ 7,000,000 any one occurrence p/o US$ 13,500,000 any one
occurrence excess of US$ 25,000,000 any one occurrence.
London Aff., Ex. E. The second clause, which I shall refer to as the "follow-
the-settlement" clause, states:
Reinsurers agree to follow the settlements of the Reassured in all respects
and to bear their proportion of any expenses incurred, whether legal or
otherwise, in the investigation and defense of any claim hereunder.
Id.
Defendants argue that Allendale cannot recover both on its claim for $
7,000,000 in unpaid reinsurance and on its claim for $ 5,000,000 in loss
adjustment expenses because the limit clause caps their liability at $
7,000,000 inclusive of all costs and expenses. Allendale, in turn, contends
the follow-the-settlement clause required the reinsurers to indemnify it for
their proportion of expenses and litigation costs even if those expenses and
costs exceeded the $ 7,000,000 cap. The viability of Allendale's loss
adjustment expenses claim therefore turns on a single legal question: can the
follow-the-settlement clause serve as a basis for Allendale to recover
expenses and costs in excess of the stated limit of $ 7,000,000?
I begin the analysis of this question with a recitation of certain contract
law fundamentals. "The cardinal principle for the construction and
interpretation of insurance contracts as with all contracts is that the
intentions of the parties should control." Newmont Mines Limited v. Hanover
Ins. Co., 784 F.2d 127, 135 (2d Cir. 1986). See also Hartford Accident &
Indem. Co. v. Wesolowski, 33 N.Y.2d 169, 350 N.Y.S.2d 895, 898, 305 N.E.2d
907 (1973)(same). To determine the parties' intent, the contract must be read
as a whole, and all its clauses must be considered together to determine if
and to what extent one may modify, explain or limit another. From this, it
follows that a contract containing two clauses which may be in conflict
should, if possible, be read to give meaning to both rather than to prefer
one to the exclusion of the other. This is especially true when interpreting
contracts drafted by sophisticated and experienced entities, for such are not
likely to inadvertently write meaningless, contradictory or vestigial
language into a contract. See Restatement (Second) of Contracts § 203(a) ("an
interpretation which gives a reasonable, lawful, and effective meaning to all
the terms is preferred to an interpretation which leaves a part unreasonable,
unlawful or of no effect"); Id. cmt. b ("since an agreement is interpreted as
a whole, it is assumed in the first instance that no part of it is
superfluous").
This being so, Allendale's arguments regarding the plain meaning of the
reinsurance agreement face an uphill battle. The reinsurance agreement
expressly states: "LIMIT : US$ 7,000,000". The follow-the-settlement clause
then follows under the section of the document entitled "CONDITIONS ". As
stated above, it is a generally accepted principle of contract law that
parties will be presumed to intend each clause of a contract to have meaning,
rather then to intend one clause to overwrite another. Knowing this, had the
parties intended the latter clause to supersede the former under any
circumstances (as Allendale now contends the follow-the-settlement clause was
intended to trump the limit clause), a standard term of art inserted directly
before the follow-the-settlement clause such as "notwithstanding any
provision in this contract to the contrary" would have served this purpose.
Instead, there is nothing in the contract to indicate that the limit clause
does not also apply to claims for expenses and costs. I therefore reject
Allendale's argument that the plain meaning of the limit clause is to limit
the reinsurers' liability exclusive of Allendale's costs and expenses.
Rather, a straight-forward reading of the contract as a whole requires the
opposite conclusion. The limitation clause comes before any other substantive
provision of the reinsurance agreement, and the word "LIMIT" is both
underlined and set apart physically from the following "CONDITIONS". The term
"LIMIT" is not expressly conditioned by another term in any way. Given the
absence of any indication that any clause [F. Supp. 270] in the contract
modified the words "LIMIT : $ US 7,000,000", the most reasonable construction
of the contract's language supports defendants' position that the limit
clause imposes an absolute cap on their liability at $ 7,000,000 in toto.
