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Munich Reinsurance America, Inc. v. American National Insurance Co.

United States District Court, D. New Jersey

February 27, 2014

MUNICH REINSURANCE AMERICA, INC., Plaintiff,
v.
AMERICAN NATIONAL INSURANCE COMPANY, Defendant

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Amy S. Kline and Sean Tracy O'Neill, Saul Ewing LLP, Philadelphia, PA, for Plaintiff.

Joel Max Eads, Trenk DiPasquale Webster Della Fera & Sodono, P.C., Ardmore, PA, for Defendant.

OPINION

Page 696

FREDA L. WOLFSON, United States District Judge.

This case involves complex retrocessional agreements between Plaintiff Munich Reinsurance America Inc. (" Munich" ) and Defendant American National Insurance Company (" ANICO" ). Munich filed a Complaint alleging breach of contract for ANICO's refusal to pay certain claims submitted for payment by Munich under the parties' agreements, and in response, ANICO filed a counterclaim for rescission of the agreements. Following motion practice,

Page 697

the Court conducted a nine-day bench trial with numerous experts and witnesses testifying as to each party's obligations under the agreements as well as their respective business practices.

In light of the evidence presented at trial, the Court concludes that ANICO is not entitled to rescission of the agreements. The Court further finds that Munich satisfied its reporting obligations under the agreements in part, and thus ANICO breached its respective payment obligations for those claims that were properly ceded and reported. To wit, those claims to which Munich is entitled to payment include all claims that were properly ceded to ANICO via IOA Re before the expiration of the Sunset Provision deadlines, including claims that arise from underlying primary policies of workers' compensation written by either Everest or Everest Re, but they do not include claims arising from injuries sustained by a roofing contractor or subcontractor. Further, Munich is not entitled to payment on those claims that were only first noticed on a spreadsheet Munich provided to IOA Re in August 2008, as that document did not satisfy the reporting requirements of Article XVI of the parties' agreements.

I. OVERVIEW

A. Reinsurance

Before proceeding to the specifics of this case, the Court sets forth a brief overview of the reinsurance industry. As I noted in my previous opinion resolving the parties' summary judgment motions, this overview of an issue as complex as reinsurance must be taken with a grain of salt; I merely seek to provide a basic primer to help orient the reader.

In Pacific Employers Ins. Co. v. Global Reins. Corp. of America, 693 F.3d 417 (3d Cir. 2012), the Third Circuit described reinsurance as

insurance for insurance companies. A reinsurer agrees to indemnify a reinsured for certain payments the latter makes under one or more of its issued policies. In return, the reinsurer receives a share of the underlying premiums. Ceding a portion of an insured risk prevents a single catastrophic loss from hurling the reinsured into insolvency. It also allows the reinsured to invest more capital or to insure more risks.

Id. at 421. Reinsurance is comparable to " a contract of indemnity." Christiania Gen. Ins. Corp. of N.Y. v. Great Am. Ins. Co., 979 F.2d 268, 271 (2d Cir. 1992).

" The reinsurance of reinsurance is called a retrocession, and the reinsurers of reinsurers--that is, reinsurers who assume retrocession risk through retrocessional agreements--are called retrocessionaires." Century Indem. Co. v. Certain Underwriters at Lloyd's, London, subscribing to Retrocessional Agreement Nos. 950548, 950549, 950646, 584 F.3d 513, 519 (3d Cir. 2009). Such retrocession agreements present considerably more complex legal and factual scenarios because " there is another layer of coverage created and another party thrown into the mix." Plitt, et al., 1A COUCH ON INSURANCE § 9:3.

There are two overarching categories of reinsurance and retrocession--treaty and facultative; the agreements here are the former. Through treaty reinsurance,

the reinsurer [or retrocessionaire] agrees to accept an entire block of business from the reinsured. Once a treaty is written, a reinsurer is bound to accept all of the policies under the block of business, including those as yet unwritten. Because a treaty reinsurer accepts an entire block of business, it does not assess the individual risks being reinsured; rather, it evaluates the overall risk pool.

Page 698

Pac. Employers, 693 F.3d at 421. As with primary insurance, reinsurance comes in several basic types, including proportion and " excess of loss" policies. The instant agreements are excess of loss policies, which obligate the retrocessionaire to pay up to its " retention" amount, i.e., the amount of " cover" the retrocessionaire agreed to provide the reinsurer, once the total claim amount has surpassed a set monetary limit or " layer" that the reinsurer must first pay. See Hartford Acc. and Indem. Co. v. Ace Am. Reins. Co., 284 Conn. 744, 750 n.5, 936 A.2d 224 (2007). Excess of loss policies come in three forms: " per risk," " annual aggregate," or " per occurrence." See Orpett, et al., 3 LAW AND PRAC. OF INS. COVERAGE LITIG. § 41:10 (2012). These three methods differ in the manner in which risks " attach" to the reinsurance agreement. Under a per occurrence policy, like those at issue here, the retrocessionaire's obligation is triggered by a particular incident, such as a personal injury. Id.

B. The Parties and the Agreements

For the purposes of the present case, Munich [1] was the ceding reinsurer and ANICO was the retrocessionaire for two excess of loss retrocessional agreements of workers' compensation reinsurance, on a per-occurrence, or per-claim, basis, which cover the periods of November 1, 2000 through December 31, 2000 (referred to by the parties as the " 2000 Year Agreement," and also as the " Stub Year Agreement," due to its short, two-month duration), and January 1, 2001 through December 31, 2001 (the " 2001 Agreement" ) (collectively, the " Retrocession Agreements" ). The terms of the two agreements are identical except for the following differences: (1) their duration; (2) the relevant provision of Article X (Claims) is reflected in Endorsement No. 1 in the Stub Year Agreement, while the identical corresponding provision for the 2001 Year is in the body of that agreement; and (3) under the Stub Year Agreement, ANICO only took a 75% share of the retrocession. Pl.'s 1 at MRAM-01-0304 to -0305 (Stub Year Agreement); Pl.'s 2 at MRAM-01-0034, -0040 (2001 Agreement).[2]

As detailed more fully infra, the Retrocession Agreements provide that ANICO shall not be liable for any single loss until Munich's loss exceeds $500,000, that ANICO is not liable for more than $500,000 per loss occurrence, and that for the 2001 Agreement ANICO is not liable beyond $20,000,000. Pl.'s 1-2 (Art. IV). A " loss occurrence" is each and every accident or occurrence, or series of accidents or occurrences, arising out of one event. Pl.'s 1-2 (Art. VII).

