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September 20, 1993


The opinion of the court was delivered by: WILLIAM G. BASSLER


 The plaintiff, The North River Insurance Co., ["North River"] and the defendant, CIGNA Reinsurance Co., ["CIGNA Re"] make cross motions for summary judgment under Fed. R. Civ. P. 56. For the following reasons, the Court grants CIGNA Re's motion for summary judgment and denies North River's summary judgment motion.


 These summary judgment motions concern whether a reinsurer, CIGNA Re, must reimburse its reinsured, North River, for certain defense cost payments made in settling personal injury claims against the underlying insured, Owens-Corning Fiberglass Corporation. ["Owens-Corning"]. North River paid those defense costs to Owens-Corning after losing an arbitration conducted under the terms of the "Wellington Agreement," an agreement among asbestos producers and insurers that CIGNA Re did not sign.

 North River filed a four-count diversity action in this Court on March 29, 1991, seeking: (1) reimbursement on four facultative reinsurance certificates involving CIGNA Re; and (2) a declaratory judgment obligating CIGNA Re to reimburse North River for future losses involving the four certificates. North River also sought reimbursement and declaratory relief against Philadelphia Reinsurance Corporation, ["Philadelphia Re"]. However, by a joint stipulation and order, filed March 17, 1993, the claims against Philadelphia Re have been dismissed.

 A. The Parties

 North River, a shell corporation (see Appendix 1 to CIGNA Re's Support Brief, July 26, 1989 ADR opinion, at 1.) wholly owned by Crum & Forster, Inc., ["Crum & Forster"] is a New Jersey corporation with its principal place of business in Morristown, N.J. CIGNA Re, an independently operated subsidiary of CIGNA Property & Casualty Insurance Companies, is a Delaware corporation with its principal place of business in Philadelphia, Pa. Before June 30, 1987, CIGNA Re was known as INA Insurance Company.

 B. The Underlying Insurance

 North River, through another Crum & Forster subsidiary, L.W. Biegler & Co., issued several excess insurance policies to Owens-Corning, including three at issue here, numbered XS-3619, XS-4073 and XS-4423, involving liability coverage from 1974-78. These policies use the same form language and provide, among other things, coverage for asbestos-related bodily injury claims.

 XS-3619 provided to Owens-Corning $ 25 million in liability coverage, as part of a $ 50 million layer in excess of $ 26 million in underlying coverage, during each of the following policy periods: (a) June 18, 1974 through October 22, 1974 ["XS-3619(A)"]; (b) October 22, 1974 through October 22, 1975 ["XS-3619(B)"]; and (c) October 22, 1975 through October 22, 1976 ["XS-3619(C)"].

 XS-4073 provided to Owens-Corning $ 30 million in liability coverage, as part of a $ 50 million layer in excess of $ 26 million in underlying coverage, for the policy period October 22, 1976 through October 22, 1977.

 XS-4423 provided to Owens-Corning $ 40 million in liability coverage, as part of a $ 50 million layer in excess of $ 26 million in underlying coverage, for the policy period October 22, 1977 through September 1, 1978.

 Paragraph 1 of each policy provides that "[North River] hereby indemnifies [Owens-Corning] against ultimate net loss." (Appendix 2 to CIGNA Re's Support Brief.) Paragraph 13 provides, in relevant part:

13. Ultimate net loss, as used herein, shall be understood to mean the sums paid in settlement of losses . . . and shall exclude all "Costs."


"Costs," in turn, are defined in paragraph 14:
14. The word "costs", as used herein, shall be understood to mean interest on judgments, investigation, adjustment and legal expenses . . .


 In paragraphs 8 and 9, the policies discuss the basis under which North River might consent to provide defense of claims:

8. . . . At no time shall [North River] be called upon to assume charge of the settlement or defense of any claims made or suits brought or proceedings instituted against [Owens-Corning], but [North River] shall have the right and shall be given the opportunity to associate with [Owens-Corning] or its underlying insurer or insurers, or both, in the control, defense and/or trial of any claims, suits or proceedings, which, in the opinion of [North River], involves or appears reasonably to involve [North River]. . . .
9. [Owens-Corning] shall be solely responsible for the investigation, settlement, defense and final disposition of any claim made or suit brought or proceeding instituted against [Owens-Corning] to which this Certificate would apply and which no underlying insurer or insurers is obligated to defend. . . .