This reading of the reinsurance agreement is buttressed by an understanding
of the traditional role of follow-the-settlement clauses in the reinsurance
industry. Such clauses generally reinforce what has been until recently the
general practice in this industry that is, for reinsurers to conduct their
business with insurers on a handshake basis, without second-guessing the
insurer's decision to pay a claim.8 Their purpose is to "preclude wasteful
relitigation by a reinsurer of defenses to underlying policy coverage in
cases where the ceding insurer has in good faith paid a settlement or
judgment." Ostrager & Newman § 16.01 at 658 (citing cases). Follow-the-
settlement clauses have not traditionally served to modify or eliminate the
limit of the reinsurer's exposure.
Finally, Allendale's arguments face the additional obstacle raised by two
directly relevant Second Circuit cases decided within the last seven years,
Bellefonte Reinsurance Co. v. Aetna, 903 F.2d 910 (2d Cir. 1990) and Unigard
Security Ins. Co. v. North River Ins. Co., 4 F.3d 1049 (2d Cir. 1993). Both
cases rejected ceding insurers' claims that a "follow-the-settlement" clause
required the reinsurers to pay for defense costs in addition to the
reinsurers' express reinsurance limit. The primary ground for these holdings
was the court's finding that the insurers' proposed interpretation
effectively read the limit clauses out of the reinsurance contracts.
Bellefonte explained:
To read the reinsurance [contract] in this case as [the insurer] suggests
allowing the "follow the fortunes"9 clause to override the limitation on
liability would strip the limitation clause and other conditions of all
meaning; the reinsurer would be obliged merely to reimburse the insurer for
any and all funds paid. . . . The "follow the fortunes" clauses in the
[contracts] are structured so that they co-exist with, rather than supplant,
the liability cap.
Bellefonte, 903 F.2d at 913. In addition, Bellefonte relied on the express
language of the contract at issue in that case, pointing out that the
insurer's suggested interpretation "would negate the phrase 'the reinsurer
does hereby reinsure Aetna . . . subject to the . . . amount of the liability
set forth herein " and concluding based on that language that "the reinsurers
are liable only to the extent of the risk they agreed to reinsure." Id. at
914.
Unigard underscored the Second Circuit's interpretation of the effect of
follow-the-settlement clauses on limit clauses in reinsurance contracts.
Holding that the contract in dispute was "virtually identical" to the
Bellefonte contract, the court wrote:
The efficacy of the reinsurance industry would not be enhanced by giving
different meanings to identical standard contract provisions depending on
idiosyncratic factors in particular lawsuits. The meaning of such provisions
is not an issue of fact to be litigated anew each time a dispute goes to
court.
Unigard, 4 F.3d at 1071. As in Bellefonte, the limitation on liability
provision was interpreted as a cap on the reinsurers' liability; the court
then ruled that "all other contractual language must be construed in light of
that cap." Id.
In reaching its conclusion that the reinsurer was not liable for expenses
beyond the stated liability limit in the contract, the Unigard [F. Supp. 271]
court also relied on the contractual terms themselves, which stated that the
obligation of the reinsurers to follow the settlement of the insurer, "
except as otherwise provided by this [Contract], shall be subject in all
respects to all the terms and conditions of [the reinsurance agreement]." Id.
at 1070-71. It was clear, the Court ruled, that the contract "otherwise
provided" for the policy limit; thus the follow-the-settlement clause was to
be construed in light of that limit. Id. at 1071.
Allendale attempts to distinguish Bellefonte and Unigard by arguing that the
holdings in both cases were based entirely on the " subject to " or " except
as otherwise provided " language discussed above, whereas the reinsurance
agreement in dispute here lacks any such terms. It is true that both holdings
relied in part on express contractual terms that unambiguously indicated the
reinsurers' obligations to follow the insured's settlement was "subject to"
the limit clause. However, the primary underpinning of both cases is the
parties' assumed intent to give meaning to both the limit clause and the
follow-the-fortunes clause. To fulfill this intent, the reinsurers' duty to
follow the settlement must be understood to be capped by the limit clause.
"To construe the [contracts] otherwise would effectively eliminate the
limitation on the reinsurer's liability to the stated amounts." Bellefonte,
903 F.2d at 913.
Allendale also strives to distinguish Bellefonte on the basis of specific
factual distinctions, such as the fact that Aetna's underlying policy was a
"liability policy" placed on a cost-inclusive basis, whereas the insurance
policy issued to Bull Data was a "property insurance" policy. Even were I to
accept Allendale's claim that "liability policies are conceptually distinct
from the property insurance policy issued to Bull Data in the case at bar",
this is a distinction without a difference.10 See Plaintiff's Memorandum of
Law in Opposition to Defendants' Motion ("Plaintiff's Memo") at 11, 11 n.12.