The story behind the Retrocession Agreements, however, is considerably more complex. Underlying the Retrocession Agreements is a reinsurance agreement Munich entered into with Everest National Insurance Company (" Everest" ) and Everest Reinsurance Company (" Everest Re" ), whereby Munich agreed to reinsure Everest and Everest Re's workers' compensation insurance program for the period of January 1, 1998 through December 31, 2001 under an excess of loss reinsurance agreement entitled " Workers' Compensation Excess of Loss Reinsurance Agreement between Everest National Insurance

Page 699

Company, Everest Reinsurance Company and American ReInsurance Company" (the " Everest Agreement" ) for the period November 1, 1997 to December 31, 2001. The Everest Agreement was governed by limits of $750,000 excess of $250,000. This means that under the Everest Agreement, Munich had no liability for any claim of less than $250,000--the layer from $0 to $250,000 was Everest's responsibility.

During the periods covered by the Everest Agreement, Munich purchased retrocessional " carve-out" coverage. Another entity, IOA Re, underwrote retrocession contracts for every year in which Munich purchased retrocessional cover for the Everest Agreement. Specifically, Munich obtained carve-out retrocessional coverage for its 1998 and 1999 treaty years through other retrocessionaires, including Continental Casualty Insurance Company (" Continental Casualty" ). 6/20/13 Tr. at 93 (Dorosz). For the periods January 1, 1998 to October 31, 1998, November 1, 1998 to October 31, 1999 and November 1, 1999 to October 31, 2000, IOA Re underwrote the retrocession on behalf of Continental Casualty. Pl.'s 50 at AAHRU-00129 to -00189 (period Jan. 1, 1998 to Oct. 31, 1998), AAHRU-00103 to -00127 (period Nov. 1, 1998 to Oct. 31, 1999); Def.'s 248 at ANICO-IOA-5836 to -5870 (period Nov. 1, 1999 to Oct. 31, 2000).

In 2000, Munich Re and Everest agreed to extend the Everest Agreement for two months, from November 1, 2000 to December 31, 2000, to enable them to have more time to discuss the terms on which Munich would reinsure the Everest Program for 2001. Munich asked IOA Re whether IOA Re, on behalf of Continental Casualty, would agree to extend the retrocessional agreement for the same two-month period. Def.'s 248 at ANICO-IOA-5790. IOA Re determined that it was interested in continuing to participate in the retrocession; however, at that time IOA Re had lost its authority to write on behalf of Continental Casualty. Id. at ANICO-IOA-5789. Instead, IOA Re proposed, and Munich agreed, that ANICO replace Continental Casualty as the retrocessionaire on the program for the two-month extension and for the calendar year 2001--the Retrocession Agreements.[3] 6/25/13 Tr. at 112:17-113:13 (Hoekstra).

To summarize, Munich purchased a carve-out for the Everest Agreement for the period November 1, 2000 and December 31, 2000, through ANICO and another retrocessionaire; ANICO accepted only a 75% share of the Stub Year Agreement with the other retrocessionaire accepting

Page 700

the other 25%. Munich also purchased retrocessional carve-out for the Everest Agreement for January 1, 2001 through December 31, 2001; ANICO accepted 100% of that risk.[4] The relevant portions of the Retrocession Agreements are set forth as follows.

Amount (per claim)

Paid By

$500,001 - $1,000,000

ANICO pays 75% of this amount for claims arising under

the Stub Year Agreement

ANICO pays 100% of this amount for claims arising under

2001 Agreement, subject to a maximum annual aggregate

of $20,000,000

Article I of the Retrocession Agreements, the " Business Covered" provision, provides:

A. [ANICO] hereby agrees to indemnify [Munich] for the amount of ultimate net loss[[5]] as herein provided and specified which may accrue to [Munich] as a result of loss or losses occurring during the term of this Agreement as a result of its participation in the following Reinsurance Agreement, covering insurance or reinsurance business in force at the inception of this Agreement and business written and/or renewed during the term of this Agreement:
WORKERS' COMPENSATION EXCESS OF LOSS REINSURANCE AGREEMENT NO. 2726-0001
B. The Reinsurance Agreement listed above (hereinafter referred to as the " Underlying Agreement" ) is between [Munich] and the following insurance company or group (hereinafter referred to as the " Original Ceding Company" ):
EVEREST NATIONAL INSURANCE COMPANY
Phoenix, Arizona
(as identified in the Underlying Agreement)

Pl.'s 1-2 (Art. I).

Article X(B) of the 2000 Retrocession Agreement and Article X(C) of the 2001 Retrocession Agreement Contracts state:

[ANICO] agrees to pay [Munich Re] on demand, [ANICO]'s proportion of all losses and/or loss expenses paid by [Munich Re] arising from the Underlying Agreement, including any and all expenses incurred directly by [Munich Re] in the litigation, defense and settlement of claims made against [Munich Re] by the Original Ceding Company under the Underlying Agreement, excluding, however, all office expenses of [Munich Re] and the salaries and expenses of its employees.

Id. at 1 (Art. X(B)); id. at 2 (Art. X(C)).

Disputes eventually arose between the parties over payment of claims, primarily over whether Munich was properly reporting claims to ANICO, and whether these claims were within ANICO's obligations to pay under the Retrocession Agreements.

