Compagnie de France v. New England Corp
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Compagnie de France v. New England Corp, (1st Cir. 1995).
Opinion
USCA1 Opinion
J u n e 2 2 , 1 9 9 5
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
____________________
No. 93-2338
COMPAGNIE DE REASSURANCE D'ILE DE FRANCE, ET AL.,
Plaintiffs, Appellants,
v.
NEW ENGLAND REINSURANCE CORPORATION, ET AL.,
Defendants, Appellees.
____________________
No. 93-2339
COMPAGNIE DE REASSURANCE D'ILE DE FRANCE, ET AL.,
Plaintiffs, Appellees,
v.
NEW ENGLAND REINSURANCE CORPORATION, ET AL.,
Defendants, Appellants.
____________________
ERRATA SHEET
The opinion of this court issued on June 19, 1995, is amended as
follows:
p.48, l.4: Change "note 24" to "note 20".
p.49, l.15: Change "note 23" to "note 21".
p.87, l.18: Change "occurred" to "did not occur".
p.91, l.4: Change "the plaintiff appeal" to "the plaintiffs
appeal".
p.91, n.34, 3rd line from bottom: Change "n.18" to "n.16".
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
____________________
No. 93-2338
COMPAGNIE DE REASSURANCE D'ILE DE FRANCE, ET AL.,
Plaintiffs, Appellants,
v.
NEW ENGLAND REINSURANCE CORPORATION, ET AL.,
Defendants, Appellees.
____________________
No. 93-2339
COMPAGNIE DE REASSURANCE D'ILE DE FRANCE, ET AL.,
Plaintiffs, Appellees,
v.
NEW ENGLAND REINSURANCE CORPORATION, ET AL.,
Defendants, Appellants.
____________________
APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Edward F. Harrington, U.S. District Judge] ____________________
____________________
Before
Torruella, Chief Judge, ___________
Campbell, Senior Circuit Judge, ____________________
and Carter, District Judge.* ______________
Robert S. Frank, Jr. with whom Cynthia T. MacLean, David A. ______________________ ___________________ _________
Attisani, Choate, Hall & Stewart, David S. Mortensen and Tedeschi, ________ ________________________ ___________________ _________
Grasso & Mortensen were on brief for defendants. __________________
Allan B. Taylor, with whom William Shields, Kenneth W. Ritt, ________________ _______________ ________________
Matthew E. Winter, Mary Theresa Kaloupek and Day, Berry & Howard were _________________ _____________________ ____________________
on brief for plaintiffs.
____________________
____________________
____________________
*Of the District of Maine, sitting by designation.
CAMPBELL, Senior Circuit Judge. This is an appeal ____________________
from a final judgment of the district court in an action
brought by a number of foreign reinsurance syndicates,
companies and pools against a domestic reinsurance company
and related parties. At issue are reinsurance contracts (or
"treaties," as they are known) under which plaintiffs,
Compagnie De Reassurance D'Ile de France, et al.,1 agreed to
reinsure portions of risks selected, and also reinsured, by
defendant New England Reinsurance Corp. ("NERCO"). After
sustaining heavy losses under these Treaties, plaintiffs sued
defendants NERCO, First State Insurance Company ("First
State"), and Cameron and Colby Co., Inc. ("Cameron & Colby"),
alleging that they had been induced to enter into the
reinsurance treaties by fraud, and further claiming breach of
contract, violations of Mass. Gen. L. ch. 93A, 2, and
violations of the Racketeer Influenced and Corrupt
Organizations Act ("RICO"), 18 U.S.C. 1961-1968.
Defendants counterclaimed, alleging breach of contract and
violations of Mass. Gen. L. ch. 93A, 2. Following a 30-day
____________________
1. The plaintiffs are listed in the district court's
opinion. See Compagnie de Reassurance D'Ile de France v. New ___ ________________________________________ ___
England Reinsurance Corp., 825 F. Supp. 370, 373 n.2 (D. __________________________
Mass. 1993). Plaintiffs Pohjola Insurance Company Ltd. and
Pohjola Insurance Company (UK) Limited were dismissed on
motion of the defendants, with the consent of the plaintiffs
during the trial, and the parties entered a Stipulation of
Dismissal dated May 5, 1995, whereby plaintiff De Centrale
Herzverzekering N.V. dismissed its appeal in No. 93-2338, and
the defendants dismissed their appeal in No. 93-2339 against
De Centrale only, leaving 31 plaintiffs remaining.
-4-
bench trial, the district court found for the plaintiffs on
all but the RICO claims. The court ordered rescission of the
challenged reinsurance Treaties and ordered defendants to pay
plaintiffs $38,118,940.07, representing all sums plaintiffs
had previously paid out on losses incurred under the Treaties
with credit for premiums received, plus prejudgment interest
at 12 percent. Defendants estimate that the net cost to them
of the court's decision, adding together the court's judgment
and the sums plaintiffs have been excused from paying out as
reinsurers of various losses, is approximately $106 million.
Free access — add to your briefcase to read the full text and ask questions with AI
USCA1 Opinion
J u n e 2 2 , 1 9 9 5
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
____________________
No. 93-2338
COMPAGNIE DE REASSURANCE D'ILE DE FRANCE, ET AL.,
Plaintiffs, Appellants,
v.
NEW ENGLAND REINSURANCE CORPORATION, ET AL.,
Defendants, Appellees.
____________________
No. 93-2339
COMPAGNIE DE REASSURANCE D'ILE DE FRANCE, ET AL.,
Plaintiffs, Appellees,
v.
NEW ENGLAND REINSURANCE CORPORATION, ET AL.,
Defendants, Appellants.
____________________
ERRATA SHEET
The opinion of this court issued on June 19, 1995, is amended as
follows:
p.48, l.4: Change "note 24" to "note 20".
p.49, l.15: Change "note 23" to "note 21".
p.87, l.18: Change "occurred" to "did not occur".
p.91, l.4: Change "the plaintiff appeal" to "the plaintiffs
appeal".
p.91, n.34, 3rd line from bottom: Change "n.18" to "n.16".
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
____________________
No. 93-2338
COMPAGNIE DE REASSURANCE D'ILE DE FRANCE, ET AL.,
Plaintiffs, Appellants,
v.
NEW ENGLAND REINSURANCE CORPORATION, ET AL.,
Defendants, Appellees.
____________________
No. 93-2339
COMPAGNIE DE REASSURANCE D'ILE DE FRANCE, ET AL.,
Plaintiffs, Appellees,
v.
NEW ENGLAND REINSURANCE CORPORATION, ET AL.,
Defendants, Appellants.
____________________
APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Edward F. Harrington, U.S. District Judge] ____________________
____________________
Before
Torruella, Chief Judge, ___________
Campbell, Senior Circuit Judge, ____________________
and Carter, District Judge.* ______________
Robert S. Frank, Jr. with whom Cynthia T. MacLean, David A. ______________________ ___________________ _________
Attisani, Choate, Hall & Stewart, David S. Mortensen and Tedeschi, ________ ________________________ ___________________ _________
Grasso & Mortensen were on brief for defendants. __________________
Allan B. Taylor, with whom William Shields, Kenneth W. Ritt, ________________ _______________ ________________
Matthew E. Winter, Mary Theresa Kaloupek and Day, Berry & Howard were _________________ _____________________ ____________________
on brief for plaintiffs.
____________________
____________________
____________________
*Of the District of Maine, sitting by designation.
CAMPBELL, Senior Circuit Judge. This is an appeal ____________________
from a final judgment of the district court in an action
brought by a number of foreign reinsurance syndicates,
companies and pools against a domestic reinsurance company
and related parties. At issue are reinsurance contracts (or
"treaties," as they are known) under which plaintiffs,
Compagnie De Reassurance D'Ile de France, et al.,1 agreed to
reinsure portions of risks selected, and also reinsured, by
defendant New England Reinsurance Corp. ("NERCO"). After
sustaining heavy losses under these Treaties, plaintiffs sued
defendants NERCO, First State Insurance Company ("First
State"), and Cameron and Colby Co., Inc. ("Cameron & Colby"),
alleging that they had been induced to enter into the
reinsurance treaties by fraud, and further claiming breach of
contract, violations of Mass. Gen. L. ch. 93A, 2, and
violations of the Racketeer Influenced and Corrupt
Organizations Act ("RICO"), 18 U.S.C. 1961-1968.
Defendants counterclaimed, alleging breach of contract and
violations of Mass. Gen. L. ch. 93A, 2. Following a 30-day
____________________
1. The plaintiffs are listed in the district court's
opinion. See Compagnie de Reassurance D'Ile de France v. New ___ ________________________________________ ___
England Reinsurance Corp., 825 F. Supp. 370, 373 n.2 (D. __________________________
Mass. 1993). Plaintiffs Pohjola Insurance Company Ltd. and
Pohjola Insurance Company (UK) Limited were dismissed on
motion of the defendants, with the consent of the plaintiffs
during the trial, and the parties entered a Stipulation of
Dismissal dated May 5, 1995, whereby plaintiff De Centrale
Herzverzekering N.V. dismissed its appeal in No. 93-2338, and
the defendants dismissed their appeal in No. 93-2339 against
De Centrale only, leaving 31 plaintiffs remaining.
-4-
bench trial, the district court found for the plaintiffs on
all but the RICO claims. The court ordered rescission of the
challenged reinsurance Treaties and ordered defendants to pay
plaintiffs $38,118,940.07, representing all sums plaintiffs
had previously paid out on losses incurred under the Treaties
with credit for premiums received, plus prejudgment interest
at 12 percent. Defendants estimate that the net cost to them
of the court's decision, adding together the court's judgment
and the sums plaintiffs have been excused from paying out as
reinsurers of various losses, is approximately $106 million.
Defendants have appealed from the judgments for
plaintiffs on the fraud, contract and Mass. Gen. L. ch. 93A
claims. Plaintiffs have cross-appealed from the district
court's dismissal of their RICO claim. For the reasons set
forth below, we sustain the district court's findings and
rulings on certain matters; reverse others as being clearly
erroneous or legally incorrect; and identify still others
that require the district court to make findings and rulings
now absent. We, therefore, vacate the district court's
judgments and remand for further proceedings consistent
herewith. Our specific dispositions are summarized on pages
98-100 of this opinion.
I. Background Background
The following is an overview. More specific facts
will be related as needed in our discussion of the various
-5-
issues.
The defendants are all subsidiaries of the Hartford
Group of Insurance Companies ("the Hartford").2 First
State, based in Boston, Massachusetts, was a primary insurer.
NERCO was a Boston-based reinsurer. Cameron & Colby, also
based in Boston, provided management, marketing,
underwriting, and other services to both First State and
NERCO. Neither First State nor NERCO had employees of its
own; their businesses were carried on by employees of Cameron
& Colby. Graham Watson, Inc.,3 not a party, was created in
1979 as an unincorporated division of Cameron & Colby; it
became the latter's wholly owned subsidiary in mid-1980.
Graham Watson's role was to provide marketing and
underwriting services in the facultative4 reinsurance
venture that is the subject of this litigation.
____________________
2. The relationship between these defendants and their
corporate parents, the Hartford and ITT, is described in the
district court's opinion, 825 F. Supp. at 373. Neither the
Hartford nor ITT is a party to this case.
3. This entity is variously referred to as "Graham-Watson"
and "Graham Watson" in the documents contained in the record.
Like the district court, we will use the unhyphenated form,
unless quoting directly a source using the hyphenated form.
4. Facultative reinsurance is one of the two major types of
reinsurance, the other being treaty reinsurance. From the
Latin word for "ability" or "power," "facultative," broadly
speaking, connotes the option to reinsure, or not, each
particular risk, as contrasted with a binding arrangement to
reinsure all risks of a particular sort. See infra. A major ___ _____
issue in this case is whether the reinsurance provided by
defendants was "facultative," as promised in the SANS
Treaties.
-6-
The underlying casualty and property risks germane
to this case were located in North America. Individuals and
entities wishing to insure against these risks procured
policies of insurance from primary insurers. The latter then
purchased reinsurance from NERCO in order to indemnify
themselves in whole or in part against losses sustained under
the primary policies they had issued.
Not wanting to keep all the exposure that it had
assumed as a reinsurer, NERCO itself often acting with and
through Graham Watson sought reinsurance on the London
insurance market, resulting in the arrangements with which
this lawsuit is concerned. Under these reinsuring agreements
-- the so-called System and Non-System ("SANS") Treaties --
many syndicates at Lloyd's of London and other overseas
reinsurance entities (some of whom are the plaintiffs in this
case) agreed to provide continuing reinsurance to NERCO on a
portion of each risk it reinsured. In industry terminology,
NERCO, having been "ceded" the risks by the primary insurers,
became a "retrocedent," the plaintiffs became
"retrocessionaires," and the agreements between them were
"retrocessional" treaties. The plaintiff retrocessionaires
agreed to indemnify NERCO for a portion of any losses NERCO
might sustain in its reinsurance of primary insurers. In
return, NERCO promised to acquire ("produce"), evaluate
("underwrite"), and price ("rate") the risks and to share
-7-
with plaintiff retrocessionaires, subject to its retention of
certain commissions, a portion of the premium it received.
A. Signing the Treaties Signing the Treaties
In 1979, NERCO retained a U.S. broker, G.L. Hodson,
to assist it in arranging for this reinsurance on the London
market. Towards this end, Graves Hewitt, the CEO of Cameron
& Colby, and his associates drafted and circulated in late
1979 a document known as the Placing Information. This
document stated that Cameron & Colby had established the
Graham Watson division after studying facultative reinsurance
operations in North America and after receiving the approval
and support of the Hartford and ITT.5 The stated purpose of
the division was:
1. To participate in the property and
casualty facultative reinsurance
business which is currently
dominated by the direct writers.
2. To rationalise [sic] the facultative
placements of both the Hartford and
the First State not only from an
administration [sic] point of view
but also to provide the
retrocessionaires with a broad cross
section of facultative reinsurance
emanating from these two companies.
According to the Placing Information, Graham Watson was
____________________
5. Plaintiffs' fraud claims rely significantly on
representations made in the Placing Information, especially
those pertaining to Graham Watson's intention to procure non-
brokered, "direct" business from "selected primary companies"
rather than brokers. We attach as an appendix a copy of the
Placing Information typically circulated to the plaintiffs.
-8-
charged with penetrating the "non-brokered . . . direct
professional reinsurance market," leaving "[f]acultative
reinsurance emanating from reinsurance intermediaries . . .
[to] continue to be written separately through NERFAC," the
latter being an existing in-house entity that had, for some
time, been writing reinsurance for the defendants. The
Placing Information was circulated to, among others, several
European sub-brokers retained by Hodson to act on NERCO's
behalf in seeking potential retrocessionaires.6
In late 1979, Hewitt traveled to London accompanied
by Thomas Hearn, a Hodson employee. Aided by employees of
sub-broker Sedgwick Payne, they approached Ralph Bailey, the
head underwriter for plaintiff Terra Nova Insurance Company
Limited, and described to him the proposed reinsurance plan.
Sedgwick-Payne's brokers thereafter negotiated with Bailey
the "slips" spelling out the terms of the treaties. With
Bailey agreeing to act as "lead underwriter" for the London
market companies, the brokers approached Ron Kellet, head
underwriter for plaintiff B.P.D. Kellet & Others, a Lloyd's
syndicate, with the request that he act as lead underwriter
____________________
6. These included Sedgwick Payne, North American Reinsurance
Brokers Ltd.; Anglo-Swiss Reinsurance Brokers, Ltd.; Carter
Brito E Cunha Ltd.; Fielding & Partners; and Jardine Thompson
Graham Ltd. None of the sub-brokers are parties to this
suit.
-9-
on behalf of all other Lloyd's syndicates.7 After the leads
had stamped and initialed the slips, indicating the
proportion of the total risk they were bound to accept, the
slips were separately presented for approval to the
underwriters for each of the plaintiffs,8 each of whom
indicated his or her acceptance of a portion of the risks by
____________________
7. A lead underwriter is initially responsible for
negotiating the terms of reinsurance contracts such as the
SANS Treaties. The lead underwriter normally commits his or
her firm or syndicate to a level of participation in a treaty
that is somewhat higher than that of other participating
reinsurers, who are referred to as the "following market."