These arguments rely on the kind of "idiosyncratic factors" that Unigard
teaches should not be considered in determining whether a follow-the-
settlement clause may extend a reinsurer's liability beyond the stated
liability limit, see Unigard, 4 F.3d at 1071, and cannot allow Allendale to
evade the clear holdings of Bellefonte and Unigard with regard the effect of
a standard follow-the-settlement clause on a limit clause in a reinsurance
contract.
While the follow-the-settlement clause requires defendants to accept
Allendale's good faith decisions to settle a case, and to pay their
proportion of that settlement, it does not increase their potential liability
in excess of the risk for which they bargained. As a matter of law, the limit
clause must be interpreted to cap the reinsurers' liability to $ 7,000,000
including all of Allendale's costs and expenses. Hence, the terms of the
reinsurance agreement preclude Allendale's claim for loss adjustment expenses
in addition to its claim for $ 7,000,000 in unpaid reinsurance.
B. Allendale's Claim for Breach of the Service of Suit Clause
Defendants have also moved for summary judgment on Allendale's claim for
breach of the service-of-suit clause, which reads in pertinent part:
It is agreed that in the event of the failure of the Underwriters severally
subscribing to this insurance (the Underwriters) to pay any amount claimed to
be due hereunder, the Underwriters, at the request of the Assured, will
submit to the jurisdiction of a court of competent jurisdiction within the
United States of America.
Notwithstanding any provision elsewhere in this insurance related to
jurisdiction, it [F. Supp. 272] is agreed that the Underwriters have the
right to commence an action in any court of competent jurisdiction in the
United States of America, and nothing in this clause constitutes or should be
understood to constitute a waiver of the Underwriters' right to remove an
action to a United States Federal District Court or to seek remand therefrom
or to seek a transfer of any suit to any other court of competent
jurisdiction as permitted by the laws of the United States of America or any
state therein.
See Defendants' Memo at 6 n.9. Defendants rely on two arguments in support of
their motion. First, defendants maintain that Allendale is collaterally
estopped from litigating this issue as the English Court of Appeals
previously decided that defendants did not breach the service-of-suit clause
by commencing the UK action. Second, defendants contend that while the
service-of-suit clause gave Allendale the right to sue in courts of the
United States, the same clause cannot be interpreted give Allendale a breach
of contract action based on the reinsurers's decision to pursue the UK
action. I will address each argument in turn, for I need not ascertain the
proper interpretation of the clause if Allendale is collaterally estopped
from bringing its service-of-suit claim.
1. Defendants' Collateral Estoppel Argument
Allendale does not dispute that the English Court of Appeal, in the course of
dismissing the UK action for lack of jurisdiction, stated that defendants did
not breach the service-of-suit clause by commencing and maintaining the UK
action. See Defendants' Index of Exhibits, Ex. F at 11, 12-13 (transcript of
English appellate decision). Defendants now contend that this statement
collaterally estops Allendale's service-of-suit clause in this action. This
argument raises the question of whether and when a decision of law by an
English court may preclude subsequent litigation of that issue in a separate
action brought in federal court.
As this is a diversity action, New York law determines the preclusive effect
of the English decision. See Johnson v. Watkins, 101 F.3d 792, 794 (2d Cir.
1996); Scheiner v. Wallace, 832 F. Supp. 687, 694 (S.D.N.Y. 1993); Fairchild,
Arabatzis & Smith, Inc. v. Prometco, 470 F. Supp. 610, 614-615 (S.D.N.Y.
1979). Under New York law, the final judgments of a foreign court will not be
recognized if that court lacked subject matter jurisdiction of the action.
See N.Y. C.P.L.R. § 5304 (1996) ("A foreign country judgment need not be
recognized if . . . the foreign court did not have jurisdiction over the
subject matter"). See also Davidson v. Capuano, 792 F.2d 275, 278 (2d Cir.
1986); Prometco, 470 F. Supp. at 615 (citing, inter alia, Johnston v.
