Opinion
No. 99C3374.
March 5, 2001.
MEMORANDUM OPINION AND ORDER
Plaintiff Continental Casualty Company ("CNA") brings this action against Defendant Yosemite Insurance Company ("Yosemite"), claiming that Defendant owes CNA $856,083.00 under a 1974 contract. In that contract (referred to here as the "Yosemite Certificate"), Yosemite agreed to provide $1 million in facultative reinsurance for a policy issued by Plaintiff to W.R. Grace Company ("Grace"). Defendant Yosemite argues that Continental breached its warranty under the Certificate to retain $9 million of the risk, and that this breach entitles Yosemite to rescission of the agreement. Additionally, Defendant argues that even if it is held responsible under the terms of the Yosemite Certificate, it is not responsible for any defense costs incurred by Grace. Plaintiff acknowledges that the Yosemite Certificate refers to a $9 million retention, but contends that figure reflects a mutual mistake and that the terms of the agreement should be reformed to reflect the parties' actual intent: that Plaintiff would retain only $2 million of the risk. Alternatively, Plaintiff argues that the contract is ambiguous and that the court should consider extrinsic evidence of the parties' intentions. Finally, even if the Certificate is correct as issued, Plaintiff contends that its failure to retain $9 million of the risk does not constitute a material breach that would warrant nullifying the agreement.
For the reasons set forth below, the court concludes that Plaintiff did agree to retain $9 million of the policy limit and that its failure to do so constitutes a material breach. Accordingly, the court grants judgment in favor of Defendant.
FACTUAL BACKGROUND
A. The CNA Policy
Plaintiff Continental Casualty Company is an insurance company specializing, among other things, in commercial and risk management insurance for large corporations. (Def.'s 56.1 Statement § 1; see also http://www.cna.com/cna/html/p-s.html.) In 1974, William Sellar, an account manager for CNA, issued a $10 million second layer excess liability policy (the "CNA Policy") to W.R. Grace Company ("Grace") to insure various asbestos-related claims against Grace. (Defendant Yosemite Insurance Company's Local Rule 56.1 Statement of Material Fact as to Which There is no Genuine Issue (hereinafter "Def.'s 56.1 Statement") ¶¶ 5-8; see also Exhibit D.) The policy covered the period June 30, 1974 until June 30, 1977, with a limit of $10 million per year. (Id. ¶ 5.) As originally drafted, it did not require CNA to reimburse Grace for the cost of defending any underlying claims. (Id. ¶ 9.)
After issuing the CNA Policy to Grace, Mr. Sellar hired Pritchard Baird to purchase facultative reinsurance coverage for the CNA Policy from different reinsurers, including Defendant Yosemite. (Id. ¶¶ 15-16.) Yosemite agreed to furnish $1 million in facultative reinsurance cover age per year for each of the three years of the Policy, also known as a 10% quota share. (Id. ¶¶ 16, 24.) It is undisputed that in all, Plaintiff obtained $8 million in facultative reinsurance coverage from four different reinsurers, thus retaining only $2 million of the Policy limit. (Local Rule 56.1 Statement of Uncontested Material Facts of Plaintiff, Continental Casualty Company (hereinafter "Pl.'s 56.1 Statement") ¶¶ 11-13.)
Reinsurance is insurance of an insurance company for insurance risks it has assumed which generally comes in two forms: facultative and treaty. (Memorandum of Law in Support of Defendant Yosemite Insurance Company's Motion for Summary Judgment, at 1.) Facultative reinsurance, the type at issue here, is reinsurance that applies to a single underlying policy issued by the reinsured company, while treaty reinsurance applies to a class of insurance polices issued or risks assumed by the reinsured company. (Id.) The reinsured company is also known as a "ceding" company or "cedent."
As Grace began to incur costs from the asbestos claims, it made a claim against the CNA Policy. (Id. ¶ 21.) In May 1997, Plaintiff agreed to indemnify Grace pursuant to the terms of the CNA Policy and agreed to pay defense costs to Grace pursuant to an amendment in the CNA Policy made after the Yosemite Certificate was issued. (Def.'s 56.1 Statement ¶¶ 10-13; Pl.'s 56.1 Statement ¶ 21.) The agreement between Plaintiff and Grace was a "coverage in place" agreement, meaning CNA agreed to pay indemnity and defense costs to Grace as Grace incurred and paid such liabilities. (Def.'s 56.1 Statement ¶ 54.) As of April 1997, Grace had paid a total of $917,197,693 for asbestos related claims. (See id., Exhibit FF.) Matthew Schmitt, a senior account executive for CNA, explained that 23% of that figure ($278,867,457) represented expenses paid. (Id.) Schmitt further estimated that 73% (approximately $75,294,213.39) of those expenses were defense costs "incurred as a result of the asbestos property damage litigation." (Id.) As of August 30, 1998, CNA had paid Grace $12,181,615.86 towards those costs. (See id., Exhibit NN.)