Members of the following market rely on the underwriting
skill and judgment of the lead as an important factor when
deciding whether and by how much to commit themselves on
reinsurance obligations. Thus, having a reputable
underwriter as lead can have a significant effect on the
ability to fully place a retrocessional treaty. There were
actually two lead underwriters in this case: Bailey for the
London market companies and Kellett for the Lloyd's
syndicates. See Edinburgh Assur. Co. v. R.L. Burns Corp., ___ _____________________ _________________
479 F.Supp. 138, 145 n.2 (C.D. Cal. 1979) ("The market
sometimes recognizes both a lead underwriter at Lloyd's and a
lead company underwriter."), aff'd in relevant part, 669 F.2d ______________________
1259 (9th Cir. 1982).
8. Not all of the 31 plaintiffs participated in all four
years of the SANS Treaties. (28 of the plaintiffs
participated in the 1980 SANS Treaties; 29 participated in
1981; 27 participated in 1982; and 15 participated in 1983.)
However, the process of stamping and initialling the slips to
indicate acceptance of a portion of the risk was repeated in
each of the following three years (1981-83) with respect to
each individual plaintiff. We also note that the plaintiffs
were not the only retrocessionaires participating in the SANS
Treaties; in all, approximately 100 separate entities
accepted portions of these risks over the four years in
question.
-10-
initialing the slip.9
These slips constituted, in abbreviated form, the
contracts between the cedent NERCO and the various
retrocessionaires.10 Briefly summarized, the slips
provided that the subject matter of the Treaties was
"Business classified by the Reassured [NERCO] as Property and
Casualty Facultative Assumed business produced and
underwritten by the Graham Watson division of Cameron & Colby
Co., Inc." They also stated that the Lead Underwriter had
authority to require exclusion of certain types of risks, and
to agree to the final wording of the formal contract. NERCO
was to retain a minimum of $250,000 of each risk ceded, and
as respects system business (i.e., risks written by First
State and other Hartford entities, infra), was not to cede _____
more than 50 percent of the original reinsurance limit of any
given risk to the Treaties, and was to co-reinsure for 10
percent participation on each such risk. The slips also
specified the commission structure and various other
conditions of the Treaties. The slips did not incorporate
the Placing Information as such.
Each underwriter subsequently signed Treaty
____________________
9. For a detailed discussion of the business practices of
the London insurance market, see Edinburgh Assur., 479 F. ___ ________________
Supp. at 144-46.
10. We place in the appendix portions of one of the typical
slips utilized here.
-11-
Wordings, formal contracts containing a more elaborate
statement of the parties' agreements. These were based on
the slips, and the parties agreed that, in the event of any
inconsistency, the slips would control. The first set of
SANS Treaties ran for the eleven month period from February 1
through December 31, 1980. Thereafter, those plaintiffs who
desired to continue for another year indicated their
willingness to join by initialling new slips and ultimately
executing new Treaty Wordings for 1981. Successive Treaties
were entered into for 1982 and for 1983. Some of the
plaintiffs entered into Treaties for each of the four years;
others were parties to the Treaties for only one, two, or
three of those years. The Treaties were open to
renegotiation each year, and certain changes, e.g., relating
to commission structure and the like, were in fact made.
For each Treaty year there were actually two slips
prepared, one for property business and one for casualty
business. The business covered by each slip was further
divided into "system business" and "non-system business."
"System business" denoted risks written by member companies
of the Hartford, and included, among others, First State and
the Hartford itself. "Non-system business" referred to risks
written by any other primary insurer. As a condition of
participation, although not included in the written
contracts, Bailey insisted that no non-system business be
-12-
ceded to the SANS Treaties for the first year. He testified
in his deposition that this was because he felt that the
system business was "the steadier, better part of the
portfolio."
B. Performance of the Treaties Performance of the Treaties
Once the Treaties were fully placed for the 1980
treaty year, NERCO began retroceding to the plaintiffs
portions of the risks it was reinsuring. Central to the
plaintiffs' present complaint, and to the district court's
finding of liability, are the source and nature of NERCO's
business as ceded to them. In the first year, over 95
percent of the business so ceded was system business.
However, few, if any, of the risks reinsured were from
Hartford companies other than First State. In the ensuing
three years, the proportion of system business declined in
favor of non-system business to less than 50 percent. There
was evidence that defendants had hoped that system business
would grow and that NERCO and its retrocessionaires would
obtain more reinsurance business directly from the other
Hartford companies, in addition to First State, but that
these hopes were not realized.
The proportion of non-system business rose steadily
after the first year, but the non-system business was of a
kind which plaintiffs contend, and the district court found,
was different from that represented in the Placing
-13-
Information. The court construed the Placing Information as
representing "that Graham Watson would produce 'non-system'
reinsurance business directly from primary insurance
companies without the use of intermediaries." In support of
the court's construction, plaintiffs point to representations
in the Placing Information that Graham Watson did not intend
to seek reinsurance "on a wholesale basis from all and
sundry" but rather to develop a close working relationship
"with selected primary companies." The Placing Information
stated that non-brokered business "placed significantly with
the direct professional reinsurance market" characterized
over 80 percent of United States facultative reinsurance.
The Placing Information also stated that Graham Watson was
"charged with the responsibility of penetrating this
business." Notwithstanding these announced intentions in the
Placing Information, most of defendants' growing non-system
business after the end of 1980 was, in fact, obtained from
intermediaries to wit, brokers and Managing General Agents
("MGAs"). MGAs serve as agents of primary insurance carriers
with authority to underwrite and place certain business on
the insurers' behalf. Defendants received the majority of
their non-system business, portions of which were then ceded
to the plaintiffs under the SANS Treaties, from Baccala &
Shoop Insurance Services, an MGA representing a variety of
primary insurance companies. Baccala & Shoop worked closely
-14-
with the broker, G.L. Hodson; in fact, they were owned by the
same entity.
1. Semi-Automatic and Automatic Facilities Semi-Automatic and Automatic Facilities
Another key issue in the present litigation stems
from the fact that, during the annual periods covered by the
Treaties, almost all of the non-system business that
defendants produced, and shared with the plaintiffs, was
underwritten using what are called "semi-automatic
facilities." (A "facility" is an agreement setting out,
among other things, the rules under which a reinsurer will
reinsure risks ceded by the other party.) Defendants insist
that semi-automatic facilities were perfectly consistent with
the representations in the slips and Treaties that the
reinsurance to be ceded to plaintiffs would be "business
classified by the Reassured [NERCO] as Property and Casualty
Facultative Assumed business." (Emphasis supplied.) ___________
Plaintiffs sharply dispute this. Calling facultative
underwriting the "fundamental material term in the SANS
Treaties," the district court agreed with plaintiffs that the
term "facultative" included only reinsurance that a reinsurer
underwrites and negotiates with the primary insurer on a
risk-by-risk individual certificate basis in advance, i.e., a
certificate of reinsurance is issued for each risk after the
reinsurer has first looked into and approved reinsuring that
particular risk.
-15-
Under the semi-automatic method that defendants
mostly used in underwriting non-system risks, defendants'
underwriters did not evaluate risks one at a time in advance
of the issuance of a policy of reinsurance on each risk.
Instead, in contracts called "Master Facultative
Certificates" ("MFCs"), NERCO agreed with an MGA, broker, or
primary insurer that the latter entity could issue
reinsurance upon risks of described types, and upon certain
conditions and with certain limits, prior to defendants'
underwriters' scrutiny and approval of the risk. After the _____
reinsurance attached to each risk, however, the agent or
ceding company would send to Graham Watson a "risk bordereau"
a document identifying and providing a summary of
information as to that, and any other, risks reinsured within
the reporting period. Graham Watson then had a brief period
after receipt of the bordereau, for example 72 hours, within
which to cancel the reinsurance on a particular risk if it so
desired, cancellation to take effect within a specified
period, say, 14 days.
Defendants contend, and presented evidence at
trial, that the semi-automatic facility is commonly
classified in the industry today as a form of facultative
reinsurance. They concede that, in an earlier era,
"facultative" was a term applied only to reinsurance
individually underwritten on a risk-by-risk basis in advance
-16-
of binding. But while accepting that the reinsurer's right
to reject individual risks remains a general feature of
facultative reinsurance, defendants contend that this feature
is adequately preserved in the more economical and
streamlined semi-automatic facility.11
Defendants also used, in a few instances, a
variation known as an "automatic facility." Under this type
of facility, rather than having the right to cancel an
individual risk, the reinsurer has the right to cancel the
entire facility on very short notice. Even without the right
to cancel a particular risk, defendants argue that this was
"facultative," since the reinsured would, as a practical
matter, agree to cancel individual risks rather than face
cancellation of the entire facility. Moreover, the reinsured
retained the freedom to cede or not to cede a particular
risk, which is not the case in treaty reinsurance.
Automatics comprised only a small portion of the non-system
business, most of which was underwritten using semi-
____________________
11. Because of the cedent's right of cancellation, and the
reinsured's right not to cede, defendants and their experts
contend that the semi-automatic facility is a form of
facultative reinsurance, and is not forbidden "treaty"
reinsurance. The SANS Treaties contained an express
exclusion for "assumed treaty" business. In "treaty"
reinsurance, the reinsurance arises solely as the consequence
of the terms of a prior general contract, with no right on
the reinsurer's part to reject a particular risk that meets
the terms of the contract, and without any right on the
reinsured's part to decline to cede a particular risk, always
assuming that the risk in question conforms to the terms of
the prior contract.
-17-
automatics.
2. The First State Business The First State Business
With regard to system business (which was almost
exclusively with First State), the defendants did not use a
risk bordereau, nor did they ever enter into a formal
contractual arrangement spelling out First State's and
NERCO's relationship in respect to the latter's reinsuring of
risks later assigned under the SANS Treaties. There was
evidence, however, indicating how matters worked in practice.
In practice, First State's underwriters had the power
initially to commit NERCO and the SANS Treaty signatories to
the reinsuring of individual risks primarily insured by First
State. The reinsurance was evidenced by a layoff sheet that
First State prepared; each layoff sheet identified a First
State risk that NERCO and the Treaty signatories were to
reinsure, and provided a brief summary of information about
that risk. A packet containing many of these layoff sheets
was periodically provided by First State to Graham Watson,
whose underwriter could study the risks and would have the
right to cancel the reinsurance at will.
Defendants contend that this method was
"facultative" because each risk was individually evaluated in
due course by a Graham Watson underwriter based on the
information provided on the layoff sheets and by follow-up
phone and face-to-face inquiries, as well as by means of
-18-
microfiches which reproduced First State's entire
underwriting file for a risk, and were available upon request
and it was understood that the reinsurance was subject to
cancellation at will by Graham Watson. They point out that
because First State's and Graham Watson's employees were
under the same roof and answerable to the same bosses, the
latter's underwriters could informally influence First State
not to cede business the latter did not wish, as further
evidence of their facultative control. Notwithstanding the
absence of a written understanding between Graham Watson and
First State, the district court found, after hearing the
evidence, that, "Graham Watson underwrote all "'system
business' . . . by the 'automatic' and/or 'semi-automatic'
method of underwriting." Since practically all system
business was with First State, this finding grouped that
underwriting with the explicit semi-automatic and automatic
facilities used in non-system business.
3. Further Performance Further Performance
At trial, plaintiffs made much of the absence of
proof of particular occasions when defendants had ever
actually rejected a risk listed in a bordereau or layoff
sheet. Plaintiffs also sharply questioned whether the
information in the bordereaux and layoff sheets was
sufficient to allow for adequate underwriting (evaluation) of
individual risks. Defendants responded by emphasizing that,
-19-
whether or not used, the right to reject at all times
existed, and by pointing to evidence that its underwriters
adequately reviewed the risks and had other means personal
inquiries, telephone calls, inspection of First State files,
and so on to make inquiry in doubtful cases. Defendants'
evidence also indicated that Graham Watson conducted periodic
audits of the underwriting practices of MGAs and others in
order to assess compliance with the terms of the various
facilities. The district court found no evidence that
defendants had rejected any risks and found that Graham
Watson's underwriting of individual risks was inadequate.
In any case, while defendants wrote some small
percentage of reinsurance under the SANS Treaties that was
facultative in the traditional sense of advance risk-by-risk
underwriting, most of the reinsurance produced under the SANS
Treaties was underwritten either under some variety of the
semi-automatic facility or, in the case of First State system
business, under the informal in-house procedures previously
described. And, as mentioned above, over the four years of
the SANS Treaties, one MGA, Baccala & Shoop, furnished almost
all of the non-system business to defendants. Non-system
business was found by the court to constitute approximately
one-half of the treaty business during the four year period.
The agreement with Ralph Bailey to avoid non-system
business for the first year was not to the liking of Graham
-20-
Watson, whose employees felt that non-system business would
be a steadier source of income for the Treaties. Bailey also
made known his dislike of MGAs and his reluctance to allow
MGA business to be ceded to the SANS Treaties. Bailey
testified that, because MGAs did not themselves bear any
risk, they did not underwrite as carefully as did
underwriters on the payrolls of the primary companies, and
hence the business produced through them was of a lower
quality.12 Again, this was not to the liking of Graham
Watson; one internal memorandum, dated December 11, 1980,
stated that "Ralph Bailey has an aversion to MGAs and he will
have to be approached rather delicately because a good deal
of the business going into this facility will be on business
which is designed to provide a real flow of business from a
single source." This memorandum also noted that Tom Hearn,
of Hodson, would travel to London on December 15, 1980 to
attempt to overcome this aversion. Responding to repeated
requests from Graham Watson employees, Bailey agreed at some
time during the first year to begin allowing non-system
____________________
12. Conflicting points of view were expressed by insurance
experts at trial about the relative effectiveness of MGA
underwriting, as filtered through semi-automatic facilities,
and risk-by-risk underwriting on a "direct" basis.
Defendants offered evidence that the losses sustained under
the SANS Treaties were less than those suffered by the
reinsurance industry as a whole during the same period.
Plaintiffs did not attempt to disprove this but rather
insisted that the defendants never provided the type of
reinsurance business they had promised.
-21-
business to be ceded to the Treaties. While he expressly
agreed to the cession of certain MGA business during the
first year (from an MGA known as the London Agency), he did
so only with great reluctance. However, he did not request
or insert an exclusion for MGA business in the slips or
Treaty Wordings for subsequent years, as he could have done.
No such express exclusion was ever inserted.
4. Renewal of the Treaties Renewal of the Treaties
The SANS Treaties were continuous contracts subject
to cancellation "upon 120 days prior written notice at
December 31, 1980 or any subsequent December 31st." This
allowed any desired adjustments to be made in the terms of
the Treaties on a yearly basis. In practice, all of the
retrocessionaires cancelled during the 120-day period
preceding December 31, 1980 and then initialled new slips for
the next calendar year. In order to induce renewal, Graham
Watson, again through Hodson and the European sub-brokers,
disseminated a document referred to as the 1981 Anniversary
Information. In addition to listing losses in excess of
$50,000 reported through September 30, 1980, and providing a
summary of the business ceded thus far, the Anniversary
Information included the following statements:
To date, the preponderance of the
business has been assumed from First
State Insurance Company and written on a
pro rata basis. Non-System business
represents a relatively small proportion
of the total and what has been written is
-22-
limited to Casualty business on an excess
of loss basis emanating from Baccala and
Shoop Insurance Services.
Because of the competitive climate in the
United States, Non-System business will
develop more slowly than originally
anticipated. It continues to be the
posture of Graham-Watson not to seek
business on a wholesale basis but rather
to develop close working relationship
[sic] with selected primary sources.
On March 23, 1981, a meeting was held in Boston to
discuss the performance of the SANS Treaties. In attendance
were Ralph Bailey and several employees of Hodson and Graham
Watson. One major topic of conversation was the inclusion of
MGA business. Bailey asked the Graham Watson underwriters
for their opinion of Baccala & Shoop, and was told by Bob
Wright, the property underwriter, that Wright knew most of
Baccala & Shoop's home office people and was comfortable with
them. Later in the meeting, however, Bailey stated that he
would not consider any new MGA business for the facility. He
did not, however, make this a contractual requirement by
inserting an exclusion for MGA business in the slip at the
next renewal.
At the close of the second year, a 1982 Anniversary
Information was disseminated, which again provided a list of
losses and a summary of the business. This document also
included figures as to overall loss experience through
September 30, 1981, which disclosed that the SANS Treaties
were losing money. Indeed, the loss ratio for the 1980
-23-
Treaties was an alarming 248.65 percent.13 In addition,
the 1982 Anniversary Information included the following
statements:
The rating basis of these treaties is
being amended with effect from 1st
January 1982 to more accurately reflect
the basis used by Graham-Watson. All
business other than that assumed from the
First State which is a "system" company
is being written on a net rated basis in
that Graham-Watson is quoting their price
and if a ceding commission is required by
the original company, this is then added
to the premium required by Graham-Watson
. . . .
