American Bankers Insurance v. Northwestern National Insurance

AMERICAN BANKERS INSURANCE COMPANY OF FLORIDA, Plaintiff-Counter-Defendant-
Appellee,
v.
NORTHWESTERN NATIONAL INSURANCE COMPANY, Defendant-Counter-Claimant-Appellant.
American Bankers Insurance Company of Florida, Plaintiff-Counter-Defendant-Appellee-Cross-
Appellant,
v.
Northwestern National Insurance Company, Defendant-Counter-Claimant-Appellant-Cross-Appellee.
Nos. 98-5266, 98-5387 and 99-4195.
United States Court of Appeals,
Eleventh Circuit.
Dec. 30, 1999.
Appeals from the United States District Court for the Southern District of Florida. (No. 97-1827-CIV-EBD),
Edward B. Davis, Judge.
Before EDMONDSON and BARKETT, Circuit Judges, and COHILL*, Senior District Judge.
BARKETT, Circuit Judge:
Northwestern National Insurance Company ("Northwestern") appeals from an adverse summary
judgment in favor of American Bankers Insurance Company of Florida ("American Bankers") on American
Bankers' suit to enforce the reinsurance contract between the parties.1 Northwestern seeks a reversal of the
district court's judgment, and a grant of summary judgment in its favor declaring that Northwestern has no
liability under the insurance contract, or alternatively, a reversal of the district court's determination of the
prejudgment interest amount in the amended final judgment.
*
Honorable Maurice B. Cohill, Jr., Senior U.S. District Judge for the Western District of Pennsylvania,
sitting by designation.
1
A reinsurance contract provides that one insurer (the "ceding insurer" or "reinsured") "cedes" all or
part of the risk it underwrites, pursuant to a policy or group of policies, to another insurer. The reinsurer
agrees to indemnify the ceding insurer on the transferred risk. The purpose of the reinsurance contract is
to diversify the risk of loss, and to reduce required capital reserves. See 13A John A. Appleman & Jean
Appleman, Insurance Law and Practice §§ 7681, at 480 (1976); 19 George J. Couch, Cyclopedia of
Insurance Law §§ 80:1, at 624 et seq. (2d ed.1983).
Background
This case involves the reinsurance contract between Northwestern and American Bankers to
indemnify payments originally made by Hartford Insurance Company ("Hartford") to Dow Corning
Corporation ("Dow") under Hartford's primary insurance policy with Dow. These payments satisfied personal
injury claims asserted against Dow by women who had received silicone breast implants.
Dow was directly insured by Hartford through two policies: (1) a comprehensive general liability
policy of $1 million on a "per occurrence" basis, subject to a $50,000 deductible; and (2) additional coverage
on an "aggregate" basis, providing that any number of occurrences could be combined up to the $1 million
policy limit, subject to a $500,000 deductible.
In order to spread its risk under this policy, Hartford purchased reinsurance protection from American
Bankers for the per occurrence policy. It chose not to reinsure the aggregate basis policy. Under American
Bankers' reinsurance contract with Hartford, American Bankers agreed to accept 30 percent of Hartford's
liability up to $225,000 for any per occurrence loss exceeding $250,000. American Bankers in turn sought
to spread its risk by purchasing reinsurance and contracted with Northwestern for this purpose. Under this
contract, Northwestern agreed to accept 92.3 percent of American Bankers' exposure to Hartford up to
$224,500 for any per occurrence loss greater than $225,000.
Between October 24, 1994 and March 28, 1995, Hartford paid Dow's claims, and then submitted bills
to American Bankers which American Bankers paid. American Bankers subsequently billed Northwestern
for its share of the payments under their contract. After paying the initial claims submitted to them by
American Bankers, Northwestern objected to the billing on the basis that American Bankers had not acted
reasonably in paying Hartford's claims. Northwestern asserted that although Hartford made payments to Dow
on an aggregate basis, it billed American Bankers on a per occurrence basis, which would not have been
covered by the reinsurance contracts. Northwestern took the position that American Bankers failed to
investigate adequately and should not have paid Hartford's claims.
After Northwestern refused to make any further payments, American Bankers filed this suit to
enforce the reinsurance contract. Northwestern counterclaimed for the return of payments it had already made
and sought a declaration that Northwestern had no obligation to American Bankers under their contract. The
district court granted summary judgment to American Bankers and denied Northwestern's cross-motion for
summary judgment. Northwestern now appeals. We review a district court's grant of summary judgment de
novo, applying the same standards utilized by the district court, and viewing the evidence in the light most
favorable to the party against whom judgment was granted. Squish La Fish, Inc. v. Thomco Specialty Prods.,
Inc., 149 F.3d 1288, 1290 (11th Cir.1998).