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C. Procedural History

On December 22, 2009, Munich filed its Complaint, alleging three claims against ANICO. See Dkt. No. 1. In Count I, Munich contends that it billed ANICO for claims under the Stub Year Agreement but did not receive payment, amounting to breach of contract and damages estimated at $674,897.27. See Dkt. No. 117 (" Final Pretrial Order" ), 5. In Count II, Munich alleges similar breach of the 2001 Agreement, amounting to estimated damages of $5,587,847.62. Id. at 16-17. Munich's Count III seeks a declaratory judgment that Munich is entitled to payment for unspecified future losses under the Retrocession Agreements for its reinsurance of Everest. See Dkt. No. 1. On February 16, 2010, ANICO filed its answer, affirmative defenses, and a counterclaim alleging it overpaid Munich under the Retrocession Agreements, and was entitled to a refund. See Dkt. No. 7. Munich answered ANICO's counterclaim and asserted affirmative defenses on March 4, 2010. See Dkt. No. 11. On April 20, 2011, ANICO filed its First Amended Answer, bringing counterclaims and affirmative defenses against Munich for rescission, breach of the Retrocession Agreements, fraudulent inducement, breach of the duty of utmost good faith, breach of the duty of good faith and fair dealing, for offset under the contracts for claims not properly payable, and for estoppel, waiver, and failure of consideration. See Dkt. No. 60. Munich filed an answer on May 9, 2011, alleging the affirmative defenses of waiver, estoppel, failure to mitigate damages, excuse of performance due to contractual breach by ANICO, and breach of the duty of utmost good faith and fair dealing. See Dkt. No. 61.

The parties filed cross-motions for partial summary judgment. This Court ruled that the Retrocession Agreements calculated retention on a ground-up basis,[6] and the Court granted summary judgment dismissing ANICO's untimely claim defense. See Dkt. No. 96 at 2. On rehearing, the Court granted summary judgment in part for ANICO, concluding that ANICO did not have to pay claims Munich submitted after the December 31, 2007 " Sunset" deadline for the 2000 Retrocession Agreement.[7] Dkt. No. 112 at 1-2. The Court also dismissed ANICO's untimely claims defense under Article X, holding that the prior grant of summary judgment to Munich on ANICO's Article X prejudice defense stood. Id. All remaining issues were left for trial.

The Court held a bench trial on June 17, 2013, that spanned 9 days. During the trial, both parties presented witnesses and experts and supplied volumes of exhibits relating to the specific Retrocession Agreements as well as the business practices of Munich, ANICO, IOA Re, and Everest generally. Following trial, the parties submitted their proposed findings of facts and conclusions of law. For convenience, I provide below a list of the trial witnesses and general summaries of the scope of their knowledge.

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Name

Title/Role

Munich employee who currently

Michael Alan Frantz

reinsurance claim operations division.

(Frantz).

Munich's senior accounting manager for the

Thomas J. Mauch

accounting department, he currently manages

all retrocessional programs, including billing.

3-4 (Mauch).

Munich senior claims consultant

Arthur Giacobbe

Agreements. 6/18/13 Tr. 127-29;

(Giacobbe).

Employee of Am Re Brokers-a

served as the broker and intermediary

IOA Re when the

Timothy Schmidt

negotiated-whose main function

recoverables and claims handling between

6/19/13 Tr. at 93-4 (Schmidt).

Munich's Claims Director who has overseen

Agreement from August 2007 to

Samuel J. Freda

responsible for ensuring proper reporting,

overview, reserving, and program oversight.

167-68 (Freda).

Munich's expert witness on

administration and reporting, including industry

practice with respect to claims administration

Susan Mack

generally, and in connection with commutation

provisions in the Retrocession Agreements.

at12-13 (Mack).

IOA Re's Chief Operating Officer, his involvement

Retrocession Agreements was on IOA Re's

Walter Dorosz

after coverage was bound, including

payment. 6/20/13 Tr. at 60, 67

A former IOA Re employee, she was

President and Director of Reinsurance

Cyndi Charney

oversaw staff, including claims adjusters who

processed loss notices, and payment requests.

(Charney).

IOA Re employee in the claims

Cathy Washburn

handling workers' compensation claims for the

Agreements in 2004. 6/21/13 Tr. 3, 7 (Washburn).

Currently a Munich Vice President, he served as

Ed Pawlowski

treaty underwriter for the Program

Agreements before promotion to account executive.

Tr. 4-6 (Pawlowski).

Former IOA Re employee who underwrote the

Agreements, evaluated the risks submitted,

Lisa Hoekstra

pricing for the coverage on ANICO's behalf.

(Hoekstra).

ANICO's Executive Vice President responsible

Steven Schouweiler

and health business. 6/25/13 Tr. at 130

ANICO's Vice President of Compliance,

James Stelling

(Stelling), he sent correspondence to

return of net premiums. Def.'s 269.

ANICO's expert on reinsurance

administration, the industry

Linda Martin Barber

claims handling, the duty of utmost

reinsurance industry and practice with

Retrocession Agreements' Sunset provisions.

(Barber).

Currently a Munich account manager in the business

division, he was an account executive in charge of

Thierry Verhaegen

relationship with Everest during the times

case. Id. at 37 (Verhaegen).

ANICO's expert in reinsurance

underwriting, including the placement

Richard Waterman

custom and process, and the duty owed

retrocessionaire in the underwriting process.

(Waterman).

Munich's expert in reinsurance

underwriting, including workers' compensation,

Lydia B. Kam Lyew

loss, and carve-out retrocession, and in

practice in the underwriting process,

information, and the duties owed between a

retrocessionaire. 7/2/13 Tr. at 19-20 (Lyew).