The current sources of business is [sic]
as follows :-
FIRST STATE INS. CO.
TWIN CITY per Baccala and Shoop
Insurance Services
ST. PAUL FIRE & MARINE
NORTHBROOK
CRUM & FORSTER
CNA
ROYAL INS. CO.
CHUBB AND SON
AETNA CASUALTY & SURETY
Plaintiffs point out defendants' failure to mention, other
than in the case of Twin City, that certain of the listed
primaryinsurersactedthroughBaccala &Shooporotherintermediary.
It appears that no formal anniversary information
was prepared for 1983, the last year of the SANS Treaties,
although letters were sent to the retrocessionaires
____________________
13. Loss ratio is the ratio of net earned premium to
incurred losses. A loss ratio under 100% indicates a
profitable treaty; a loss ratio greater than 100% indicates
that more money is being paid to satisfy claims than is being
made in the form of premiums.
-24-
containing a list of losses, a summary of the business, and
notification of various changes that had been made over the
past year, none of which are material here. However, the
retrocessionaires were told that the treaties were
"continuing for 1983 basically as before."
Following the placing of the SANS Treaties, the
plaintiffs at first accepted their shares of the premiums and
paid their shares of corresponding losses incurred by NERCO.
The losses were considerable, as they were throughout the
insurance industry at this time. Beginning as early as the
fourth quarter of 1982, however, certain of the plaintiffs
ceased paying losses.14 There was evidence that some of
the plaintiffs (in addition to Terra Nova, through Bailey, as
related above) began to inquire as early as 1982 about the
use of MGAs to obtain business (rather than through the
formation of direct relationships with primary insurers), and
about the underwriting methods used by the defendants.
C. The Present Lawsuit The Present Lawsuit
In 1985, some of the plaintiffs retained counsel
____________________
14. The district court made no findings as to when each
individual plaintiff first refused to make payments on losses
incurred. The plaintiffs introduced evidence which showed
the last quarter in which each plaintiff made a payment to
the Defendants. The earliest was Kansa Reinsurance, which
made its last payment in the fourth quarter of 1982; the
latest were nine plaintiffs including Uni Storebrand, Sampo,
and the seven companies bound through Aurora Underwriters,
all of whom made their last payments some time in the fourth
quarter of 1986.
-25-
and sought to conduct a preliminary inspection of NERCO's
books pursuant to a provision in the Treaty Wordings allowing
a right of inspection "at all reasonable times for the
purpose of obtaining information concerning this contract or
the subject matter thereof." NERCO allowed a seven day
preliminary inspection in the fall of 1985, but a dispute
then arose between the parties concerning the conditions
under which any further inspection was to be conducted.
Evidently dissatisfied with the results of this
inspection, and concerned about the growing loss ratios of
the SANS Treaties, a group of sixteen plaintiffs (of whom
seven are no longer parties) commenced this action against
NERCO on January 6, 1987. They alleged that they had a
contractual right under the treaties to inspect NERCO's
records, and that although they had previously conducted a
seven day inspection, a further, more exhaustive evaluation
was needed. They sought an order compelling a new
inspection. On February 13, 1987, the parties entered a
voluntary stipulation allowing, and establishing procedures
for, a further inspection to be conducted by Roy T. Ward and
four of his employees. On February 27, 1987, the district
court entered an order allowing the inspection to continue
pursuant to that stipulation.
Meanwhile, in late 1986 a second group of
reinsurers that had continued to pay losses to NERCO while
-26-
the parties discussed the possibility of a commutation15
retained a reinsurance inspection firm, Palange & Associates,
to inspect NERCO's books and records. The inspection was
conducted in Boston in 1987. Again, disputes arose as to the
scope and methods of this inspection; however, no court
action was required to resolve these disputes, and Mr.
Palange completed his inspection in the spring of 1988.
Following these inspections, on July 12, 1988, the
original plaintiffs, now joined by the remainder of the
present plaintiffs, moved to amend their complaint. The new
complaint omitted the substantive allegations of the original
complaint, and deleted the plaintiffs' request that the
treaties be enforced. Instead, the plaintiffs asserted that
the treaties had been induced by fraud and should be
rescinded. They also asserted claims for breach of contract,
violation of Mass. Gen. L. ch. 93A, 2, and the Racketeer
Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C.
1961-1968. Denying these allegations, defendants asserted
the statute of limitations as a defense and counterclaimed
for recovery under the challenged treaties, and for treble
damages, costs and attorneys fees under Mass. Gen. L. ch.
93A, 2.
____________________
15. A commutation is a method of terminating a reinsurer's
obligation to pay future claims in return for a lump sum
payment. It does not necessarily involve any claim or
admission of wrongdoing by the reinsured.
-27-
Prior to trial the defendants moved for summary
judgment on the statute of limitations issue, as well as on a
variety of other grounds not important here. The district
court held a hearing on the matter on January 15, 1992. In a
written order dated January 16, 1992, the court denied
summary judgment on the statute of limitations ground, with
no explanation.
A jury-waived trial began on April 5, 1993. The
statute of limitations was raised again during trial. The
court delayed ruling until it could "find out what the facts
were." On the twenty-second day of trial, the judge stated
simply that "[i]t seems that there is no problem with Statute
of Limitations." However, the court appeared to entertain
the issue again two days later, accepting a deposition into
evidence after defendants argued it was relevant to the
statute of limitations.
The trial concluded on May 19, 1993, and the
district court entered a memorandum and order on June 7,
1993. See 825 F. Supp. 370 (D. Mass. 1993). The court held ___
that the defendants had induced the plaintiffs to enter into
the treaties by means of fraudulent misrepresentations, had
breached their contracts with plaintiffs, and had engaged in
unfair and deceptive trade practices in violation of Mass.
Gen. L. ch. 93A. The RICO count was rejected. The court
-28-
made no mention of defendants' statute of limitations
defenses.16
By way of relief, the district court ordered
rescission of the challenged reinsurance contracts and
ordered defendants to repay to plaintiffs all sums plaintiffs
had previously paid out on losses incurred under those
contracts with credit for premiums paid to the plaintiffs,
plus prejudgment interest at 12 percent. Judgment was
entered for the plaintiffs in June 30, 1993 in the amount of
$37,501,701.12 plus postjudgment interest and costs.
Following several motions to amend this judgment, a new
judgment was entered on September 21, 1993 in the amount of
$38,118,940.07, which listed the amount due to each
____________________
16. The district court also made no specific resolution in
its judgment of defendants' counterclaims. It can be
implied, however, as defendants state in their brief, that
the court dismissed the counterclaims "sub silentio." The ____________
counterclaims sought to hold plaintiffs liable for their
unperformed reinsurance obligations imposed by the treaties.
While it would have been better practice for the court to
have denied the counterclaims expressly, its intent to do so
is apparent from its rescision of the treaties as having been
induced by defendants' fraud and breached by defendants'
actions. We have held, in parallel circumstances, that such
elliptical judgments will be deemed to adjudicate all claims
for Rule 54(b) purposes notwithstanding their failure to deal
specifically with the counterclaims in question. Joseph E. _________
Bennett Co. v. Trio Indus., Inc., 306 F.2d 546, 548 (1st Cir. ___________ _________________
1962); see Fed. R. Civ. P. 54(b); 28 U.S.C. 1291. By the ___
same token, we hold that defendants, having acted reasonably
by focussing their appeal on the district court's findings of
liability, did not forfeit the right to seek relief under
their counterclaims by not expressly appealing from the
district court's unspecified dismissal of those
counterclaims.
-29-
individual plaintiff, as opposed to the lump sum stated in
the first judgment. The defendants' filed their notice of
appeal from the fraud, contract, and ch. 93A claims on
October 19, 1993; the plaintiffs' filed their notice of
appeal from the adverse RICO finding on November 2, 1993.
Motions relating to the plaintiffs' requests for attorney's
fees and costs are still pending in the district court.
D. The District Court's Findings The District Court's Findings
In its memorandum and order of June 7, 1993, the
district court found that the defendants made, and the
plaintiffs relied upon, "four material representations" to
secure the plaintiffs' participation in the SANS Treaties.
These were:
1. That Graham Watson would produce and
underwrite property and casualty
facultative reinsurance. This ___________
representation mean[t] that Graham Watson
would underwrite reinsurance on an
individual, risk-by-risk, certificate __________
basis.
2. That Graham Watson would produce
such reinsurance directly from system and ________
non-system original insurers without the
use of any intermediaries. This
representation mean[t] that Graham Watson
would be a direct writer of reinsurance
from the original insurer, which
reinsurance cessions would not be
brokered.
3. That the Hartford Companies, along
with First State, would be the "system
business" original insurers. This
representation mean[t] that the Hartford
Insurance Group would be the source of
"system business." The Hartford
Insurance Group is made up of the so-
called Hartford Companies and First ___________________ _____
-30-
State, an excess and surplus line _____
carrier.
4. That Graham Watson would seek
facultative reinsurance business from
selected primary companies, rather than _______
on a wholesale basis. This
representation mean[t] that Graham Watson
would assume reinsurance from selected
insurance companies, not reinsurance
companies or Managing General Agents,
that is, from risk-bearing insurance
entities.
825 F. Supp. at 376-77 (emphasis in original). The district
court found that although business had been assumed from
several of the Hartford Companies, including First State,
Hartford Specialty Company, Nutmeg Insurance Company, and
Twin City Insurance Company, all of this business with the
exception of the First State business had been classified as
non-system business. The court listed, as sources of non-
system business, a number of primary insurance companies, but
also a number of brokers and MGAs, and found that "[t]he
majority of 'non-system business' emanated from Baccala and
Shoop, a Managing General Agent, through the intermediary
G.L. Hodson." Id. After a further discussion of Graham ___
Watson's underwriting practices, the court stated:
Upon a review of the evidence, the
Court finds that Graham Watson did not
facultatively underwrite, that is,
underwrite on an individual risk
certificate basis as represented, any of
the "system business" nor virtually any
of the "non-system business"; Graham
Watson underwrote all "system business"
and virtually all "non-system business"
by the "automatic" and/or "semi-
automatic" method of underwriting.
-31-
The Court also finds, on the basis
of the evidence, that most of the "non-
system business" emanated from MGAs
through the use of intermediaries and
from intermediaries themselves, and was
not produced from primary risk-bearing
insurance entities directly. Although
the plaintiff reinsurers were aware that
Baccala and Shoop, an MGA, had ceded to
the SANS Treaties approximately five
percent of the total business during the
first year, 1980, they were never
apprised that, during the ensuing three
years, Baccala and Shoop would cede the
majority of "non-system business" and
that other MGAs and intermediaries would
cede, in conjunction with Baccala and
Shoop, most of the "non-system business"
to the SANS Treaties. "Non-system
business" constituted, over the course of
the SANS Treaties, approximately one-half
of the total business ceded to the
Treaties.
825 F. Supp. at 379 (emphasis in original).
With respect to the plaintiffs' fraud claims, the
district court stated that the plaintiffs understood that the
term "facultative," as used in the SANS Treaties, was being
used in its "standard and traditional sense, namely,
underwriting on a risk-by-risk certificate basis." It found
that NERCO was aware of this understanding on the plaintiffs'
part, "and was well aware that it, itself, was secretly using
the term in a special sense without ever disclosing such
special meaning" to the plaintiffs, and that this was
therefore a knowing misrepresentation. As to the breach of
contract claims, the district court found that NERCO did not
keep, and never intended to keep, its contractual promise to
-32-
underwrite risks obtained directly from selected primary
sources on an individual risk-by-risk certificate basis.
II. Preliminary Matters Preliminary Matters
A. Standard of Appellate Review Standard of Appellate Review
When reviewing the findings of a district court
sitting without a jury, "'the court of appeals cannot
undertake to decide factual issues afresh.'" Jackson v. _______
Harvard Univ., 900 F.2d 464, 466 (1st Cir. 1990) (quoting ______________
Reliance Steel Prod. Co. v. National Fire Ins. Co., 880 F.2d _________________________ ______________________
575, 576 (1st Cir. 1989)), cert. denied, 498 U.S. 848 (1990). ____________
We may set aside findings of fact by the district court,
whether based on oral or documentary evidence, only if
"clearly erroneous," and with due regard "to the opportunity
of the trial court to judge of the credibility of witnesses."
Fed. R. Civ. P. 52(a). A finding is clearly erroneous when,
"'although there is evidence to support it, the reviewing
court on the entire evidence is left with the definite and
firm conviction that a mistake has been committed.'" See ___
Anderson v. City of Bessemer City, 470 U.S. 564, 573 (1985) ________ ______________________
(quoting United States v. United States Gypsum Co., 333 U.S. _____________ ________________________
364, 395 (1948)), reh'g denied, 333 U.S. 869); accord Brown ____________ ______ _____
Daltas & Assoc., Inc. v. General Accident Ins. Co. of Am., 48 _____________________ ________________________________
F.3d 30, 36 (1st Cir. 1995).
Review of legal rulings is, however, de novo. _______
"[I]f the trial court bases its findings upon a mistaken
-33-
impression of applicable legal principles, the reviewing
court is not bound by the clearly erroneous standard."
Inwood Lab., Inc. v. Ives Lab., Inc., 456 U.S. 844, 855 n.15 _________________ ________________
(1982) (citing United States v. Singer Mfg. Co., 374 U.S. ______________ ________________
174, 194 n.9 (1963)); accord Cumpiano v. Banco Santander ______ ________ ________________
Puerto Rico, 902 F.2d 148, 153 (1st Cir. 1990). "[T]o the ___________
extent that findings of fact can be shown to have been
predicated upon, or induced by, errors of law, they will be
accorded diminished respect on appeal." Dedham Water Co., __________________
Inc. v. Cumberland Farms Dairy, Inc., 972 F.2d 453, 457 (1st ____ ____________________________
Cir. 1992) (citing RCI Northeast Servs. Div. v. Boston Edison _________________________ _____________
Co., 822 F.2d 199, 203 (1st Cir. 1987)). ___
Application of these principles is complicated in
the present case by the district court's disregard, in
several key areas, of Rule 52(a)'s further injunction that,
"[i]n all actions tried upon the facts without a jury . . . ,
the court shall find the facts specially and state separately
its conclusions of law thereon." Fed. R. Civ. P. 52(a).
Rule 52(a) imposes on the district court "an obligation to
ensure that its ratio decidendi is set forth with enough _______________
clarity to enable a reviewing court reliably to perform its
function." Touch v. Master Unit Die Products, Inc., 43 F.3d _____ ______________________________
754, 759 (1st Cir. 1995). The court made no findings and
rulings whatsoever on the important statute of limitations
issues discussed infra, nor, in general, did it make _____
-34-
subsidiary findings resolving disputed evidence. Thus in
finding that defendants had committed fraud in promising
"facultative" reinsurance, the court stated that all parties
understood that term to mean risk-by-risk, individual
certificate underwriting, but made no attempt to distinguish
or explain the great body of evidence indicating a broader
meaning. Its finding that all plaintiffs relied on the
Placing Information is similarly bereft of explanation as to
how this could be, given the absence of proof of reliance in
a number of instances.
These omissions have required us to remand for
certain additional findings. Where possible, however, we
have disposed of key issues or, if that was impossible, have
set out a guiding legal standard for use on remand. In sum,
we have endeavored to dispose of as much of the appeals as we
properly can at this juncture.
B. Choice of Law Choice of Law
We dispose first of certain contentions raised with
regard to legal standards. Plaintiffs challenge defendants'
assertion that the SANS Treaties contain an express choice of
law provision providing for the application of Massachusetts
law to plaintiffs' common law fraud and contract claims. In
fact, Article XVIII of the SANS Treaties merely provides that
if a dispute is litigated, plaintiffs will submit to the
jurisdiction of any court of competent jurisdiction in the
-35-
United States, and "all matters hereunder shall be determined
in accordance with the law and practice of such court." But
while plaintiffs' point is well taken, they go on to concede
that "[i]n this case, Massachusetts choice of law principles
dictate the application of Massachusetts substantive law to
plaintiffs' common law claims." Given the parties' (and the
lower court's) general acceptance of Massachusetts law,
albeit on different theories, and in the absence of a
preferable choice, we shall apply Massachusetts law except as
otherwise noted. See Bird v. Centennial Ins. Co., 11 F.3d ___ ____ ____________________
228, 231 n.5 (1st Cir. 1993) (accepting parties' agreed
choice of law where there was a "reasonable relation" between
the litigation and the forum whose law had been selected).