Discussion
In this case, American Bankers seeks to enforce the reinsurance contract between the parties while
Northwestern seeks a declaration that it has no obligations under the contract. Thus, our starting point is the
language of the contract in order to ascertain its terms and determine whether it has been breached. The
relevant language in the contract at issue is as follows:
All claims involving this reinsurance when settled by the Company, shall be binding on the
Reinsurer, which shall be bound to pay its proportion of such settlements....
American Bankers contends that under this provision of the contract Northwestern cannot "second-guess"
its decisions to pay claims and must defer to American Bankers' judgment. Northwestern argues that although
this may be true generally, Northwestern is not obligated to defer to American Bankers' judgments where,
as here, American Bankers did not fulfill its obligation to act in good faith.
When faced with reviewing the terms of a reinsurance contract, courts have recognized that the
parties to these particular contracts are sophisticated companies regularly involved in bargaining on an equal
footing. Both parties to this relationship are experts in the subject around which their relationship centers.
Moreover, reinsurance contracts themselves are sophisticated documents. The Second Circuit has succinctly
explained the nature of the reinsurance contract and the pragmatic derivations of the need both to defer to the
decisions of the ceding insurance company, but at the same time, to require good faith in the making of those
decisions:
Reinsurance involves contracts of indemnity, not liability. Reinsurers do not examine risks, receive
notice of loss from the original insured, or investigate claims. In practice, the reinsurer has no
contact with the insured.... The reinsurance relationship is often characterized as one of "utmost good
faith." This utmost good faith may be viewed as a legal rule but also as a tradition honored by ceding
insurers and reinsurers in their ongoing commercial relationships. Historically, the reinsurance
market has relied on a practice of the exercise of utmost good faith to decrease monitoring costs and
ex ante contracting costs.... [R]einsurers cannot duplicate the costly but necessary efforts of the
primary insurer in evaluating risks and handling claims. Reinsurers may thus not have actuarial
expertise ... in defending ordinary claims. They are protected, however, by a large area of common
interest with ceding insurers and by the tradition of utmost good faith.
Unigard Sec. Ins. Co. v. North River Ins. Co., 4 F.3d 1049, 1054 (2d Cir.1993) (citations omitted). The
relationship of these reinsurance contracts and companies leads to the principle that reinsurers are generally
bound by the reinsured's decision to pay the claim and must refrain from second guessing a good faith
decision to do so. See Henry T. Kramer, The Nature of Reinsurance, in Reinsurance 1, 5 (R.W. Strain ed.,
1980); Christiania Gen. Ins. Corp. v. Great Am. Ins. Co., 979 F.2d 268, 280 (2d Cir.1992) ("A reinsurer
cannot second guess the good faith liability determinations made by its reinsured....").
The contractual articulation of this general principle has been called the "follow the fortunes" clause
in reinsurance certificates or contracts. As it does in this case, the clause usually states that when an insurer
loses to—or settles with—the insured, the reinsurer must "follow the fortunes" of the ceding company and
pay on its reinsurance obligations. The Third Circuit has noted the compelling policy reasons that counsel
against de novo review of the insured's decision to pay under the "follow the fortunes" doctrine:
To permit the reinsurer to revisit coverage issues resolved between the insurer and its insured would
place insurers in the untenable position of advancing defenses in coverage contests that would be
used against them by reinsurers seeking to deny coverage.... Were the Court to conduct a de novo
review of [the insurer's] decision-making process, the foundation of the cedent-reinsurer relationship
would be forever damaged. The goals of maximum coverage and settlement that have been long
established would give way to a proliferation of litigation. Cedents faced with de novo review of
their claims determinations would ultimately litigate every coverage issue before making any attempt
at settlement.
North River Ins. Co. v. CIGNA Reinsurance Co., 52 F.3d 1194, 1206 (3rd Cir.1995) (citations omitted).
This is not to say that there are no limitations to this doctrine. A court must still ask whether the
ceding insurer acted in good faith in settling or paying the claims. This in turn requires that we determine
what constitutes good faith in this context. We are persuaded that simple negligence cannot be enough to
establish bad faith. Virtually every decision by the ceding insurance company could be second-guessed and
litigated under a simple negligence standard. Thus, to equate bad faith with simple negligence would vitiate
all of the policy reasons that give rise to the follow the fortunes doctrine. Rather, we agree with the Second
Circuit that the proper minimum standard for bad faith should be deliberate deception, gross negligence or
recklessness. See Unigard, 4 F.3d at 1069; see also North River, 52 F.3d at 1216 ("As we have noted, bad
faith requires an extraordinary showing of a disingenuous or dishonest failure to carry out a contract. The
standard is not mere negligence, but gross negligence or recklessness. "); id. at 1207 (" '[F]ollow the fortunes'
doctrine requires a court to find reinsurance coverage unless the reinsurer demonstrates the liability to the
insured was the result of fraud and collusion or not reasonably within the scope of the original policy.").