Compagnie Generale Transatlantique, 242 N.Y. 381, 384, 152 N.E. 121 (1926)).
The reason for this rule is fundamental: "jurisdiction over a case is power
to render a binding judgment in it; if there is no jurisdiction, there is no
power." Disher v. Information Resources, Inc., 873 F.2d 136, 139 (7th Cir.
1989). As stated above, the English Court of Appeals may have determined that
defendants did not breach the service-of-suit clause by initiating the UK
action, but it also determined that it lacked subject matter jurisdiction
over the action. See Defendants' Index of Exhibits, Ex. F at 15-16.
Accordingly, none of the English court's decisions of law, other than its
finding that it lacked jurisdiction, have preclusive effect under New York
law. I must therefore turn to the parties' arguments regarding the proper
interpretation of the service-of-suit clause.
2. Interpretation of the Service-of-Suit Clause
Allendale maintains that summary judgment is inappropriate because the
service-of-suit clause provides them with a viable claim for breach of
contract, or in the alternative is ambiguous on this issue. See Plaintiff's
Memo at 18-19. Defendants argue that the clause, as a matter of law, allowed
them to sue in England, thereby prohibiting a breach of contract action based
on the UK action. Because I find that the service-of-suit clause may
reasonably be interpreted from an objective standpoint to support either
party's position, defendants' motion for [F. Supp. 273] summary judgment of
Allendale's breach of contract claim is denied.
The determination of whether a contract provision is ambiguous is a threshold
question of law for the court. See Walk-In Medical Centers, Inc. v. Breuer
Capital Corp., 818 F.2d 260, 263-64 (2d Cir. 1987) (citing, inter alia,
Sutton v. East River Savings Bank, 55 N.Y.2d 550, 450 N.Y.S.2d 460, 462, 435
N.E.2d 1075 (1982)). As the Court of Appeals has explained,
an "ambiguous" word or phrase is one capable of more than one meaning when
viewed objectively by a reasonably intelligent person who has examined the
context of the entire integrated agreement and who is cognizant of the
customs, practices, usages and terminology as generally understood in the
particular trade or business.
818 F.2d at 263 (quoting Eskimo Pie Corp. v. Whitelawn Dairies, Inc., 284 F.
Supp. 987, 994 (S.D.N.Y. 1968)). Thus, "an ambiguity is present only where
each of the competing interpretations is objectively reasonable," and "courts
may not create an ambiguity where none exists." United National Ins. Co. v.
Waterfront New York Realty Corp., 994 F.2d 105, 107 (2d Cir. 1993) and
Ingersoll Milling Mach. Co. v. M/V Bodena, 829 F.2d 293, 306 (2d Cir. 1987).
Where a court determines that a contractual provision is ambiguous, it is
appropriate to refer to extrinsic evidence, including industry custom and
practice, to determine the parties' intent. See Christiania General Ins.
Corp. of New York v. Great American Ins. Co., 979 F.2d 268, 274 (2d Cir.
1992) (citing London Assurance Corp. v. Thompson, 170 N.Y. 94, 99, 62 N.E.
1066 (1902)). However, "when resort to extrinsic evidence is necessary to
shed light on the parties' intent summary judgment ordinarily is not an
appropriate remedy" unless, viewing all the facts in the light most favorable
to the non-movant, no reasonable trier of fact could find against the movant.
979 F.2d at 274 (citing Seiden Assocs., Inc. v. ANC Holdings, Inc., 959 F.2d
425, 428-29 (2d Cir. 1992)).11
The service-of-suit clause is a standard provision that Lloyd's underwriters
have used in insurance and reinsurance contracts for decades. See Travelers
Ins. Co. v. Keeling, 1993 U.S. Dist. Decision, No. 91 Civ. 7753, 1993 WL
18909(S.D.N.Y. Jan. 19, 1993); Rokeby-Johnson v. Kentucky Agricultural Energy
Corp., 108 A.D.2d 336, 489 N.Y.S.2d 69, 74 (1st Dep't 1985); Appalachian Ins.