C. The Burden Required to Prove Fraud The Burden Required to Prove Fraud
The defendants argue strenuously, and the district
court stated, that the plaintiffs were required to prove
fraud by "clear and convincing evidence." The plaintiffs
respond that under applicable Massachusetts law fraud need
not be shown by anything more than the ordinary preponderance
of the evidence standard applicable to civil cases in
general. Review of Massachusetts law indicates that the
plaintiffs are right.17
____________________
17. Defendants also argue that, because the plaintiffs
adopted "clear and convincing evidence" as the applicable
burden of proof in the district court, and did not object
when defense counsel stated their burden in those terms, it
is now too late for them to contest the burden of proof.
-36-
In Callahan v. Westinghouse Broadcasting Co., Inc., ________ ___________________________________
372 Mass. 582, 363 N.E.2d 240 (Mass. 1977), the Massachusetts
Supreme Judicial Court ("SJC") commented on the burden of
proof applicable to a libel action governed by Gertz v. _____
Robert Welch, Inc., 418 U.S. 323 (1974) and New York Times ___________________ ______________
Co. v. Sullivan, 376 U.S. 254 (1964). Recognizing that the ___ ________
Supreme Court required "clear and convincing proof" in a
libel case, the SJC nonetheless noted that,
the words "clear and convincing proof"
had not been discussed in our cases
[other than in the libel context] because
the phrase had not been used theretofore
in this Commonwealth. Indeed, because of
the vagueness of an intermediate standard
of proof, we have not looked with favor
on the use of such a standard.
Callahan, 372 Mass. at 583, 363 N.E.2d at 241. We have not ________
found any Massachusetts case stating that a "clear and
convincing" standard should be applied in a common law fraud
case, nor have we found any indication that the SJC has,
since Callahan, looked with greater favor on introducing a ________
"clear and convincing" standard of proof to cases where none
otherwise exists. See Paul J. Liacos, Handbook of ___ ____________
Massachusetts Evidence 38-39 (5th ed. 1981) (stating that the ______________________
burden of proof in Massachusetts civil cases is "by a
____________________
However, while parties may stipulate to the facts (and
perhaps even to the law, in different circumstances), they
may not, by agreement or by some principal of acquiescence or
waiver, compel courts to follow a clear and convincing
standard that is contrary to the governing law.
-37-
preponderance of the evidence" and listing those few issues,
not including fraud, where a higher standard is required,
including proof of a gift causa mortis, contents of a lost
will, irregularity of official proceedings, and malice in a
defamation action); see also 9 John Henry Wigmore, Evidence ________ ________
in Trials at Common Law 2498 (Chadbourn rev. 1981) (noting ________________________
that "clear and convincing" standard is commonly applied in
cases of fraud, but failing to cite, in a comprehensive list
of authorities, any Massachusetts case applying this
standard). We conclude, therefore, that Massachusetts has
not adopted a "clear and convincing" standard in cases of
fraud.
D. The Duty Owed to the Reinsurers The Duty Owed to the Reinsurers
The plaintiffs argue, and the district court found,
that the defendants were under a duty to the plaintiffs of
utmost good faith ("uberrimae fidei"). The defendants refer ________________
to the same standard. We agree that a reinsurer like NERCO,
having obtained by treaty the power to impose significant
risks and liabilities upon plaintiff retrocessionaires, owed
to them the utmost good faith in its dealings under the
treaties. See generally Unigard Sec. Ins. Co., Inc. v. North _____________ ___________________________ _____
River Ins. Co., 4 F.3d 1049 (2d Cir. 1993). ______________
This means that, as the district court properly
recognized, defendants owed plaintiffs a duty "to exercise
good faith and to disclose all material facts." In the non-
-38-
marine context, however, a claim of fraud may not be founded
on innocent misrepresentation and concealment. Thus, the ________
district court properly required the plaintiff to prove that
the defendant made a false representation
of a material fact with knowledge of its
falsity for the purpose of inducing the
plaintiff to act thereon, and that the
plaintiff relied upon the representation
as true and acted upon it to his damage.
Kennedy v. Josephthal & Co., Inc., 814 F.2d 798, 805 (1st _______ ________________________
Cir. 1987) (quoting Danca v. Taunton Sav. Bank, 385 Mass. 1, _____ _________________
8, 429 N.E.2d 1129, 1133 (1982) (citations omitted)).
The standard for fraudulent concealment is similar:
Except with respect to marine risks,
concealment exists and avoids the policy
where the insured has knowledge of a fact
material to the risk which honesty, good
faith, and fair dealing require that he
should communicate to the insurer but
which he designedly and intentionally
withholds.
9 George J. Couch, Cyclopedia of Insurance Law 38:2 (2nd ____________________________
ed. 1985) (Couch). Massachusetts' adherence to the same rule
is indicated in Century Indem. Co. v. Jameson, 333 Mass. 503, __________________ _______
504-05, 131 N.E.2d 767, 769 (Mass. 1956); see also Unigard, 4 ________ _______
F.3d at 1069 (holding that simple negligence in not
disclosing a material fact does not constitute bad faith so
as to avoid a policy of reinsurance).
III. The Fraud Claims The Fraud Claims
We turn now to the substantive issues, and,
initially, to the fraud claim which is pivotal to all the
-39-
district court's findings. The district court saw two
fundamental issues in the case, both of them relevant to its
finding of fraud. One was "whether Graham Watson did
underwrite facultative reinsurance" on the system and non- ___________
system business. The other was "whether Graham Watson
produced 'non-system business' by establishing direct
relationships with primary, risk-bearing, insurance
companies."
A. "Facultative" Underwriting "Facultative" Underwriting
Plaintiffs argued, and the district court found,
that "the parties to the contract" (including, it would seem,
defendants themselves) "understood the meaning of that term
["facultative"] in its standard and traditional sense,
namely, underwriting on a risk-by-risk certificate basis, the
classic meaning of the term." 825 F. Supp. at 382.
According to the court, "NERCO knew" that plaintiffs
understood "'facultative' in its standard and traditional
sense of risk-by-risk certificate underwriting and was well
aware that it, itself, was secretly using the term in a
special sense without ever disclosing such special meaning to
the Plaintiff reinsurers." Thus, the court concluded, the
defendants' representation that the business would be
underwritten on a risk-by-risk individual certificate basis
was "knowingly false when made." Id. ___
1. No Express Misrepresentation No Express Misrepresentation
-40-
We hold that these findings are clearly erroneous
insofar as they attribute to defendants an implicit or
express representation that they would engage exclusively in
classic risk-by-risk, individual certificate underwriting.
The record is without evidence from which a court could find
that defendants represented to plaintiffs that the
facultative business underwritten by Graham Watson would be
limited to individual certificate, risk-by-risk underwriting.
To be sure, as the court found, there was evidence
that the overseas sub-brokers engaged to represent defendants
by their broker, G.L. Hodson, understood "facultative" in the
classic risk-by-risk individual certificate sense. Nigel
Huntington-Whitely, the employee principally assigned to the
SANS Treaty placements by defendants' sub-broker, Sedgwick-
Payne, testified to having this understanding. But he
indicated that it "may have just been an assumption," and
could not identify the source of his understanding beyond his
sense of what the term "facultative" might mean. It was not
established that the sub-brokers were told this by defendants
nor that prior to the initial (1980) Treaties the sub-brokers
communicated this view to plaintiffs or to defendants during
negotiations.
To fill this gap, plaintiffs point to Huntington-
Whitely's letter of June 24, 1981 (well over a year after the
Treaties were entered into), wherein he states in passing
-41-
that "Graham Watson is underwriting each risk individually."
However, this statement clearly did not induce the plaintiffs
to enter into the 1980 and 1981 SANS Treaties, given its
timing. Moreover, it is arguable that the semi-automatic
facilities, because they allowed Graham Watson's underwriters
to reject individual risks, were a form of individual risk
underwriting and thus not necessarily inconsistent with this
statement.
Plaintiffs also point to the 1982 Anniversary
Information, which states that, on non-system business,
"Graham Watson is quoting their price and if a ceding
commission is required by the original company, this is then
added to the premium required by Graham Watson." Plaintiffs
argue that this specifically describes individual risk
negotiation. However, it could just as easily be read to
refer to Graham Watson quoting a price during the initial
negotiations leading to the formation of a semi-automatic
facility. Thus, it is not an explicit promise to perform
individual risk-by-risk certificate underwriting. Moreover,
this representation, like the statement in Huntington-
Whitely's letter, was made in 1981, and thus could not have
fraudulently induced the plaintiffs to participate in the
1980 and 1981 SANS Treaties.
Defendants' chief executive, Graves Hewitt,
testified at the trial to having told one of the lead
-42-
underwriters, Bailey, in 1979, about his dissatisfaction with
the method of using a separate certificate as to each risk,
and his intention, in connection with the SANS Treaties, to
use a single controlling facility for multiple risks, as was
later done by means of the semi-automatic MFCs. Because the
district court found -- contrary to Hewitt's testimony --
that defendants had not disclosed their intent to use semi-
automatics, we must assume that it did not credit that
testimony, although nowhere in its findings did the court
mention and reject the testimony. We do not, in any case,
rely upon Hewitt's testimony in determining that the court's
fraud findings premised on the term "facultative" were
erroneous.
Bailey himself did not attend the trial but was
deposed and his deposition was read. He did not describe a
meeting with Hewitt in 1979 nor any specific representations
having been made to him prior to the execution of the
Treaties on the character of the facultative underwriting.
He testified generally to "understanding" that Graham Watson
would assess and underwrite each risk separately, but did not
refer to any conversation or occasion where any defendant so
promised. Asked if he would have considered semi-automatic
binding authorities to be facultative underwriting, he said
that "is not what I had intended and not what I had been told
from my own recollection." This was the closest he came to
-43-
suggesting that he was told by someone (defendants, brokers,
or others?) that facultative meant what the judge found. We
think this vague testimony, which makes no reference to
specific sources, falls short of supporting a finding that
defendants expressly promised to engage in risk-by-risk __________
underwriting only or knew that plaintiffs misunderstood their
intentions in this regard.
2. The Intended Meaning of the Term The Intended Meaning of the Term
"Facultative" "Facultative"
We similarly hold clearly erroneous the finding
that defendants "knew" that plaintiffs understood
"facultative" to be limited to risk-by-risk certificate
underwriting. There is no evidence of statements or
correspondence by plaintiffs or their representatives to
defendants, prior to execution of the slips and treaties,
informing defendants that the plaintiffs understood the
meaning of facultative to be so limited.
Of course, if the court properly could have found,
on the basis of the evidence, that the term "facultative" was
unambiguous, referring only to individual certificate, risk-
by-risk underwriting, then defendants would be charged with
knowledge of that ordinary meaning. However, as the evidence
clearly showed, that term, both standing alone and as used in
the Placing Information, slips, and Treaty Wordings,
encompasses a variety of underwriting methods, about the
propriety of which the parties and their experts disagree.
-44-
Whether or not a term as used by parties to a contract is
ambiguous is a question of law subject to plenary review.
ITT Corp. v. LTX Corp., 926 F.2d 1258, 1261 (1st Cir. 1991) _________ _________
(citations omitted); see also In re Navigation Technology ________ _____________________________
Corp., 880 F.2d 1491, 1495 (1st Cir. 1989) ("Contractual _____
language is considered ambiguous where the contracting
parties reasonably differ as to its meaning."). However,
where a term is ambiguous, its meaning presents a question of
fact, see Commercial Union Ins. Co. v. Boston Edison Co., 412 ___ _________________________ _________________
Mass. 545, 557, 591 N.E.2d 165, 172 (1992) (citations
omitted), a finding on which may only be reversed if clearly
erroneous. Fed. R. Civ. P. 52(a).
As noted, the district court found that the parties
understood the meaning of the term "facultative" in its
"standard and traditional sense, namely, underwriting on a
risk-by-risk certificate basis." If by this finding, and
others like it, the district court meant that the term was
legally unambiguous, being limited in meaning to only that
one type of underwriting, it was wrong as a matter of law.
Expert testimony and treatises presented by both sides
support the view that the term, as used in the industry
today, has been broadened beyond its classic roots,
notwithstanding plaintiffs' insistence that the classic
method is alone the proper one.
Most likely the court did not mean the term was
-45-
unambiguous as a matter of law, but rather concluded, on the
basis of all the evidence, that, as used in the present
circumstances, it should be given the limited meaning
ascribed.18 Yet the district court offered no reasons why
it gave the term the limited reading it did. Nor did it
explain why it believed defendants "knew" that plaintiffs so
restricted the term. On the latter point, it may have been
influenced by testimony from defendants' principal, Graves
Hewitt, who said he had as good an understanding of the
London insurance market as any American. The judge may have
felt that, possessing such insight, Hewitt "knew" that, as
some English witnesses testified, "facultative" would be
understood to mean risk-by-risk certificate underwriting in
that market. But absent evidence that Hewitt actually knew
and believed this, such a leap would be pure speculation
given Hewitt's own contrary testimony.
Moreover, English treatises introduced into
evidence by plaintiffs indicate that, notwithstanding
plaintiffs' witnesses, the reinsurance industry in England
____________________
18. "When the written agreement, as applied to the subject
matter, is in any respect uncertain or equivocal in meaning,
all the circumstances of the parties leading to its execution
may be shown for the purpose of elucidating, but not of
contradicting or changing its terms." Affiliated FM Ins. Co. ______________________
v. Constitution Reins. Corp., 416 Mass. 839, 842, 626 N.E.2d __________________________
878, 880 (1994) (quoting Keating v. Stadium Management Corp., _______ ________________________
24 Mass. App. Ct. 246, 249, 508 N.E.2d 121 (1987) (quoting
Robert Indus., Inc. v. Spence, 362 Mass. 751, 753-54, 291 ____________________ ______
N.E.2d 407 (1973)), review denied, 400 Mass. 1104, 511 N.E.2d _____________
620 (1987).
-46-
recognizes types of facultative reinsurance other than the
risk-by-risk certificate variety. A leading English writer
on reinsurance, Golding, describes in his authoritative
treatise (introduced by plaintiffs) various types of
facultative reinsurance other than the risk-by-risk
certificate variety. One variation Golding describes is the
so-called "cover in course of post." He states:
It will be clear that much of
the labour involved in the facultative
method is connected with getting the
necessary initials on the slips. In
modern practice this can be largely
avoided by the system of what may be
called giving cover "in course of post" -
- though the term nowadays extends to the
use of telex communications as much as to
the mail. The reinsured will arrange
facilities with a number of reinsurers,
whereby it may issue request notes by
post, for one or more lines of a risk to
be reinsured, as may be agreed. The
reinsurers will then hold covered each up
to the amount of its agreed share and
remains so bound, unless and until it has
signified its declinature "in course of
post". As a rule a limit is fixed,
within which this must be notified say 48
hours after receipt, though sometimes
this is extended up to as much as a
fortnight to allow for possible delays in
transmission. If no declinature is made
within the period, the reinsurer is bound
in the ordinary way. The system does
save a great deal of work, and is much
favored by reinsureds accordingly. Yet ___
it may be emphasized that it still _________________________________________
remains facultative reinsurance, for the _________________________________________
reinsurer is in no way deprived of its _________________________________________
power to decline, even though it must _________________________________________
accept responsibility in the meantime. ______________________________________
C.E. Golding, Golding: The Law and Practice of Reinsurance 42 ____________________________________________
-47-
(K.V. Louw ed., 5th ed. 1987) (emphasis supplied); see also ________
R.L. Carter, Reinsurance 234-35 (2nd ed. 1983) (detailing use ___________
of bordereau to report risks bound under the "cover in course
of post" method, which he also classifies as facultative).19
____________________
19. Golding also states:
The subject of facultative reinsurance
w[ould] not be complete without some
reference to the form of reinsurance
called a "facultative obligatory" or
"open cover," which is generally regarded
as belonging to the facultative section
of the business and is often so treated
in the books of a reinsurer.
An open cover is a reinsurance
arrangement under which the reinsured may
at its option cede a share of certain
defined risks, which share the reinsurer
is bound obligatorily to accept. Such an
arrangement thus partakes partly of the
nature of a facultative reinsurance and
partly of a treaty. To the reinsured it
is facultative because cessions are
optional at its discretion. . . . To the
reinsurer the open cover is more in the
nature of a treaty. The obligation is an
obligatory one and it applies not to an
individual case but to all cases of a
given class that may be ceded. No matter
how the open cover may be regarded in a
reinsurer's books, it is clear that it
has none of the characteristics of a
facultative reinsurance and in particular
it lacks the fundamental feature, the
power, inherent in a facultative
reinsurer, to decline a risk if though
fit.
