Opinion
Case No. 2:18-cv-11966
2021-11-23
AMERISURE MUTUAL INSURANCE COMPANY, Plaintiff, v. TRANSATLANTIC REINSURANCE COMPANY, Defendant.
Carl H. Poedtke, DLA Piper LLP, Emily Danya Gilman, Matthew Freilich, Stephen W. Schwab, DLA Piper LLP, Chicago, IL, Lori M. McAllister, Dykema Gossett, Lansing, MI, for Plaintiff. Chelsea R. Mikula, Tucker Ellis LLP, Cleveland, OH, Ronie Schmelz, Tucker Ellis LLP, Los Angeles, CA, Timothy J. Jordan, Garan Lucow, Detroit, MI, for Defendant.
Carl H. Poedtke, DLA Piper LLP, Emily Danya Gilman, Matthew Freilich, Stephen W. Schwab, DLA Piper LLP, Chicago, IL, Lori M. McAllister, Dykema Gossett, Lansing, MI, for Plaintiff.
Chelsea R. Mikula, Tucker Ellis LLP, Cleveland, OH, Ronie Schmelz, Tucker Ellis LLP, Los Angeles, CA, Timothy J. Jordan, Garan Lucow, Detroit, MI, for Defendant.
OPINION AND ORDER DENYING DEFENDANT'S SUMMARY JUDGMENT MOTION [69] AND GRANTING PLAINTIFF'S PARTIAL SUMMARY JUDGMENT MOTION [71]
STEPHEN J. MURPHY, III, United States District Judge
In the present reinsurance dispute, Defendant moved for summary judgment, ECF 69, and Plaintiff moved for partial summary judgment, ECF 71. The parties fully briefed the motions. After rescheduling the motion hearing several times, the Court decided to resolve the motions without a hearing. See E.D. Mich. L.R. 7.1(f)(2). For the reasons below, the Court will deny Defendant summary judgment and grant Plaintiff partial summary judgment.
ECF 69 and ECF 71 are redacted summary judgment motions. The parties filed the same motions under seal. ECF 67; 70. In this opinion and order, the Court will cite the redacted briefings unless the Court is required to cite sealed material.
BACKGROUND
In the early 1980s, Plaintiff, a Michigan insurance company, issued general liability and umbrella insurance policies to a company called Armstrong Machine Works. ECF 39-2; 39-3; 39-4; 39-5; 39-6. Armstrong produced inverted bucket steam traps that contained asbestos. ECF 70-1, PgID 1943 (under seal). At the time, however, the asbestos did "not present a disposal hazard under ordinary circumstances" because it was " ‘locked-in’ or ‘encapsulated’ " and was "not friable." ECF 77-2, PgID 3339, 3343.
In 1981 and 1982, Armstrong's general liability coverage contained a $1 million aggregate limit. ECF 39-2, PgID 461. Under the coverage, Plaintiff not only covered $1 million of Armstrong's losses due to legal liability, but also "supplementary payments" like claim defense expenses. ECF 39-3, PgID 479. The 1981 and 1982 umbrella policies contained $15 million and $30 million aggregate limits respectively. ECF 39-4, PgID 487; ECF 39-5, PgID 489. Like the general liability coverage, both umbrella policies required Plaintiff to cover Armstrong's losses up to the aggregate limit as well as defense and supplementary payments. ECF 39-6, PgID 492.
In 1981 and 1982, Defendant, a New York reinsurance company, issued facultative certificates that covered a portion of Plaintiff's risk under the respective umbrella policy. ECF 39-7; 39-8. The parties contracted through a New York broker. ECF 39-7, PgID 498; ECF 39-8, PgID 502.
During the underwriting process, the asbestos in Armstrong's products was not addressed. See ECF 67-1, PgID 1348, 1388 (under seal). Defendant claimed that it would have never issued the reinsurance certificates had it known of an "asbestos exposure" in Armstrong's products. ECF 69-3, PgID 1877. Defendant even issued a "Home Office Bulletin" in 1980 that stated, "[i]t is the policy of [Defendant] to exclude coverage where there is a known asbestos exposure." ECF 75-17, PgID 2638 (under seal). But Plaintiff claimed that it knew only "of the presence of a rubberized gasket that contained encapsulated asbestos" during the underwriting. ECF 69-2, PgID 1864.
In the end, Defendant issued two facultative certificates to Defendant. ECF 39-7; ECF 39-8. Each certificate contains two sections: a declaration and general conditions. Id.
Item four of the 1981 certificate's declaration states that the "Reinsurance Accepted" is $2 million part of $4 million "each occurrence and in the aggregate where applicable excess of" $1 million "each occurrence and in the aggregate where applicable excess of primary." ECF 39-7, PgID 498. The certificates require Defendant to provide reinsurance on a "Contributing Excess" basis. Id. ; ECF 39-8, PgID 502.
The liability limits for the 1982 certificate differs; it has two reinsurance layers. ECF 39-8, PgID 504. Layer A has "$2,000,000 part of $15,000,000 each occurrence and in the aggregate, where applicable, excess of $5,000,000 each occurrence and in the aggregate, where applicable, excess of primary." Id. Layer B has "$2,000,000 part of $10,000,000 each occurrence and in the aggregate, where applicable, excess of $20,000,000 each occurrence and in the aggregate, where applicable, excess of primary." Id. The other terms in the 1982 certificate do not differ from the 1981 certificate. Compare id. at 502–03 (1982 certificate), with ECF 39-7, PgID 498–99 (1981 certificate).
Under the certificates’ general conditions, Defendant's liability "follow[s]" Plaintiff's "liability in accordance with the terms and conditions of the policy reinsured hereunder except with respect to those terms and/or conditions as may be inconsistent with the terms of th[e] Certificate." ECF 39-7, PgID 499 ¶1; ECF 39-8, PgID 503 ¶1. "Contributing Excess" is defined as "[Plaintiff's] policy applies in excess of other valid insurance, reinsurance or a self-insured retention and the limit of liability of [Defendant] applies proportionally to all loss settlements in the percentage(s) set forth in Item 4 of the Declarations." ECF 39-7, PgID 499 ¶10; ECF 39-8, PgID 503 ¶10. The term "loss" means "only such amounts as are actually paid by [Plaintiff] in settlement of claims or in satisfaction of awards or judgements." ECF 39-7, PgID 499 ¶3(d); ECF 39-8, PgID 503 ¶3(d). "The term ‘loss’ shall not include loss expense." ECF 39-7, PgID 499 ¶3(d); ECF 39-8, PgID 503 ¶3(d). "The term ‘loss expense’ [ ] mean[s] all expenses incurred in the investigation, adjustment, settlement or litigation of claims, awards or judgments, including the salaries and expenses of [Plaintiff's] staff adjusters but excluding the office expenses of [Plaintiff] and the salaries and expenses of all other employees of [Plaintiff]." ECF 39-7, PgID 499 ¶3(f); ECF 39-8, PgID 503 ¶3(f). The certificates also require Plaintiff to "notify [Defendant] promptly of any event or development which [Plaintiff] reasonably believes might result in a claim against [Defendant]." ECF 39-7, PgID 499 ¶3(a); ECF 39-8, PgID 503 ¶3(a).
Each certificate became "valid and binding when signed by a duly authorized representative" of Defendant. ECF 39-7, PgID 499; ECF 39-8, PgID 503. Defendant's President and Secretary signed each certificate. ECF 39-7, PgID 498–99; ECF 39-8, PgID 502–03.
Over the years, Armstrong was sued in thousands of cases for injuries related to its asbestos-containing product. See ECF 67-2, PgID 1682 (under seal). In 2004, an actuarial report for Plaintiff found an increased exposure to asbestos claims for all Plaintiff's policyholders. ECF 67-2, PgID 1446–48, 1451–96 (under seal). Plaintiff responded by increasing its reserves for asbestos losses by tens of millions of dollars. ECF 67-2, PgID 1632–34 (under seal). Two years later, Plaintiff notified a reinsurer that its obligations under a reinsurance treaty with Armstrong had been triggered. ECF 67-2, PgID 1647, 1650–54 (under seal). Plaintiff also agreed to share costs for Armstrong's asbestos losses with another insurer. ECF 67-2, PgID 1638–45 (under seal). Two more years later, Plaintiff questioned whether Armstrong might exhaust the limits on the primary insurance policies. ECF 67-2, PgID 1662–64 (under seal). And in 2013, Armstrong exhausted its primary policies from 1976 to 1986. Id. at 1679 (under seal).