Plaintiff then billed Defendant $856,083.34 under the Yosemite Certificate. (Pl.'s 56.1 Statement ¶ 22.) Defendant refused to pay, claiming the Certificate was void because Plaintiff failed to retain the amount of risk it warranted in the Certificate and that, even if the Certificate was not void, Defendant was not responsible for any defense costs incurred by Grace. (Def.'s 56.1 Statement ¶ 64.) To understand both arguments, it is necessary to first understand the terms of the Certificate.
A detailed explanation of how that figure was calculated is set forth in Def.'s 56.1 Statement RR, Letter from Schmitt to McDonnell, January 29, 1999. Neither party explains what percentage of that figure constituted defense costs. As the calculations are not relevant to the court's analysis, they are not set forth here.
B. The Terms of the Yosemite Certificate
Unfortunately, neither party has been able to locate the Yosemite Certificate in its entirety, though Plaintiff has produced a copy of the first page of the document. (Id. ¶¶ 19, 21.) In addition, both parties agree that the brokers, not Plaintiff itself, negotiated the reinsurance cover age. (Def.'s 56.1 Statement ¶ 15.) Mr. Sellar did not speak directly to any of the reinsurers about the details of the policies, and does not remember ever speaking with anyone from Yosemite about its reinsurance of the CNA Policy. (Id. ¶ 17.) Instead, all of the details were conveyed to the facultative reinsurers by the broker. (Id.) Neither party has been able to identify any of the Pritchard Baird brokers involved in the Yosemite Certificate. (Id. ¶ 51.) Because Pritchard Baird entered bankruptcy proceedings in the mid-1970s and went out of business, all of its files have been destroyed. (Id.; Pl.'s 56.1 Statement ¶ 29.)
Both parties agree, however, that as is typical of facultative reinsurance certificates, the Certificate was a single page, the front side setting forth a description of the underlying Policy reinsured and the Yosemite reinsurance coverage, and the back side setting forth the terms and conditions applicable to that coverage. (Def.'s 56.1 Statement ¶ 18.) According to the copy of the front page that Plaintiff located, under "Item 3" on the form, CNA's retention of the CNA Policy limit was listed as "$9,000,000." (Id., Exhibit I.) The question remains as to what was on the back side of the Certificate.
Defendant maintains that the backside consisted of a standard form that it used for its facultative reinsurance certificates. (See id. ¶¶ 22-23.) On the back page of Defendant's standard form, Paragraph B(2) provides, in relevant part:
Retention of the Company. This reinsurance is accepted in reliance on the Company's not reducing its net interest in original policy loss or liability as determined by the amount specified in Item 3 (Company Retention). Should the Company Retention be reduced by reinsurance or otherwise without notice to the Reinsurer (except as the Company Retention may be covered by non-specific excess of loss catastrophe reinsurance applying to more than one of the Company's policies in a single event), the Reinsurer's liability for loss otherwise fully collectible hereunder shall be determined in accordance with the following: . . .
(2) If t his reinsurance is on a pro rata (or quota share) basis, THE COMPANY WARRANTS THAT IT WILL RETAIN as the Company Retention the amount stipulated in Item 3 (except as noted therein). If at the time of any loss the Company's actual retention shall be less than the amount stipulated in Item 3, reinsurance hereunder shall be void either from inception or, when later, the date on which the reduction took place, and the Company and the Reinsurer shall each return to the other any remittances for loss or premium made following such date.
(Id. ¶ 25; Exhibit J.) Based on both this standard form and on the retention amount listed on the front page of the Yosemite Certificate, Defendant contends Plaintiff warranted that it would retain $9 million of the Policy limit, and that its failure to do so renders Yosemite's coverage void. (Id. ¶ 26.)
As evidence that this standard form, containing language described above, was in fact used for the Yosemite Certificate, Yosemite offers the testimony of Robert Brown, President of Yosemite from 1975-1983. (Brown Dep., at 12.) Brown handled claims on Yosemite facultative certificates as President of Yosemite and, later, after leaving Yosemite and moving to another company, he continued to "handle all of Yosemite's commercial business." (Id. at 12, 127.) In total, Brown handled such claims for 18 years. (Id.) He testified that during the 1970s, Defendant used only one form of facultative reinsurance certificate and this form contained a standard set of terms and conditions. (Id. at 124-128.) In addition, Robert McDonnell, who has handled claims on Yosemite facultative certificates for the last 7 years, testified that Defendant used only one facultative certificate form during the 1970s, and that he had "never come across any thing but [that] one." (McDonnell Dep., at 8-10, 211-12.)