Co. v. Union Carbide Corp., 162 Cal. App. 3d 427, 432, 208 Cal. Rptr. 627
(Cal. Ct. App. 1984). For almost as long, state and federal courts throughout
the nation have struggled to give meaning to this clause, sometimes reaching
different conclusions on basic issues such as (1) whether the clause is a
type of "forum selection clause"12 (2) whether the clause precludes the
insurer from making a successful motion for forum non conveniens if the
insured files an action in a United States court13 ; (3) whether the clause
bars the insurer from removing an insured's state court action to federal
court14 ; and (4) whether the clause precludes [F. Supp. 274] an insurer from
bringing an action in a United States forum before the insured files its own
action.15 Yet none of the cases cited above squarely address the issue raised
by defendants' motion: does Allendale have a viable claim for breach of the
service-of-suit clause based on the defendants' continued pursuit of the UK
action?
Despite the parties' contentions to the contrary, the answer cannot readily
be distilled from the language of the clause. Allendale argues that a plain
meaning of the service-of-suit clause shows it was intended to give Allendale
the absolute right to sue defendants in a United States court. Defendants, in
turn, assert that nothing in the service-of-suit clause expressly barred them
from bringing their own action in the forum of their choosing, but that
Allendale merely bargained for and obtained the right to sue defendants in a
forum which might not otherwise be suitable based on lack of personal
jurisdiction. Both interpretations of the service-of-suit clause are
feasible.
Defendants' position has appeal, for if Allendale had wished to insert an
exclusive forum selection clause into the reinsurance agreement, it surely
possessed the sophistication required to draft one.16 By the same token, if
Allendale had wished to bar defendants from bringing an action in England it
could have bargained for an express contractual prohibition. Thus, defendants
maintain, to interpret the service-of-suit clause as Allendale now advocates
would inject an agreement into the contract that would have been reduced to
written terms had it existed in the first place.
Defendants cite no binding authority that supports their proposed
interpretation of the service-of-suit clause. Rather, they rely on cases that
stand for the here-uncontested proposition that a service-of-suit clause does
not convey an absolute right upon the insured to have its claims litigated in
the forum of its choosing. International Ins. Co. v. McDermott, Inc., 956
F.2d 93 (5th Cir. 1992) and Employers Mut. Cas. Co. v. Key Pharmaceuticals,
Inc., 1992 U.S. Dist. Decision, 91 Civ. 1630, 1992 WL 8712*3 (S.D.N.Y. Jan.
16, 1992) merely held that almost identical service-of-suit clauses were not
triggered by "preemptive" actions brought by insurers in a forum permitted by
the clause that is, within the United States. In those cases, the insureds
could not and did not claim the insurers had violated the service-of-suit
clause because the insurers had not refused to submit to courts of competent
jurisdiction within the United States, but rather had merely refused to
submit to the exact fora within the United States selected by the insureds.
Defendants also cite Boutari and Son, Wines & Spirits, S.A. v. Attiki
Importers and Distributors, Inc., 22 F.3d 51 (2d Cir. 1994) in support of
their argument. Boutari involved a forum selection clause that stated in
pertinent part: "Any dispute arising between the parties hereunder shall come
within the jurisdiction of the competent Greek Courts. . . ." The Court of
Appeals held that the choice of forum was permissive, not mandatory, and
therefore reversed the District Court's decision to dismiss the action
brought in the Eastern District of New York based on the clause. See Boutari,
22 F.3d at 53 ("when only jurisdiction is specified the clause will generally
not be enforced without some further language indicating the parties' intent
to make jurisdiction exclusive") (citing, inter alia, Docksider, Ltd. v. Sea
Technology, Ltd., 875 F.2d 762, 764 (9th Cir. 1989)).
The rule of Boutari is a narrow one: a forum selection clause conferring
jurisdiction [F. Supp. 275] in one forum will not be interpreted as intended
to exclude jurisdiction elsewhere unless such an intention is clearly
expressed by the terms of the contract. See Boutari, 22 F.3d at 53.
Defendants' arguments based on Boutari fail for several reasons. First, the
service-of-suit clause at issue here is quite different than the forum
selection clause at issue in Boutari. Second, Allendale does not claim that
the service-of-suit clause gave it the right to choose an exclusive forum in
which its dispute with defendants would be litigated. Had defendants chosen
to commence their action in or transfer it to a United States court,
Allendale could not have asserted that it had rights under the service-of-
suit clause to choose a particular forum in the United States. See Brooke
Group Ltd., 640 N.Y.S.2d at 482. Rather, Allendale claims that the service-
of-suit clause obliged defendants to transfer the UK action to a court of the
United States once Allendale requested that it do so.