In March 2014, Plaintiff provided notice under the certificates to Defendant when half of the indemnity amount reached the reinsurer's retention. ECF 67-1, PgID 1314–20 (under seal); ECF 77-3, PgID 3347, 3355–56. And in January 2017, the claims reached Defendant's reinsurance layer. ECF 75-4 (under seal). After Defendant refused to pay, Plaintiff sued for breach of the 1981 facultative certificate. ECF 1.
LEGAL STANDARD
The Court must grant a motion for summary judgment "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). A moving party must identify specific portions of the record that "it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett , 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Once the moving party has met its burden, the non-moving party may not simply rest on the pleadings but must present "specific facts showing that there is a genuine issue for trial." Matsushita Elec. Indus. Co. v. Zenith Radio Corp. , 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) (emphasis omitted) (quoting Fed. R. Civ. P. 56(e) ).
A fact is material if proof of that fact would establish or refute an essential element of the cause of action or defense. Kendall v. Hoover Co. , 751 F.2d 171, 174 (6th Cir. 1984). A dispute over material facts is genuine "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). When considering a motion for summary judgment, the Court must view the facts and draw all reasonable inferences "in the light most favorable to the non-moving party." 60 Ivy St. Corp. v. Alexander , 822 F.2d 1432, 1435 (6th Cir. 1987) (citations omitted).
DISCUSSION
The Court will first discuss whether to apply Michigan or New York law to the parties’ summary judgment motions. After, the Court will address Defendant's summary judgment arguments that the Court should rescind the facultative certificates. Last, the Court will interpret the certificates’ liability limits since both parties moved for summary judgment on the issue.
I. Choice of Law
A federal district court sitting in diversity applies the forum state's choice-of-law rules. Klaxon Co. v. Stentor Elec. Mfg. Co. , 313 U.S. 487, 496, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). Because the Court is in Michigan and the parties’ certificates lack a choice-of-law clause, see ECF 39-7, PgID 499; ECF 39-8, PgID 503, Michigan's choice-of-law rules govern the parties’ disputes.
The parties agree that, to resolve contract law conflicts, Michigan applies the most significant relationship test under the Restatement (Second) of Conflict of Laws § 188. ECF 69, PgID 1830–31; ECF 77, PgID 3049. Indeed, the Michigan Supreme Court applies the Second Restatement's test for contract law conflicts. Chrysler Corp. v. Skyline Indus. Servs., Inc. , 448 Mich. 113, 124, 528 N.W.2d 698 (1995) ; see also Stone Surgical, LLC v. Stryker Corp. , 858 F.3d 383, 389 (6th Cir. 2017). For insurance disputes, the same test applies. Ric-Man Constr., Inc., v. Pioneer Special Risk Ins. Servs., Inc. , 522 F. Supp. 3d 255, 261 (E.D. Mich. 2021).
Under the Second Restatement, the Court must weigh five contacts: "the place of contracting, the place of negotiation of the contract, the place of performance, the location of the subject matter of the contract, and the domicil, residence, nationality, place of incorporation and place of business of the parties." Stone Surgical, LLC , 858 F.3d at 389 (internal quotations omitted) (quoting Restatement (Second) of Conflict of Laws § 188(2) (Am. L. Inst. 1971) ). The Court weighs the contacts based on "their relative importance ... to the particular issue." Liberty Mut. Fire Ins. Co. v. Holka , 984 F. Supp. 2d 688, 694 (E.D. Mich. 2013) (quoting Restatement (Second) of Conflict of Laws § 188(2) ).
The parties disagree about whether the contacts require the Court to apply Michigan or New York law. ECF 69, PgID 1831–32; ECF 77, PgID 3049–50. The Court will therefore address each factor in turn.
Ordinarily, "the initial task of a choice-of-law analysis is to determine whether there is an actual conflict between the substantive law of the interested jurisdictions." Lim v. Miller Parking Co. , 560 B.R. 688, 703 (E.D. Mich. 2016) (internal quotation marks and quotation omitted). Because Michigan reinsurance substantive law is underdeveloped and requires its own robust examination, the Court will, in the interest of judicial economy, address the Second Restatement factors rather than determine whether there is an actual conflict between Michigan and New York substantive reinsurance law.
A. Place of Contracting
"[T]he place of contracting is the place where [the last necessary act occurred], under the forum's rules of offer and acceptance." Restatement (Second) of Conflict of Laws § 188 cmt. 2. "For insurance contracts, generally the insurer's ‘countersigning is the last act and the place of countersigning is the place where the contract was made.’ " Gerber Life Ins. Co. v. Bissa , No. 12-12368, 2013 WL 2196023, at *3 (E.D. Mich. May 20, 2013) (quoting Morbark Indus., Inc. v. W. Emprs. Ins. Co. , 170 Mich. App. 603, 615, 429 N.W.2d 213 (1988) ); see, e.g., N.Y. Life. Ins. Co., v. Agee , 807 F. Supp. 53, 56 (E.D. Mich. 1992).
The certificates’ plain terms explain that each certificate will "become valid and binding when signed by a duly authorized representative" of Defendant. ECF 39-7, PgID 499; ECF 39-8, PgID 503. Defendant's President and Secretary signed each certificate. ECF 39-7, PgID 498–99; ECF 39-8, PgID 502–03. Each certificate lists a New York City address for Defendant. ECF 39-7, PgID 498; ECF 39-8, PgID 502. As a result, the place of contracting is New York.
Defendant alleged that based on Ric-Man and Holka , Michigan is the place of contracting because the certificates were issued to a Michigan entity. ECF 69, PgID 1831. But the argument is inapposite for two reasons. First, Holka decided the place of contracting based on several facts in that case—not only because the policy was issued to a Michigan resident. See 984 F. Supp. 2d at 694 ("Here, Michigan is the place of contracting and negotiation. The place of performance has yet to be determined, as no payment has been made to any parties in the underlying lawsuit. Mr. Holka is, and Mrs. Holka was, a resident of Michigan."). And second, Ric-Man adopted Holka ’s conclusion but misquoted Holka ’s reasoning. See Ric-Man Const., Inc. , 522 F. Supp. 3d at 261 ("The policy was issued to a Michigan entity, so ‘Michigan is the place of contracting and negotiation.’ ") (quoting Holka , 984 F. Supp. 2d at 694 ). The first contact therefore favors New York.
That said, "[s]tanding alone, the place of contracting is a relatively insignificant contact." Restatement (Second) of Conflict of Laws § 188 cmt. 2. Put differently, the contact's weight increases if other contacts also favor New York law. See id.
B. Place of Negotiation
The parties contracted through a broker. ECF 39-7, PgID 498; ECF 39-8, PgID 502. Plaintiff claimed that the parties had meaningful negotiations through the broker and that the broker's New York residence would therefore favor the application of New York law. ECF 71, PgID 2046. But two points undermine the argument.
One, "in Michigan, when an insurance policy is facilitated by an independent insurance agent or broker, that individual is considered an agent of the insured rather than an agent of the insurer." AMI Stamping, LLC v. ACE Am. Ins. Co. , 709 F. App'x 354, 360 (6th Cir. 2017) (cleaned up). As a result of agency, therefore, the broker's impact on the factor would favor Michigan law.
And two, based on the evidence, the parties did not appear to negotiate at all over the certificates’ terms. See ECF 67-1, PgID 1324, 1326, 1343, 1354–58 (all under seal) (discussions with broker about the certificates). In fact, Plaintiff even alleged that the certificates were "preprinted forms that [Defendant] drafted." ECF 71, PgID 2039 (citing ECF 71-1, PgID 2078 ¶55). Without meaningful negotiations, there would be no place of negotiation. See Delphi Auto. PLC v. Absmeier , 167 F. Supp. 3d 868, 878 (E.D. Mich. 2016).
Yet Defendant asserted that under Ric-Man and Holka , the place of negotiation is Michigan. ECF 69, PgID 1831. As, however, the Court explained previously, Ric-Man misapplied Holka ’s reasoning and Holka found, as a factual matter, that Michigan was the place of negotiation.