As further evidence that the Yosemite Certificate must have included the terms and conditions from the standard form, Defendant points out that the terms and conditions on the standard form relating to cancellation of the certificate were enforced by Plaintiff itself in 1977 when Defendant attempted to retroactively cancel the policy in February 1977 due to the loss of its retrocessional cover age. (See Def.'s 56.1 Statement ¶¶ 29-33.) Plaintiff refused the request because it "did not properly comply with the advance notice of cancellation requirements" found in the Yosemite Certificate. (Id. ¶ 31.) Though Plaintiff did not specify what that advance notice would require, Paragraph J of the standard form provides for cancellation of the Certificate by either CNA or Yosemite only upon thirty days written notice. (Id. ¶ 33.) After discussions between CNA and Yosemite representatives, Defendant agreed to send a new notice of cancellation effective on thirty days notice. (Id. ¶ 31.) Defendant then sent a letter dated May 11, 1977, providing notice of cancellation for June 12, 1977, in compliance with Paragraph J of the standard form. (Id. ¶ 32.) Defendant contends that these circumstances suggest compliance with the terms of the standard form, supporting an inference that the standard form was actually utilized for the Yosemite Certificate.
Retrocessional coverage is insurance of all or part of a reinsurance policy that a reinsurer has previously assumed (in effect, it is "reinsurance of reinsurance").
Defendant's cancellation does not affect the outcome of this dispute.
Plaintiff contends that there is not enough evidence to show that the parties actually used the standard form in this reinsurance transaction. Without such evidence, Plaintiff argues, there is no basis for Yosemite's argument that CNA breached a retention warranty. (Plaintiff's Response to Defendant's Local 56.1 Statement of Material Facts as to Which There is a Genuine Issue ¶ 1.) Plaintiff concedes that the front page of the Certificate refers to CNA's retention of $9 million, but argues that this did not reflect CNA's intentions, nor did it constitute a warranty. (See Pl.'s 56.1 Statement ¶¶ 11-12.) Plaintiff claims it actually intended to purchase pro-rata facultative reinsurance for 80%, or $8 million, of the CNA Policy limit, and to retain 20%, or $2 million, of the limit. (Id.)
As evidence that it only intended to retain $2 million of the limit, Plaintiff first points to the actual coverage it purchased. At the same time that Sellar arranged for Pritchard Baird to purchase the Yosemite Certificate, Plaintiff purchased additional facultative reinsurance from Lloyds of London, London Market Companies, International Surplus Lines Insurance Company, and Fortress Reinsurance Company. (Id. ¶ 13.) After these purchases, Plaintiff retained 20% of the CNA Policy limit. (Id. ¶¶ 17, 18.) Plaintiff contends that because it intended to and did in fact purchase $8,000,000 in reinsurance, it never would have pledged to retain more than $2 million in the Yosemite Certificate.
The facultative reinsurance for the London market was purchased through a London broker, Leslie Goodwin International, LTD, not Pritchard Baird. (Id. ¶ 15.)
Plaintiff also points to a number of documents in support of its position. First, an internal memorandum from Sellar, dated June 25, 1975, to another CNA employee, R.J. Rossi, reflects CNA's 20% retention of the Policy limit. (Id. ¶ 17.) Another internal CNA memorandum prepared by Sellar shows that Plaintiff retained $2 million of the Policy limit until June 30, 1976, when its retention increased to 25%. (Id. ¶ 18.) In a letter dated April 13, 1977, written by Sellar to Marsh McLennan, Grace's broker for the CNA Policy, Sellar indicated t hat Plaintiff's retention of the limit would be 25%. (Id. ¶ 20.)
Plaintiff does not say who R.J. Rossiis, but it submits an internal memo that lists Rossi's title as "NAMD Home Office." (See ¶ 17; see also Goldstein Decl. Exhibit 15.)
Plaintiff's retention of the Policy limit increased to 25% after Fortress, one of the reinsurers, canceled its 5% reinsurance of the Policy effective June 30, 1976. (Id. ¶ 19.)
Plaintiff also can show that other reinsurers were aware that Plaintiff was retaining only 20% of the Policy limit. For example, the London Reinsurers issued reinsurance policy no. FUL079831, which reflected Plaintiff's retention as $2 million. (Id. ¶ 14.) In addition, the London broker, Leslie Godwin International, Ltd., in connection with the placement of facultative reinsurance of the Policy in the London market, filled out a "placing slip" that included a handwritten notation stating that CNA would retain $2,000,000 of the risk. (Id. ¶ 15; see also Goldstein Decl. Exhibit 8.) Finally, Plaintiff points out that Defendant had no underwriting guidelines in effect in 1974 that prohibited the issuance of facultative certificates with less than a 90% retention by the ceding company and that Defendant issued numerous facultative certificates in the period 1974-1977 which reflected the ceding company's net retention as less than 90%. (Pl.'s 56.1 Statement ¶¶ 30, 32.)
After Plaintiff settled Grace's claim under the CNA Policy, Plaintiff sought reimbursement from Defendant under the Yosemite Certificate. Defendant's refusal to pay precipitated this action, in which CNA seeks monetary damages and a declaratory judgment regarding Defendant's future obligations under the Certificate.
