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Reinsurance Nuts & Bolts: A Potpourri of Reinsurance Issues Courtesy of Gulf Ins. Co. v Transatlantic Reins. Co. (Part I of a Two-Part Post)

November 17th, 2009 Appellate Practice, Contract Interpretation, New York State Courts, Nuts & Bolts, Nuts & Bolts: Reinsurance, Rescission and Reformation 1 Comment » By Philip J. Loree Jr.


Today we look at a reinsurance case recently decided by the New York Supreme Court, Appellate Division, First Department, New York’s intermediate appellate court for cases originating in New York County (Manhattan) and certain other counties in the New York metropolitan area.  We would not characterize Gulf Ins. Co. v Transatlantic Reins. Co., ___ A.D.3d ___,  2009 NY Slip Op. 06788 (1st Dep’t Oct. 1, 2009) (copy here), as a ground-breaker, but it involves a number of interesting  issues, including the interpretation and construction of a quota share treaty, course of performance, reformation and rescission. 

Substantive reinsurance cases are a relatively rare breed to begin with (especially in recent years), and cases that discuss a broad range of issues in some depth are rarer still.  That makes Gulf/Transatlantic worthy of some attention, especially to those interested in learning a few reinsurance law basics.  Hat tip to my friend and former colleague James P. Tenney for bringing the case to our attention.

 A few caveats are in order.  First, one of the reasons we do not see that many substantive reinsurance cases arising out of reinsurance treaties (as opposed to facultative certificates) is because arbitration clauses have historically been the norm in the treaty context.  Disputes like those in Gulf/Transatlantic are therefore more commonly resolved in arbitration.  That may change in the future as attitudes about the desirability of arbitration as a method to resolve reinsurance disputes appear to be in flux (let’s hold that thought for another day). 

Second, as most reinsurance lawyers know (or quickly learn), courts usually decide reinsurance cases according to the strict rules of law, while arbitration panels generally do not, particularly when there is an honorable engagement clause in the contract.  (See our discussion of honorable engagement clauses, here.)   Never assume that the outcome of a reinsurance case in arbitration is going to mirror one a court would reach, although courts and arbitrators may occasionally reach the same or similar conclusions based on the same set of facts.          

Third, given the number of issues raised in the case, and their somewhat technical nature, we thought it best simply to discuss what they were, how they arose and how the Court ruled on them, rather than engaging in a critical analysis or providing our thoughts on how a typical arbitration panel might have decided them.  We simply attempt to make the opinion a little easier for reinsurance professionals and others interested in the subject to digest.   

Part I of this two-part post sets forth the background, and deals with two issues, both of which relate to the amount of reinsurance accepted by the reinsurer.  One involves contract interpretation, the other, reformation.  Part II of this post will tackle three issues:  one involving whether a stub period of a policy was reinsured by one of the treaties, one concerning whether the reinsurer agreed to reinsure both coverage types specified in parts A and B of the treaty, and another concerning whether the reinsurer’s rescission claim raised a question of fact sufficient to defeat summary judgment.  


Beginning in 1996 Gulf Insurance Company (“Gulf”) wrote automobile residual value insurance (“RVI”) policies.   Gulf obtained reinsurance for these policies, including a series of quota share treaties in which various reinsurers participated.  As is frequently the case, each treaty was evidenced by a treaty wording, and an interest & liabilities agreement (“I & L”), which set forth each reinsurers’ participation in the treaty.  Gerling Global Reinsurance Corporation of America (“Gerling”) (n/k/a “GLOBAL Reinsurance Corporation of America”) participated only in the treaties effective 1999, 2000, and 2001. 

In March 2000 a Gulf policyholder, First Union Corporation (“First Union”), commenced a coverage action against Gulf, claiming $418 million was due it under its RVI policy.  In 2003 Gulf and First Union settled the coverage action for $266 million and Gulf billed its 1996, 1997 and 1998 reinsurers for what it claimed were their respective shares of the settlement.  Gerling was not billed because it did not participate in any of those treaty years.  The reinsurers refused to pay and Gulf commenced an action in Supreme Court, New York County (New York County’s trial court of general jurisdiction) to collect the disputed reinsurance balances.

In March 2004 Gulf billed a portion of the settlement to reinsurers participating in treaties in later years, including the treaty effective 1999 in which Gerling participated.  Gerling refused to pay and Gulf commenced an action against it in Supreme Court, New York County.  Gerling, in turn, commenced a separate action in the same court seeking rescission of the treaties effective 1999, 2000 and 2001, and, in the alternative, certain declaratory relief.  Pretrial proceedings in these two actions were consolidated. 

After discovery, the parties filed cross-motions for summary judgment.  The issues raised by the motions for summary judgment, and their resolution by the trial and appellate courts, are discussed in detail in this two-part post (in the order in which they were addressed by the Court).      