Golding, supra, at 46-47. The open cover, as Golding _____
describes it, seems somewhat similar to the automatic
facility, except that under the open cover, the reinsurer
lacks the ability to cancel the contract on short notice, as
it may under the automatic. As the somewhat anomalous open
cover is "generally regarded" as facultative, so much more
might the automatic facility be so regarded, since it
-48-
But even ignoring these indications that English
custom and practice have gone beyond classic facultative
methodology, it is the American, not the English, usage that
seems to us key. The underwriters in London and Europe
contracted in the slips with defendant NERCO, an American
company, for reinsurance "classified by the Reassured [NERCO] ___________________________
as Property and Casualty Facultative Assumed Business ___________
produced and underwritten by the Graham Watson division of
Cameron & Colby, Inc." (Emphasis supplied.)20 The
____________________
explicitly includes a right to reject risks by rejecting the
entire facility. Automatics were, in any event, a minor part
of defendants' business, semi-automatics having been the
predominant mode.
20. At footnote 7 of its opinion, the court stated that this
language
was understood by the parties to the
contract as providing NERCO with a
limited discretion in classifying the
types of reinsurance and that is this
Court's interpretation on the basis of
the evidence.
It is unclear precisely what the court had in mind by this
statement. There was testimony that the contract language
meant that NERCO had discretion to classify a particular risk
as either a property or a casualty risk; there was other
testimony that it was standard language which gave NERCO
discretion to determine what business was facultative. The
plain meaning of the language seems to us to allow NERCO
reasonable, though not unlimited, discretion to decide what
types of reinsurance fit within the stated classification --
namely, as "Property and Casualty Facultative Assumed
business . . . ." Determining whether the business was
"facultative" as well as whether it was "property" or
"casualty" would all be included. See Commercial Union, 7 ___ ________________
F.3d at 1052 (citing Jiminez v. Peninsular & Oriental Steam _______ ___________________________
Navigation Co., 974 F.2d 221, 223 (1st Cir. 1992); Feinberg ______________ ________
v. Insurance Co. of N. Am., 260 F.2d 523, 527 (1st Cir. _________________________
-49-
facultative reinsurance NERCO was to classify covered risks
in the American, not the English, market. NERCO was
expressly delegated the right to "classify" the reinsurance.
See supra note 20. In exercising that right, NERCO was, of ___ _____
course, held to a standard of reasonable classification.
Salem Glass Co. v. Joseph Rugo, Inc., 343 Mass. 103, 106, 176 _______________ _________________
N.E.2d 30, 32-33 (1961) (where a contract leaves a certain
discretion or power in the hands of one party, that party is
under a duty to exercise that power reasonably); accord ______
Johnson v. Educational Testing Serv., 754 F.2d 20, 26 (1st _______ __________________________
Cir. 1985), cert. denied, 472 U.S. 1029 (1985). Nonetheless, ____________
being an American company operating here, NERCO would
obviously be expected to classify its business pursuant to
American, not English, terminology. Hence, to the extent
there is any difference between the prevailing English and
American views of what kind of underwriting the market
regards as "facultative," the parties would have intended the
American interpretation to control, absent evidence of some
contrary intent. Cf. Hazard's Adm'r. v. New England Marine ___ _______________ ___________________
Ins. Co., 33 U.S. 557, 564 (1834) ("Underwriters are presumed ________
to know the usages and customs of all of the places from or
to which they make insurances.").
____________________
1958)) ("In construing a contract, we must give reasonable
effect to all terms whenever possible."); id. at 1052-53 ___
(citing Liberty Mut. Ins. Co. v. Gibbs, 773 F.2d 15, 17 (1st _____________________ _____
Cir. 1985) (where unambiguous, contract terms must be given
their plain meaning).
-50-
To be sure, plaintiffs' experts gave testimony
tending to show that the American market understood the term
"facultative reinsurance" to mean risk-by-risk certificate
underwriting. One might argue that the district judge was
entitled to believe plaintiffs' experts over defendants' (who
testified to the opposite understanding),21 and to infer
that the ordinary meaning of the term "facultative" was,
therefore, the traditional one of risk-by-risk certificate
underwriting.
But the evidence that the term "facultative,"
within the American market, embraces more than just the
individual risk certificate method is simply too extensive
for the court to have rejected. Normally, of course, we are
bound by the district court's choice among competing experts.
But it is hard to gainsay experts such as defendants' expert
James Inzerillo, see supra note 21, when even plaintiffs' ___ _____
experts did not categorically deny the widespread use, within
____________________
21. Defendants' experts testified that "facultative"
included reinsurance underwritten by the semi-automatic and
related methods. One of defendants' experts was James
Inzerillo, the former president of Munich American
Reinsurance Co., the United States branch of Munich Insurance
Co., the largest reinsurer in the world. He testified that
individual risk underwriting was "by no means" the only form
of facultative reinsurance, and that MFCs and semi-automatic
and automatic facilities were all forms of facultative
reinsurance. Moreover, he testified that the largest direct-
writing professional reinsurers in the country all used such
facilities in their facultative operations. None of
plaintiffs/ experts categorically denied the widespread use
of such facilities in facultative operations.
-51-
the facultative operations of American reinsurers, of
facilities like the semi-automatics and automatics here in
issue. Plaintiffs' experts did not, in fact, testify that
the ordinary meaning of the term in the American reinsurance
industry was limited to individual certificate risk-by-risk
underwriting. Rather they intimated that this was what, in
their own opinion, the term properly meant or should mean.
Yet, the question is not the abstract use of language but
whether NERCO having discretion under the slips and Treaty
Wordings could reasonably classify the semi-automatic and
other methods it used in its own operations as "facultative"
and whether it committed fraud when it did so.
The best approach to answering this question lies
in the realities of industry practice. Cf. Affiliated FM ___ _____________
Ins., 416 Mass at 845, 626 N.E.2d at 881 ("Where, as here, ____
the contract language is ambiguous, evidence of trade usage
is admissible to determine the meaning of the agreement.").
Plaintiffs' expert, Phelan, conceded that American companies
commonly used facilities similar to defendants' semi-
automatics and automatics within their facultative
departments. He regarded this as anomalous, and pointed out
practical considerations which had led to that development.
But while disapproving, he admitted to the widespread use of
facilities of this type within the industry under the
-52-
facultative designation.22
American treatise writers, moreover, like the
English writers from whom we have quoted, acknowledge a
substantial, even predominant, modern trend towards use of
facultative facilities similar to the semi-automatics here in
question.23 We think it is substantially beyond cavil
____________________
22. Phelan testified, on cross-examination:
Q: Now you said in response to Mr.
Ritt's question, if I understood you
correctly, that the professional
reinsurers in this country in their
facultative departments commonly write
semiautomatic and automatic facilities
and call them facultative; isn't that
right?
A: Yes.
Q: And you have testified, if I
understand it, that there is nothing, per
se, wrong with doing so; isn't that
right?
A: That is correct.
23. For instance, Langler, writing in America in the 1950's,
describes an arrangement very much like the MFCs used by the
defendants, which he places squarely in the facultative camp.
He says,
Such facultative business as is now being
done by Reinsurance Companies in the
main, is transacted under Agreements
somewhat similar to the enclosed. The
offices ceding the business either
prepare binders and/or certificates
supplied by the Reinsurer or, if equipped
to do so, will furnish reports of the
business on an itemized bordereau, . . .
. It is, however, the invariable right of
the Reinsurer (or should be) to ask for
the cancellation, within 5 days after
receipt of advices, of any cession or
cessions submitted under the terms of the
agreement, otherwise the reinsurance is
-53-
____________________
considered binding on both parties. It
should be noted that this cancellation
privilege is worthless unless itemized
reports are received, from which it will
be possible to review the cessions and
extract one or more for cancellation
notice, if desired.
Willian J. Langler, The Business of Reinsurance 103-04 ______________________________
(1954). Langler includes a sample contract for use with this
method, which contains the following clause:
Cancellation Privilege. The Reinsurer _______________________
binds itself to accept reinsurances ceded
to it hereunder with the understanding
however that it may cancel any cession or
cessions within five days after receipt
of advices . . . upon notice to the
Ceding Company.
Id. at 106. This clause is not dissimilar to cancellation ___
clauses found in the MFCs used by the defendants to assume
business.
The district court quoted from 2 Klaus Gerathewohl
et al., Reinsurance Principles and Practice 1 (John _______________________________________
Christofer La Bonte trans., 1980) in support of its view that
semi-automatic and automatic facilities are not a legitimate
form of facultative reinsurance. Gerathewohl does state, as
a general proposition, that facultative reinsurance "always
covers a single risk." However, he states, in a section
entitled "The management of facultative reinsurance
business," that "[i]n order to keep the direct insurer's
management and administration operations for facultative
reinsurance business at a minimum, it is essential to
rationalize - ie [sic] standardize - all operational ___________
processes as far as the individual nature of facultative
reinsurance will allow." Id. at 12 (emphasis added). Among ___
the methods used "particularly by large professional
reinsurance companies that specialize in the facultative
business," id. at 13, is the following: ___
Application of General Terms and
Conditions of Facultative Reinsurance
containing general principles applicable
to all cessions made. Such streamlining
and standardization of facultative
reinsurance agreements avoids the
-54-
that, in recent times, the term "facultative reinsurance"
includes methods, in addition to traditional risk-by-risk
certificate underwriting, similar in concept to the semi-
automatics.
Given this body of evidence, including plaintiffs'
expert's concession as to the classification, we see no
adequate basis, from the term "facultative" itself, for the
judge to infer that defendants necessarily knew that
plaintiffs would or should interpret "facultative," as used
in the slips and Treaty Wordings, as limited solely to risk-
by-risk certificate underwriting. While the latter is the
original and classic method, see Unigard, 4 F.3d at 1053-54, ___ _______
other "streamlined" forms are clearly now being utilized
within the industry under the rubric of "facultative," both
here and abroad, including types in which the reinsurer can
be bound on individual risks by the reinsured acting pursuant
to the terms of a general authorizing contract. Such a
____________________
necessity to negotiate the terms and
conditions on each individual case and
also excludes possible cases of doubt
owing to the absence of express
stipulations.
Id. at 14-15. Thus, Gerathewohl cannot stand as support for ___
a definition of facultative underwriting that excludes all
but individual risk-by-risk negotiation. Moreover,
Gerathewohl is a German author, writing for a German
reinsurance company. His views, while probably authoritative
in that context, cannot be taken as authoritative over those
of writers more intimate with the common practices of the
American reinsurance market.
-55-
contract requires the reinsured to report the placement of
the reinsurance to the reinsurer via a bordereau; and it may
give the reinsurer the right, within a specified time frame,
to reject any particular risk thereafter but not
necessarily ab initio. The semi-automatics in issue here _________
were designed along these lines. Facilities employing this
method were developed to offset the paperwork and high costs
associated with classic certificate facultative reinsurance
individually negotiated in advance on a risk-by-risk
basis.24 The hallmark of facultative reinsurance
evaluation of each risk separately by the reinsurer's
underwriter is sought to be preserved by maintaining the
right to cancel after the fact. Although a window of
exposure is created during which the reinsurer is bound
without his consent on what the latter may later decide is an
unacceptable risk, the potential for damage is minimized by
the relative shortness of the exposure and by contract
conditions which prevent the reinsured from binding the
reinsurer to predescribed types of risks the reinsurer does
____________________
24. The First State reinsurance, as the district court
found, fell within the automatic and/or semi-automatic method
of underwriting. See supra section I.B.2. The record ___ _____
supports that finding, in the sense that the practices and
understanding between First State and Graham Watson were
generally analogous to those under the formalized MFCs,
although the close employment settings may have indicated
greater de facto underwriting control. ________
-56-
not wish to cover.25
We conclude that there is insufficient support in
the record for the court's key fraud finding that defendants
knowingly misrepresented to plaintiffs that they would
receive one type of reinsurance (the classic risk-by-risk
certificate form of facultative), while intending all along
to provide another type (semi-automatic and automatic). The
evidence does, indeed, support the court's finding that
defendants intended to supply reinsurance underwritten by the
semi-automatic and (to a minor degree) automatic methods
(although not to the complete exclusion of classic
facultative, a small amount of which was also produced). But
the record does not support the finding that the defendants
knew that the plaintiffs expected to receive only the classic
risk-by-risk certificate form of facultative reinsurance, nor
does it support the finding that defendants made knowing
misrepresentations with respect to the term "facultative".
3. No Concealment No Concealment
____________________
25. The district court found that semi-automatic
underwriting differed from the classic risk-by-risk
facultative method in that "the 'right to cancel' and the
'right to reject' are effective only at the time the right is ___________
exercised by the reinsurance underwriter and well after the _____
reinsured risks had attached to the SANS Treaties." These
rights were not effective ab initio. But this appears to be _________
a price the industry has been willing to pay for the
streamlined operation, as Golding notes, see Golding, supra, ___ _____
at 42 ("Yet it may be emphasized that it still remains
facultative reinsurance, for the reinsurer is in no way
deprived of its power to decline, even though it must accept __________________________
responsibility in the meantime.") ______________________________
-57-
Before leaving this subject, we shall consider an
alternate theory of fraud based on use of the term
"facultative," a theory which, arguably, might enable us to
uphold the district court's result.
Defendants doubtless knew that the streamlined
forms of facultative underwriting they intended to provide
under the SANS Treaties were not the same as the traditional
form of facultative underwriting. Graves Hewitt's testimony
indicated as much. He testified that most of the facultative
business in his company's NERFAC division had been
underwritten in the classic individual certificate manner.
He wanted Graham Watson to switch to the semi-automatic
method in order to get rid of the paperwork and expense
associated with the classic method.26 The record also
bears the inference (assuming, as we infer, supra, that the _____
court discredited Hewitt's testimony that he so informed
Bailey in 1979) that defendants not only did not inform
plaintiffs or their own sub-brokers of their intention
____________________
26. Hewitt testified that when he approached Bailey in 1979,
he did so intending to short circuit the classic facultative
arrangements which NERFAC was using because "we had mountains
of paper to file . . . . I made it clear to Ralph we were
not interested in doing business that way." The court, as it
was entitled to, apparently rejected Hewitt's testimony. (If
accepted, it would have seriously undermined any theory of
intentional misrepresentation.) The testimony at least
indicates that Hewitt was well aware that the MFCs and
accompanying modes of underwriting were in some sense a
departure from past practice. There was evidence of their
occasional use by NERFAC in the past, but most of NERFAC's
underwriting was by the traditional facultative method.
-58-
to streamline their underwriting, but kept this information
to themselves. Does it follow from this that, while
negotiating the SANS Treaties, defendants designedly failed
to volunteer to plaintiffs facts material to the risk
i.e., their intention to use this type of facultative ____
underwriting "which honesty, good faith and fair dealing
require[d] that [they] should communicate to the insurer"? 9
Couch 38:2.
Although argued by plaintiffs, the above theory was
not adopted by the district court. Instead, the court found
that defendants had misled plaintiffs by making the
"knowingly false" representation that "reinsurance
underwriting would be individual risk certificate
underwriting." While there is insufficient record support
for such an express misrepresentation, it can be argued that
defendants, being under the duty to exercise the utmost good
faith, Unigard, 4 F.3d at 1066, were required to disclose, as _______
a fact material to the risk, their proposed utilization of
streamlined facultative underwriting procedures going beyond
the traditional method.
Couch states:
In effecting a contract of reinsurance,
it is incumbent upon the original insurer
to communicate to the reinsurer all facts
of which it has knowledge which are
material to the risk, and where it states
as a fact something untrue, with intent
to deceive, or where it states a fact
positively as true without knowing it to
-59-
be true, and which tends to mislead, the
policy is avoided where such statement or
fact materially affects the risk; also,
any undue concealment or intentional
withholding of facts material to the
risk, which ought in good conscience to
be communicated by the original insurer,
avoids the contract, without regard to
whether the knowledge or information with
respect to material facts was acquired by
the original insurer previously or
subsequently to the writing of the
original contract.
19 Couch 80:77. While the above speaks of the relationship
between original insurer and reinsurer, we think the same
general principles apply between a retrocedant and
retrocessionares in a reinsurance treaty. The question boils
down to whether a failure to disclose plans to deviate from
traditional risk-by-risk underwriting, should be considered
"undue concealment or intentional withholding of facts
material to the risk, which ought in good conscience to be
communicated. . . ." Id. We answer in the negative for two ___
reasons.
First, in determining what information is so
material as to require disclosure by the insured sua sponte, __________
courts recognize that the insured need not disclose "what the
insurer already knows or ought to know." 9 Couch 38:15.