DISCUSSION
Because both parties agree that Illinois law applies to this dispute, this court may apply Illinois law and need not decide whether another forum's law would be more appropriate. See McFarland v. General AM. Life Ins. Co., 149 F.3d 583, 586 (7th Cir. 1998); see also Wood v. Mid-Valley Inc., 942 F.2d 425, 426-27 (7th Cir. 1991) ("The operative rule is that when neither party raises a conflict of law issue in a diversity case, the federal court simply applies the law of the state for which the federal court sits. . . . Courts do not worry about conflict of laws unless the parties disagree on which state's law applies.").
Summary judgment is appropriate only when "the pleadings, depositions, answers to interrogatories, and admissions on file together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. Fed.R.Civ.P. 56(c); see also Flores v. Preferred Tech. Group, 182 F.3d 512, 514 (7th Cir. 1999.) Under Illinois law, if a contract is unambiguous, there is no issue of material fact and the court must decide the contract's meaning as a matter of law. U.S. v. 4500 Audek Model Number 5601 AM/FM Clock Radios, 220 F.3d 539, 542-43 (7th Cir. 2000). For this reason, contract interpretation is particularly suited to disposition by summary judgment. Id.; see also ECHO, Inc. v. Whitson Co., 121 F.3d 1099, 1102 (7th Cir. 1997).
When considering cross-motions for summary judgment, the court considers the motions simultaneously, "extend[ing] to each party the benefit of any factual doubt when considering the other's motion." Buttitta v. City of Chicago, 803 F. Supp. 213, 217 (N.D. Ill. 1992), aff'd 9 F.3d 1198 (7th Cir. 1993). This "Janus-like perspective . . . sometimes forces the denial of both motions," but only where there are material facts in dispute. See id. Because the court agrees with the parties that no genuine issue of material fact exists, summary judgment is proper at this time.
B. The Terms of the Yosemite Certificate
The terms of the Yosemite Certificate are the central issue before the court. It is undisputed that the front page of the Certificate lists Plaintiff's retention of the Policy limit as $9 million. The parties contest whether the $9 million retention was warranted by Plaintiff and whether Plaintiff's failure to retain that amount of risk is grounds for voiding the contract.
Though neither party has been able to locate a copy of the back page of the Certificate, Defendant contends that the Certificate followed a standard form it used for all facultative reinsurance contracts in the 1970s. Paragraph B(2) of that form provides: (1) the retention amount set out in item 3 on the first page of the Certificate (in this case, $9 million) is a warranty by the reinsured; and (2) when Defendant's reinsurance is provided on a quota share basis (as it was in this case), breach of the reinsured's retention warranty at the time of loss under the reinsurance contract renders the reinsurance void from inception. If, therefore, Defendant can show that it did employ its standard form for the Yosemite Certificate, the $9 million retention was warranted under the terms of the agreement and the failure to retain the $9 million is grounds for voiding the contract.
As noted, Defendant has offered the testimony of Robert Brown, President of Yosemite from 1975-1983 and of Robert McDonnell, who has handled claims on Yosemite facultative certificates for the last seven years. In contract cases where some portion of the agreement is missing, testimony from employees knowledgeable about the company's practices and standard forms is admissible to prove the terms of the contract. See, e.g. Poelker v. Warrensburg Latham Community School Dist. NO. 11, 251 Ill. App.3d 270, 289, 621 N.E.2d 940, 953-54 (4th Dist. 1993); In re Salt, 346 Ill. App. 546, 549, 105 N.E.2d 773, 773-34 (1st Dist. 1952); UNR Indus. Inc. v. Continental Ins. Co., 682 F. Supp. 1434, 1442-43 (N.D. Ill. 1988). In addition, there is no requirement that these witnesses must have been employees at the time of the contract execution as long as they have personal knowledge of the writing. See FED. R. EVID. 1004; United States v. McCaughey, 977 F.2d 1067, 1072 (7th Cir. 1992) (holding that there is no hierarchy of secondary evidence, and that any thing that elucidates a writing's contents may constitute secondary evidence).
Though neither Brownn or McDonnell was at Yosemite when the Certificate was written, both men testified that they became familiar with the standard form used in the 1970s in the course of their employment with Yosemite. Brown testified that he was familiar with the facultative forms used by Yosemite and that there was "only one [form]" used during this time. (Brown Dep., at 125.) Likewise, McDonnell testified that from his current employment handling Yosemite accounts, he became familiar with the standard form Yosemite used in the 1970s and that "he only came across the one [standard form]." (McDonnell Dep., at 211-12.)
In addition, as noted earlier, Defendant presented evidence that Plaintiff itself invoked the cancellation provision found on the back page of the standard form when Defendant attempted to cancel the Certificate in 1977. Specifically, Plaintiff rejected a retroactive cancellation of th e policy, instead insisting th at Defendant give 30 days written notice, as prescribed by Paragraph J of the standard form. (Def.'s 56.1 Statement ¶ 29-31.) It therefore appears likely that at least Paragraph J of the standard form was found on the back of the Certificate.