Allendale's position is that the language of the clause indicates its purpose
was to give Allendale the unfettered right to sue defendants in the United
States. If this is so, Allendale claims, defendants' interpretation does not
faithfully effectuate the parties' intent. Allendale's rights under the
service-of-suit clause are triggered by the reinsurers' refusal "to pay any
amount claimed to be due". Thus, if the service-of-suit clause were to be
interpreted as defendants now propose, the reinsurers would have the capacity
to delay their refusal to pay Allendale's claims until they filed a
declaratory action in England thus ensuring that Allendale never had an
unhindered opportunity to litigate its claim in a court of the United
States.17
Furthermore, because it gives the reinsurers the ability to frustrate
Allendale's right to sue in the United States by bringing a preemptive action
in a foreign jurisdiction, defendants' proposed interpretation of the
service-of-suit clause would put great pressure on Allendale to sue the
reinsurers as soon as they refused to pay a claim. A reasonable mind could
certainly conclude that the parties did not intend to create such an unwise
incentive to resort to litigation to resolve a dispute under the reinsurance
agreement. As New York courts have held before, there should be no penalty
for being slow to litigate, nor any advantage for being first to the steps of
the courthouse. This well-established principle is particularly compelling
with regard to a contract formed between members of an industry that has been
traditionally reluctant to bring its disputes into courts of law, preferring
instead to resolve them in more expeditious ways.
In addition, defendants' interpretation of the service-of-suit clause would
permit the parties to conduct two identical actions, one initiated by
defendants in England and a second commenced by Allendale in a United States
court. This interpretation of the service-of-suit clause is surely not
required absent a clear indication of the parties' intent. For example, in
Karl Koch Erecting Co. v. N.Y. Convention Center Development Corp., 838 F.2d
656, 659 (2d Cir. 1988), the Court of Appeals held that a forum selection
clause that exclusively designated the New York state court18 barred the
insured from removing the insurer's declaratory action to the Southern
District of New York. In reaching this conclusion, the court reasoned that
the parties' intent could not have been to allow the insured to remove the
insurer's declaratory action to a federal court, because the insured's
counterclaims would then have to [F. Supp. 276] be filed in state court thus
resulting in bifurcation of the action and defeating the obvious purpose of
the clause. See id. Read broadly, the holding of Karl Koch Erecting Co.
teaches that given two interpretations of a jurisdictional clause, one of
which could result in piecemeal or duplicitous litigation in different fora,
and one of which results in the adjudication of the parties' entire dispute
in a single forum, the latter may be presumed to be more faithful to the
parties' original intent unless the contract expressly indicates otherwise.
This proposition supports Allendale's interpretation of the service-of-suit
clause.
The parties have not cited any case that mandates one interpretation of the
service-of-suit clause. Read from an objective standpoint, the language of
the service-of-suit clause may provide Allendale with a breach of contract
action based on defendants' decision to continue a proceeding in a foreign
jurisdiction after Allendale asserted its right to litigate the same dispute
in a United States court. The ultimate resolution of this question will turn
on a finding of the parties' intent, which cannot be said to be evident as a
matter of law from the language of the clause itself. Defendants' summary
judgment motion to dismiss Allendale's claim for breach of the service-of-
suit clause is denied.
IV. Conclusion
For the foregoing reasons, defendants' motion for summary judgment is granted
with regard to Allendale's loss adjustment expenses claim and denied with
regard to Allendale's breach of service-of-suit claim.
SO ORDERED:
Shira A. Scheindlin
United State District Judge
Dated: New York, New York
July 8, 1997
1 To be more precise, defendants move for either partial judgment on the
pleadings pursuant to Rule 12(c), or in the alternative partial summary
judgment pursuant to Rule 56. Rule 12(c) expressly provides that "if, on a
motion for judgment on the pleadings, matters outside the pleadings are
presented to and not excluded by the court, the motion shall be treated as
one for summary judgment." Because the parties have submitted various
affidavits and documents along with their pleadings, and because I have not
excluded those materials from my determination of defendants' motions, those
motions are most appropriately treated as Rule 56 motions for summary
judgment.