 In paragraph 15, the policies specify that, "with the written consent of [North River]," costs incurred by Owens-Corning could be apportioned under a formula described in that paragraph. (Id.)

 North River and another Crum & Forster company, International Surplus Lines Insurance Company, issued a total of 28 insurance contracts to Owens-Corning for the period June 18, 1974 to September 1, 1985, which afford more than $ 700 million in indemnity coverage, excluding defense costs. (See Appendix 27 to CIGNA Re's Support Brief, at 5.) To date, North River has paid more than $ 300 million to Owens-Corning in indemnity payments and more than $ 250 million in defense costs under these insurance contracts. (See Steven A. Falk Affidavit at 3.)

 C. The Reinsurance Certificates

 CIGNA Re in 1974 joined a reinsurance pool, established by broker Towers, Perrin, Forster & Crosby, Inc. ["TPF & C"], which issued to North River a typed "Memorandum of Reinsurance," attached to a pre-printed, standard form certificate of reinsurance, drafted by TPF & C, bearing policy number V01078. Under V01078, CIGNA Re provided an 18.5 percent share of the pool's reinsurance coverage of $ 1 million, as part of North River's $ 25 million share of excess liability coverage under XS-3619.

 CIGNA Re in June 1974 issued to North River a pre-printed, standard form certificate of facultative reinsurance, drafted by CIGNA Re, bearing policy number FRC-01817. Under FRC-01817, CIGNA Re provided reinsurance coverage to North River for $ 5 million of North River's $ 25 million share of excess liability coverage under XS-3619.

 CIGNA Re in March 1977 issued to North River a pre-printed, standard form certificate of reinsurance, again drafted by CIGNA Re and similar in most respects to the form of FRC-01817, bearing policy number FRC-016186. Under FRC-016186, CIGNA Re provided reinsurance coverage to North River for $ 5 million of North River's $ 30 million share of excess liability coverage under XS-4073.

 CIGNA Re in March 1978 issued to North River a pre-printed, standard form certificate of reinsurance, using exactly the same form as FRC-016186, this one bearing policy number FRC-019062. Under FRC-019062, CIGNA Re provided reinsurance coverage to North River for $ 5 million as part of North River's $ 40 million share of excess liability coverage under XS-4423.

 All four of these CIGNA Re certificates contain pre-printed coverage provisions commonly known in the reinsurance industry as a "following form" clause and a "follow the fortunes" clause. For the purposes of these motions, the variation in language among the four certificates is not material to these clauses.

 For example, the "following form" clause of FRC-016186, included in Section 1, "Application of Certificate," provides in relevant part:

. . . The liability of [CIGNA Re] shall follow that of [North River] and, except as otherwise specifically provided herein . . . shall be subject in all respects to all of the terms and conditions of [XS-4073], except such as may purport to create a direct obligation of [CIGNA Re] to the original insured or anyone other than [North River]. . . .

 (Appendix 5B to CIGNA Re's Support Brief.)

 The "follow the fortunes" clause of FRC-01686, included in Section 4, "Loss Settlement," provides in relevant part:

. . . All claims involving this reinsurance, when settled by [North River], shall be binding on [CIGNA Re], which shall be bound to pay its proportion of such settlements, and in addition thereto, . . . its proportion of expenses, . . .


 The four certificates also include a provision, whose language does not vary significantly among the different certificates, under which CIGNA Re must give its consent to any modification of the certificates. For example, FRC-01686, in Section 11, "Amendments," provides:

The terms of this Certificate shall not be waived, amended or in any way modified unless contained in an endorsement to this Certificate, executed by a duly authorized representative of [CIGNA Re].


 There are at least three other reinsurance certificates under which CIGNA Re agreed to reinsure North River for policies involving Owens-Corning, in addition to the four certificates identified in the complaint. CIGNA Re has previously paid more than $ 30 million in indemnity payments under all of these seven certificates. (CIGNA Re's Support Brief at 1.) North River argues that CIGNA Re still owes it more than $ 22 million, plus interest, in defense costs on these certificates. (Id., Exhibit A). As explained below, however, only four of those seven certificates, and approximately $ 13 million plus interest in defense costs, are at issue here.