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II. FINDINGS OF FACT

A. Formation of the Retrocession Agreements

1. Underwriting Process

In entering into the Retrocession Agreements, both Munich and ANICO relied on brokers. Munich was represented by its wholly owned subsidiary, Am Re Brokers,[8] who operated as Munich's intermediary in obtaining retrocessional coverage for the Everest Agreements. 6/24/13 Tr. at 23-25 (Pawlowski). ANICO was represented by its independent broker, IOA Re, who, as noted, also represented other retrocessionaires. 6/20/13 Tr. at 65 (Dorosz). Indeed, Munich's relationship with IOA Re was not limited to the Munich-ANICO Retrocession Agreements: for every year that Munich obtained retrocessional coverage for the Everest Agreements, IOA Re acted as the retrocessional underwriter: for 1998, 1999 and the period from January 1 to October 31, 2000, IOA Re underwrote the retrocession on behalf of Continental Casualty; for the period from November 1 to December 31, 2000 and for 2001, IOA Re underwrote the retrocession on behalf of ANICO.[9] 6/24/13 Tr. at 181:9-181:15 (Hoekstra) (1998); id. at 186:13-187:19 (2000 and 2001); 6/25/13 Tr. at 22:4-29:11 (Hoekstra) (Jan. 1, 1998 to Oct. 31, 1998); id. at 29:12-61:5 (Nov. 1, 1998 to Oct. 31, 1999); id. at 61:4-79:13 (Nov. 1, 1999 to Oct. 31, 2000). IOA Re served as ANICO's reinsurance manager in placing and underwriting the retrocessional contracts; additionally, IOA Re also acted as ANICO's servicing agent, which included paying claims and receiving and distributing premiums. Id. In particular, IOA agreed to manage and administer ANICO's reinsurance business, including: marketing, underwriting, billing and processing premiums, and receiving reinsurance claims and adjusting losses. Def.'s 246 (IOA-ANICO Reinsurance Management Agreement) at 2-3; see also supra Note 3.

Lisa Hoekstra was an underwriter at IOA Re for workers' compensation excess of loss reinsurance from 1993 to 2004, and was the point of contact for Am Re Brokers with respect to obtaining retrocessional coverage for the Everest Agreements. 6/24/13 Tr. at 176:21-177:14 (Hoekstra). As an underwriter at IOA Re, it was Ms. Hoekstra's job to evaluate risks for retrocessional coverage submitted to IOA Re, and to provide proposed pricing for coverage on behalf of the companies IOA Re represented, including ANICO. Id. at 178:3-178:8.

In underwriting and proposing retrocessional coverage, IOA Re relied primarily on the nature of the insurance polices underlying the reinsurer's business, in order to ascertain the risk of loss on those policies. Thus, in the case of providing retrocessional cover for Munich's reinsurance of the Everest program, Ms. Hoekstra explained that her underwriting process focused

Page 704

on the policies written by Everest, not on Munich's reinsurance of Everest. Id. at 17:4-13. That said, as a retrocessional underwriter, Ms. Hoekstra relied on the retrocedent--Munich--to provide all information material to IOA Re's underwriting process. Id. at 178, 194.

During the period encompassing the reinsurance of the Everest program, Am Re Brokers supplied Ms. Hoekstra the same information that Munich had received from Everest in the form of an underwriting package; Ms. Hoekstra used the same underwriting package to underwrite both the 2000 Stub Year and 2001 Retrocession Agreements. Id. at 187:9-188:6; 6/25/13 Tr. at 80:18-22 (Hoekstra). It was Munich's practice, through Am Re Brokers, to supply these materials each year it sought retrocessional coverage, and to then wait for any follow up questions or additional requests from IOA Re regarding the package. 6/24/13 Tr. at 8:20-23 (Pawlowski); 7/1/13 Tr. at 66:1-16, 67:18-23, 68:18-69:7 (Verhaegen). Through this, Am Re Brokers hoped and expected that the underwriting package conveyed the information necessary to calculate IOA Re's clients' exposure, and to accurately price retrocessional coverage. 6/24/13 Tr. at 8:24-9:14 (Pawlowski). Indeed, Ms. Hoekstra agreed that the types of submissions she received from Am Re Brokers were typical of the underwriting submissions for the workers' compensation excess of loss program covered by the Everest program. 6/25/13 Tr. at 22:15-22:19 (Hoekstra).

Ms. Hoekstra did not follow any specific checklist for required underwriting submissions; however, under IOA Re's general underwriting guidelines, Ms. Hoekstra explained that she expected to receive the following information from a ceding reinsurer in order to accurately propose retrocessional coverage, each pertaining to the underlying insurer: (i) loss control, (ii) historical splits of business by hazard code by state, (iii) a summary of the underwriting, loss control and claims departments, and (iv) any audit reports. Id. at 127:8-128:6. Ms. Hoekstra further noted that beyond this information, she would not typically request other materials that may be in the retrocedent's possession because she would not be in the position to know whet other information existed; however, if she were to request, for example, audit reports, she expected to receive all such reports available to the ceding reinsurer. Id. at 126:12-17, 128:23-25. Indeed, as escribed infra, it is generally a matter of industry custom and practice for the ceding company to send an underwriting package to the retrocessionaire or its broker, and await specific follow-up questions or requests--and this was the process followed by IOA Re in the years it served as the broker underwriting the Munich retrocession. 7/2/13 Tr. at 35:22-39:12; 43:22-45:8 (Lyew). In sum, Ms. Hoekstra trusted that Munich's underwriting package contained everything material to IOA Re's underwriting process, and it was her practice, after reviewing this package, to request additional information she believed relevant and necessary to her underwriting process, and in doing so, to generally memorialize these questions in writing in her file. Id. at 20:6-21:10.

Significantly, Ms. Hoekstra explained that in calculating the premium rate for retrocessional coverage for Munich during the years covered by Munich's reinsurance of the Everest program, she relied on data related only to Everest's business, not that of Munich. In calculating a rate for retrocessional coverage, IOA Re used a " Treaty Underwriting Work Sheet" and " Basis Underwriting Information" form; these documents are completed solely from data pertaining to Everest-- e.g., the opportunity summary, description of the business to be written, underwriting guidelines, historical results, projected premium and expected loss ratios on these worksheets relate to

Page 705

Everest--and do not allow for any input of data related to the ceding reinsurer. Id. at 20:2-5, 35:20-36:11, 37:8-39:9, 41:9-45:9, 53:12-54:4, 61:19-64:7, 68:18-69:18, 81:10-24, 86:9-88:12; see also Pl.'s 50 at AAHRU 00104; Def.'s 248 at ANICO-IOA-5842, 5801. At the same time, Ms. Hoekstra would also review prior years' performance of retrocessional cover written by IOA Re for the Everest program. 6/25/13 Tr. at 21:25-22:3 (Hoekstra).