2 This type of arrangement, in which a licensed insurer issues a policy with
the understanding that another party will insure it, is called a "fronting
cession". See, e.g., Union Sav. Am. Life Ins. Co. v. North Cent. Life Ins.
Co., 813 F. Supp. 481, 484 (S.D. Miss. 1993) ("A fronting arrangement is a
reinsurance device used by a company, not qualified or licensed to do
business in a particular state, to profit from the sale of insurance in that
state"). See generally Barry R. Ostrager and Thomas R. Newman, Handbook on
Insurance Coverage Disputes ("Ostrager & Newman") 645 (7th ed. 1994). To
distinguish Allendale's reinsurance agreement with FMI from the direct
insurance policy that FMI issued to Bull Data, I will refer to the former as
the "fronting cession".
3 There are two basic types of reinsurance policies, facultative and treaty.
"In facultative reinsurance, a ceding insurer purchases reinsurance for a
part, or all, of a single insurance policy. Treaty reinsurance covers
specified classes of a ceding insurer's policies." Unigard Security Ins. Co.
v. North River Ins. Co., 4 F.3d 1049, 1053-54 (2d Cir. 1993) (citing 1 Klaus
Gerathewohl, Reinsurance Principles and Practice 64-128 (1980)). See also
Charles F. Corcoran III, Reinsurance Litigation: A Primer, 16 W. New Eng. L.
Rev. 41, 43-44 (1994).
4 Because defendants reinsured Allendale, which in turn had reinsured FMI,
defendants are not technically "reinsurers" as that term is generally used in
the nomenclature of the reinsurance industry. Rather, defendants are
"retrocessionaires" the reinsurers of a reinsurer. See Ostrager & Newman at
643. However, the parties have consistently referred to Allendale as the
insurer and defendants as the reinsurers, and to avoid confusion I shall
adhere to these terms throughout this Opinion.
5 The "US$ 7,000,000 any one occurrence [part of] US$ 13,500,000 excess of
US$ 25,000,000 per occurrence" indicates that the reinsurers agreed to
indemnify Allendale for $ 7 million of the reinsurance layer between $ 25
million and $ 38.5 million. See Defendants' Rule 3(g) Statement of
Uncontested Facts ("Defendants' 3(g) Statement") at 3 n.1; Plaintiff's
Response to Defendants' 3(g) Statement ("Plaintiff's 3(g) Response") at P 8.
6 During the appellate stage of the UK action, Allendale commenced an action
against defendants in the U.S. District Court of Rhode Island. However,
Allendale discontinued the Rhode Island action by stipulation and
subsequently commenced this action in the Southern District of New York.
7 Defendants are the reinsurers for only one layer of the reinsurance of the
fronting cession. The other reinsurers have apparently reimbursed Allendale.
See Plaintiff's Memo at 1. Thus, although defendants have not raised the
issue, I note that it is unclear why defendants alone and not all the
reinsurers are be liable for their proportionate share of $ 5,000,000 unless
plaintiff intends to say that each defendant is liable for its share of the
defendant reinsurers' collective proportion of the entire $ 5,000,000.
8 There is a common-sense explanation for the traditionally amicable
relationship between insurers and reinsurers. Reinsurers are, of necessity,
paid smaller premiums than insurers, and thus cannot afford "to duplicate the
costly but necessary efforts of the primary insurer in evaluating risks and
handling claims." Unigard, 4 F.3d at 1054. Nevertheless, they may generally
rely on the good faith of the insurers because "repeat transactions are the
norm, [and] reputation is thus important to commercial success and the loss
of repeat business is a penalty that usually outweighs the short-term gains
of misrepresentations or stonewalling contractual obligations." Id.
9 For the purposes of understanding Bellefonte, there is no distinction
between "follow-the-fortunes" clauses and "follow-the-settlement" clauses.
See Ostrager & Newman § 16.01 at 657.