It is said that "[a] minute disclosure of every material
circumstance is not required." Puritan Ins. Co. v. Eagle _________________ _____
S.S. Co., S.A., 779 F.2d 866, 871 (2d Cir. 1985). ______________
Ordinarily the insured is not required to
make more than a general statement of
-60-
facts, and is not expected to go into the
details about which the insurer manifests
no interest and makes no inquiry . . . .
9 Couch 38:58. There is a "wide distinction . . . between
[the insured's duties in] those cases where there is no
inquiry and those where questions are propounded by the
insurer." Id. ___
Here there is no indication that plaintiffs asked
defendants during the negotiation of the first SANS Treaties
to describe what types of facultative underwriting they
proposed to engage in. To the contrary, the executed
contracts expressly allowed defendants a reasonable
discretion in this regard. And as we have just held, the
type of underwriting methods they utilized, while not the
classic form of facultative reinsurance, fell within industry
parameters.
The parties here were of equal power and highly
knowledgeable. The slips and Treaty Wordings were negotiated
by and between sophisticated reinsurance professionals.
Without first being asked by the other party, one would not
expect defendants to volunteer a plethora of details on their
proposed underwriting practices. Matters would have been
different had defendants affirmatively misrepresented their
intended underwriting practices or given incomplete, evasive
or incorrect answers to questions asked. We see no basis to
infer "undue concealment" from their failure to volunteer
-61-
further information about facultative underwriting
characteristics where, for all that appears, the subject was
not broached.
The slips, as said, were worded so as to vest
discretion in NERCO as to the business it would classify as
"facultative," indicating a willingness to leave this choice
to NERCO. As previously discussed, NERCO's choice had to be
reasonable and exercised in good faith. Salem Glass, 343 ____________
Mass. at 106, 176 N.E.2d at 32-33; Johnson, 754 F.2d at 26. _______
But, within those limits, the decision was left in NERCO's
hands. To say that NERCO had a duty to volunteer to
plaintiffs, unasked, the nature of its proposed facultative
underwriting facilities and, in effect, secure their advance
approval, goes beyond the parties' bargain as written. If
plaintiffs had wished to limit defendants to a particular
facultative method, that requirement should have been
inserted in the contract. It was not. The duty of utmost
good faith should not enable a party, whose bargain later
turns sour, to expand the terms of an original, fairly
bargained contract.27 Given the equal strength and
____________________
27. To argue that the plaintiffs' underwriters were lulled
into not asking because they did not understand the American
meaning of "facultative" is surely to underestimate the
acuity of the London underwriters who write insurance around
the world. As already mentioned, English authorities like
Golding, supra, indicate that, even in the British market, _____
streamlined methods of facultative underwriting are well
known. But assuming different considerations in reinsuring
risks in other parts of the world, underwriters are expected
-62-
sophistication of the parties, and the fact that underwriting
considerations now in dispute were such obvious topics of
inquiry had plaintiffs wanted to know more, we are not
convinced that the record establishes that the intended
methods of proposed facultative underwriting were material
items of the type defendants were required, without inquiry,
to disclose.
However, even if the materiality of the information
were such that defendants should have volunteered it, the
record lacks evidence from which to find that defendants,
recognizing its materiality, withheld it deliberately rather
than through oversight. Claims in fraud against non-marine
reinsurers cannot rest on a showing of mere negligent
concealment. Unigard, 4 F.3d at 1069. The semi-automatic _______
and like methods employed were, as above indicated, within
accepted parameters of facultative classification, and the
contract left their use to defendants' discretion. Plans to
use such facilities were not so abnormal as to imply
fraudulent intent from the mere fact of non-disclosure. Any
argument that plans to use semi-automatics had to be
disclosed because that method of underwriting was especially
risky is belied by the absence of evidence linking the SANS
____________________
to seek information as to the terms and practices in the
insured's market if they are interested. Cf. Hazard's ___ ________
Adm'r., 33 U.S. at 564 ("Underwriters are presumed to know ______
the usages and customs of all of the places from or to which
they make insurances.").
-63-
Treaty losses with the method of underwriting used. To the
contrary, defendants presented evidence which, if believed,
could indicate that the losses under the Treaties were less
than the industry averages for the period.28 It is
undisputed, as the judge stated, that the market in which the
losses occurred was "disastrous" generally. Substantial
contrary evidence was not introduced, nor was there
substantial evidence of large Treaty losses from risks of a
type that would likely not have been reinsured under the more
deliberate classic facultative procedures. We find the
record inadequate to support a finding that in failing to
disclose their plans to use semi-automatic and related
underwriting methods, defendants were acting with fraudulent
intent.
We thus reject, as an alternative means of
affirming the court's "facultative" fraud finding, the
fraudulent withholding theory above discussed. We conclude
that the court clearly erred to the extent it based its
finding of fraud on defendants' promise to produce and
underwrite "facultative" reinsurance.29
____________________
28. Cf. Unigard, 4 F.3d at 1054 (noting that "in recent ___ _______
years, the reinsurance market has witnessed an increase in
participants and a decline in profitability due to huge
environmental losses")
29. For reasons set out in our discussion of the plaintiffs'
contract claims, infra, we reject the district court's _____
determination of fraud insofar as based on its finding that
defendants did not, in fact, "produce" or "underwrite" the
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B. Risks Obtained Directly from Primary Insurers Risks Obtained Directly from Primary Insurers
The district court's fraud determination rests also
on findings of misrepresentations in the 1979 Placing
Information concerning Graham Watson's intent to obtain
reinsurance directly from selected primary insurers without
intermediaries. The court found that (1) NERCO represented
that it would "produce 'non-system business' from primary,
risk-bearing, insurance companies directly"; (2) that "in
fact, it produced most of such business from [Managing
General Agents] through intermediaries and from
intermediaries themselves, and yet never disclosed these
material matters to the Plaintiff reinsurers as it was
required to do"; (3) that plaintiffs had put their trust and
confidence in, and entered into the SANS Treaties in reliance
upon, the foregoing representations (as well as upon the
supposed representation of individual risk certificate
underwriting, rejected above); (4) that the inducing
representations to produce and underwrite reinsurance from
selected primary sources, and by a direct approach rather
than through intermediaries, "were knowingly false" and "were
not kept by NERCO nor did NERCO intend to keep such
promises."
Two complementary theories emerge from these
____________________
reinsurance, but rather improperly delegated those duties to
others.
-65-
findings. First, that defendants never intended, when in
1979 they wrote and circulated the Placing Information
containing the challenged representations, to live up to
them. Second, that when later, during the course of the
Treaties, it became apparent that "direct" non-system
business was unavailable, and defendants decided to seek non-
system business through intermediaries, they did not disclose
"these material matters, as [they were] required to do."
1. Fraud in the Inducement Fraud in the Inducement
The first theory amounts to fraud in the
inducement. While the misrepresentations were of intentions
as to a course of action in the future, the deliberate
misstatement of present intentions can constitute fraud.
Present intention as to a future act is a
fact. It is susceptible of proof. When
such intention does not exist, . . . it
is a misrepresentation of a material fact
. . . . The statement of fact as to
present intention of the defendant, being
susceptible of actual knowledge and being
a fact alleged to have been false, may be
made the foundation of an action for
deceit.
Feldman v. Witmark, 254 Mass. 480, 481-82, 150 N.E. 329 _______ _______
(1926), quoted in Barret Assoc., Inc. v. Aronson, 346 Mass. _________ ____________________ _______
150, 190 N.E.2d 867, 868 (1963). It is true the Placing
Information was never incorporated into the contracts
(consisting of the slips and Treaty Wordings). But
defendants prepared and circulated the Placing Information
specifically to induce persons and entities like the
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plaintiffs to enter into the Treaties. Knowingly false
material statements therein inducing reliance would be
actionable fraud.30
Defendants respond that the representation in the
Placing Information of an intention to "develop a close
working relationship with selected primary companies" and
related statements were accurate reflections of their
intentions when made. In support of this, they point to
evidence of their efforts after the Treaties were entered
into to develop a working relationship with primary
companies. They also argue that at all times they did have
an ongoing direct relationship with First State. Utilizing
brokers and MGAs to provide NERCO with reinsurance business
was said to have occurred only after it was apparent that
these earlier, sincere efforts had failed.
But the court was entitled to find otherwise, as it
did. Anderson, 470 U.S. at 573-74 (if evidence is subject to ________
more than one reasonable interpretation, it cannot be clearly
erroneous). Before the Placing Information was written,
there was evidence that NERCO commonly used intermediaries.
Statements by defendants' witnesses at trial and in certain
of defendants' planning documents issued prior to the SANS
Treaties suggest an intention to continue to do so in the
____________________
30. Defendants challenge the district court's finding that
all plaintiffs relied on these misrepresentations. We
discuss reliance in the following section.
-67-
Graham Watson operation. And defendants' efforts, after the
Treaties were in place, to secure non-brokered business could
be found to be predictably ineffectual, further suggesting a
lack of intention to secure the direct business described in
the Placing Information. The Placing Information
representations, it might be inferred, more reflected a
calculated effort to entice plaintiffs to enter into the
Treaties than honestly to project defendants' real business
plans. While susceptible of another construction, the record
adequately supports the court's finding that representations
in the Placing Information as to Graham Watson's direct
writing intentions were knowingly misstated.
Defendants argue that even though NERCO may have
used intermediaries, it nonetheless complied with its
representation that it would develop a close working
relationship with primary companies. Defendants point out
that the reinsurance it wrote with the aid of intermediaries
came, for the most part, from highly regarded primary
insurance companies. They also argue that the intermediaries
enabled them to develop relationships with these companies
that might, in time, become "direct." But the court, as it
did, was entitled to read the Placing Information as
inconsistent with the securing of business through brokers
and MGAs. The Placing Information says, for example, that
"[f]aculative reinsurance emanating from reinsurance
-68-
intermediaries will continue to be written separately through
NERFAC." While defendants seek to place a different meaning
on this, the court was entitled to read this as saying that
business through intermediaries would not be handled by
Graham Watson. And there were other statements supporting
the same impression.
The court was entitled to conclude that there were
significant differences between a "direct" relationship
between NERCO and selected primary insurers and a
relationship by brokers and MGAs. These differences could
affect the quality of the business, at least in some people's
minds, and might have caused some plaintiffs, had they been
aware of defendants' actual plans, to reevaluate their
decision to participate in the SANS Treaties. In the case of
business obtained through MGAs, for instance, the MGA
underwrote the risk for the primary insurer (as opposed to
the underwriting being performed by the primary insurer
itself); communications, premiums, and reporting and
accounting documents were routed through the broker. The MGA
was not at risk should an actual loss arise. Bailey, a lead
underwriter, strenuously objected to business underwritten by
intermediaries, regarding it as of lesser quality. The court
was entitled to believe that the non-system business provided
through Baccala and Shoop and others was materially different
from the business represented in the Placing Information.
-69-
We, therefore, affirm the district court's finding that
material and knowing misrepresentations were made in the
Placing Information in 1979.
2. Concealment Concealment
The court also found that NERCO "never disclosed
these material matters to the Plaintiff reinsurers as it was
required to do." This appears to be a finding that, while
the Treaties were in effect, NERCO violated its good faith
duty to disclose to plaintiffs matters coming to its
attention material to the risk most notably its growing
use of intermediaries for non-system business and its
abandonment of the plans set out in the Placing Information
to establish direct relationships with primary insurers. See ___
Unigard, 4 F.3d at 1069. This trend, however, was not _______
totally unannounced by defendants. In the 1981 Anniversary
Information, defendants revealed that, although the
preponderance of that year's business was system business
from First State, a "relatively small proportion of the non-
system business had been written on an excess of loss basis
emanating from Baccala and Shoop Insurance Services." At
this time, Bailey was already well aware that NERCO was
receiving the Baccala and Shoop business. He objected to it,
but finally went along for that year. Because Bailey was a
lead underwriter, this conceivably (although we do not
decide) put all the plaintiffs for whom he was acting on
-70-
notice that more such business could be anticipated in the
following year, yet neither he nor anyone else took the
simple precaution of inserting a prohibition against this
type of business in the renewal slips for 1981 and following
years.
The district court dismissed the 1981 Anniversary
Information disclosure in the following finding:
Although the Plaintiff reinsurers were
aware that Baccala and Shoop, an MGA, had
ceded to the SANS Treaties approximately
five percent of the total business during
the first year, 1980, they were never
apprised that, during the ensuing three
years, Baccala and Shoop would cede the
majority of "non-system business" and
that other MGAs and intermediaries would
cede, in conjunction with Baccala and
Shoop, most of the "non-system business"
to the SANS Treaties.
This finding does not explain, however, why Bailey and
others, once on notice that business was being accepted that
was contrary to representations in the Placing Information,
did not continue to protest and try to head off the
acceptance of further such business. Moreover, the court
made no reference to other evidence that certain of the
plaintiffs may have learned a considerable amount about the
nature and source of defendant's business during the life of
the SANS Treaties. Such evidence is relevant, under
discovery principles, to the various statutes of limitations,
including the three year fraud statute, infra. It may also _____
be substantively relevant to plaintiffs' fraud claims and the
-71-
recovery rights of individual plaintiffs. Although we have
sustained the district court's finding that defendants
deliberately misstated their business plans in 1979, if
certain plaintiffs renewed their annual participations in the
SANS Treaties even after becoming aware that defendants were
using intermediaries and lacked "direct" business, this could
affect their right to recover in fraud for subsequent Treaty
business, and might conceivably cast doubt as to their right
to recover at all, on some theory of acquiescence or waiver.
These matters require the making of further findings as to
what information became known to whom, and when, and
determination of the legal effect of any such knowledge
and/or notice.
Therefore, although we affirm the district court's
finding that knowing misrepresentations were made in the
Placing Information, we direct that reconsideration be given
on remand to the legal significance of the information
revealed in the 1981 Anniversary Information, and any other
information the court finds was subsequently received by the
plaintiffs, or some of them, as it relates to plaintiffs'
rights to abandon their reinsurance obligations under the
SANS Treaties, and recover damages for losses already paid.
In considering such matters, the district court should take
into account, among other things, defendants' duty of utmost
good faith, the identity of those plaintiffs affected by the
-72-
particular information, the legal effect on plaintiffs of
information possessed by Bailey because of his special role
as a lead underwriter, and the fact that the Treaties were
renewable annually. The district court did not discuss or
make findings on these matters. So as to leave a clear field
on remand, we vacate (without, however, necessarily
disapproving) and leave for further evaluation by the
district court, the court's finding that NERCO "never
disclosed these material matters to the plaintiff reinsurers,
as it was required to do." However, we affirm the district
court's finding that the defendants' made material
misrepresentations in the Placing Information regarding plans
to obtain business directly from primary insurers and related
matters.
On remand it will also be necessary for the court
to consider exactly which of the SANS Treaties were infected
by the misrepresentations made in the Placing Information.
This question may be affected not only by which information
came to what plaintiffs during the term of the SANS Treaties,
but also by the fact that the business produced by First
State was obtained directly, without the involvement of any
intermediary. No part of that business, therefore, was
seemingly affected by these misrepresentations although we do
not foreclose the issue. In addition, because the district
court made no subsidiary findings concerning the various
-73-
arrangements under which Graham Watson assumed non-system
business, we cannot tell whether all of that business
involved the use of brokers and/or intermediaries, or whether
some portion of it was obtained directly from primary
insurers. On remand, the district court should take into
account all such issues in determining assuming the
statutes of limitations and other matters do not stand in the
way of recovery what relief to provide.
C. Reliance Reliance
The district court properly listed reliance as one
of the elements of a common law fraud under Massachusetts
law. 825 F. Supp. at 380 (stating that plaintiffs must prove
that they "relied upon that representation as true and acted
upon it to their detriment"). The court then found that the
representation that defendants would obtain business directly
from primary insurers was "made by NERCO with the intention
of inducing the Plaintiff reinsurers to enter into the SANS
Treaties, and, in reliance on said . . . representation[], ______________
the Plaintiff reinsurers did enter into the SANS Treaties to
their detriment." 825 F. Supp. at 383 (emphasis supplied).
The court made no subsidiary findings which would indicate
what evidence it credited in finding that all of the 32
plaintiffs31 relied.
____________________
31. Thirty-two being the number of plaintiffs before the
district court at the time it rendered judgment.
-74-
Defendants challenge this finding, pointing out
that a majority of the plaintiffs failed to present any proof
whatsoever that they had individually read and relied upon
the Placing Information. Underwriters for only some of the
plaintiffs testified that they had relied upon the challenged
statements. Plaintiffs conceded in closing argument that for
many of the individual plaintiffs there was no specific proof
of reliance.