In any event, the evidence shows that the certificates’ terms never appeared in dispute and there was no meaningful negotiation over the certificates. See ECF 67-1, PgID 1326, 1348–50, 1354–58 (all under seal). On those bases, the contact favors neither Michigan nor New York law. See Pac. Emps. Ins. Co. v. Glob. Reinsurance Corp. of Am. , 693 F.3d 417, 437 (3d. Cir. 2012) ("There were no meaningful negotiations concerning the Certificate. PEIC's Minnesota broker exchanged telexes with Constitution in New York, but the terms and conditions were never in dispute. Thus, it is difficult to speak at all of a ‘place of negotiation.’ ").
C. Place of Performance
"The state where performance is to occur under a contract has an obvious interest in the nature of the performance and in the party who is to perform." Restatement (Second) of Conflict of Laws § 188 cmt. 2. The challenge here is to define the place of performance for a reinsurance certificate under Michigan law.
For contracts generally, "the state of performance is defined as the state in which the party who has allegedly breached the contract was obliged to perform." Norris & Assocs., Inc. v. GRM Indus., Inc. , 898 F. Supp. 523, 525 (W.D. Mich. 1995) (citing Liberty Mut. Ins. Co. v. Vanderbush Sheet Metal Co. , 512 F. Supp. 1159, 1167 (E.D. Mich. 1981) ). For insurance contracts, place of performance is where "[t]he incident for which coverage is claimed." Ric-Man , 522 F. Supp. 3d at 261 ; see Holka , 984 F. Supp. 2d at 694 (noting that place of performance is where payment is made on the insurance policy). The Michigan Supreme Court has likewise suggested that "the place of performance of an indemnification agreement is the place where the indemnitee is found subject to liability." Skyline Indus. Servs., Inc. , 448 Mich. at 128, 528 N.W.2d 698. Although indemnification agreements and the insurance contracts in Ric-Man (professional liability insurance) and Holka (homeowners and car insurance) differ from reinsurance certificates, Michigan case law does not suggest that the Court should treat reinsurance certificates differently. See Mich. Twp. Participating Plan v. Fed. Ins. Co. , 233 Mich. App. 422, 428, 430, 592 N.W.2d 760 (1999) ("[A] reinsurance contract is a contract of indemnity" and thus liability under a reinsurance contract is "completely consistent with a plethora of Michigan cases in the field of insurance law.").
New York law, however, treats reinsurance differently than Michigan law. In New York, the place of performance for reinsurance certificates "is the place to which the ceding insurer must make its demand for payment ...." AIU Ins. Co. v. TIG Ins. Co. , 934 F. Supp. 2d 594, 601 (S.D.N.Y. 2013) (omission in original) (quotation omitted). Plaintiff suggested that the Court should adopt the New York standard. ECF 71, PgID 2046 ("[T]he place of performance is New York because that is the place from which the certificates were issued and where claims would be made."). But no Michigan case law hints that the Court should do so, and the Court must apply Michigan law because Michigan is the forum State.
Put simply, the place of performance under Michigan law is where Plaintiff is subject to liability. Skyline Indus. Servs., Inc. , 448 Mich. at 128, 528 N.W.2d 698. For that reason, the place of performance here is unclear because Plaintiff's liability could arise in many states. See Leff v. NAC Agency, Inc. , 639 F. Supp. 1426, 1428 (E.D. Mich. 1986) (emphasis omitted) ("[S]ubject reinsurance agreements" have an uncertain place of performance because "potential indemnity extends to all prospective paid or allowed claims, not merely those which arise out of Michigan occurrences or claimants."). Because place of performance is unclear, the contact favors neither State's law.
D. Subject Matter Location
Prior decisions in the Eastern District of Michigan have adopted the Second Restatement's commentary to determine where an insurance contract's subject matter is located. The commentary explains that when "the risk is the principal subject of the contract" "local law of the state where the ... risk was located would be applied to determine many of the issues arising under the contract." Restatement (Second) of Conflict of Laws § 188 cmt. 2. Judges in the Eastern District therefore look at where "the lion's share of the risk" is located. Holka , 984 F. Supp. 2d at 694 ; see also Ric-Man , 522 F. Supp. 3d at 261. But Ric-Man and Holka never addressed where risk is located for reinsurance certificates.
Indeed, "pinpoint[ing] an actual ‘location’ for such an abstract subject matter"—like a reinsurance certificate—is difficult. Pac. Emps. Ins. Co. , 693 F.3d at 437. If "it is located anywhere, an insurer's liability on a policy simply shares a location with the insurer itself"—not with the reinsurer. Id. After all, "[t]he original insurer is the only party having any right against the reinsurer and the reinsurance contract is merely one to indemnify the original insurer." Leff , 639 F. Supp. at 1429 (citation omitted). Pinpointing the location of subject-matter to the insurer's location makes sense because "generally a reinsurer has little actual role to play in any dispute involving the underlying insurance policies." AIU Ins. Co. , 934 F. Supp. 2d at 602.
Because Michigan is the place of the insurer (Plaintiff) and because Plaintiff bears "the lion's share of the risk" as the insurer, the contact heavily favors Michigan. Holka , 984 F. Supp. 2d at 694 ; see Ric-Man , 522 F. Supp. 3d at 261 ("[W]here the contract at issue is a policy of insurance, the forum where the risk is located ... has a compelling and usually controlling interest in the application of its law."); Restatement (Second) of Conflict of Laws § 188 cmt. 2 ("[T]he location of the thing or of the risk is significant.").
E. Places of Incorporation and Business
The places of incorporation and business for Plaintiff and Defendant are Michigan and New York respectively. ECF 69, PgID 1831; ECF 39, PgID 438. The last contact therefore is neutral and favors neither State's law. F. Conclusion
In the end, one contact favors New York law, another contact favors Michigan law, and three contacts favor neither State's law. Because the contact favoring Michigan law has the most weight, the Court will apply Michigan law to the pending summary judgment motions.
II. Rescission of the Certificates
Defendant moved to rescind the certificates on the ground that Plaintiff violated its duty of utmost good faith to Defendant. ECF 69, PgID 1835. The Court will first discuss why Michigan law recognizes the duty of utmost good faith and why a reinsurer may move to rescind a reinsurance certificate if the reinsured violated the duty. After, the Court will explain why Michigan law also allows Defendant to move for rescission of the certificates based on untimely notice. The Court will then address whether Defendant waived its rescission defenses. Last, the Court will determine whether Defendant may rescind the certificates based on Plaintiff violating the duty of utmost good faith and providing untimely notice.
A. Duty of Utmost Good Faith
Like many states, the duty of utmost good faith is rarely litigated in Michigan. See Gerard V. Mantese & Mark C. Rossman, Reinsurance Contracts and the Role of Fiduciary Duty , Mich. Bar J., May 2007 at 18; Steven W. Thomas, Note, Utmost Good Faith in Reinsurance: A Tradition in Need of Adjustment , 41 Duke L.J. 1548, 1551–52 (1992). Because the issue is essentially one of first impression, the Court must "make the best prediction ... of what the State's Supreme Court would do if it were confronted with the question." Combs v. Int. Ins. Co. , 354 F.3d 568, 577 (6th Cir. 2004) (cleaned up). The Court must also "be extremely cautious" about expanding state law, and "consider all relevant data." Id. at 577–78 (cleaned up).
The duty of utmost good faith largely "requires the reinsured to disclose to the reinsurer all material facts that may affect the subject risk." 1A Steven Plitt et al., Couch on Insurance § 9:17 (3d ed. 2021). Imposing a duty of utmost good faith aims to reduce asymmetric information, and that reduction in turn prevents reinsurers from "duplicat[ing] actuarial and claims-handling efforts," all of which prevents the reinsurance market from folding. Unigard Sec. Ins. Co., Inc. v. N. River Ins. Co. , 4 F.3d 1049, 1066 (2d. Cir. 1993).
Defendant seemed to assume that Michigan law recognizes a duty of utmost good faith on a reinsured like Plaintiff. See ECF 69, PgID 1833–35. Yet Defendant cited no Michigan case law that mentioned a reinsurer's duty of utmost good faith. Id.
There is a dearth of Michigan case law about a reinsured's duty of utmost good faith. Mantese & Rossman, supra , at 18. Based on the Court's research, the Michigan Supreme Court last addressed the issue almost a century ago. Id. ; see Columbian Nat'l Fire Ins. Co. v. Pittsburgh Fire Ins. Co. , 236 Mich. 243, 248, 210 N.W. 258 (1926).