In this case, Northwestern argues that Hartford submitted a false claim to American Bankers which
American Bankers then paid as a result of its failure to investigate. Specifically, Northwestern asserts that
Hartford paid Dow for multiple claims under its aggregate policy, but treated all of the claims as a single
occurrence for purposes of presenting them to American Bankers, its reinsurers. Northwestern argues that
American Bankers should have investigated and determined that Hartford's claims were not covered by the
reinsurance contract between Hartford and American Bankers and, therefore, not covered by the reinsurance
contract between American Bankers and Northwestern.
American Bankers responds that it acted appropriately in evaluating and paying Harthord's claims.
It points out that the reinsurance contract defines "occurrence" to mean "an accident, event or happening,
including continuous or repeated exposure to conditions, which results in bodily injury ....[,]" and that
Hartford's policy provides that:
$50,000 shall be deducted from the aggregate amount of all sums which the Company shall be
obligated to pay as (a) damages ... with respect to all insurance afforded by the policy as the result
of Bodily Injury ... arising out of any one occurrence.
American Bankers argues that at the time of its decision there was legitimate debate about whether a large
group of similar claims were the result of a single occurrence or multiple occurrences. See Barry R. Ostrager
& Thomas R. Newman, Insurance Coverage Disputes § 9.02 (8th ed.1995). American Bankers points out
that courts had held that many claims may constitute a single occurrence in the context of massive toxic tort
losses, and where multiple claims constitute a single occurrence, single occurrence based coverage operates
in a manner similar to aggregate coverage. Hartford's bills were presented on the basis that all of the
auto-immune breast implant claims constituted a single occurrence. American Bankers maintains that, in
good faith, it determined that it should pay those claims.
We agree with American Bankers that Northwestern's contention that the reinsurance contracts
provided only for per occurrence coverage merely begs the question of whether the claims constituted a single
occurrence or multiple occurrences. Under the state of the law2 at the time of the submission of Hartford's
claim for payment, we cannot say that American Bankers acted in a grossly negligent or reckless manner in
accepting or paying those claims. American Bankers was, in fact, "following the fortunes" of its ceding
insurance company, Hartford. Nor is there anything in the record to support a claim that American Bankers
acted in a fraudulent or deliberately deceptive or grossly negligent manner.
We are not persuaded that the after the fact determination by Hartford that it had erroneously billed
American Bankers makes a difference to our decision.3 To determine whether a decision is made in good
faith, we must look to the circumstances at the time of the decision. The question is not whether Hartford or
American Bankers were ultimately correct or incorrect, but whether they acted in good faith at the time.
2
See, e.g., Uniroyal, Inc. v. Home Insurance Co., 707 F.Supp. 1368, 1380-87 (E.D.N.Y.1988) (Agent
Orange); Owens-Illinois, Inc. v. Aetna Casualty and Surety Co., 597 F.Supp. 1515, 1527-28
(D.D.C.1984) (asbestos); Owens-Illinois, Inc. v. United Insurance Co., 264 N.J.Super. 460, 498-503, 625
A.2d 1, 21-23 (1993), aff'd. in part, rev'd in part, 138 N.J. 437, 650 A.2d 974 (1994) (asbestos);
Insurance Coverage Disputes § 9.02. See also International Surplus Lines Insurance Co. v. Certain
Underwriters at Lloyd's, 868 F.Supp. 917, 921 (S.D.Ohio 1994) (reinsurer could not challenge the single
occurrence basis on which the ceding company had paid the asbestos claims presented by its insured).
3
Subsequent to American Bankers' payments to Hartford on its reinsurance contract, Hartford advised
American Bankers that it had erroneously overbilled American Bankers. Hartford explained that it
believed that the aggregate deductible issued to Dow had already been exhausted by previous claims.
Because the deductible actually had not been exhausted, "[H]artford has amended its bills to allow the
unexhausted portion of the aggregate deductible ... to respond as if on a per claim basis." Hartford
concluded that American Bankers should have been billed a total of $1,054,955.21, rather than
$1,803,836.29. The difference of $748,881.08 was refunded to American Bankers and the appropriate
percentage of overbilling was likewise refunded to Northwestern. The district court subsequently
amended its final judgment, reducing American Bankers' recovery.