Plaintiff contends this evidence is insufficient to show that the standard form applied. First, Plaintiff points to several facultative reinsurance contracts issued by Defendant where the reinsured company's net retention was less than 90%, presumably to show that Yosemite had no policy of only insuring certificates where the insurer retained 90% of the policy limit. Next, Plaintiff argues that Defendant has not met its burden of proving the terms of the Certificate because it cannot locate anyone who negotiated the Certificate. Finally, CNA urges, neither Brown nor McDonnell can testify as to the standard form employed in 1974, the time the Yosemite Certificate was issued, because neither was working for Defendant at that time.
The court finds that none of these facts make Defendant's evidence insufficient. The fact that Defendant entered into certificates where the reinsured company retained less than 90% of the risk is irrelevant to the question of whether the standard form was used for the Yosemite Certificate. Defendant readily admits that the standard form says nothing about a standard retention amount; instead, the form provides that whatever retention amount is specified on the front page is warranted and any change in that amount can void the contract. The fact that smaller retention amounts were written into other certificates does not defeat Defendant's position that the standard form was employed in the Yosemite Certificate.
Next, though it would no doubt help to know what occurred during negotiations, where neither side has this information, the court will consider other evidence to show what may have occurred. That evidence includes the testimony of Brown and McDonnell, who have worked on Defendant's facultative forms from the 1970s, that Defendant used only one standard form during that time period. Other relevant evidence includes the fact that the cancellation provision of the standard form was employed in this Certificate.
Notably, even if the standard form was not employed in this case, the front page of the Yosemite Certificate unequivocally states that Plaintiff was to retain $9 million of the Policy limit. In reinsurance contracts, it is customary for the ceding company to retain and remain liable in its own right for a portion of the reinsured risk. See Penn Re, Inc. v. Stonewall Ins. Co., No. 89-2621, slip op. at 1 (E.D.N.C. Jan 16, 1990). The amount that the ceding company agrees to retain is not incidental to the terms of the reinsurance policy; instead, this amount is one of the ways reinsurance companies accurately assess the risk they are incurring. See International Surplus Lines Ins. Co. v. Fireman's Fund Ins. Co., No. 88C 320, 1989 WL 165045, at *2 (N.D. Ill. Dec. 29, 1989). As other courts have explained, "[t]he greater a reinsured company's stake in the outcome of litigation, or a claim based upon the original policy, the more attentive that company will be to the investigation of the claim and minimization of the claimant's recovery." Fortress Re, Inc. v. Jefferson Ins. Co. of New York, 465 F. Supp. 333, 339 (E.D.N.C. 1978), aff'd, 628 F.2d 860 (4th Cir. 1980), see also Stonewall Ins. Co. v. Fortress Reinsurers Managers, Inc., 83 N.C. App. 263, 268, 350 S.E.2d 131, 134 (Ct. of Appeals N.C. 1986) (insurer's compliance with warranty retention in certificate of facultative reinsurance could reasonably have been expected to influence decision of reinsurer to grant reinsurance; therefore, trial court did not err in concluding that plaintiff's breach of the retention was material). Indeed, it is for this reason that retention warranties in reinsurance certificates are commonplace. See e.g. Stephens v. National Distillers and Chemical Corp., No. 91 Civ. 2901, 1996 WL 271789, at *1 (S.D.N.Y. May 21, 1996); see also See Penn Re, Inc. v. Stonewall Ins. Co., No. 89-2621, slip op. at 1 (E.D.N.C. Jan 16, 1990).
When a ceding company fails to disclose material facts regarding the original risk of loss, that failure can render a reinsurance agreement voidable or rescindable, even where the failure was unintentional. See Christiania Gen. Ins. Corp. of New York v. Great Am. Ins. Co., 979 F.2d 268, 278 (2nd Cir. 1992); Liquidation of Union Indemnity Ins. Co. v. American Centennial Ins. Co., 89 N.Y.2d 94, 105, 674 N.E.2d 313, 319 (N.Y. 1996) citing Royal In dem. Co. v. Preferred Acc. Ins. Co., 243 A.D. 297, 301, 276 N.Y.S. 313 (N.Y. A.D. 1934) (rescission of reinsurance agreement was proper where ceding insurer had misrepresented certain facts as to the amount of risk it would retain). Material facts are those likely to influence the decisions of underwriters; facts which, had they been revealed by the reinsured, would have either prevented a reinsurer from issuing a policy or prompted a reinsurer to issue it at a higher premium. Christiania, 979 F.2d at 278.
Assuming this $9 million retention figure was not a mistake, the retention may well be deemed a material part of the Certificate, even without the language employed by the standard form. Under the language of the contract, Plaintiff was willing to retain 90% of the Policy limit itself. One can see how this information could be important to Defendant to determine the actual risk it was incurring in issuing the Yosemite Certificate. Failure to retain this amount, even without the warranty agreement in the contract, could be a material breach of the contract. The court therefore finds that under the terms of the Certificate, the $9 million retention was warranted, or, at least, was a material part of the Certificate. It turns now to Plaintiff's argument that the $9 million figure was the result of a mutual mistake.