With this information, IOA Re applied its proprietary internal model to create a " manual rate" for retrocessional coverage.[10] Id. at 50:4-51:6. After the manual rate was generated, Ms. Hoekstra further discounted the rate based on discretionary adjustment factors that again related solely to Everest, not Munich.[11] Id. at 71:2-74:10. In performing each of these calculations and discounts, IOA Re does not take into account the ceding reinsurer's--Munich's--own rate that it charged Everest or the cedent's own expected loss ratio. Id. at 54:24-60:12. Similarly, Ms. Hoekstra did not factor Munich's experience into IOA Re's calculation of the rate it would propose to Munich, as Munich's reinsurance coverage of the Everest program was different than what IOA Re would propose as retrocessional coverage. Id. at 112:3-16. That said, Ms. Hoekstra conceded that had Munich disclosed additional information that it had in its possession, it is possible that IOA Re would not have entered into the Retrocession Agreements on behalf of ANICO at the same rate or at all. 6/24/13 Tr. at 208-211 (Hoekstra).

Ms. Hoekstra also learned additional information regarding Munich's reinsurance of the Everest program, outside of the underwriting packages, through discussions with Am Re Brokers. For example, Ms. Hoekstra was aware that Munich Re was losing money on the $250,000 excess $250,000 layer of its reinsurance.[12] 6/25/13 Tr. at 107:10-108:3 (Hoekstra); 110:11-111:2; Def.'s 248 at ANICO-IOA-5799.

Page 706

Indeed, at the time the Retrocession Contracts were being underwritten, IOA Re was aware of a number of losses that had reached the retrocession layer for prior years of the program, including a full limits loss in March 2000, and was projecting additional loss development to those years. 6/25/13 at 90:11-95:8 (Hoekstra); Def.'s 248 at ANICO-IOA-5807. Munich told Ms. Hoekstra that the results of Munich's prior years covering Everest were unsatisfactory, and Ms. Hoekstra's file reflects Munich was losing money on its prior years of reinsurance and was displeased with the performance of this program. 6/24/13 Tr. at 21:21-22:5 (Pawlowski); Def.'s 248 at ANICO-IOA-5799.

Ms. Hoekstra nevertheless explained that Munich's losses were not something she considered or took into account when underwriting retrocessional coverage; thus, she did not inquire further into Munich's own financial experience with the Everest program, such as why Munich was not profitable at the $250,000 excess $250,000 layer, nor did she request any information regarding Munich's own evaluation of the profitability of reinsuring Everest. 6/25/13 Tr. at 107:10-112:16, 109:21-110:9, 121:12-123:25 (Hoekstra). Rather, Ms. Hoekstra explained that, in reviewing Munich's reinsurance of Everest, she focused on the layer of coverage for which Munich was seeking retrocessional coverage; for that reason, IOA Re did not expect that that the loss ratio for Munich's reinsurance of Everest would be the same as Everest's own loss ratio or for the layer of any assumed retrocessional coverage of Munich's own layer. Id. at 66:13-67:23. Put differently, Ms. Hoekstra understood that ANICO, through IOA Re, was reinsuring only part of Munich's coverage: only losses that breached the $500,000 layer of an Everest-issued workers' compensation policy would impose liability on ANICO under the retrocession. Id. at 16:24-17:3. Because IOA Re expected there to be more losses in the $250,000 excess of $250,000 layer than in the $500,000 excess of $500,000 layer, the projected loss ratios, and corresponding premium rate, for the $750,000 excess of $250,000 layer would not be the same as the projected loss ratios and rate for the $500,000 excess $500,000 layer, notwithstanding that that layer falls within the $750,000 excess $250,000 layer. Id. at 56:16-58:2. Thus, in the case of the losses amounting to less than $500,000, Ms. Hoekstra explained that those losses did not significantly affect her underwriting of the $500,000 excess $500,000 layer because she was more focused on the potential for a catastrophic loss, not on the frequency of losses, which were different for the $500,000 excess $500,000 layer than for the layer of $0 up to $500,000. Id. at 111:3-12, 112:3-16. In Ms. Hoekstra's view, the only " sharing of risk" between Munich and ANICO would be that they both shared the common risk associated with the underlying Everest policies. Id. at 18:25-19:22. For this reason, IOA Re's calculated premium price, on behalf of ANICO, for the retrocession of the Everest program from Munich was a percentage of the premiums Everest received from the policies it issued, not the premium Munich received from Everest. Id. at 28:25-29:11.

In that connection, it was Ms. Hoekstra's assumption that Munich would be conducting its own evaluation of the Everest underwriting package, including (i) doing due diligence on the losses and loss history as well as audits of Everest and (ii) reviewing the performance of its prior years of reinsuring the Everest workers' compensation program. Id. at 21:11-24, 26:19-27:11. In spite of this assumption, Ms. Hoekstra never requested any such information from Am Re Brokers.[13] Id. at

Page 707

27:12-25.

2. Findings of Munich's (Non)disclosures

The Court finds that Munich supplied IOA Re with the same underwriting files that it received from Everest, and that Munich supplied virtually all information that IOA Re requested of Munich. Beyond that, the Court finds that Munich failed to disclose, or failed to fully disclose, information relating to Munich's own evaluation of Everest, and its reinsurance of the Everest program. I pause to note that these facts form the basis of ANICO's counterclaim for rescission, as ANICO contends that this undisclosed information was material to IOA Re's underwriting process and decision to provide retrocessional coverage. Although materiality is a question of fact, it is guided by legal principles. Thus, for ease of understanding, I set forth my findings on materiality within my analysis of ANICO's counterclaim, infra .