At the time, the Michigan Supreme Court emphasized that a reinsured had a "fiduciary position demanding fairness and open disclosure of all reinsurance reducing its agreed retention of risks, and, if its failure to disclose was intentional, it constituted [ ] fraud." Columbian Nat'l Fire Ins. Co. , 236 Mich. at 248, 210 N.W. 258. If a reinsured violates the duty, then the reinsurance is void and the reinsurer may recover payments of insurance losses. Id. at 247, 210 N.W. 258 ("[I]f done with intent to defraud rather than through mere inadvertence, then reinsurance so procured from defendant was in each instance void, and payments of losses thereon, without knowledge of the fraud, could, under proper pleading, be recovered."). In sum, Michigan law recognizes a reinsured's duty of utmost good faith and it has also concluded that violating the duty can void reinsurance.
Since then, neither the Michigan Court of Appeals nor any federal district court in Michigan has addressed the specific reinsurance issue. See, e.g., Travelers Cas. & Sur. Co. v. Constitution Reinsurance Corp. , No. 01-71057, 2004 WL 2387313, at *5–7 (E.D. Mich. Aug. 2, 2004) (addressing the ‘follow the fortunes’ doctrine); Mich. Tp. Participating Plan v. Fed. Ins. Co. , 233 Mich. App. 422, 427–33, 592 N.W.2d 760 (1999) (same); Mich. Millers Mut. Ins. Co. v. N. Am. Reinsurance Corp. , 182 Mich. App. 410, 415–18, 452 N.W.2d 841 (1990) (per curiam) (analyzing language in a reinsurance certificate).
Under modern reinsurance law, a party may move to rescind "reinsurance contracts only [when] the reinsured acted in bad faith or [when] the reinsurers suffered prejudice from a failure to disclose." Compagnie de Reassurance d'Ile de Fr. v. New Eng. Reinsurance Corp. , 944 F. Supp. 986, 994 (D. Mass. 1996) (collecting cases). At its core, "[t]he failure of a reinsured to disclose material facts to the reinsurer will warrant the rescission of a reinsurance contract." Plitt et al., supra , § 9:31.
The Michigan Supreme Court, however, recognized almost a century ago that reinsurance contracts are "void" when a reinsured willfully fails to disclose risks to the reinsurer. Columbian Nat'l Fire Ins. Co. , 236 Mich. at 247–48, 210 N.W. 258. To remedy the failure, a reinsurer may "recoup" its payments on the losses that were incurred. Id. at 248, 210 N.W. 258. It follows that the Michigan Supreme Court has not explicitly declared that a reinsurer may rescind a reinsurance contract based on a reinsured's failure to disclose. The reason is simple: the term ‘void’ differs from ‘rescind.’
Michigan courts interpret legal words based on their ordinary meaning and context when the words were used. See TOMRA of N. Am., Inc. v. Dep't of Treasury , 505 Mich. 333, 339, 952 N.W.2d 384 (2020) (interpreting state statute); see generally Antonin Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts § 7 (2012). In an opinion issued the same day as Columbia National Fire , the Michigan Supreme Court explained that rescinding a contract is impossible when a contract is void. Rott v. Goldman , 236 Mich. 261, 265–67, 210 N.W. 335 (1926). Thus, the meanings of ‘void’ and ‘rescind’ differ because the two words contemplate different situations. And accordingly, the Michigan Supreme Court has not explicitly recognized rescission as a defense for reinsurers.
But Michigan common law does recognize rescission as a defense. "At common law, [a] defrauded party could only seek rescission, or avoidance of the transaction, if the fraud related to the inducement to or inception of the contract." Meemic Ins. Co. v. Fortson , 506 Mich. 287, 305, 954 N.W.2d 115 (2020) (citation omitted). Columbia National Fire therefore appears to deviate from Michigan common law.
Based, however, on a recent Michigan Supreme Court decision, the Court must infer that ‘void’ and ‘rescind’ had the same meaning in 1926. In Meemic , the Michigan Supreme Court held that, historically and at common law, the terms ‘void’ and ‘rescind’ were used interchangeably. See id. at 305 n.13, 954 N.W.2d 115. Because the Michigan Supreme Court has resolved the precise issue, the Court need not dive further into it. And because the terms ‘void’ and ‘rescind’ were historically synonymous, Michigan common law—like modern reinsurance law—recognizes rescission as a defense for reinsurers when a reinsured violates the duty of utmost good faith.
Justice Zahra disagreed with the holding because, based on his review of case law, the terms differed. Id. at 325 n.22, 954 N.W.2d 115 (Zahra, J., concurring).
B. Timely Notice
Under Michigan common law, a party may rescind a contract if the other party "fail[s] to perform a substantial part of the contract or one of its essential items." Meemic Ins. Co. , 506 Mich. at 307, 954 N.W.2d 115 (cleaned up); see also Omnicom of Mich. v. Giannetti Inv. Co. , 221 Mich. App. 341, 348, 561 N.W.2d 138 (1997) (citation omitted) ("[T]o warrant rescission of a contract, there must be a material breach affecting a substantial or essential part of the contract."). Under the common law, Defendant may therefore rescind the certificates based on Plaintiff's untimely notice if the failure to provide timely notice breached an essential term of the reinsurance certificates.
Michigan insurance law also requires an insured to establish prejudice before rescinding a contract. Triple Inv. Grp., LLC v. Hartford Steam Boiler Inspection & Ins. Co. , 71 F. Supp. 3d 733, 740 (E.D. Mich. 2014) (collecting cases). Under Michigan law, "[a]n insurer suffers prejudice when the insured's delay in providing notice materially impairs the insurer's ability to contest its liability to the insured or the liability of the insured to a third party." Tenneco Inc. v. Amerisure Mut. Ins. Co. , 281 Mich. App. 429, 761 N.W.2d 846 (2008) (citing W. Bay Expl. Co. v. AIG Specialty Agencies of Tex., Inc. , 915 F.2d 1030, 1036–37 (6th Cir. 1990) ). The same is true for reinsurance. Plitt et al., supra , § 9:32. The Court will therefore apply the prejudice standard.
Defendant appeared to concede that it must show prejudice from Plaintiff's alleged failure to provide notice. See ECF 83, PgID 3606–09.
One exception to the prejudice standard is when "the policy clearly and unambiguously provides that the notice provision is a condition precedent." Plitt et al., supra , § 9:32. Here, the reinsurance certificates do not contemplate notice as a condition precedent, and the exception therefore does not apply. ECF 39-7, PgID 499 ¶3(a); ECF 39-8, PgID 503 ¶3(a); see Archambo v. Laws. Title Ins. Corp. , 466 Mich. 402, 412, 646 N.W.2d 170 (2002) (citations omitted) ("A ‘condition precedent’ is a condition that must be met by one party before the other party is obligated to perform.").
In all, Defendant must make three showings: (1) an essential term of the reinsurance certificate required Plaintiff to provide timely notice; (2) Plaintiff breached the term; and (3) Plaintiff's breach prejudiced Defendant.
C. Waiver
Plaintiff raised an equitable defense that Defendant waived its right to rescission by failing to timely bring it. ECF 77, PgID 3051, 3060. Under Michigan law, a party seeking to rescind a contract must not "unduly delay [ ] the exercise of that right." Wall v. Zynda , 283 Mich. 260, 265, 278 N.W. 66 (1938). And for that reason, a "party who seeks to rescind must act with reasonable promptness after discovering the facts. What is a reasonable time depends on the circumstances of the particular case." Gyles v. Stadel , 252 Mich. 349, 351–52, 233 N.W. 339 (1930) (emphasis added) (citation omitted); see also Grabendike v. Adix , 335 Mich. 128, 140, 55 N.W.2d 761 (1952) (citation omitted) ("[O]ne who desires to rescind a contract must act within a reasonable time ... and what is a reasonable time depends upon the circumstances of each particular case.").
For reinsurance disputes generally, determining whether a reinsurer has waived the right to rescind is a fact-specific inquiry. One court, for example, found that a reinsurer waived a rescission claim because it failed to raise the claim more than eight years after the reinsurer questioned how the reinsured handled claims. Munich Reinsurance Am., Inc. v. Am. Nat'l Ins. Co. , 999 F. Supp. 2d 690, 740 (D.N.J. 2014). Another court held that a reinsurer waived a rescission claim after failing to raise it within four years. Sumitomo Marine & Fire Ins. Co., Ltd.-U.S. Branch v. Cologne Reinsurance Co. of Am. , 75 N.Y.2d 295, 300, 304, 552 N.Y.S.2d 891, 552 N.E.2d 139 (1990). But a court also found that a reinsurer did not waive a rescission claim because it "did not have the facts on which its rescission claim is based until it conducted its investigation, after [the reinsured] submitted its first claim." Utica Mut. Ins. Co. v. Fireman's Fund Ins. Co. , 238 F. Supp. 3d 314, 349–50 (N.D.N.Y. 2017).