C. Reformation Due to Mutual Mistake
Though normally "contracts are to be taken at face value, and the written agreement is presumed to express the parties' intent," in certain cases, "this presumption may be rebutted, and the court may . . . step in and reform the contract." Board of Trustees of the Univ. of Illinois v. Insurance Corp. of Ireland, Ltd., 969 F.2d 329, 332 (7th Cir. 1992); see also Elson v. State Farm Fire and Casualty Co., 295 Ill. A pp. 3d 1, 15, 691 N.E.2d 807, 817 (1st Dist. 1998). Reformation of a contract should only be allowed, however, when "clear and convincing evidence compels the conclusion that the instrument as it stands does not properly reflect the true intention of the parties, and . . . there has been either a mutual mistake or a mistake by one party and fraud by the other." Elson, 295 Ill. App.3d at 15, 691 N.E.2d at 817; RS P/W C Fields Ltd. Partnership v. BOSP Investments and BOMAT Investments, 829 F. Supp. 928, 961 (7th Cir. 1993); see also Maren go Federal Sav. and Loan Ass. v. First Nat. Bank of Woodstock, 172 Ill. App.3d 859, 863, 527 N.E.2d 121, 123-24 (2d Dist. 1998). The purpose of reformation is to make a writing express the agreement that the parties intended it should. Board of Trustees of the Univ. of Illinois, 969 F.2d at 332. In this case, Plaintiff does not argue that any fraud occurred; instead, it insists that the $9 million retention figure was a result of mutual mistake.
Under Illinois law, the party seeking reformation due to mutual mistake must present clear and convincing evidence that a mistake of fact was made which was mutual and common to both parties to the contract. Alliance Syndicate, Inc. v. Parsec, Inc., __ Ill. App.3d __, __N.E.2d__, No. 1-97-2295, 2000 WL 1868452, *9 (1st Dist. Dec. 19, 2000); Rose v. Mony Life Ins. Co., 82 F. Supp.2d 920, 925 (N.D. Ill. 2000); Auto-Owners Ins. Co. v. South Side Trust Sav. Bank, 176 Ill. A pp. 3d 303, 310, 531 N.E.2d 146, 151 (3rd Dist. 1988). In other words, there must be clear and convincing evidence that at the time of the execution of the instrument there was an agreement between the parties which was incorrectly expressed in the written document. Alliance Syndicate, Inc., 2000 WL 1868452 at *9. Though clear and convincing evidence does not mean that the testimony must be "uncontradicted, unimpeached, crystal clear or perfect testimony," it does mean th at the facts presented by plaintiff must be "highly probably true." Cronin v. McCarthy, 264 Ill. App.3d 514, 525, 637 N.E.2d 668, 675 (1st Dist. 1994).
Plaintiff has offered some evidence to show that it did not intend to retain $9 million of the CNA Policy limit or to give such a retention warranty, including internal memoranda reflecting Plaintiff's retention of only 20% of the risk and letters from Plaintiff to others reflecting that retention amount. Defendants argue, however, and the court agrees, that none of this evidence relates to the issue here: whether Plaintiff communicated that intent to Defendant or whether Defendant likewise intended for Plaintiff to retain only $2 million when it entered into the Yosemite Certificate.
Nor can Plaintiff present any evidence of Defendant's intentions: Plaintiff did not negotiate the Yosemite Certificate directly, instead hiring Pritchard Baird to conduct the negotiations with Yosemite. Sellar acknowledged that he had no personal knowledge of the information Pritchard conveyed to Defendants. Because Pritchard Baird has since gone out of business, Plaintiff cannot identify the people who negotiated the Certificate with Defendant. Thus, Plaintiff has no evidence that Pritchard Baird ever communicated Plaintiff's intent to retain $2 million of the risk or that Defendant accepted that retention amount.
Failing in its burden to show by clear and convincing evidence what transpired during the negotiation of the Yosemite Certificate, Plaintiff attempts to fill the gap by insisting that the information conveyed to the London reinsurers, that Plaintiff would retain only 20% of the risk, is relevant to what occurred in the Yosemite Certificate negotiations. The court cannot agree. The London reinsurance certificates were negotiated by Leslie Goodwin International, LTD., not Pritchard Baird. Even had the London Reinsurers negotiated with Pritchard, it is impossible to say that Pritchard would have necessarily communicated the same information to them. Thus, this information is irrelevant in determining what Defendant knew and in tended when it negotiated with Pritchard.