A.  What Amount of Reinsurance did Gerling Accept

A key issue informing the resolution of the summary judgment motions was whether Gerling’s percentage participation in the 1999 and 2000 Treaties, as stated in the I & Ls, was intended to be a percentage participation of a 45% quota share of Gulf’s gross liability under the applicable RVI policies, or simply a percentage participation of Gulf’s gross liability under those policies.  The Court held that Gerling accepted 6.5% of 45% of Gulf’s gross liability under the policies reinsured by the Treaties, not 6.5% of 100% of that gross liability. 

Most versed in reinsurance law and practice would correctly observe that this holding was uncontroversial.  But there was nevertheless some support for Gulf’s position based on the maxim “loss follows premium.” 

 Let’s take a look at what the Treaties and I & Ls provided as respects Gerling’s participation.  As the 1999 and 2000 Treaties were identical, we need only consider the 1999 Treaty wording and I & L (collectively, “the Treaty”).  The applicable “Business Covered” section of the Treaty wording said that “[t]he Company [Gulf] shall cede to the Reinsurer [defined to include all participating reinsurers collectively] and the Reinsurer shall accept from the Company a 45% quota share participation of the net retained insurance liability of the Company on each risk insured.”  “Net retained insurance liability” was defined as “the remaining portion of the Company’s gross liability on each risk reinsured under this Agreement after deducting recoveries from all reinsurance, other than the reinsurance provided hereunder and the reinsurance provided in the Company Retention Article.”  The “Company Retention Article” said that “[t]he Company will maintain for its net account a 55% participation in the business reinsured hereunder.  However, at its discretion, the Company may purchase facultative reinsurance.”

Let’s pause briefly here to deal with a wrinkle in the contract language that did not affect the outcome, but which might otherwise cause confusion.   The definition of “net retained insurance liability” set forth above suffered from what presumably was a scrivener’s error.  It provided for the deduction of “recoveries from all reinsurance, other than the reinsurance provided hereunder and the reinsurance provided by the Company Retention Article.”   Slip op. at 4 (emphasis added).  Where, as here, Gulf’s retention was expressed on a pro-rata basis (55%), not deducting inuring facultative reinsurance for the purposes of calculating net retained insurance liability would result in Gulf effectively receiving additional quota share reinsurance on loss that was already reinsured 100% by inuring facultative reinsurance.  The parties therefore agreed that “net retained insurance liability” simply meant “the remaining portion of the Company’s gross liability.  .  .  after deducting recoveries from all reinsurance, other than the reinsurance provided hereunder.”     

Turning back to the rest of the contract, the I & L stated that “[Gerling] shall have a 6.50% participation … in the Interests and Liabilities of the Reinsurer as set forth in the Agreement attached hereto entitled Quota Share Reinsurance Agreement.”  The Treaty wording said “Gulf shall cede to the Reinsurer and the Reinsurer shall accept from [Gulf] a 45% quota share participation of [Gulf’s] net retained insurance liability … on each risk insured.”  These two documents, taken together, showed that Gerling accepted a 6.5% participation in the 45% quota share of Gulf’s net retained insurance liability.  The Court said that whether or not Gulf had inuring reinsurance, “[t]he crucial and unambiguous fact is that Gerling has a 6.5% participation in the 45% quota share and that quota share cannot be equal to 100% of Gulf’s net retained insurance liability.”  Slip op. at 7.  

The premium provisions of the I & L buttressed this conclusion.  They stated that “[Gulf] shall pay [Gerling] 6.50% of all premiums duethe Reinsurer in accordance with the provisions of the Agreement [the Treaty] attached.”  (emphasis added)  The Treaty wording, in turn, stated that “[Gulf] shall pay to the Reinsurer 45% of [Gulf’s] original gross net written premium … in respect to its net retained insurance liability.”  And the Treaty defined “original gross net written premium” as “gross written premium less returns, cancellations, inuring excess of loss reinsurance and facultative reinsurance, if any.” 

So putting aside for the moment any extrinsic evidence, the I & L and Treaty wording provided that Gerling was entitled to a 6.5% share of 45% of the “original gross net written premium.”  That, in turn, meant that Gerling accepted a 6.5% share of “a 45% quota share participation of the net retained insurance liability of the Company on each risk insured.”  Slip op. at 6-7.  

But the extrinsic evidence arguably cast matters in a different light.  First, Gulf had not procured any inuring reinsurance.  Second, Gulf paid Gerling – and Gerling accepted without objection — 6.5% of 100% of the “original gross net written premium.”  Third, as Gulf pointed out, “when all of the reinsurers’ individual participations under their I & L contracts were added up (TRC 12.5%; XL 11.25%; Odyssey 11.25%; and Gerling 10%), they total the 45% share of Gulf’s gross liabilities that the .  .  . reinsurers agreed collectively to accept under the [Treaty].”  Slip op. at 5.  

Gerling explained “’that its acceptance of the [higher amounts of premium] was based upon its mistaken acceptance of the broker’s representations to its bookkeeping department that the amounts were correct.’”  Slip op. at 6 (quoting trial court).  Gerling also pointed out that “because the premium was received after — not contemporaneously with — execution of the contract documents, its receipt and related documents of its bookkeepers ‘do not reflect any interpretation of treaty wordings.’”  Slip op. at 6 (quoting trial court) (emphasis added). 