 D. The Wellington Agreement and the ADR Proceeding

 During the 1970s and early 1980s, personal injury plaintiffs filed thousands of products liability actions stemming from the manufacture and sale of asbestos-containing products, resulting in enormous expenditures by asbestos producers and insurers. In an effort to reduce costs in resolving insurance coverage disputes arising from these actions, many of the largest producers and insurers met under the auspices of the Center for Public Resources, with Yale Law School Dean Harry Wellington acting as mediator. After several years of discussions, many, though not all, of the major producers and insurers signed the June 19, 1985 "Agreement Concerning Asbestos-Related Claims." ["The Wellington Agreement"]

 Crum & Forster and its subsidiaries, including North River, signed the Wellington Agreement. (See Letter of July 30, 1985 from Crum & Forster Corp. to Aetna Life & Casualty, included in Appendix 7 of CIGNA Re's Support Brief.) Owens-Corning was one of several asbestos producers that signed the agreement. CIGNA Re's parent company, CIGNA Property & Casualty Insurance Companies, also signed. CIGNA Re, however, did not, nor did other reinsurers.

 By signing the Wellington Agreement, North River agreed to be bound by certain of its provisions which affect the payment of defense costs. For example, Section XI of the Wellington Agreement, "Allocated Expenses," creates a presumption that issuers of affected policies would pay "allocated expenses," unless the policies expressly provided to the contrary. (See Appendix 8 to CIGNA Re's Support Brief, at 7.) Section XXIII defines "allocated expenses" as "all fees and expenses incurred for services performed outside the [Wellington Agreement's special claims handling facility] that can be directly attributed to the defense and disposition of a particular asbestos-related claim." (Id. at 15.)

 Ian R. Heap, as senior vice-president for insurance operations, was instrumental in Crum & Forster's decision to sign the Wellington Agreement. However, he recognized that the failure of reinsurance companies to join Wellington could have a negative impact on his company, should it sign. Heap testified at his deposition:

I was extremely concerned about the inability of the reinsurance community to articulate its position clearly of whether or not it was to give full support to the Wellington Agreement. It seemed to me that the industry had to move along the path of this alternative dispute resolution, and in the public interest we as insurers had to go along with it; and if in their judgment reinsurers failed to do it, then we had the business risk of being without reinsurance, and it was one that I felt Crum and Forster was prepared to take.

 (Appendix 2 to CIGNA Re's Opposition Brief, at 123-24.) (emphasis added.) Heap wrote a memo dated June 21, 1985, two days after Crum & Forster signed the Wellington Agreement, explaining why the company had signed despite its reinsurance concerns. Heap states:

Crum and Forster originally subscribed to this Agreement on condition that there was an acceptable level of support by reinsurers, and I will describe the grounds on which this condition was seen to be satisfied before we actually executed the final Agreement.
. . .
It was not expected that there would be unanimity by reinsurers in acceptance of the Agreement, nor was it expected that any reinsurers would be willing to sign a blank check for recoveries on asbestos-related claims, but it was necessary that insurers attain an acceptance by reinsurers of the basic principles of the Agreement and agree that payments made by the Facility would be seen to be good payments for the purpose of reinsurance recoveries. It was always understood that reinsurance recoveries for facility claims payments would be subject to the terms and conditions of the treaty or certificate language, and it is understood that with or without the Facility there will inevitably be differences of opinion between insurers and reinsurers on . . . coverage issues.

 (Appendix 7 to Cigna Re's Support Brief, Memo of June 21, 1985, at 1.) (emphasis added.)

 Appendix D of the Wellington Agreement specifically requires each producer and insurer who subscribes to the Agreement to execute a "Schedules Certification" for each affected policy within twenty (20) days of becoming a signatory of the agreement. A signatory's failure to so execute such a scheduling document within the 20-day period "shall be deemed an assent to and valid execution of the Schedules in question by such signatory." (Id. at 38.)

 North River under Appendix D had the option of scheduling each Owens-Corning policy as either a "G" form policy (one that pays defense costs, or "allocated expenses," beyond policy limits), an "H" form policy (one that pays allocated expenses within the policy limits), or an "I" form policy (one that does not pay allocated expenses at all). (Id. at 38-39.) As North River and Owens-Corning both signed the Wellington Agreement on June 19, 1985, each party's 20-day scheduling period ended on July 9, 1985.

 More than a month before even signing Wellington, on April 15, 1985, Owens-Corning sent an insurance schedule to North River's parent company, Crum & Forster, showing that it had scheduled the policies as "G," paying expenses in addition to policy limits. (See Appendix 9 to CIGNA Re's Support Brief.) On June 28, 1985, Owens-Corning reaffirmed its "G" policy form designation for the policies. (See id., Appendix 10.)