Reliance is an element of common law fraud in
Massachusetts, as the district court stated. Danca, 385 _____
Mass. at 8, 429 N.E.2d at 1133 (citations omitted). It is
"general insurance law" that reliance is an element of fraud
in the insurance context. E.g., Foremost Guar. Corp. v. ____ _____________________
Meritor Sav. Bank, 910 F.2d 118, 123 (4th Cir. 1990). ___________________
Plaintiffs nonetheless argued below and on appeal that proof
of reliance was not needed, citing Shapiro v. American Home _______ _____________
Assur. Co., 584 F. Supp. 1245 (D. Mass. 1984). In Shapiro, __________ _______
the district court said that "[t]he weight of Massachusetts
authority does not consider 'reliance' as a separate element
which an insurer must prove in order to invalidate an
insurance policy." Id. at 1250. But Shapiro, and the cases ___ _______
cited therein, see Pahigian v. Manufacturers' Life Ins. Co., ________ ____________________________
349 Mass. 78, 206 N.E.2d 660 (1965); Davidson v. ________
Massachusetts Casualty Ins. Co., 325 Mass. 115, 89 N.E.2d 201 _______________________________
(1949); Bouley v. Continental Casualty Co., 454 F.2d 85 (1st ______ ________________________
-75-
Cir. 1972) (applying Connecticut law), are factually
distinguishable from the present case. Shapiro and its _______
predecessors dealt with misrepresentations made on a form
application for a policy of insurance, which application was
then attached to and became a part of the policy. In
Shapiro, the application stated on its face that "any claim _______
or action arising [from an incorrect answer to the previous
question in the application] is excluded from this proposed
coverage." Shapiro, 584 F. Supp. at 1247. The Shapiro line _______ _______
of cases relate to what have been called "warranties" in
insurance law. See 9 Couch, 36:1 ("Generally speaking, a ___
warranty in the law of insurance is a statement, stipulation,
or condition which forms a part of the contract, whereby the __________________________________
insured contracts as to the existence of certain facts,
circumstances, or conditions, the literal truth as to which
is essential to the validity of the contract.") (emphasis
supplied). Warranties are typically enforced regardless of
reliance. In the present case, the Placing Information was
not a warranty. It was neither incorporated in, nor attached
to, the contracts eventually executed, nor did the contracts
themselves contain any promise that Graham Watson would
obtain business directly from primary insurers. Shapiro, _______
Pahigian, and Davidson were, in addition, all cases decided ________ ________
under Mass. Gen. L. ch. 175, 186, a consumer protection
statute not at issue here, and arguably inapplicable to this
-76-
situation. Cf. Liberty Mut., 773 F.2d at 18 (refusing to ___ ____________
apply Mass. Gen. L. ch. 175, 112, a consumer protection
statute, in the reinsurance context, and noting that a
contract of reinsurance is more "a contract of indemnity"
than a policy of insurance). Finally, in Shapiro, the court _______
found that even if reliance were a required element of proof
under 186, such reliance would be found on the evidence
before the court. Shapiro, 584 F. Supp. at 1249. This _______
obviously cannot be said here of those plaintiffs who did not
present individual evidence of reliance, infra. Plaintiffs' _____
counsel conceded in closing argument that what he called
subjective reliance by the underwriter who wrote the risk was
not proven here in many instances. We, therefore, find no
basis in Shapiro for making an exception here to the _______
Massachusetts requirement that a plaintiff seeking recovery
in fraud must prove reliance on the misrepresentations made.
As direct evidence of reliance is admittedly
lacking as to many plaintiffs, the question arises whether
there may be circumstantial evidence of reliance to fill in
the gap. We cannot find such evidence. The plaintiffs were,
for the most part, unrelated entities from several European
nations. They were approached by no fewer than five sub-
brokers. Defendants, it is true, concede in their brief that
the SANS "placing materials were distributed by the London
sub-brokers to prospective retrocessionaires, including the
-77-
plaintiffs, in London and Central Europe." But delivery of
the placing materials to a plaintiff is not the same as proof
that the recipient looked at and relied upon them. Nor is
the fact that certain other plaintiffs read and relied upon
the placing materials evidence that all plaintiffs did so.
Several of the plaintiffs were unable to produce copies of
the Placing Information from their own files, and many were
unable to present the testimony of anyone who could say that
the Placing Information was seen and relied upon in making
the decision to enter into the SANS Treaties. There was also
evidence that, at least as to some of the plaintiffs, the
sub-broker soliciting participation and the underwriter who
made the decision to participate were corporate affiliates,
thus raising the possibility of some motive for participation
unrelated to the defendants' inducing statements.
In light of these facts, the district court's
finding that all plaintiffs had relied upon the false
statements in the Placing Information is legally and
factually insupportable and must be vacated. We remand with
directions for the district court to determine which of the
plaintiffs have proven reliance in conformity with the
requirements of Massachusetts law, and to deny recovery in
fraud to any plaintiff who has not met this burden.
IV. Contract Claims Contract Claims
We turn to the plaintiffs' contract claims.
-78-
(1) The slips called for the cession of "[b]usiness
classified by the Reassured [NERCO] as . . . Facultative
Assumed business produced and underwritten by the Graham
Watson division of Cameron & Colby Co., Inc." As we have
held, the character of the business ceded could reasonably be
classified as facultative business. We find insufficient
record support for the court's finding that, "NERCO
contracted under the SANS Treaties that Graham Watson would
examine each individual risk submission by the ceding company
on a risk-by-risk basis and, if the risk be accepted, . . .
would then issue an individual certificate to the ceding
company." We accordingly reject, as clearly erroneous, the
court's finding of breach of contract based upon the supposed
non-facultative character of the reinsurance retroceded to
plaintiffs.
(2) The district court further found that
NERCO also breached its contractual
obligation to produce property and
casualty facultative assumed business,
for under the "automatic" and/or "semi-
automatic" method of underwriting the
reinsurance business is actually produced
by the ceding source companies and not by
the original reinsurer.
We hold this finding to be clearly erroneous. While the
primary insured or its agent may indeed have the authority
under the automatic or semi-automatic methods to initiate the
issuance of the reinsurance, this can only be done pursuant
to the reinsurer's authorization in the MFC or other advance
-79-
arrangement. The reinsurance was clearly "produced" by
defendants by negotiating and setting up the MFCs or other
arrangements under which the business was assumed.
(3) The district court also found that NERCO
breached its contractual representation that the business
would be "underwritten" by Graham Watson. The district court
found a contractual breach because, under the automatic
and/or semi-automatic methods employed, "Graham Watson
delegated its reinsurance underwriting authority to the
source company to automatically cede risks to the SANS
Treaties." The district court was undoubtedly right that
under the semi-automatic and like methods, the ceding
company, or the MGA representing it, was given the right
initially to assign the risks to NERCO, and through it to
plaintiffs, before review by Graham Watson's underwriters.
However, this was done under facilities previously entered
into with Graham Watson, containing underwriting terms and
requirements satisfactory to the latter. And, in the case of
most of the business, Graham Watson had the right within a
stated time to reject any risk upon receipt of the bordereau
or lay-off sheet disclosing it, if the risk did not meet its
underwriting approval. Graham Watson was underwriting the
business, albeit using the streamlined facultative methods
discussed earlier in the opinion. As we have held, these
methods fall within the industry's purview of "facultative
-80-
underwriting." Our decision on that point dictates rejection
of the district court's above finding, which rests
essentially on the erroneous view that the types of
facilities defendants were using were illegitimate and
unacceptable underwriting vehicles. We hold, therefore, that
this finding, too, was clearly erroneous.
Having said this, we remain troubled by the
evidence, and the court's findings, of possible systematic
inadequacies in the quality of the underwriting performed. _______
Conceivably, underwriting could be so deficient as to be
tantamount to a breach of the duty to underwrite. Plaintiffs
insisted, with support from their experts, that Graham Watson
was less than diligent in its underwriting efforts once the
risks were reported to it by means of the layoff sheets and
bordereau. There was evidence of delay and of inadequate
underwriting data. There was also some evidence that Graham
Watson's underwriters may never have rejected a single risk. _____
The district court found that Graham Watson did not have "the
quantity or quality of information it needed to facultatively
underwrite the risks ceded to the SANS Treaties." This
finding was, to be sure, based on the court's incorrectly
narrow definition of facultative reinsurance, and was in
support of its finding that Graham Watson did not perform
facultative underwriting. Whether, under this court's very
different view of the propriety of defendant's streamlined
-81-
facilities, Graham Watson's "underwriting" could possibly be
found to have been so inadequate as to violate its
contractual duty to "underwrite" is a question we are in no
position to answer. We leave this issue to the district
court, on remand, with instructions to also decide whether
other considerations such as the bar of the statute of
limitations leave it viable.
(4) The district court found that NERCO "violated
its contractual obligation to 'co-reinsure for 10 percent
participation on all 'System Business' ceded hereunder,' as
required by Warranty No. 2 in the Slip." Warranty No. 2
reads as follows:
2) Reassured [NERCO] co-reinsure for 10%
participation on all "System Business"
ceded hereunder.
The plaintiffs argue that this term was inserted into the
Slips at Bailey's insistence because he wanted NERCO to keep
a significant risk in the business, thus providing it with
"an increased incentive to exercise care and prudence in risk
selection." They then argue that in fact, NERCO did not keep
a 10 percent retention, but instead obtained outside
reinsurance of that 10 percent which reduced the amount of
risk it kept for itself to a "minuscule" amount. In other
words, they read the Warranty to require a 10 percent
unreinsured retention. The district court appears to have ___________
also read the warranty in this manner; this is the only
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reasonable reading of the court's statement, as there was no
evidence that NERCO did not initially retain at least 10
percent of each risk it ceded.
The defendants respond that Bailey's testimony
shows that the intent of the Warranty was not that NERCO
could not obtain any reinsurance of its retention, but rather
that NERCO should have exposure to losses that was equal to
or greater than Bailey's firm's exposure. They point out
that the evidence shows that, in fact, "NERCO's actual losses
on the portion of the SANS risk portfolio that it retained
(unreinsured) was $105,000,000 an amount virtually equal
to all of the losses of all of the plaintiffs combined." ___
(Emphasis in original.)
We believe the court was entitled to view the
evidence on this point as it did. There is no doubt that
NERCO did reinsure some portion of its retention; Hewitt
admitted as much, and the plaintiffs introduced into evidence
some of the reinsurance contracts used by NERCO to reinsure
the retention. There was also evidence on both sides of the
question whether the parties intended Warranty No. 2 to
require NERCO to keep an unreinsured retention. While there
are no contemporaneous documents using the phrase
"unreinsured retention" or words of similar import, several
witnesses, including Nigel Huntington-Whitely, who was
pivotally involved in the negotiation of this point,
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testified that an unreinsured retention was what was
intended.
The issue of what the parties intended by this
language is an issue of fact, which we must uphold absent
clear error. See Commercial Union, 412 Mass. at 557, 591 ___ _________________
N.E.2d at 172. We, therefore, affirm the district court's
finding of breach of contract on this ground, subject, of
course, to any relevant findings the district court may make
on remand concerning the effect of the statute of limitations
and other material issues remaining open, infra. _____
V. The Statute of Limitations The Statute of Limitations
The defendants argue that "virtually" all of
plaintiffs' claims should have been barred by the applicable
statute of limitations defenses raised below. As already
noted, we have not been able to find in the record any
explanation by the district judge of his reasoning or his
view of the law and the facts on these potentially
dispositive issues. The possible effects of the various
statutes of limitations on the different claims cannot be
reviewed without findings and rulings based on the record.
We, therefore, express no opinion at this time but direct the
district court, upon remand, to consider the impact of the
applicable statutes of limitations on the various claims, and
make appropriate findings and rulings.
The parties agree that the date from which to
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measure the statutes of limitations is July 12, 1988, when
the plaintiffs first raised their claims of fraud and breach
of contract,32 by adding these claims to their Second Amended
Complaint. The applicable statute of limitations for fraud
is three years, Mass. Gen. L. ch. 260, 2A; Tagliente v. _________
Himmer, 949 F.2d 1, 4 (1st Cir. 1991); that for breach of ______
contract is six years, Mass. Gen. L. Ann. ch. 260, 2
(1992). The plaintiffs argue that each of these statutes is
subject to the discovery rule, meaning that a cause of action
did not accrue until the plaintiffs learned or reasonably
should have learned of the factual basis for their claims.
White v. Peabody Const. Co., Inc., 386 Mass. 121, 129, 434 _____ _________________________
N.E.2d 1015, 1020 (1982); see also Cambridge Plating Co., _________ _______________________
Inc. v. Napco, Inc., 991 F.2d 21, 26-28 (1st Cir. 1993) ____ ___________
(discussing Massachusetts discovery rule); Tagliente, 949 _________
F.2d at 4 (same). If plaintiffs' claims accrued prior to
July 12, 1982 (contract) or July 12, 1985 (fraud), and unless
the discovery rule applies so as to delay the accrual of the
alleged causes of action beyond these dates, then those
claims would have been barred.
There are various facts which, if proven to the
____________________
32. As we say below, the district court erred in finding
liability under Mass. Gen. L. ch. 93A. Therefore, we do not
discuss the statute of limitations relevant to that claim.
Nor, do we discuss the statute of limitations relevant to the
RICO claim because we affirm the district court's finding
that RICO does not apply to the facts of this case.
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satisfaction of the factfinder, might necessitate evaluation
of whether any or all of plaintiffs' fraud, and possibly
other, claims were time barred. There is, for example,
uncontroverted evidence that the lead underwriter, Ralph
Bailey, had personal knowledge prior to 1981 of defendants'
use of the MGA Baccala & Shoop. Another matter to be
examined is the disclosure in the 1981 Anniversary
Information, distributed to the plaintiffs in late 1980, of
the fact that business had been assumed from Baccala & Shoop.
There are also in the record other indications of information
being conveyed to one or more plaintiffs at various times,
which need evaluation to determine whether the running of the
limitations periods was triggered at those moments and with
what effect. For example, some of the plaintiffs stopped
paying claims made by NERCO as early as the fourth quarter of
1982. The plaintiffs were obligated to make such payments by
their own reciprocal duty of utmost good faith, unless, of
course, they had knowledge of a bona fide defense to payment, _________
such as the defendants' fraud. See Contractors Realty Co., ___ ________________________
Inc. v. Insurance Co. of N. Am., 469 F. Supp. 1287, 1294 ____ _________________________
(S.D.N.Y. 1979) (noting the "reciprocal duty on the part of
the insurer to deal fairly, to give the assured fair notice
of his obligations, and to furnish openhandedly the benefits
of a policy"). Also there were letters and testimony
suggesting that certain people connected with plaintiffs had
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knowledge as to various matters early in the 1980's.33
We direct the district court to evaluate all of
these items, and any others it deems relevant, and to make
such findings and rulings as it believes appropriate in the
circumstances. We leave entirely to it, in the first
instance, the determination of whether and how to apply the
Massachusetts discovery rule or other relevant rule of law
and how to calculate, on this record, the proper running of
the applicable statutes of limitations.
VI. The Chapter 93A Claims The Chapter 93A Claims
In a footnote, the district court found, without
more, that "the conduct of NERCO constitutes a violation of
Chapter 93A, Section 2 of the General Laws of the
Commonwealth of Massachusetts." 825 F. Supp. at 383 n.9.
Mass. Gen. L. ch. 93A, 2 declares unlawful "unfair methods
of competition and unfair or deceptive acts or practices in
the conduct of any trade or commerce." Mass. Gen. L. ch.
93A, 11 provides for the bringing of a civil action by the
victim of such practices. An action may not be brought,
however, "unless the actions and transactions constituting
____________________
33. For example, Eric Verhes of Compagnie de Reassurance
D'Ile de France apparently knew of the use of Baccala and
Shoop by mid-1982; and plaintiff Imperio Re exchanged a
series of letters with NERCO via the sub-broker Carter Brito
E Cunha Ltd. in late 1984 discussing the use of Baccala and
Shoop, and commented in one dated December 21, 1984 that the
fact that business was "underwritten by Baccala and Shoop . .
. would appear to be a further point contravening the wording
of the Contract."