While Gulf’s extrinsic evidence was consistent with Gulf’s position that Gerling accepted a 6.5% participation of Gulf’s gross liability under the reinsured RVI policies, it contradicted what the Court found to be the clear and unambiguous provisions of the I & L and Treaty wording.  New York law does not permit consideration of extrinsic evidence to vary the terms of clear and unambiguous contract language.  Because the I & L and Treaty provisions were unambiguous, the Court found that the conflicting extrinsic evidence was irrelevant.  Slip op. at 7 (citation omitted).  Accordingly, the Court held that the trial court “correctly concluded that the relevant provisions of the 1999 and 2000 treaties and I & L contracts unambiguously state Gerling’s percentage participation as a percentage of all risk assumed by the reinsurers.”  Slip op. at 8.  

 B.  Did the Trial Court Properly Grant Summary Judgment on Gulf’s Reformation Claim?

In the event it lost on the amount of reinsurance accepted issue, Gulf sought, in the alternative, reformation of the Treaties to provide that Gerling accepted a 6.5% share of Gulf’s gross liability under the reinsured policies.  The predicate for reformation was mutual mistake.  The trial court granted Gerling’s motion for summary judgment, but the Court reversed, finding that Gulf had adequately established its burden to show that there was a material issue of fact precluding summary judgment.  Slip op. at 12.  

Given its finding that the Treaties clearly and unambiguously provided that Gerling accepted a 6.5% share of 45% of Gulf’s gross liability, the Court had to square this case with two prior New York Court of Appeals decisions holding that a party resisting summary judgment of a claim for reformation of a clear and unambiguous contract between sophisticated parties must come forward with “unequivocal and persuasive evidence of mutual mistake”  Slip op. at 8, 8-10; see Chimart Assoc. v Paul, 66 N.Y. 2d 570 (1986) (here);  Backer Mgt. Corp.v Acme Quilting Co, 46 N.Y. 2d 211 (1978). 

Gulf was required to show that the mutual mistake existed at the time the contract was executed.  But the Court found that, while “[h]ow the parties perform a contract necessarily is manifested after execution of the contract…,” “their [subsequent] performance is highly probative of their state of mind at the time the contract was signed.”  Slip op. at 10.   The Court acknowledged that “neither Gulf’s course-of-performance evidence nor the Gerling ‘Account Instructions’ conclusively establish mutual mistake.”  Slip op. at 11.  And if Gerling’s version of the events was “accepted, Gulf’s course-of-performance evidence could be viewed as equivocal,” because “the interpretation of a contract manifested by a party’s performance ‘must be the conscious action of a responsible agent of the party against whom the interpretation is urged[.]’”  Slip op. at 11 (quoting Jansen v United States, 344 F.2d 363, 369 (Ct. Cl. 1965)): 

 Gerling countered Gulf’s evidence with an affidavit from Alice Belkin, an assistant secretary and account analyst in Gerling’s accounting department who was involved in reviewing and booking premiums and losses reported to Gerling by Gulf through its broker, Guy Carpenter. According to Ms. Belkin, she recorded in Gerling’s books premium and loss experience relating to the reinsurance agreements with Gulf in accordance with assurances she received from Guy Carpenter, not on the basis either of any review by her of the terms of the treaties and I & L contracts or of discussions with Gerling underwriters knowledgeable about those terms. Referring to Ms. Belkin’s affidavit, and apparently accepting the truth of its factual assertions, Supreme Court wrote that “Gerling explains that its acceptance of the [higher amounts of premium] was based on its mistaken acceptance of the broker’s representations to its bookkeeping department that the amounts were correct.”

Slip op. at 11.  

But, for the purposes of summary judgment, the trial court should have taken Gulf’s version of the facts as true, and not effectively have ruled that Gerling’s evidence was more credible than Gulf’s: 

The trier of fact might have a favorable impression of Ms. Belkin’s credibility.  But it also might regard testimony in accordance with those factual assertions as a deus ex machina, appearing too suddenly and conveniently after Gulf ceded the First Union claim to its reinsurers. Gulf contends, and we agree, that from all the evidence it submitted, a fact finder reasonably could conclude that a multibillion dollar reinsurance company does not collect the premium and pay losses for more than three years without any internal controls whatsoever to ensure that the substantial amounts it receives and pays are consistent with the terms of the underlying contracts.  As a panel of the Third Department stated in a similar context, “we think it cannot be said on this record that a reasonable person could by no rational process find the evidence of mutual mistake to be clear, positive and convincing.  Summary judgment on affidavits should not be granted where there is any doubt as to the existence of triable issues of fact.

Slip op. at 11-12 (citations omitted). 

Accordingly, the Court reversed the trial court’s grant of summary judgment, holding that “Gulf was not required to come forward with incontrovertible proof of mutual mistake. It met the heavy burden it was required to shoulder of coming forward with ‘unequivocal evidence of mutual mistake’ in evidentiary form.”  Slip op. at 12. 

In Part II we discussed the remaining three issues considered by the Court, so stay tuned.  .  .  .


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