Here, Plaintiff pointed out that Defendant paid the invoice for loss and loss expense payments for the 1989 treaty share of Armstrong asbestos losses notice in 2014 rather than objecting to the notice's timeliness. ECF 75, PgID 2521; ECF 75-10; 75-11 (all under seal). Because of the payment, Plaintiff claimed that Defendant waived its rescission right. ECF 75, PgID 2521 (under seal). But Defendant need only act "with reasonable promptness after discovering the facts" to move for rescission. Gyles , 252 Mich. at 351, 233 N.W. 339 (emphasis added). Nothing in the cited material shows that Defendant knew that Plaintiff may have provided late notice or breached the duty of good faith. In fact, the record evidence shows that Defendant learned in a recent deposition that Plaintiff had known—during the underwriting process—that Armstrong products had asbestos. ECF 69-2, PgID 1864. And Defendant first suggested, a year earlier, that it would assert a defense based off Plaintiff's alleged material misrepresentations and failures to disclose. ECF 41, PgID 527 (answer to first amended complaint).
The Court will therefore deny summary judgment to Plaintiff on its equitable defense. Plaintiff has not shown that Defendant did not act with reasonable promptness to rescind the certificates given that Defendant learned about the facts supporting the defense during discovery.
D. Rescission Based on Duty of Utmost Good Faith
"Michigan's contract law recognizes several interrelated but distinct common-law doctrines—loosely aggregated under the rubric of ‘fraud’—that may entitle a party to a legal or equitable remedy if a contract is obtained as a result of fraud or misrepresentation." Titan Ins. Co. v. Hyten , 491 Mich. 547, 555, 817 N.W.2d 562 (2012). Most applicable here is the silent fraud doctrine. "This doctrine holds that when there is a legal or equitable duty of disclosure, ‘[a] fraud arising from the suppression of the truth is as prejudicial as that which springs from the assertion of a falsehood.’ " Id. at 557, 817 N.W.2d 562 (quoting Tompkins v. Hollister , 60 Mich. 470, 483, 27 N.W. 651 (1886) ). The Court will apply the silent fraud doctrine to determine whether Plaintiff violated its duty of utmost good faith by failing to disclose information about the presence of asbestos in Armstrong's products. Two reasons support applying the silent fraud doctrine.
Defendant appeared to contend that Michigan's silent fraud doctrine would apply. ECF 69, PgID 1843.
One, "Michigan courts have recognized that silence cannot constitute actionable fraud unless it occurred under circumstances where there was a legal duty of disclosure." M&D, Inc. v. W.B. McConkey , 231 Mich. App. 22, 29, 585 N.W.2d 33 (1998) (emphasis in original). Because the duty of utmost good faith is a duty "demanding fairness and open disclosure," it is no different than other legal or equitable disclosure duties under Michigan law. Columbian Nat'l Fire Ins. Co. , 236 Mich. at 248, 210 N.W. 258 ; see Hord v. Env't Rsch. Inst. of Mich. , 463 Mich. 399, 412, 617 N.W.2d 543 (2000) ("[T]o constitute silent fraud there must be a legal or equitable duty of disclosure."). And two, applying the silent fraud doctrine avoids "adopting [any] substantive innovation in state law." Combs , 354 F.3d at 578 (internal quotation marks and quotation omitted). In fact, the Court need only rely on Michigan's extensive silent fraud case law to resolve the matter rather than fashioning a new doctrine specific to reinsurance.
For silent fraud, Defendant must show that Plaintiff "knew of a material fact but concealed or suppressed the truth through false or misleading statements or actions and with the intent to deceive." Roberts v. Saffell , 280 Mich. App. 397, 405, 760 N.W.2d 715 (2008) (citing W.B. McConkey , 231 Mich. App. at 28–33, 585 N.W.2d 33 ). Defendant reasoned that a fact is material "if it affects the insurance provider's acceptance of the risk or the hazard assumed by the insurer." ECF 69, PgID 1843 (quoting Westfield Ins. Co. v. Cole , No. 347713, 2020 WL 7090090, at *3 (Mich. Ct. App. Dec. 3, 2020) ). The Court agrees. The Michigan Supreme Court has explained that, for insurance applications, a fact "is ‘material’ where communication of it would have had the effect of ‘substantially increasing the chances of loss insured against so as to bring about a rejection of the risk or the charging of an increased premium.’ " Oade v. Jackson Nat'l Life Ins. Co. of Mich. , 465 Mich. 244, 254, 632 N.W.2d 126 (2001) (quoting Keys v. Pace , 358 Mich. 74, 82, 99 N.W.2d 547 (1959) ). "Materiality is determined as of the time the parties entered into the reinsurance agreement." Plitt et al., supra , § 9:31.
Michigan defines a "material fact" the same way as other states like New York. See Christiania Gen. Ins. Corp. of N.Y. v. Great Am. Ins. Co. , 979 F.2d 268, 278 (2d. Cir. 1992) (A fact is material under New York law "if, had it been revealed, the insurer or reinsurer would either not have issued the policy or would have only at a higher premium."); Plitt et al., supra , § 9:31 ("A fact is deemed to be ‘material’ if it can be shown that the reinsurer would not have issued the policy if it had known of the fact or it would have only issued it for a higher premium.").
Defendant argued that the Court should rescind the certificates because Plaintiff failed to disclose the presence of asbestos in Armstrong's products. ECF 69, PgID 1843–44. Defendant argued that it would have never issued the reinsurance certificates had it known of an "asbestos exposure." ECF 69-3, PgID 1877. Defendant even issued a "Home Office Bulletin" in 1980 that stated, "[i]t is the policy of [Defendant] to exclude coverage where there is a known asbestos exposure." ECF 75-17, PgID 2638 (under seal). At its core, Defendant claimed the asbestos in Armstrong's products was a material fact that Plaintiff concealed from Defendant during the underwriting process. Yet Plaintiff identified evidence that refutes the claim and thus precludes the Court from granting summary judgment. For example, the 1980 Bulletin was never included in Defendant's underwriting manual. ECF 75-27, PgID 2976 (under seal); ECF 77-18, PgID 3516. Based on the Court's review, the term "asbestos" is never mentioned in Defendant's underwriting manual during the relevant time. See generally ECF 75-20 (under seal). Plus, according to Plaintiff's expert, the reinsurance industry custom in the early 1980s did not consider "the mere presence of asbestos ... to present an uninsurable exposure if it was properly sealed or encapsulated." ECF 77-18, PgID 3511. And during the early 1980s, regulators did not believe the mere presence of asbestos in the Armstrong product created a safety risk. ECF 75-27, PgID 2968 (under seal); see ECF 77-2, PgID 3339, 3343 (noting that the asbestos was " ‘locked-in’ or ‘encapsulated’ and [was] not friable," and therefore did "not present a disposal hazard under ordinary circumstances," when no asbestos fibers were detected). With that in mind, Defendant never explained whether it would have acted differently had it known about the asbestos presence ; Defendant only claimed it would have acted differently based on an asbestos exposure. ECF 69-3, PgID 1877; ECF 75-17, PgID 2638 (under seal). Because evidence showed that the asbestos was encapsulated (unexposed) in Armstrong products, ECF 77-2, PgID 3339, 3343, the parties have a genuine factual dispute about whether Defendant would have acted differently if it had known about the asbestos presence in Armstrong's products.
Another genuine factual issue about whether Plaintiff knew about an asbestos exposure precludes the Court from granting summary judgment. According to Plaintiff, it knew only "of the presence of a rubberized gasket that contained encapsulated asbestos." ECF 69-2, PgID 1864 (emphasis added). Nothing about the testimony showed that Plaintiff knew—at the time—the asbestos encapsulated in Armstrong's products would lead to an asbestos exposure. See id. And evidence supports the testimony. ECF 77-2, PgID 3339, 3343.