Nor does the legal authority cited by Plaintiff support its position here. In those cases where reformation is granted under Illinois law, both parties to the contract or insurance policy testified that the written agreement was not consistent with the intentions of the parties. For example, in Magnus v. Barrett, 197 Ill. App.3d 931, 557 N.E.2d 252 (1st Dist. 1990), the court permitted reformation of a car insurance policy after the insuring agent testified that he thought he was adequately insuring both the car and the plaintiff driver at the time of the policy, but did not correctly do so. The court found that because the plaintiff and agent had reached a "common understanding regarding coverage, but then inaccurately reflected that understanding when reducing the agreement to writing" reformation of the policy was proper. Id. at 935, 557 N.E.2d at 256; see also In re Marriage of Johnson, 237 Ill. App.3d 381, 383-85, 604 N.E.2d 378, 380-82 (4th Dist. 1992) (where divorce decree stated that the marital residence would be sold upon ex-husband's remarriage, but both ex-husband and ex-wife testified that they had agreed in settlement negotiations that it would be sold only upon ex-wife's remarriage, decree was reformed to reflect the intentions of both parties); Marengo Fed. Sav. Loan Ass'n v. First Nat. Bank, 172 Ill. App.3d 859, 864, 527 N.E.2d 121, 124 (2d Dist. 1988) (reformation was proper where loan agreement failed to indicate that four promissory notes were secured with second mortgages but defendant admitted that he knew before the agreement was executed that the plaintiff would not loan him money on an unsecured basis and that the mortgages would be required).
In contrast, Illinois courts will not allow reformation where there is no evidence to show that defendant's intent differed from what was reflected in the written agreement. For example, in Auto-Owner's Ins. Co. v. Southside Tr. Sav. Bank, 176 Ill. App.3d 303, 531 N.E.2d 146 (3d Dist. 1988), the plaintiff insurer agreed to issue a performance bond for a father and son subcontracting company, conditioned on the company's obtaining an irrevocable letter of credit as security for the bond. Id. at 305, 531 N.E.2d at 147. The defendant bank, however, refused to issue the letter of credit with the company as the principal, instead insisting that George Collins, the father, be designated as principal. Id. at 305, 531 N.E.2d at 148. This same understanding was not shared by the plaintiff insurer, who believed that the subcontracting company itself was the principal for the bond and was backed up by the letter of credit. Id. at 307, 531 N.E.2d at 149. When the company defaulted, plaintiff sued, seeking reformation of the letter of credit. Id. at 310-11, 532 N.E.2d at 151. The court found no mutual mistake warranting reformation: the bank's witnesses testified that the letter of credit "stated exactly what defendant wanted it to state." Id. As long as defendant did not share the intent of plaintiff at the time the letter of credit was issued, reformation was not proper. See also Klemp v. Hergott Group, Inc., 267 Ill. App.3d 574, 582-82, 641 N.E.2d 957, 963 (1st Dist. 1994) (where defendants agreed to pay plaintiffs an additional $500,000 for a piece of land contingent on defendants obtaining new zoning classification for the land, the court would not reform the contract to require defendants to appeal any negative zoning decisions absent evidence that both parties intended for defendants to be obligated to pursue the appeal).
Here, similarly, Plaintiff has presented no evidence that Defendant did not intend for Plaintiff to retain the amount written on the Certificate. Nor is there any evidence that Defendant knew of Plaintiff's intention not to retain that amount. Absent any reason to believe that a mutual mistake occurred in drafting the Yosemite Certificate, the court concludes reformation is not proper in this case.
D. Doctrine of Extrinsic Ambiguity
Plaintiff's next argument, that the doctrine of extrinsic ambiguity applies in this situation, must fail for similar reasons. Like reformation, the doctrine of extrinsic ambiguity allows a party to introduce extrinsic evidence to demonstrate that although the contract looks clear, anyone who understood the context of its creation would understand that it does not mean what it seems to mean. Matthews v. Sears Pension Plan, 144 F.3d 461, 466 (7th Cir. 1998); Federal Deposit Ins. Corp. v. W.R. Grace Co., 877 F.2d 614, 620 (7th Cir. 1989). As has already been discussed, Plaintiff has not offered any extrinsic evidence to show that both parties did not mean for Plaintiff to retain $9 million of the CNA Policy Limit. Thus, the doctrine does not allow Plaintiff to recover in this action.
Indeed, Plaintiff is not able to meet even the first requirement of this doctrine: it cannot show that anyone who understood the context of the contract would know that it does not mean what it seems to mean. Plaintiff does not suggest that a $9 million retention by a reinsured is unheard of, nor does it suggest any reason to believe that this figure was unusual on its own. Though Plaintiff may not have intended to retain $9 million, it has not shown why Defendant would have reason to know that, or why anyone looking at this contract in its context would know that it did not mean what it seems to mean.
E. Materiality of the Retention Warranty
Finally, Plaintiff argues that even if the court finds that the contract was not ambiguous and that Plaintiff warranted that it would retain $9 million of the Policy limit, Defendant cannot escape liability under the Certificate simply because of Plaintiff's breach. To support its argument, Plaintiff relies on 215 ILCS 5-154, which states in relevant part:
No misrepresentation or false warranty made by the insured . . . or breach of a condition of such policy shall defeat or avoid the policy . . . unless it shall have been made with actual intent to deceive or materially affects either the acceptance of the risk or the hazard assumed by the company.