a. Munich's Review of Changes to Everest's Business in and around 2000

Thierry Verhaegen, the account manager of the Everest Agreements in the business runoff operations at Munich, 7/1/13 Tr. at 37:1-37:15 (Verhaegen), explained that Munich first looked to Everest because Munich was interested in growing its workers' compensation line of business. Id. at 37. Initially, Mr. Verhaegen considered Everest's business to be " pretty poor." [14] Def.'s 229; 7/1/13 Tr. at 75 (Verhaegen). However, Munich's view of the Everest program quickly changed to positive, and Munich continued to renew the program, sometimes at reduced rates. 7/1/13 Tr. at 42:10-45:8 (Verhaegen); Pl.'s 70. In that connection, in or around August 2000, Everest informed Munich that it would be adding a book of business from a new managing general agent (" MGA" ), American All Risk Insurance Services (" AARIS" ), to its program beginning on November 1, 2000, and thus Munich was required to consider the consequences to its reinsurance based on this additional book of underlying policies. Def.'s 67; 6/24/13 Tr. at 31-32 (Pawlowski). Mr. Verhaegen explained that this was initially received as " good news," because it would double the size of the Everest program, allowing Munich to further expand its workers' compensation line of business Def.'s 248 at ANICO-IOA-5786; Pl.'s 94; 7/1/13 Tr. at 45:17-47:1 (Verhaegen).

Munich proceeded to review AARIS from an underwriting standpoint in September 2000. Def.'s 281 at MRAM-06-01337. At the time, Ed Pawlowski, Munich's treaty underwriter on the Everest program, see 6/24/13 Tr. at 4-6 (Pawlowski), sent an email to Mr. Verhaegen with

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respect to Munich's current estimated premium after the inclusion of AARIS; in particular, Mr. Pawlowski was concerned that AARIS had unfavorable historical losses. Def.'s 70; 6/24/13 Tr. at 74-76 (Pawlowski). In October 2000, Mr. Verhaegen sent an email to Everest expressing these concerns regarding the AARIS book of business, and on November 2, 2000, Mr. Verhaegen sent Everest another email regarding an AARIS claims review, specifically noting that one of Munich's concerns about AARIS was the " stair-stepping" of reserves.[15] Def.'s 78, 238.

Much of these discussions relating to AARIS were not disclosed to IOA Re. That said, Munich's internal evaluation of AARIS was based off of the same underwriting package from Everest that IOA Re had for retrocessional coverage purposes. 6/24/13 Tr. at 76:15-76:25 (Pawlowski). Further, when Ms. Hoekstra requested specific loss history for AARIS, Am Re Brokers provided her with an underwriting audit report of AAIRS from September 2000. After reviewing this audit report, Ms. Hoekstra determined that the audit report was " favorable" in that it would support extending retrocessional coverage of the Everest program even with the inclusion of the AARIS book of business. Def.'s 248 at ANICO-IOA-5786; 6/25/13 Tr. at 113:20-115:19 (Hoekstra); 6/24/13 Tr. at 195:2-5 (Hoekstra).

b. Fay Isik Memorandum

Munich did also not disclose to IOA Re a memorandum from Fay Isik, a former Munich underwriter for the Everest program, to her replacement, Mr. Pawlowski, who, as noted, served as Munich's underwriter of the reinsurance of Everest for the 2000 and 2001 years. Def.'s 69. In the memorandum, Ms. Isik provided a retrospective assessment and summary of the performance of the Everest program from its inception up to the date of August 15, 2000, and explained, inter alia, that (i) Everest and Munich considered their relationship to be " opportunistic," [16] (ii) an actuarial exposure rating study had been prepared due to recent loss activity, (iii) Munich needed a rate increase, which had already been discussed with Everest, (iv) a statistical study had been performed in October 1999, and was scheduled to be updated in August 2000,[17] (v) in 2000, several underwriting reviews had been performed, and one included a " needs improvement" recommendation,[18] and (vi) Munich was projecting

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a loss ratio of 150 percent on its own coverage for the 2000 year. Id. ; 6/24/13 Tr. at 6, 31, 52-57, 142-144 (Pawlowski); Def.'s 69. Most of these details were not disclosed to IOA Re at the time of the formation of the Retrocession Agreements.[19]

c. Munich's Rate Calculations

Around the time that Munich was seeking to renew its retrocessional coverage of the Everest Agreements, Munich had sustained higher than expected losses to its reinsurance of the Everest program, which led Munich to increase its premium rate going forward. 7/1/13 Tr. at 47:12-48:23 (Verhaegen); 6/24/13 Tr. at 48 (Pawlowski); Def.'s 69 at MRAM-06-00708. Nevertheless, Munich still decided to extend its coverage of the Everest program without first obtaining continuing retrocessional coverage; this decision was made because Everest agreed to pay a new higher premium rate, which satisfied Munich's underwriting guidelines without the need for a retrocession. 6/24/13 Tr. at 100:15-24, 101:4-9, 157:15-158:3, 160:25-161:18, 164:22-165:13 (Pawlowski); Def.'s 77. Although these facts were generally known or apparent to IOA Re, see 6/25/13 Tr. at 21:11-15 (Hoekstra), the specifics underlying Munich's decision to renew its coverage of the Everest Agreements, such as the actual premium rate, were not provided to Ms. Hoekstra or IOA Re.

In determining whether to renew the Everest programs for 2000, Munich reviewed underwriting information from prior years. 6/24/13 Tr. at 14-15 (Pawlowski). For example, on August 28, 2000, an underwriting experience report of the entirety of Munich's coverage of Everest--including the carve out layer that ANICO eventually assumed--revealed a loss.[20] Id. at 62 (Pawlowski); Pl.'s 98. A September 10, 2000 rate study on the Everest program was also run in a manner that included the carve out layer. 6/24/13 Tr. at 72 (Pawlowski); Def.'s 235. Beyond these studies, Munich's internal correspondence shows that while Munich's overall evaluation of reinsuring the Everest program was positive, Munich did not expect to make much money off of Everest, if at all; [21] however, Munich expected that renewing the Everest business for 2001 would make sense from an overall business and economic standpoint. Def.'s 239; 6/24/13 Tr. 95-97 (Pawlowski); id. at 173:15-174:24 (Pawlowski). These internal communications, including Munich's loss ratios for years prior to 2000, were not shared with IOA Re during the underwriting of the retrocessional agreements.[22]

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d. Munich's Underwriting Standards

Munich relied not only on underwriting profitability in determining whether to renew its reinsurance coverage of Everest, but also on profits gained off investments made from premiums. 7/1/13 Tr. at 144 (Verhaegen); 6/24/13 Tr. at 139 (Pawlowski). Munich did not disclose to IOA Re that it was considering investment gain as a portion of its profitability on the Everest program, although it was not uncommon for workers' compensation reinsurers to do so at that time. 6/24/13 Tr. 139; 140-42 (Pawlowski).