 North River decided not to execute the scheduling certificate. Instead, on July 2, 1985 its parent company, Crum & Forster, sent a letter to Owens-Corning, attaching a copy of the schedule Owens-Corning had sent to Crum & Forster. The letter began by stating that "attached is the schedule of coverage provided by the Crum and Forster Organization and is stated to the best of our knowledge at this time." (Id., Appendix 11.) However, the letter then contradictorily stated on page 2 that "a final determination re any Policy Form has not been made." (Id.)

 In March 1987, Owens-Corning called upon North River to pay defense costs under the policies. North River refused, on the grounds that the policies did not cover defense costs. The parties submitted their dispute to the procedures mandated by the Wellington Agreement. Appendix C of the agreement provides for alternative dispute resolution ["ADR"] of asbestos-related controversies. (Id., Appendix 8, at 28.)

 In the first phase of the ADR process, the dispute first went before Dean John Feerick of Fordham Law School, designated as a "neutral" under the agreement, for non-binding mediation. Owens-Corning made three arguments in favor of North River paying defense costs: (1) North River had waived its right to contest the scheduling of the policies; (2) North River in withholding defense cost payments had acted in bad faith; and (3) the policies themselves, in light of Section XI's presumption, did not expressly exclude defense costs. Dean Feerick advised Crum & Forster that it "had a winner on the waiver claim [and] on the bad faith issues, but that [it] had a difficult time and a difficult case on the policy form issues." (Id., Appendix 12, at 293-94, Testimony of Roger L. Prickett, Crum & Forster vice-president for environmental claims.) He also suggested that Crum & Forster settle with Owens-Corning by designating the policies as "H" form, paying defense costs within indemnity limits. (Id. at 295.)

 North River and Owens-Corning did not settle, however. The matter entered the so-called "Proceeding" phase of the Wellington dispute resolution process. A memorandum to the file, dated January 29, 1988, written by George B. Luteran, a senior claims specialist for Crum & Forster, summarized a meeting Luteran had attended the previous day to discuss the dispute with Crum & Forster in-house counsel Bradford Rich, Esq., Prickett and George Hardin, Esq., outside counsel from Bumgardner, Hardin & Ellis of Springfield, N.J. That memo states, in relevant part:

A meeting was held on 1-28-88 . . . to discuss [the Owens-Corning dispute and a related dispute involving PPG Industries].
. . . Discussion centered as to whether it might be possible to negotiate a compromised settlement with each of these insureds. However, if we were to compromise on the allocated costs issue we would have an extremely difficult time in recovering any money spent for such costs from our reinsurers. The only choice we have in the matter is to go forward to ADR. . . .
. . .
Part of the strategy in going to ADR will be to ask that the findings be limited to whether our policies are G, H or I with no opinion or reasons for such a finding.
. . .

 (Appendix 14 to CIGNA Re's Opposition Brief.) (emphasis added.)

 Crum & Forster's manager of reinsurance accounting, Steven A. Falk, in September 1988 sent a letter to "Reinsurers at Interest," noting that Dean Feerick had recommended a settlement that "will require the payment of some portion of Owens-Corning's allocated expenses (i.e. defense expenses) in addition to policy limits." (Id., Exhibit 14.) This characterization, however, contradicts Prickett's deposition testimony that Dean Feerick had recommended that the parties agree to settle for an "H" form designation, which would allow payment of defense costs, but within policy limits. (See Appendix 12 to CIGNA Re's Support Brief, at 295.)

 After extensive document discovery, numerous depositions and several days of trial, an arbitrator designated under the Wellington Agreement, retired United States District Court Judge H. David Hermansdorfer, issued his opinion on July 26, 1989. Judge Hermansdorfer's decision has three sections. In Part A, he ruled that North River through its failure to schedule the policies had waived its right to contest payment of defense costs. In Part B, as an alternative ground for requiring North River to pay defense costs, the judge ruled that North River had failed to carry its burden under Section XI to prove that the policies expressly excluded defense costs. In Part C, the judge ruled that North River had not acted in bad faith in regard to Owens-Corning. (Judge Hermansdorfer'S Opinion is attached as Appendix 1 to CIGNA Re's Support Brief.)

 North River, through Crum & Forster, notified its reinsurers of the unfavorable ADR result. By letter dated August 3, 1989, again addressed to "Reinsurers-at-interest," ...

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