In all, the Court must look at the evidence when the parties agreed to the reinsurance certificates. See Oade , 465 Mich. at 254, 632 N.W.2d 126 (noting that a fact is material if it would bring about rejection of the risk or an increased premium); see also Christiania , 979 F.2d at 279 ("[M]ateriality must be assessed as of the time the contract was entered into.... [I]t is possible a jury could believe [the reinsurer's] position was simply hindsight."). To determine whether Plaintiff's failure to disclose the asbestos presence in Armstrong's products violated the duty of utmost good faith, the Court would have to weigh the evidence; a task that the Court cannot do at summary judgment. The Court will therefore deny Defendant's summary judgment argument because Plaintiff has shown genuine issues of material fact about whether it breached the duty of utmost good faith.
E. Rescission Based on Untimely Notice
To rescind the reinsurance certificates based on untimely notice, Defendant must make three showings. First, that an essential term of the reinsurance certificate required Plaintiff to provide timely notice. Meemic Ins. Co. , 506 Mich. at 307, 954 N.W.2d 115 (quoting Innovation Ventures , 499 Mich. at 510, 885 N.W.2d 861 ). Second, that Plaintiff breached the term. Id. And third, that Plaintiff's breach prejudiced Defendant. Triple Inv. Grp., LLC , 71 F. Supp. 3d at 740 (collecting cases); see, e.g. , Plitt et al., supra , § 9:32. The Court will address each issue in turn.
1. Essential Term
The parties appeared to concede that the reinsurance certificates’ prompt notice requirement was an essential term. See ECF 69, PgID 1836 (explaining the importance of timely notice); ECF 77, PgID 3052 (acknowledging that Plaintiff provided reasonable notice). Indeed, the parties’ reinsurance certificates state that Plaintiff "will notify [Defendant] promptly of any event or development which [Plaintiff] reasonably believes might result in a claim against [Defendant]." ECF 39-7, PgID 499 ¶3(a); ECF 39-8, PgID 503 ¶3(a). And prompt notice is widely seen as an essential term that requires the reinsured's compliance. Plitt et al., supra , § 9:32.
2. Breach
The reinsurance certificate's terms will determine "what gives rise to the reinsured's duty to give notice." Plitt et al., supra , § 9:32. The standard is no different than other notice requirements under Michigan insurance law. Triple Inv. Grp., LLC , 71 F. Supp. 3d at 739 (citations and quotations omitted) (recognizing that "prompt notice" requirements in insurance policies are common and defining the meaning depends on "the circumstances of the case").
The parties’ reinsurance certificate states that Plaintiff "will notify [Defendant] promptly of any event or development which [Plaintiff] reasonably believes might result in a claim against [Defendant]." ECF 39-7, PgID 499 ¶3(a); ECF 39-8, PgID 503 ¶3(a) (same). Under Michigan insurance law, "[t]he purpose of giving notice as soon as practicable after the occurrence of an accident is to give the insurer an opportunity to investigate the facts and circumstances affecting the question of liability and the extent of such liability." Wehner v. Foster , 331 Mich. 113, 119, 49 N.W.2d 87 (1951). Michigan courts have therefore construed "[p]rompt notice ... ‘to mean within a reasonable time under the circumstances of the case.’ " Triple Inv. Grp., LLC , 71 F. Supp. 3d at 739 (quoting 13 Couch on Insurance § 190:31 (2014) ).
For reinsurance law generally, ‘prompt notice’ has the same meaning. See Plitt et al., supra , § 9:32 ("[T]he reinsured will be required to provide notice to the reinsurer when, based upon all of the information available to the reinsured, reasonable judgment would suggest that the claim was likely to involve the reinsurer even if there are reasonable doubts on the matter."). The parties echoed those holdings in their briefs and appear to agree that Plaintiff was obliged to notify Defendant once there was "a reasonable possibility" that Defendant could face liability under the facultative certificates. Christiania , 979 F.2d at 276 ; see ECF 69, PgID 1838–39; ECF 77, PgID 3053.
Defendant highlighted several events for which Plaintiff could have reasonably believed that a claim might result against Defendant. The Court will address each in turn.
First, a 2004 actuarial report examined the asbestos risks for all Plaintiff's policyholders and found that Plaintiff faced an increased exposure to asbestos claims. ECF 67-2, PgID 1446–48, 1451–96 (under seal). After the report, Plaintiff increased its reserves for asbestos losses by tens of millions of dollars. Id. at 1632–34 (under seal). Second, in 2006, Plaintiff notified a reinsurer that its obligations for Armstrong reinsurance treaties had been triggered. Id. at 1647, 1650–54 (under seal). Third, in 2006, Plaintiff agreed to share costs for Armstrong's asbestos bodily injury claims with a third-party insurer. Id. at 1638–45 (under seal). Fourth, Plaintiff wrote to Armstrong in 2008 about whether Armstrong would exhaust the limits on the primary insurance policies. Id. at 1662–64 (under seal). Fifth, Plaintiff wrote to Armstrong in 2013 that Armstrong had exhausted primary policies from 1976 to 1986. Id. at 1679–80 (under seal). And last, between 2007 and 2013, plaintiffs across the country had hit Armstrong with more than six thousand new asbestos-related lawsuits. Id. at 1682 (under seal).
Besides disputing that the above events did not require Plaintiff to notify Defendant, Plaintiff claimed that it provided reasonable notice because it followed ‘the fifty percent rule’. ECF 75, PgID 2514 (under seal); see ECF 75-22, PgID 2757 (under seal) ("[Plaintiff's] witnesses stated the rule of thumb for reporting loss to reinsurers is the point at which paid and reserved losses reach 50% of the cedent's retention."). The rule is allegedly common throughout the reinsurance industry. ECF 75-23, PgID 2778 (under seal). Under the supposed rule, Plaintiff notified reinsurers once it had determined that half of the indemnity amount reached the reinsurer's retention. ECF 77-3, PgID 3347, 3355–56. Here, Defendant had a $3 million attachment point and thus Plaintiff notified Defendant after Plaintiff had incurred $1.5 million in losses. Id. at 3364–65; see ECF 75-6, PgID 2576–77 (under seal); ECF 75-7, PgID 2586–87 (under seal). Plaintiff's expert testified that the fifty percent rule was "a reasonable proxy" that Plaintiff reasonably believed "losses will penetrate [Defendant's] layer." ECF 75-22, PgID 2758 (under seal).
Based on all the foregoing record evidence and testimony, the Court cannot grant summary judgment because whether Plaintiff provided reasonable notice is in genuine dispute over material facts. A factfinder must therefore weigh the evidence. Some of the evidence adduced by Plaintiff lacked a direct link to whether Defendant may be liable under the facultative certificate. The 2004 report and Plaintiff's increase of reserves for asbestos-related losses were directly related to Plaintiff's total asbestos exposure for all its 129 asbestos accounts—not only Armstrong's accounts. ECF 67-2, PgID 1475, 1634 (under seal). Thus, the facultative certificates with Defendant were only two straws in the haystack that caused Plaintiff to increase its reserves. Likewise, Plaintiff's cost-sharing agreement applied to more reinsurance policies than simply Defendant's. ECF 67-2, PgID 1640 (under seal) (noting the policies involved spanned from 1958 to 1990). And the cost-sharing agreement appears to have postponed Defendant's liability because it spread the costs to another payor. ECF 77-8, PgID 3405. In all, the 2004 report, the 2006 cost-sharing agreement, and Plaintiff's increase in asbestos-loss reserves show only that Plaintiff knew it could expect more Armstrong losses in general—not that Defendant would face liability under its specific facultative certificates.
As for the remaining evidence, the 2006 notice to the treaty reinsurers appears unrelated to Defendant's own liability because the treaty reinsurers’ obligations may have been triggered before Defendant's facultative obligations. ECF 75-23, PgID 2788 (under seal); ECF 77-10, PgID 3416 (Plaintiff "did not have reserves that would have placed us into the umbrella for Armstrong."); see Mich. Millers Mut. Ins. Co. , 182 Mich. App. at 413, 452 N.W.2d 841 (explaining that treaty and facultative reinsurance are distinct types of insurance). Yet the 2008 and 2013 letters show that Plaintiff may have objectively known that Defendant would face liability. The 2008 letter showed that Plaintiff believed "exhaustion of some or all of the Amerisure policies at some point in perhaps the not-too-distant future, is a real possibility." ECF 67-2, PgID 1662 (under seal). And the 2013 letter appears to show that Armstrong had exhausted twelve primary policies. ECF 67-2, PgID 1679 (under seal). But testimony gathered in discovery also established that Armstrong had "almost [ ] $1 million left in the remaining umbrella polic[ies]" in 2013 and that, several months later, Plaintiff informed Defendant and other facultative reinsurers that they might face future liability. ECF 77-3, PgID 3361–62; see also ECF 75-3, PgID 2548 (under seal) (all primary policies were exhausted in May 2014).