Id. Based on this statute, Illinois courts have held that a false statement in an insurance application does not in and of itself void the policy. For example, in Ratliff v. Safeway Ins. Co., 257 Ill. App.3d 281, 282, 628 N.E.2d 937, 938 (1st Dist. 1993), the defendant insurance company refused to cover an accident by plaintiff's son where the insurance application listed plaintiff as the only driver. Id. at 282-83, 628 N.E.2d at 939. The court held that a false statement (that plaintiff was the only driver of the car) was not grounds for voiding an insurance policy without proof that the statements were made with the intent to deceive or involved matters materially affecting the acceptance of the risk. Id. at 288, 628 N.E.2d at 942. The court found for defendant, however, after determining that the failure to disclose the second driver did materially affect the acceptance of the risk. Id. at 288-89, 628 N.E.2d at 943.
In this case, Plaintiff argues that because Defendant cannot prove that the warranty was made with intent to deceive or that the warranty involved matters materially affecting the acceptance of the risk, the Certificate is not void. Plaintiff's argument must fail for several reasons.
To begin, as Defendant contends, in In re Liquidations of Reserve Ins. Co., 122 Ill.2d 555, 568, 524 N.E.2d 538, 544 (1988), the Supreme Court of Illinois found that the Illinois Insurance Code does not apply to reinsurance contracts. In Reserve, the Court held that reinsurers were classified as general creditors and not as insurance companies for bankruptcy purposes. Id. at 563-64, 524 N.E.2d at 542. Plaintiff notes that Reserve did not deal with section 154 and that, in fact, no cases directly address the question of whether section 154 is applicable to reinsurance contracts. Nevertheless, the Reserve court's reasoning defeats the notion that the term "insurance" is interchangeable with "reinsurance" under the Illinois Insurance Code. As the Illinois Supreme Court explained, "[t]he language of other sections of the Code indicates that that specific meaning of `reinsurance' was intended by the legislature to be separate and distinct from that of `insurance,' that is, direct insurance." Id. at 562, 524 N.E.2d at 541. It also noted that "when the legislature intended reinsurance to be included within a particular section, `reinsurance' was explicitly mentioned." Id. at 563, 524 N.E.2d at 541-42. The rationale of Reserve suggests that section 154 does not apply to reinsurers.
Plaintiff attempts to distance this case from the holding in Reserve by arguing that the court's concern in that case was protecting the general public in the context of insurance company liquidations. Plaintiff contends that there are no similar public policy concerns with respect to Section 154. In National Fid. Life Ins. Co. v. Karaganis, 811 F.2d 357, 365 (7th Cir. 1987), however, the Seventh Circuit expressly recognized public policy concerns for enacting section 154: "Enactment of section 154 itself demonstrates a public policy in favor of constraints . . . on the ability of insurance companies to defeat policies by alleging misrepresentation or fraud by the insured." Id. Under section 154, only material breaches will invalidate insurance agreements; the obvious purpose of that provision is to protect insured parties, who often have unequal bargaining power vis a vis insurance companies. Id. Insurance companies, on the other hand, do not need the same protection when attempting to indemnify their possible future claims through reinsurance. See Reserve, 122 Ill. 2d at 561, 524 N.E.2d at 541 ("[i]nsurers who negotiate and enter into reinsurance agreements do so from a substantially more equal bargaining position than do policyholders of direct insurance.")
As explained earlier, the court finds that under the terms of the Yosemite Certificate (paragraph B.2. of the standard form), failure to retain the state amounted was grounds for voiding the contract. Even without those terms, as was discussed above, breach of the retention materially altered the risk to Defendant such that the failure to retain the stated $9 million constitutes a material breach of the Certificate. See supra Discussion Section B. Because section 154 does not apply to the case at hand, because the plain language of the Yosemite standard form calls for the reinsurance to be void from its inception should the reinsured fail to retain the amount warranted, and because the court finds that the failure to retain $9 million of the Policy limit as stated under the Certificate constitutes a material breach, the Certificate is void and Plaintiff cannot recover under it. In light of this finding, the court need not decide whether Defendant would have been responsible for Grace's defense costs under the Certificate.
CONCLUSION
Plaintiff may have intended to retain only $2 million of the CNA Policy limit when it entered into the Yosemite Certificate with Defendant, but it did not contract to retain that amount. In the absence of any evidence that Defendant intened to retain a different amount then it contracted for, there is no grounds for mutual mistake and, therefore, reformation is not proper. In addition, because the court finds that the retention listed in the Certificate was warranted and because the Certificate is not ambiguous, there are no grounds for excusing Plaintiff's breach of that Certificate and, according to the provisions of the Certificate, it is now void. Defendant's motion for summary judgment (Doc. No. 17-1) is granted, and Plaintiff's cross motion for summary judgment (Doc. No. 23-1) is denied.