In Part I of this two-part post (here) we discussed the background and procedural history of Gulf/Transatlantic and how New York’s Appellate Division, First Department resolved the issues of: (a) the amount of reinsurance accepted by Gerling; and (b) whether the trial court should have granted Gerling’s motion for summary judgment on Gulf’s reformation claim. This Part II covers the remaining three issues whether: (a) the 1998 First Union Policy “attached” to the 1999 Treaty; (b) Gerling reinsured the policies Gulf issued to a subsidiary of the General Electric Company; and (c) Gerling established a question of material fact concerning whether it was entitled to rescind the 1999 Treaty.
A. Did a three-month stub period of the 1998 First Union Corporation Policy “attach” to the 1999 Treaty?
Gerling sought a declaration that the policy issued to First Union Corporation (the “First Union Policy”) was not covered by the 1999 Treaty, and Gulf sought a declaration that Gerling was “obligated to indemnify Gulf under the 1999 treaty for Gerling’s share of [a settlement Gulf entered into with First Union and for which it sought partial reimbursement under]. . . the 1999…Treaty.” Slip op. at 13. Both parties moved for partial summary judgment on this claim, and the trial court granted partial summary judgment in favor of Gerling and denied partial summary judgment in favor of Gulf. The Court held that the trial court should have denied both parties’ summary judgment motions on this claim because neither party met its burden on its motion.
Effective January 1, 1996 Gulf issued a twelve-month policy to First Union (the “1996 First Union Policy”). Gulf issued two subsequent policies effective January 1, 1997 (the “1997 First Union Policy”), and January 1, 1998 (the “1998 First Union Policy”). Gulf and First Union reached an agreement to extend coverage for three months into 1999 under the same terms of the 1998 First Union Policy pending negotiations, but neither Gulf nor Gerling presented any evidence whether the agreement was oral or written, or cited “any evidence bearing on the question of whether the agreement, as opposed to the coverage, was effective as of a date in 1998, as of. . . January 1, 1999 or as of a later time and date in 1999.” Slip op. at 13.
The 1999 Treaty was “’[e]ffective January 1, 1999 at 12:01 a.m., Eastern Standard Time, to January 1, 2000 at 12:01 a.m. Eastern Standard Time, as respects losses occurring on policies attaching during the term’“ Slip op. at 12 (emphasis in original; quoting 1999 Treaty). The “Business Covered” article said that Gulf ceded to its reinsurers a “’quota share participation of the net retained insurance liability of [Gulf] on each risk insured under new and renewal policies becoming effective at and after 12:01 a.m., Eastern Standard Time, January 1, 1999, as respects losses occurring at and after said date covering business classified by [Gulf] as Automobile Residual Value Insurance’” Slip op. at 12. (emphasis in original; quoting 1999 Treaty). “Policies” were defined as “’[Gulf's] binders, policies and contracts providing insurance and reinsurance on the business covered under this Agreement.’” Slip op. at 12 (emphasis in original; quoting 1999 Treaty). The Treaty’s choice-of-law clause provided that “’[t]his Agreement shall be governed by and construed according to the laws of the State of New York.’” Slip op. at 12 (emphasis in original; quoting 1999 Treaty).
While the Treaty did not define the verb “attaching,” the Court said that “[i]ts meaning. . . seems clear from the above-quoted language of Article I of the treaty, and the parties appear to be in agreement that a policy, be it a “new” or a “renewal” policy, “attach[es]” during the term of the treaty if it becomes effective during the treaty’s term.” Slip op. at 12. Thus, concluded the Court, “[r]egardless of whether the agreement is characterized as an ‘extension,’ a ‘new’ or a ‘renewal’ policy, the decisive question is whether that policy attached — i.e., became effective — during the term of the [T]reaty.” Slip op. at 15-16. And the resolution of that question turned on whether First Union and Gulf intended “that the agreement become effective on a date during the term of the” Treaty. Slip op. at 16.
The problem for both Gerling and Gulf was that neither came forward with any evidence as to what First Union’s and Gulf’s intent was as respects when the parties intended the agreement to extend the term of the policy to be effective:
[I]f Gulf and First Union agreed in 1998 to extend the 1998 policy and intended their agreement to be effective in 1998, Gerling would be entitled to summary judgment. But if Gulf and First Union agreed in 1999 to extend the 1998 policy, or agreed in 1998 to such an extension but intended their agreement to be effective in 1999, Gulf would be entitled to summary judgment (putting aside, of course, Gerling’s claim that it is entitled to rescission of the 1999 treaty [See Section C., below]). As neither party alerts us to any evidence presented to Supreme Court bearing on when the agreement was reached or when it was intended to be effective, neither party met its burden and each party’s motion for partial summary judgment should have been denied.
Slip op. at 16.
B. Did Gerling agree to reinsure Gulf’s Section B coverage in 1998?
The Treaties contained two separate coverage types: Section A, which consisted of RVI policies Gulf issued to various insureds; and Section B, which consisted solely of the RVI policies Gulf issued to a subsidiary of the General Electric Company. The issues we have discussed thus far have applied to both coverage sections, so we have not yet had occasion to distinguish between the two.
But Gulf contended that there was an oral agreement between Gerling and Gulf under which Gerling agreed to reinsure Gulf’s section B coverage during the period August 1, 1998 until and including December 31, 1998. Gulf contended this was a separate agreement from the 1999 Treaty, and therefore proof of its existence was not barred by the integration clause in the 1999 Treaty. Gerling moved for partial summary judgment on Gulf’s claim, which the trial court granted, and which the Court affirmed.
The Court did not have to address Gulf’s claim that the agreement was separate from the 1999 Treaty, because it found that Gulf failed to meet its burden to establish the existence of a material issue of fact warranting the denial of summary judgment. See Slip op. at 17-18.