10 Allendale argues that an insurer's liability under a property insurance
policy is triggered only when the insured has sustained an actual loss,
whereas liability insurance requires an insurer to make payment whenever
liability attaches even if the insured has not yet suffered a loss. See
Plaintiff's Memo at 11 and 11 n.12. While this may be so, I see no reason why
this difference between the two kinds of insurance policies necessarily
supports Allendale's assertion that loss adjustment expenses must be
considered "separate and apart from the indemnity payment" and thus are not
capped by the limit clause. Id. at 11 n.12. As stated above, whether or not
Allendale's ability to recover loss adjustment expenses is capped by the
limit clause must be determined by looking to the parties' intent as
reflected in the language of the contract.
11 Neither Allendale nor defendants have presented extrinsic evidence
regarding the meaning of the service-of-suit clause, or argued that this
motion may be decided by reference to such.
12 Compare Rokeby, 489 N.Y.S.2d at 71 (clause is a forum selection clause),
overruled by Columbia Cas. Co. v. Bristol-Myers Squibb Co., 215 A.D.2d 91,
635 N.Y.S.2d 173, 176 (1st Dep't 1995), with Price v. Brown Group, Inc., 206
A.D.2d 195, 619 N.Y.S.2d 414, 417-418 (4th Dep't 1994) (clause is not a forum
selection clause). This issue was recently resolved by the New York Court of
Appeals in Brooke Group Ltd. v. JCH Syndicate 488 et al., 87 N.Y.2d 530, 640
N.Y.S.2d 479, 482, 663 N.E.2d 635 (1996) (service-of-suit clause must be
distinguished from exclusive forum selection clauses and clause does not
therefore preclude insurer's motion for forum non conveniens).
13 See, e.g., Appalachian Ins. Co., 162 Cal. App. 3d at 633-634 (clause does
not preclude successful forum non conveniens motion because such motion may
be granted based on considerations of public interest alone even if parties
agreed on forum).
14 See McDermott Int'l, Inc. v. Lloyds Underwriters, 944 F.2d 1199, 1204-05
(5th Cir. 1991) (service-of-suit clause did not waive reinsurer's right to
remove). But see, e.g., Keeling, 1993 U.S. Dist. Decision, 1993 WL 18909 at
*5 (distinguishing McDermott and holding clause barred insurer from removing
state action to neighboring federal court); Lavan Petroleum Co. v.
Underwriters at Lloyds, 334 F. Supp. 1069, 1073 (S.D.N.Y. 1971) (same);
General Phoenix Corp. v. Malyon, 88 F. Supp. 502, 503 (S.D.N.Y. 1949) (same);
Archdiocese of Milwaukee v. Underwriters at Lloyd's, 955 F. Supp. 1066, 1071-
1072 (E.D. Wis. 1997) (same and listing cases with similar holding).
15 Compare Price, 619 N.Y.S.2d at 418 (clause did not preclude insurer from
filing in United States court before insured filed an action) with Rokeby,
489 N.Y.S.2d at 74-75 (reaching opposite conclusion).
16 For exactly this reason, the case law cited by Allendale regarding the
presumptive validity of exclusive forum selection clauses does not apply in
this case. The service-of-suit clause at issue here is substantively
different from the forum selection clauses analyzed in cases such as M/S
Bremen v. Zapata Off-shore Co., 407 U.S. 1, 32 L. Ed. 2d 513, 92 S. Ct. 1907
(1972), for it does not expressly designate a single forum in which the
parties agreed to resolve their dispute. See Brooke Group Ltd., 640 N.Y.S.2d
at 482.
17 Technically speaking, Allendale was free to file an action to assert its
rights under the reinsurance agreement in a United States court after
defendants filed the UK action. The two actions (defendants' UK action and
Allendale's United States action) would be mirror images of each other as
they would involve identical issues of law and the same parties. Yet these
identical actions would not be litigated on even ground. Given that neither
federal nor state courts are required to try cases that duplicate the
expenditure of time, money and judicial resources, Allendale would face the
substantial hurdle of convincing the United States court to try its case
during the pendency of the U.K. action. See, e.g., Will v. Calvert Ins. Co.,
437 U.S. 655, 662-63, 57 L. Ed. 2d 504, 98 S. Ct. 2552 (1978); N.Y. C.P.L.R.
§ 3211(a)(4).
18 The clause in question read: "No action or proceeding shall be commenced
by [Koch] against [NYCCDC] except in the Supreme Court of the State of New
York." Id. at 659.