Similarly, Munich also did not fully disclose to IOA Re that it was considering using an offshore entity, Inter-ocean, for the 2001 renewal of Munich's coverage of the Everest program. See id. at 117. At the time, Munich determined that if it was unable to adjust its pricing rate, its internal guidelines would have required Munich to move its reinsurance of the Everest program into an entity like Inter-ocean for accounting purposes. Def.'s 72; Def.'s 238 at MRAM-23-00066; Def.'s 248 at ANICO-IOA-05786. Munich only disclosed to IOA Re that it was considering Inter-ocean for tax discount purposes. Def.'s 248 at ANICO-IOA-05786. Ultimately, Munich did not need to proceed with using Inter-ocean because it obtained a more favorable pricing rate with Everest. 6/24/13 Tr. at 174:25-175:1 (Pawlowski); 7/1/13 Tr. at 48:24-49:22, 52:2-57:24 (Verhaegen); Pl.'s 125.

e. Commodore

Also around the time that Munich was entering into the Retrocession Agreements, it was arranging with Everest to make adjustments on another, unrelated reinsurance program between Everest and Munich, named Commodore. 24/13 Tr. at 90 (Pawlowski); Def.'s 238; see also Def.'s 219. The Commodore program, which was coming to an end around 2000, had performed unsatisfactorily from Munich's perspective, and so Munich negotiated retroactive adjustments of Commodore, in the form of a payback,[23] as part of Munich's agreement to continue reinsuring Everest's workers' compensation program. Def.'s 238; 6/24/13 Tr. at 175:2-5 (Pawlowski); 7/1/13 Tr. at 58:6-60:19 (Verhaegen). Although Munich received this adjustment on Commodore in connection with the workers' compensation program, Munich's decision to continue to reinsure Everest was not contingent on the Commodore adjustments or vice-versa; nevertheless, IOA Re was not made aware of Munich's deal with Everest regarding Commodore. 6/24/13 Tr. at 90-91, 93, 127, 175 (Pawlowski); 7/1/13 Tr. at 58:6-60:19 (Verhaegen).

3. Expert Testimony on Underwriting

Both Munich and ANICO presented testimony at trial from experts in the field of insurance and reinsurance underwriting concerning the formation of the Retrocession Agreements.[24] Munich relied on Ms. Lydia Kam Lyew, and ANICO on Richard

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Waterman. Ms. Lyew has extensive and current experience working for companies that assume and cede reinsurance, and has extensive experience underwriting workers' compensation reinsurance and workers' compensation carve out reinsurance. 7/2/13 Tr. at 10:25-18:19 (Lyew). Mr. Waterman also has extensive experience in the field of reinsurance; however, he has not been employed by a company that assumes or cedes reinsurance for more than 20 years and has never underwritten workers' compensation carve out reinsurance. 7/1/13 Tr. at 151:12-151:23 (Waterman).

Ms. Lyew testified that the relevant material information that needed to be disclosed between Munich and IOA Re was all information pertaining to the layer that ANICO would be reinsuring, as well as information about Everest, i.e., the same materials that were available to Munich. 7/2/13 Tr. at 24:9-24:22, 25:6-27:17, 70:7-70:17 (Lyew). With regard to industry customs and practices, Ms. Lyew testified that ceding companies typically send underwriting packages like those sent by Munich to the reinsurer or retrocessionaire, or the broker, and then expect the reinsuring entity or broker to follow up with any questions or requests for additional information. Id. at 35:22-39:12, 43:22-45:8. To that end, Ms. Lyew explained that the ceding company would not typically include in the underwriting package (i) audit reports that do not contain materially adverse information--and stair stepping of reserves was not, at the time, considered in the industry to be materially adverse information; (ii) loss ratios for prior coverage years; or (iii) the use or proposed use of an offshore entity. Id. at 22:6-17, 23:6-14, 40:11-43:21, 45:20-46:14, 52:12-57:5, 61:18-25, 62:10-64:8, 83:5-85:24.

Mr. Waterman agreed that the standard between the cedent and the reinsurer is to disclose all information reasonably material to the underwriting process. 7/1/13 Tr. at 194:7-8 (Waterman). Mr. Waterman disagreed with Ms. Lyew as to what constituted " material" information, for example, testifying that it would be material for an underwriter, such as Ms. Hoekstra, to know (i) that Munich had loss ratios over 150% on its prior coverage of the Everest program, (ii) the reasons Munich was considering using an offshore entity, and (iii) of the stair-stepping of reserves at MGAs covered by the Everest program. Id. at 156:2-159:1. According to Mr. Waterman, this information should have been disclosed because it was clear to him that, in pricing and assessing the risk of the Everest program, Munich was relying on information not contained in the underwriting package that it shared with IOA Re. Id. at 159:2-20.