In sum, genuine issues of material fact preclude the Court from granting summary judgment here. An objective assessment of the evidence showed that Plaintiff may have had a reasonable belief that Defendant may not be liable. Although Plaintiff might have, in 2008, believed that Defendant might ultimately be liable for reinsurance down the road, Plaintiff needed to notify Defendant "within a reasonable time under the circumstances of the case." Triple Inv. Grp., LLC , 71 F. Supp. 3d at 739 (quotation omitted). And the circumstances here require a factfinder to weigh the evidence as to Plaintiff's belief and the circumstances of notification. Plaintiff had warning signs of impending liability, but Plaintiff also agreed to share costs with another insurer, which in turn undermined the credibility of those signs. And given that Plaintiff was required to notify Defendant with enough time to allow Defendant the "opportunity to investigate the facts and circumstances affecting the question of liability and the extent of such liability," notifying Defendant too early of the matters it discovered would be unreasonable. Wehner , 331 Mich. at 119, 49 N.W.2d 87. Moreover, Plaintiff's fifty percent rule may be reasonable given all the facts because the time at which the duty to notify arises is fact dependent. That issue as well requires the Court to weigh the evidence given the unique circumstances of the litigation. See id. In sum, the Court simply cannot resolve whether Plaintiff breached its timely notice duty at the present stage.
3. Prejudice
Because a genuine issue of material fact precludes the Court from granting summary judgment on the notice issue, the Court need not analyze whether Defendant was prejudiced. In all, the Court will deny summary judgment on the timely notice argument.
Finally, Defendant claimed in its reply brief that it has a right to summary judgment because Plaintiff breached the certificates. ECF 83, PgID 3603. The claim is a rehash of the notice summary judgment argument. Compare id. at 3603–10, with ECF 69, PgID 1836–41. Because the claim essentially duplicates the earlier notice argument, and because claims raised for the first time in a reply brief are waived, the Court will reject the argument. See Scottsdale Ins. Co. v. Flowers , 513 F.3d 546, 553 (6th Cir. 2008) (holding that arguments raised for the first time in a reply to a response brief are waived).
III. Liability Limits
Plaintiff moved for partial summary judgment and claimed that, under its reading of the certificates, Defendant's payments for loss expenses to Plaintiff do not erode the facultative certificates’ liability limits. ECF 71, PgID 2059. Defendant also moved for summary judgment but interpreted the certificates to provide for the opposite. ECF 69, PgID 1848–49. Both parties contended that the facultative certificates’ plain terms favor their own readings. ECF 71, PgID 2047; ECF 73, PgID 2352. Given the Court's earlier choice-of-law analysis, the Court must interpret the certificates’ liability limits under Michigan law. Michigan courts interpret insurance policies "like any other contract." Meemic Ins. Co. , 506 Mich. at 296, 954 N.W.2d 115. Insurance policies are "read as a whole, with meaning given to all terms." Dancey v. Travelers Prop. Cas. Co. of Am. , 288 Mich. App. 1, 8, 792 N.W.2d 372 (2010) (citation omitted). And courts read terms based on "their commonly used meaning." Grp. Ins. Co. of Mich. v. Czopek , 440 Mich. 590, 596, 489 N.W.2d 444 (1992) (citation omitted). If the policy "clearly define[s]" a term, courts will give the "term its stated meaning." Farm Bureau Mut. Ins. Co. of Mich. v. Nikkel , 460 Mich. 558, 567, 596 N.W.2d 915 (1999) (citing Czopek , 440 Mich. at 596, 489 N.W.2d 444 ).
"Any clause in an insurance policy is valid as long as it is clear, unambiguous[,] and not in contravention of public policy." Id. (quoting Raska v. Farm Bureau Mut. Ins. Co. of Mich. , 412 Mich. 355, 361–62, 314 N.W.2d 440 (1982) ). Michigan courts will not rely on evidence of custom or practice to determine a contract's meaning when the contract's plain terms are clear. Indep. Twp. v. Reliance Bldg. Co. , 175 Mich. App. 48, 54, 437 N.W.2d 22 (1989) (citations omitted). But Michigan courts do consider an insurance contract ambiguous if it "is subject to more than one reasonable interpretation." Farmers Ins. Exch. v. Kurzmann , 257 Mich. App. 412, 418, 668 N.W.2d 199 (2003) (citing Klapp v. United Ins. Grp. Agency, Inc. , 468 Mich. 459, 467, 663 N.W.2d 447 (2003) ).
Put bluntly, the facultative certificates are poorly written. That said, even poorly written contracts can be unambiguous. Masco Corp. v. Wojcik , 795 F. App'x 424, 429 (6th Cir. 2019) ("Unambiguous language does not become ambiguous simply because it could have been written even more unambiguously."). Here, the plain terms in the facultative certificates rebuff Defendant's reading of them.
Among other irregularities, the certificates use two spellings of "judgment" and both alternate between using and not using Oxford commas. See ECF 39-7, PgID 499; ECF 39-8, PgID 503.
Based on the 1981 certificate's plain terms, the "Reinsurance Accepted" is $2 million part of $4 million "each occurrence and in the aggregate where applicable excess of" $1 million "each occurrence and in the aggregate where applicable excess of primary." ECF 39-7, PgID 498. That plain term provides that after $1 million in losses is reached, the reinsurance pays $2 million for "each occurrence and in the aggregate." Id. But the sentence does not explain what payments count toward the $2 million aggregate limit; the certificate's general conditions do.
The liability limits for the 1982 certificate differ. ECF 39-8, PgID 504. The other terms in the 1982 certificate do not differ from the 1981 certificate. Compare id. at 502–03 (1982 certificate), with ECF 39-7, PgID 498–99 (1981 certificate).
Under the general conditions, Defendant's liability "follow[s]" Plaintiff's "liability in accordance with the terms and conditions of the policy reinsured" except "to those terms and/or conditions as may be inconsistent with the terms of th[e] [c]ertificate." Id. at 499 ¶1; ECF 39-8, PgID 503 ¶1. In reinsurance law, the clause is called a ‘follow form’ clause. See Travelers , 2004 WL 2387313, at *4 n.6 ; Plitt et al., supra , § 9:16.
A ‘follow form’ clause merely "subjects the reinsurer's liability to the terms of the underlying insurance contract between the original insurer and the original insured." Plitt et al., supra , § 9:28. Reinsurance certificates will "often expressly limit the reinsurer risk to a narrower risk than that which is covered by the original policy." Id.
Under Michigan law, "[a] reinsurer cannot be held liable for losses (or amounts of losses) that it did not agree to cover." Travelers , 2004 WL 2387313, at *4 ; see Mich. Millers Mut. Ins. Co. , 182 Mich. App. at 414, 452 N.W.2d 841 ("The extent of the liability of the reinsurer is determined by the language of the reinsurance contract, and the reinsurer cannot be held liable beyond the terms of its contract merely because the original insurer has sustained a loss."). The same applies to reinsurance law in general. Plitt et al., supra , § 9:29 (emphasis added) ("Costs incurred by the reinsured in providing a defense for the original insured, if covered under the original insurance, will also be covered under the reinsurance agreement unless there is a specific exclusion to the contrary.").
Neither party appears to dispute that the underlying insurance contract required Plaintiff to indemnify Armstrong for loss expenses. ECF 71, PgID 2048; ECF 73, PgID 2364; see ECF 39-6, PgID 492 ¶2(2)(i) (underlying insurance contract). The parties do not dispute that Defendant owed some loss expense share. See ECF 39-7, PgID 499 ¶3(c) (Defendant "shall promptly reimburse [Plaintiff] for its share of the loss and loss expense."); ECF 39-8, PgID 503 ¶3(c) (same). The dispute is therefore over whether the loss expense liability in the primary insurance policy is "inconsistent with the terms of th[e] [c]ertificate." ECF 39-7, PgID 499 ¶1; ECF 39-8, PgID 503 ¶1.