Under New York law, said the Court, “’[t]o create a binding contract, there must be a manifestation of mutual assent sufficiently definite to assure that the parties are truly in agreement with respect to all material terms.’” Slip op. at 17 (quoting Re Express Indus. & Term. Corp. v New York State Dept. of Transp., 93 N.Y.2d 584, 589 (1999) (here)). And to defeat summary judgment on a claim predicated on the existence of an oral agreement, the party opposing summary judgment must “’set forth such necessary evidentiary details as when, where or by whom the alleged oral agreement was made or the substance of the conversations.’” Slip op. at 17 (quoting Apache-Beals Corp. v Intl. Adjusters, Ltd., 59 A.D.2d 1032, 1033 (4th Dep’t 1977), aff’d, 46 N.Y.2d 888 (1979) (here)).
Gulf’s evidentiary submissions did not meet this burden, and the Court affirmed the trial court’s grant of partial summary judgment. Gulf relied on a March 29, 1999 fax from the broker to Gerling’s underwriter which purported to “confirm,’ among other things, coverage under Section B effective August 1, 1998,” but the fax did not “identify when, where or by whom Gerling agreed to such coverage,” and the underwriter “did not respond to the fax or to a subsequent letter” from the Broker “enclosing for [the underwriter’s] signature an I & L contract for Section B coverage only for the period from August 1, 1998 through December 31, 1998.” Slip op. at 17 (quotations omitted). Gerling also relied on other facts, “including Gerling’s receipt of a premium from Gulf consistent with participation by Gerling on Section B coverage for the last five months of 1998.” Slip op. at 17-18. While those facts might have established an implied contract, Gulf’s claim was based on an oral contract, and they did not establish the existence of such a contract. See slip op. at 17-18.
C. Did Gerling establish that there was a question of material fact as to whether it was entitled to rescind the 1999 Treaty?
Rescission was one of the grounds on which Gerling opposed Gulf’s motion for summary judgment concerning Gerling’s indemnification obligations under the 1999 Treaty. The trial court ruled there was a material question of fact as to whether Gerling was entitled to rescind the 1999 Treaty. The Court affirmed, albeit on different grounds.
For the benefit of readers not already familiar with the law governing rescission of reinsurance contracts, a reinsurer need not prove actual – or even constructive – fraud or mutual mistake to rescind a reinsurance contract. What sets reinsurance contracts apart is the duty of utmost good faith (uberrimae fidei): To establish a prima facie case for rescission, a reinsurer need only show that pre-contract the cedent failed to disclose material facts concerning the original risk of loss. Even an innocent nondisclosure may suffice. See, e.g., Union Indemnity Ins. Co. v. American Centennial Ins. Co., 89 N.Y.2d 94, 106-07 (1996) (copy here). For a more thorough recitation of the applicable legal principles, and cites to other key cases, see slip op. at 18.
Gerling’s rescission defense concerned events surrounding the First Union policy, which was discussed in Section A., above. As discussed, there is a question of fact as to whether that policy was ceded to the 1999 Treaty in the first place. But Gerling’s rescission defense is predicated on different facts.
Gerling adduced evidence that, when Gulf solicited Gerling’s participation in the 1999 Treaty, Gulf failed to disclose that L&M – Gulf’s managing general agent (“MGA”) – “was seeking a 360% increase in the premium rate on. . . the First Union policy, even though, in response to inquiries from. . . Gerling’s underwriter, Gulf stated that it was too early in the program to seek premium adjustments from its insureds.” Slip op. at 18-19. It was undisputed that: (a) the First Union Policy – due to expire on December 31, 1998 – accounted for approximately one-half the premium reported under the reinsured RVI program; (b) “L&M was seeking … a substantial premium increase;” and (c) Gerling was not informed of the request prior to agreeing to participate in the 1999 Treaty. Slip op. at 19.
The crux of Gulf’s position was that there was no evidence that Gulf knew, at the time of placement, that L&M was requesting a substantial increase in premium for the First Union policy, and that L&M’s knowledge cannot be imputed to Gulf because L&M was acting not as an agent, but as an independent contractor of Gulf. In support Gulf cited the agency agreement between L&M and Gulf, which expressly recited that L&M acted as an independent contractor, not an employee of Gulf.
The Court held that L&M’s knowledge could be imputed to Gulf. It recited New York’s common-law definition of an agency relationship – one that “results from a manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and the consent by the other to act.” Slip op. at 19 (quotations and citations omitted). While it did not discuss the terms of the Gulf/L&M agency agreement, it said that “a review” of it “makes clear” that “the true relationship between Gulf and L&M with respect to Gulf’s RVI program is that of principal and agent.” Slip op. at 19. The Court also rejected Gulf’s fallback argument that there can be no imputation of knowledge from agent to principal for the purposes of a reinsurance nondisclosure claim, noting that “[n]o case cited by Gulf purports so to hold or even to suggest that the common-law rule imputing the knowledge of an agent to the principal is not applicable in the reinsurance context,” and that Gulf provided no “justification for such an exception” or any attempt to “reconcile it with the duty of utmost good faith owed by reinsureds.” Slip op. at 19-20.
The Court held that Gerling satisfied its burden to defeat Gulf’s motion for summary judgment, and that the materiality of the nondisclosure presented a question of fact for trial. Slip op. at 20.
Tags: Amount of Reinsurance Accepted, Appellate Division First Department, Contract Interpretation, Course of Performance, Extrinsic Evidence, Gulf Ins. Co. v Transatlantic Reins. Co, Inuring Reinsurance, Mutual Mistake, Parol Evidence Rule, Quota Share Treaty, Reformation, Rescission, Residual Value Policies, Retention, Summary Judgment