The Court determines that while both witnesses were generally credible, based on the testimony of the experts and the testimony of the other witnesses, Ms. Lyew's descriptions of the industry customs and practices were better supported. Ms. Lyew's explanation that the ceding reinsurer typically sends the underwriting package to the retrocessionaire in the same form as the reinsurer receives it, and then waits for any follow up from the retrocessionaire, aligns with Ms. Hoekstra's testimony and IOA Re's business practices. Compare 7/2/13 Tr. at 35:22-39:12, 43:22-45:8 (Lyew) with 6/25/13 Tr. at 107:10-112:16 (Hoekstra). Moreover, Mr. Waterman agreed with Ms. Lyew that a potential retrocessional such as ANICO, or its experienced broker IOA Re, would know and expect that the ceding reinsurer would be conducting internal audits of the underlying program, and that the ceding reinsurer does not have an affirmative duty to disclose audit reports in its possession if those reports do not contain materially adverse information. 7/1/13 Tr. at 188:7-190:8 (Waterman); 7/2/13 Tr. at

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8:13-8:25 (Waterman). Indeed, Mr. Waterman further agreed that it is incumbent on the retrocessionaire, or its broker, to request from the ceding reinsurer any audits or other information of which it may be aware. 7/1/13 Tr. at 191:7-191:16 (Waterman). Overall, given that Mr. Waterman does not have recent experience in underwriting reinsurance, or any experience with workers' compensation carve out reinsurance, I place little weight on his description of what information would be " material" to a retrocessionaire underwriter.

4. Munich's Payment Demand and Schouweiler's Testimony

Steven Schouweiler is an Executive Vice-President for ANICO, responsible for the accident and health business, including the business covered by the Retrocession Agreements. 6/25/13 Tr. at 130:13-130:17 (Schouweiler). At a certain point after litigation began in the instant case, Mr. Schouweiler determined that there were sufficient facts being disclosed in discovery previously unknown to him, ANICO, or IOA Re, that would justify rescission of the Retrocession Agreements--particularly deposition testimony from Mr. Pawlowski. 6/25/13 Tr. 133 (Schouweiler); see Def.'s 67-70, 72, 76-77, 81-82. Indeed, much of Mr. Schouweiler's basis for rescission turns on the discovery, following Mr. Pawlowski's deposition, of Munich's internal calculations of its estimated loss ratios for the years covered by the Retrocession Agreements, which, as noted above, were not disclosed to IOA Re. 6/25/13 Tr. at 133 (Schouweiler). After this point, ANICO did not receive premium from, or pay any claims to, Munich, and shortly thereafter, in January 2011, ANICO moved to amend its answer to include the rescission counterclaim, which motion was granted in April 2011.[25]

In addition to a tender of premium allegation in ANICO's Amended Answer, ANICO wrote to Thomas Mauch, Munich's senior accounting manager, in December and offered a tender in the amount of premiums received, offset pursuant to the contracts by amounts paid by ANICO for claims.[26] Def.'s 269. Around this time, in ANICO and Munich realized that they had different understandings of the amount of premiums Munich had paid under the Retrocession Agreements, to wit, whether ANICO, through IOA Re, had received premium payments for the 2000 Stub Year. Munich therefore rejected ANICO's tender offer, inter alia, because it did not include remittance of the premiums Munich had paid IOA Re for the 2000 Stub Year. Def.'s 270.

Upon further investigation by Munich and IOA Re in 2012, the following facts became apparent regarding the 2000 Stub Year premium. During the years that Munich obtained retrocessional coverage for the Everest program between 1998 and 2001, IOA Re, in addition to acting as the broker, operated as a servicing agent by paying claims and receiving and distributing premiums for retrocessional companies. These companies included Continental Casualty, whose coverage was managed by a " runoff manager" known at times as either Castlewood, International Solutions, or ENSTAR (collectively, " Castlewood" ).[27]

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See 6/20/13 Tr. at 93:3-94:16 (Dorosz). Prior to the 2000 Stub Year, Munich had obtained from IOA Re retrocessional coverage from Continental Casualty for the period from November 1, 1999 to October 31, 2000 (the " 1999 Year" ). Id. at 92:23-93:15. Following the expiration of Continental Casualty's coverage of Munich at the end of the 1999 Year, Castlewood took over Continental Casualty's business as its runoff manager; Continental Casualty's records and premiums were transferred to Castlewood, and Munich's future claims were directed to Castlewood. Id. at 93:16-95:11, 96:11-22. Review of Munich's files reveal that when Munich remitted payment to IOA Re in 2002,[28] it supplied a check in the amount necessary to cover premiums for both the 1999 Year and the 2000 Stub Year, but failed to indicate to IOA Re that the check was intended to cover both years; instead, it appeared from Munich's remittance that the check was intended for only the 1999 Year.[29] See id. at 109:12-110:16; Pl.'s 20; Def.'s 314. Accordingly, IOA Re sent the entire payment that Munich submitted for both the 1999 Year and the 2000 Stub Year to Continental Casualty/Castlewood; only after IOA Re reviewed its files in 2012 did it determine that the amount remitted by Munich at that time should have been applied to both the 1999 Year and the 2000 Stub Year. 6/20/13 Tr. at 109:12-110:16; 174-76 (Dorosz); Pl.'s 20; Def.'s 313-15. Indeed, in an email response to Munich following this discovery, Mr. Dorosz stated that it he was " not sure how anyone would have been able to determine that the [Stub Year] was included in what you sent me." Def.'s 313. Both IOA Re's and ANICO's subsequent attempts to determine if Continental Casualty/Castlewood actually received the premium for the 2000 Stub Year have been unavailing, and thus ANICO contends it cannot tender that premium because it never received it. 6/20/13 Tr. at 105:23-106:20 (Dorosz); 6/25/13 Tr. 153-54 (Stelling).

In light of the foregoing, the Court finds that IOA Re received the 2000 Stub Year premium, but erroneously, based on Munich's failure to properly identify the payment, remitted the premium to Castlewood Casualty/Continental as part of the 1999 Year adjusted premium; the Court further finds that Mr. Stelling credibly testified that ANICO itself has never received the premium for the 2000 Stub Year.

B. Claims Reporting under the Retrocession Agreements

1. Munich's Reporting Procedures

As discussed above, Munich's reinsurance obligations and ANICO's retrocessional obligations related to the Retrocession Agreements arise solely from claims paid by Everest on its workers' compensation polices under the Everest Agreement. In that connection, Article X of the Retrocession Agreements (" Article X" ) provides in relevant part:

A. [Munich] agrees to advise [IOA Re for and on behalf of ANICO] promptly of all claims under this Agreement on being advised by [Everest ...

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