Defendant argued that the loss expense liability in the primary insurance policy contradicts the "Reinsurance Accepted" sentence in the certificate. ECF 69, PgID 1848. Rather than face liability for all loss expenses, Defendant reasoned that the certificate stopped imposing loss expense liability once Defendant paid $2 million of losses and loss expenses combined. Id. But Defendant's reasoning ignores many of the certificate's general conditions.
The certificates require Defendant to provide reinsurance on a "Contributing Excess" basis. ECF 39-7, PgID 498; ECF 39-8, PgID 502. "Contributing Excess" is defined as Plaintiff's "policy applies in excess of other valid insurance, reinsurance or a self-insured retention and the limit of liability of [Defendant] applies proportionally to all loss settlements in the percentage(s) set forth in Item 4 of the Declaration." ECF 39-7, PgID 499 ¶10 (emphasis added); ECF 39-8, PgID 503 ¶10. The term "loss" means "only such amounts as are actually paid by [Plaintiff] in settlement of claims or in satisfaction of awards or judgements." ECF 39-7, PgID 499 ¶3(d); ECF 39-8, PgID 503 ¶3(d). "The term ‘loss’ shall not include loss expense." ECF 39-7, PgID 499 ¶3(d); ECF 39-8, PgID 503 ¶3(d). "The term ‘loss expense’ " means "all expenses incurred in the investigation, adjustment, settlement or litigation of claims, awards or judgments, including the salaries and expenses of [Plaintiff's] staff adjusters but excluding the office expenses of [Plaintiff] and the salaries and expenses of all other employees of [Plaintiff]." ECF 39-7, PgID 499 ¶3(f); ECF 39-8, PgID 503 ¶3(f). Put together, the 1981 certificate provides: the reinsurer's liability limit applies proportionally (based on the $2 million part of $4 million percentage) to all amounts actually paid by Plaintiff only in settlement or satisfaction of claims, awards, or judgments. Adopting Defendant's reading of the certificates is revisionist. Reading the term "loss expenses" into the "Contributing Excess" definition would alter the parties’ intent because the parties explicitly excluded loss expenses from counting against Defendant's liability limit. See Mich. Twp. Participating Plan , 233 Mich. App. at 430, 592 N.W.2d 760 (holding that liability under reinsurance policies is limited to the words in a policy). The policy plainly stated that Defendant's liability limit "applies proportionally to all loss settlements"—not all loss settlements and loss expenses. ECF 39-7, PgID 499 ¶10; ECF 39-8, PgID 503 ¶10.
What is more, the term "Excess of Loss" provides that "[t]he limit(s) of liability of [Defendant] ... applies(y) only to that portion of loss settlement(s) in excess of the applicable retention of [Plaintiff]." ECF 39-7, PgID 499 ¶10 (emphasis added); ECF 39-8, PgID 503 ¶10. Defendant did not argue that the certificates provide reinsurance on an excess of loss basis—rather than a pro rata basis—nor could it. The 1981 certificate provides reinsurance for excess loss because the reinsurance kicks in only in "excess of 1,000,000" dollars in loss. ECF 39-7, PgID 498. And the certificate contemplates only two bases of reinsurance: excess of loss and pro rata. See id. at 499 ¶¶3(e), (f) (noting that Defendant's liability for its proportion of "loss" and "loss expense" depends on whether the reinsurance policy "is on an excess of loss basis" or "a pro rata basis"); ECF 39-8, PgID 503 ¶¶3(e), (f) (same). As a result, the certificates provide excess of loss reinsurance, and the liability limits apply only to loss settlements—not loss expenses.
The 1982 certificate differs on the amount at which the reinsurance is triggered. ECF 39-8, PgID 504.
The two most common coverages are excess of loss and pro rata (proportional) reinsurance. See generally Travelers Cas. & Sur. Co. v. Certain Underwriters at Lloyd's of London , 96 N.Y.2d 583, 588, 734 N.Y.S.2d 531, 760 N.E.2d 319 (2001).
Still, Defendant claimed that Michigan law supported its reading of the certificates. ECF 69, PgID 1846–47; ECF 73, PgID 2355–57. The Michigan case law, however, undermines Defendant's argument. Michigan Township stands for the settled holding that courts cannot read terms into an insurance policy when the parties have not expressly agreed to the terms. 233 Mich. App. at 427–31, 592 N.W.2d 760. Michigan Township also dealt with a ‘follow the fortunes’ clause that is not relevant here. Id. Travelers likewise found that a ‘follow the fortunes’ clause would "not override or alter express coverage limits in a reinsurance certificate." 2004 WL 2387313, at *5. None of the Michigan cases suggest that Defendant cannot be liable when the reinsurance certificate's express language imposes liability. ECF 39-7, PgID 499 ¶¶1, 3(c), 10; ECF 39-8, PgID 503 ¶¶1, 3(c), 10. In short, Defendant sought to avoid the certificate's plain terms and Michigan law prohibits the Court from allowing Defendant to do that. See Mich. Millers Mut. Ins. Co. , 182 Mich. App. at 417–18, 452 N.W.2d 841 ("[W]e will not impose liability on the reinsurer for a settlement contribution absent such an agreement.").
Defendant's last argument focused on the phrase "in the aggregate" that was used in the reinsurance accepted provision. ECF 73, PgID 2363. Defendant believed that the sentence "reflects the parties’ agreement to cap [Defendant's] liability to the specific dollar amount stated." Id. But the argument stretches the sentence's plain reading too far. The sentence states that "REINSURANCE ACCEPTED: 2,000,000 [part of] 4,000,000 each occurrence and in the aggregate where applicable excess of 1,000,000 each occurrence and in the aggregate where applicable excess of primary." ECF 39-7, PgID 498. The term "in the aggregate" establishes only that Defendant will provide $2 million coverage for each occurrence, combined during the reinsurance coverage period. See Aggregate , Black's Law Dictionary (5th ed. 1979) ("Entire number ...; total amount; ... a combined whole."); see also Travelers , 2004 WL 2387313, at *4 (interpreting reinsurance certificates from 1972–1978 that contained the phrase " ‘each occurrence and in the aggregate where applicab[l]e part of’ "). The term neither influences nor alters Defendant's liability limit from "appl[ying] proportionally to all loss settlements." ECF 39-7, PgID 499 ¶10; ECF 39-8, PgID 503 ¶10.
The 1982 certificate contains the same wording but for different amounts under two reinsurance layers. ECF 39-8, PgID 504.
In sum, the certificates’ terms are clear, and the Court must enforce the terms as written. The Court will therefore grant Plaintiff partial summary judgment and deny Defendant summary judgment. Defendant's payments for loss expenses do not count against the liability limits in the certificates; loss settlements will exhaust Defendant's liability limit under the certificates.
CONCLUSION
Because a trial is needed to resolve factual issues, the Court will schedule an in-person bench trial at the Theodore Levin Federal Courthouse for February 15, 2022 and the final pretrial conference for February 2, 2022. ECF 11, PgID 96. The Court cannot (due to COVID-19 protocols) and therefore will not adjourn the dates. And because the parties already mediated with Special Master Dennis Barnes, the Court will refer the case to mediation with the Special Master. The mediation must occur no later than December 31, 2021.
ORDER
WHEREFORE , it is hereby ORDERED that Defendant's motion for summary judgment [69] is DENIED .
IT IS FURTHER ORDERED that Plaintiff's motion for partial summary judgment [71] is GRANTED .
IT IS FURTHER ORDERED that the final pretrial conference is SCHEDULED for February 2, 2022 and the in-person bench trial is SCHEDULED for February 15, 2022 .
IT IS FURTHER ORDERED that the case is REFERRED to the Special Master for mediation and settlement discussions.
IT IS FURTHER ORDERED that the parties must proceed in compliance with Local Rule 16.4. The mediation and settlement discussions must occur no later than December 31, 2021 . The parties must contact the Special Master and provide him with a copy of this order as soon as practicable and NOTIFY the Court of the date of the mediation session once it is scheduled.
IT IS FURTHER ORDERED that the Special Master must NOTIFY the Court within seven days of completion of mediation, stating only the "date of completion, who participated, whether settlement was reached, and whether further [alternative dispute resolution] proceedings are contemplated." E.D. Mich. L.R. 16.4(e)(6). If a settlement is reached, the parties must NOTIFY the Court right after completion of mediation and SUBMIT a proposed, stipulated order of dismissal within twenty-one days. Id. at 16.4(e)(7). If a settlement is not reached, the parties must NOTIFY the Court within seven days of the completion of mediation.