Under the facts in the record, we conclude that the district court did not err in determining that American
Bankers was entitled to recover on its reinsurance contract.
As to Northwestern's second appeal seeking reversal of the district court's ruling on prejudgment
interest, we likewise affirm. The issue of prejudgment interest was litigated as part of the original case.
During the litigation, American Bankers argued that prejudgment interest should be calculated from the date
on which each bill was approved for payment by Northwestern's claims department to July 27, 1998.
Northwestern, by motion, opposed American Bankers' method of calculating prejudgment interest, arguing
that under Florida law prejudgment interest should run from the time the cause of action accrues. The district
court rejected Northwestern's argument and its final judgment reflected the prejudgment interest as sought
by American Bankers. Northwestern's notice of appeal from this judgment, case numbers 98-5266 and 98-
5387, did not raise any issue pertaining to prejudgment interest.
Two months after the final judgment had been entered, and after Northwestern's notice of appeal had
been filed, Hartford notified the parties of its billing error. See note 3 supra. Northwestern filed a motion
pursuant to Rule 60(b) of the Federal Rules of Civil Procedure4 to vacate the judgment on the ground of
"newly discovered evidence." The district court granted Northwestern's motion only for the purpose of
appropriately computing the amount owed to American Bankers by Northwestern in light of Hartford's
refunds. The district court specifically noted that:
4
Rule 60(b) provides in part:
On motion and upon such terms as are just, the court may relieve a party or [his] legal
representative from a final judgment, order, or proceeding for the following reasons: (1)
mistake, inadvertence, surprise, or excusable neglect; (2) newly discovered evidence
which by due diligence could not have been discovered in time to move for a new trial
under Rule 59(b); (3) fraud (whether heretofore denominated intrinsic or extrinsic),
misrepresentation, or other misconduct of an adverse party; (4) the judgment is void; (5)
the judgment has been satisfied, released, or discharged, or a prior judgment upon which
it is based has been reversed or otherwise vacated, or it is no longer equitable that the
judgment should have prospective application; or (6) any other reason justifying relief
from the operation of the judgment. The motion shall be made within a reasonable time,
and for reasons (1), (2), and (3) not more than one year after the judgment, order, or
proceeding was entered or taken.
Fed.R.Civ.P. 60(b).
this Court granted the Rule 60 motion only to the extent necessary to adjust the final judgment
amount. No other aspect of the court's original final judgment is under review or subject to
reconsideration. Appellate-leave would only serve to unnecessarily delay the correction of a simple
matter which has little bearing, if any, on the liability issues on appeal.
American Bankers v. Northwestern, No. 97-1827 (S.D.Fla. Nov. 17, 1998).
Northwestern filed a notice of appeal from the amended final judgment (i) reiterating its position
regarding American Bankers' decision to pay Hartford's claims, and (ii) appealing the district court's ruling
regarding the calculation of prejudgment interest. Having resolved the contractual issue, the question
remaining is the calculation of prejudgment interest.
Before we can address the merits of this question, however, we must address American Banker's
contention that Northwestern's argument in this regard is untimely. An order granting or denying relief under
Rule 60(b) is final and appealable. 7 J. Moore's Federal Practice, para. 60.30[3], at 60-343. An appeal of a
ruling on a Rule 60(b) motion, however, is narrow in scope, addressing only the propriety of the denial or
grant of relief and does not raise issues in the underlying judgment for review. See Browder v. Director,
Dep't of Corrections, 434 U.S. 257, 263 n. 7, 98 S.Ct. 556, 54 L.Ed.2d 521 (1978). Because of this limitation,
the law is clear that Rule 60(b) may not be used to challenge mistakes of law which could have been raised
on direct appeal. Gulf Coast Fans, Inc. v. Midwest Electronics Importers, 740 F.2d 1499, 1507 (11th
Cir.1984) ("Rule 60(b) does not extend the time for filing a notice of appeal."). Moreover, a district court's
order under Rule 60(b) is reviewable only for abuse of discretion. Browder, 434 U.S. at 263, 98 S.Ct. 556;
Gulf Coast Fans, 740 F.2d at 1510.
Both the original and final amended judgment calculate the prejudgment interest in the same way,
running from the date on which each of the three bills at issue was approved by Northwestern. While
Northwestern objected to this manner of calculation before the final judgment, it never mentioned it in its
briefs on direct appeal. Given that this issue was litigated before the original final judgment, Northwestern
cannot now raise the issue in its subsequent appeal from the district court's grant of relief under Rule 60(b).
Thus, we agree that Northwestern's argument regarding prejudgment interest is untimely. For all the
foregoing reasons the judgments of the district court are
AFFIRMED.