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the alleged unfair method of competition or the unfair or
deceptive act or practice occurred primarily and
substantially within the commonwealth." Id. ___
The defendants argued below as they do on appeal
that the acts and practices said to constitute a violation of
2 did not occur primarily and substantially within the
commonwealth, as required by 11. The district court,
however, made no finding on this important point. The
closest the court came to finding where the critical conduct
occurred was a statement, in the course of a colloquy with
counsel, that it was "implicit . . . activities had to have
been found in Massachusetts." The court went on to say that
while "there were activities within the state that would
constitute a violation of 93A, as I found . . . there are
more important activities, more crucial activities that took
place overseas." We are thus left without a specific finding
and with considerable confusion as to what the court had in
mind. Given the absence of guidance -- indeed, with guidance
that points in opposite directions -- we must determine as
best we can whether the 11 locus requirement was met on
this record.
In insisting that the acts and practices said to
constitute a violation did not occur primarily and
substantially within the commonwealth, the defendants assert
as follows: The Placing Information was prepared by G.L.
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Hodson in New York. It was then transmitted to the sub-
brokers in London, and communicated by the sub-brokers from
London to the plaintiffs at their places of business in
London and continental Europe. The plaintiffs, to the extent
they relied on any misrepresentations, did so in Europe,
signed the slips and Treaty Wordings in Europe, and suffered
any financial injury in Europe. As the judge himself
indicated, "notwithstanding that there were activities within
this state, at least and maybe the most crucial were
overseas." The latter reason caused the court to refuse to
award double or treble damages, a discretionary matter under
11. Defendants argue that this shows a misreading of the
statute, because if the district court found that the crucial
actions creating liability had occurred overseas, they could
not have occurred primarily and substantially in
Massachusetts, hence he should have found no liability at all
under ch. 93A. Defendants insist that if misleading
statements are made in Massachusetts but are received and
relied upon outside the commonwealth, there can be no
liability under ch. 93A.
The plaintiffs reply that the district court
implicitly found that the defendants failed to meet their
statutory burden of proving that their fraudulent conduct did
not occur primarily and substantially in the commonwealth.
Plaintiffs disagree that the only relevant conduct is the
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placing of the Treaties overseas, and argue that the relevant
conduct includes (1) the location of the defendants and their
business, (2) the initial drafting of the placing information
in Boston, prior to its communication to G.L. Hodson, (3) the
fact that all subsequent false and deceptive information
emanated from Boston, (4) certain later meetings between
various plaintiffs and defendants, and between defendants and
their brokers, in Boston, (5) the place of performance of the
contracts (Boston), (6) the day-to-day operation of the SANS
program in Boston, (7) the alleged obstruction of plaintiffs'
attempts to inspect NERCO's books and records in Boston, and
(8) the reaping of the benefits of the fraud in Boston. They
argue that Massachusetts case law does not provide a bright-
line test for the "primarily and substantially" standard, but
rather requires a "pragmatic, functional analysis" which must
include consideration not only of where the communications,
reliance, and injury took place, but also where the bulk of
the more mundane activities did not occurr.
A finding whether the defendant has met its
statutory burden of proving that its activities and
transactions occurred primarily and substantially in
Massachusetts is a matter of law, subject to plenary review.
Clinton Hosp. Ass'n v. Corson Group, Inc., 907 F.2d 1260, ____________________ ___________________
1264 (1st Cir. 1990). In Bushkin Assoc., Inc. v. Raytheon _____________________ ________
Co., 393 Mass. 622, 473 N.E.2d 662 (1985) the Supreme ___
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Judicial Court determined, on facts bearing much similarity
to the transmission of the fraud claims here, that the
violation did not occur "primarily and substantially within
the commonwealth." Ch. 93A, 11. The plaintiff, Bushkin, a
New York resident, based his ch. 93A claim on "alleged
representations made during a telephone call or calls in 1975
between a Raytheon officer in Massachusetts and Bushkin in
New York." Id. at 638, 473 N.E.2d at 672. As a result of ___
information Bushkin disclosed to Raytheon over the phone,
Raytheon learned that Beech Aircraft Corporation was a
possible acquisition target. Bushkin alleged that Raytheon
had promised to pay him a fee if it were successful in
acquiring Beech. After telling him that it was no longer
interested in Beech, Raytheon acquired it with the aid of
another consultant, and denied Bushkin any compensation. Id. ___
at 624-26, 473 N.E.2d at 664-65.
In finding against Bushkin, the SJC noted that the
telephone calls were between the two states, the allegedly
deceptive statements were made in Massachusetts but received
and acted on in New York, and that any loss was incurred in
New York. Id. Based on Bushkin, this court in Clinton Hosp. ___ _______ _____________
minimized the location of the dissembler at the time he makes
a deceptive statement for purposes of the "primarily and
substantially" analysis. "Rather," we said, "the critical
factor is the locus of the recipient of the deception at the
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time of the reliance." Clinton Hosp., 907 F.2d at 1265-66. _____________
We likewise gave weight to the situs of the loss. Id. ___
Viewing the conduct surrounding the fraudulent
misrepresentations in the Placing Information points to the
same result as that reached in Bushkin. As in that case, _______
non-Massachusetts residents are here attempting to recover
for the allegedly unfair trade practices of a corporation in
Massachusetts, under a statute designed to protect against
in-state frauds. As in that case, the defendant's day-to-day
business activities were largely carried on in Massachusetts.
As in that case, we shall assume that the allegedly deceptive
acts or practices in particular, the Placing Information
originated in Massachusetts, but the Placing Information
was intended to be, and was, circulated abroad, and
plaintiffs received and acted upon it there. The situs of
the plaintiffs' losses was also in Europe. It follows that
with respect to plaintiffs' claims of fraud in the
inducement, the defendants have met their statutory burden
under 11 of proving that their fraudulent conduct did not
occur primarily and substantially in Massachusetts. On this
point, we reverse the district court's ruling that defendants
are liable under Mass. Gen. L. ch. 93A, 2.
This does not, however, end the matter. In this
opinion, we have sustained the district court's finding of a
breach of contract stemming from defendants' violation of its
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contractual obligation to retain 10% of all system business
ceded to the SANS Treaties. We have also left open, for
further consideration on remand, a contract claim for
possible failure to perform underwriting as promised. And we
have left open the possibility, on remand, of a finding of
fraudulent concealment of the use of intermediaries and of
other conduct deviating from representations in the Placing
Information, in the years following the initial Treaties.
The above activities, or some of them, might conceivably
support -- although we take no position at this time -- a
finding of 2 violations occurring primarily and
substantially within Massachusetts. Accordingly, while we
hold that fraud in the inducement based upon representations
in the Placing Information did not occur primarily and
substantially within Massachusetts, we do not at this time
foreclose liability under Mass. Gen. L. ch. 93A based on
different conduct of the type mentioned above. We leave such
determination to the district court on remand.
VII. The RICO Claims The RICO Claims
In the same footnote in which it found the
defendants liable under ch. 93A, the district court found for
the defendants under the Racketeer Influenced and Corrupt
Organizations Act ("RICO"), 18 U.S.C. 1961-1968, stating
that,
Title 18, United States Code, Sections
1961-1968 do not apply to the facts of
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this case on the ground that the
Plaintiffs have failed to establish that
they suffered an "investment" injury
under Section 1962(a) or an "acquisition"
injury under Section 1962(b) or that the
three Defendants were separate persons as
required under Section 1962(c).
825 F. Supp. at 383 n.9.34 In No. 93-2338, the plaintiffs
appeal from this ruling, arguing that the district court was
wrong with respect to all three sections of RICO.
In order to recover in a civil RICO action, a
plaintiff must prove both that the defendant violated one of
the provisions of 18 U.S.C. 1962 and that the plaintiff was
injured "in his business or property by reason of" the
defendant's violation. 18 U.S.C. 1964(c). Thus, in
proving a right to recover for a RICO violation premised upon
____________________
34. No judgment dismissing the RICO claims was entered by
the district court; the only disposition of those claims is
the above-quoted language in the district court's Memorandum
and Order of June 7, 1993. See Fed. R. Civ. P. 58 ("Every ___
judgment shall be set forth on a separate document. A
judgment is effective only when so set forth and when entered
as provided in Rule 79(a)."). We proceed, however, as though
the judgment for the plaintiffs issued on September 21, 1993
pursuant to that order had included language expressly
dismissing the RICO claims. See Fiore v. Washington County ___ _____ _________________
Community Mental Health Ctr., 960 F.2d 229, 236 n.10 (1st _____________________________
Cir. 1992) (en banc) (holding that separate document
requirement is waived by filing of timely notice of appeal).
"The 'separate document' rule does not defeat appellate
jurisdiction where a timely appeal is filed and the parties
do not suffer any prejudice from the absence of a separate
document entering judgment on claims that were clearly
disposed of in an earlier order." Southworth Mach. Co., Inc. __________________________
v. F/V Corey Pride, 994 F.2d 37, 39 (1st Cir. 1993) _________________
(citations omitted); see also supra, n.18 (discussing failure ________ _____
of district court to expressly dismiss defendants'
counterclaims).
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1962(a), the plaintiffs had to prove that they were harmed ______
by reason of NERCO's use or investment of income derived from
a pattern of racketeering activity in some enterprise (here
alleged to be Graham Watson) engaged in interstate or foreign
commerce. 18 U.S.C. 1962(a), 1964(c). This they failed
to do. Even assuming that they had been defrauded through
the use of the mails or international wires, see 18 U.S.C. ___
1961(1)(B), that alone is not enough to show that they were
harmed additionally by NERCO's use or investment of the
proceeds of that fraud to establish or operate Graham Watson.
See, e.g., Lightning Lube, Inc. v. Witco Corp., 4 F.3d 1153, __________ ____________________ ___________
1188 (3d Cir. 1993) ("the plaintiff must allege an injury
resulting from the investment of racketeering income distinct
from an injury caused by the predicate acts themselves").
The plaintiffs have simply "repeat[ed] the crux of [their]
allegations in regard to the pattern of racketeering
activity." Id. ___
Under 1962(b), the plaintiffs had to show that
they were harmed by reason of NERCO's acquisition or
maintenance of control of an enterprise through a pattern of
racketeering activity. Again, even assuming that plaintiffs
proved the underlying RICO violation, they failed to prove
any harm beyond that resulting from the fraud which
constituted the predicate act. See, e.g., Danielsen v. __________ _________
Burnside-Ott Aviation Training Ctr., Inc., 941 F.2d 1220, ___________________________________________
-95-
1231 (D.C. Cir. 1991) ("plaintiffs must allege an
'acquisition' injury, analogous to the 'use or investment
injury' required under 1962(a) to show injury by reason of
a 1962(b) violation"). The plaintiffs claimed that they
were harmed by their participation in the SANS treaties, not
by the defendants' acquisition or control of Graham Watson.
As to the 1962(c) claim, the district court
stated that "the three Defendants were [not] separate
persons." In fact, however, NERCO, First State, and Cameron
& Colby were distinct corporate entities, with separate legal
identities. The distinction between those three entities is
not, however, decisive for 1962(c) purposes. The statute
requires that the person (i.e., the three defendants) engaged ______
in racketeering be distinct from the enterprise (in this __________
case, Graham Watson, not a defendant) whose activities he or
she seeks to conduct through racketeering. See, e.g., __________
Miranda v. Ponce Federal Bank, 948 F.2d 41, 44-45 (1st Cir. _______ ___________________
1991) (citing cases) ("the same entity cannot do double duty
as both the RICO defendant and the RICO enterprise").
Assuming the court meant to find that NERCO, First State, and
Cameron & Colby were not distinct from Graham Watson, it was
clearly entitled, on the evidence presented, to make such a
finding. Up until mid-1980, Graham Watson was merely an
unincorporated division of Cameron & Colby. After that time,
although it became a separate wholly-owned subsidiary
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corporation, all of its employees were in fact Cameron &
Colby employees, and there is no evidence whatsoever that
Graham Watson took any actions independent of its parent.
Cf. Brittingham v. Mobil Corp., 943 F.2d 297, 302-303 (3d ___ ___________ ___________
Cir. 1991) (noting that 1962(c) claims may be dismissed
"when the enterprise and defendant, although facially
distinct, are in reality no different from each other"). We
accordingly affirm the district court's dismissal of the
plaintiffs' RICO claims.
VIII. Damages Damages
The district court ruled that "[i]n the
circumstances of this case, it is not feasible to reasonably
calculate damages on the basis of the 'benefit of the
bargain' method of damages." The court accordingly (after
further proceedings) entered judgment in the amount of
$38,118,940.07 (which sum included prejudgment interest),
plus postjudgment interest and costs. This sum was
calculated to be the difference between claims paid by the
plaintiff reinsurers less the premiums they received during
the course of the SANS Treaties. The district court also
announced in its Memorandum and Order of June 7, 1993 (but
not in any separate judgment), that "the only appropriate
remedy is to rescind the SANS Treaties as a matter of
equity."
Defendants complain on appeal that plaintiffs
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should have been required to prove, and could only recover,
"benefit of the bargain" damages. Defendants argue that
plaintiffs in fact suffered no damage at all as "[t]he
results achieved under the SANS Treaties were poor, but they
were better than industry average results . . . .
Plaintiffs' experts, who utilized individual certificate
facultative underwriting, reluctantly admitted their own
operations lost money and were closed down." In defendants'
view, the losses under the SANS Treaties were due to
"extremely adverse market conditions low premiums and
unprecedented loss experiences." As the judge commented, it
was "a disastrous market." Defendants go on to point out
that "[t]here was no evidence that brokerage-located business
resulted in larger losses than business obtained 'directly.'"
The court, in its opinion excused the plaintiffs
from establishing damages because, for plaintiffs to have
done so,
it would have been necessary to obtain
the financial records of the major direct
reinsurance companies . . . which
financial records are confidential and
not accessible to third parties.
We find no legal error in the court's decision to
furnish relief for fraud based on cancelling plaintiffs'
reinsurance obligations under the Treaties. When an insurer
establishes that it was induced by fraud to issue policies of
insurance, cancellation of the policy is a customary form of
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relief. See, e.g., Century Indem., 333 Mass. at 504-05, 131 _________ ______________
N.E.2d at 769. To the extent that these plaintiffs were
ceded shares in reinsurance under Treaties they were induced
to join, and continued to participate in, because of
defendants' fraud, the district court was authorized, where
otherwise appropriate, to provide the remedy of retroactively
cancelling the applicable Treaties, reimbursing plaintiffs
for their net losses, and absolving them from their
unfulfilled reinsurance obligations thereunder.
In this opinion we have reversed the fraud finding
based on the "facultative" representations, but have upheld
it in respect to reliance on representations in the 1979
Placing Information regarding securing nontreaty business
"directly" rather than through intermediaries. Thus a
cancellation remedy for fraud may still be appropriate as to
reinsurance retroceded to plaintiffs which was infected by
that fraud. However, we have remanded for further
consideration of whether the statutes of limitations,
including that for fraud, constitute a bar to the claims of
any or all plaintiffs. We have also remanded for
consideration whether, at least in some cases, the original
fraud was dissipated, or its duration limited to a particular
year or years, by the receipt of knowledge of the falsity of
the earlier representations coupled with renewal of the
Treaty or other conduct indicating acquiescence or waiver.
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We have further remanded for consideration of whether certain
of the plaintiffs are barred from relief for fraud because of
their failure to establish reliance.
We accordingly vacate all relief granted by the
court and remand for further findings on what relief, if any,
is appropriate in light of the other findings that are made
upon remand. If there are instances where recovery is
appropriate for breach of contract only, rather than fraud,
the court should determine the proper measure of relief, and,
subject to our rulings herein, the district court shall
recalculate the proper award, if any is due, on the basis of
its assessment of the law and facts.
IX. Prejudgment Interest Prejudgment Interest
The defendants argue that the district court's
order rescinding the SANS Treaties was a restitutionary
award, not an award of damages. Thus, they say, the court's
assessment of prejudgment interest at the rate of 12 percent
set by Mass. Gen. L. ch. 231, 6B, 6C, and 6H was
erroneous, because the rate of interest set by those statutes
is applicable only to awards of damages, not to rescissionary
awards. They argue that the plaintiffs made an express
election of remedies, choosing rescission and restitution,
and thus foregoing their option to pursue the remedy of
contract damages and interest on those damages. The
defendants contend that prejudgment interest should have been
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applied at the rate of 6 percent set by Mass. Gen. L. ch.
107, 3.
In light of the fact that we are vacating the award
and remanding this case to the district court, where any
judgment eventually awarded to either party may bear little
resemblance to the judgment we vacate today, we decline the
defendants' invitation to consider this point at length. We
find it of interest, however, that 6C has been held
applicable to a recovery based on an action for money paid by
mistake, Commercial Union, 412 Mass. at 555-56, 591 N.E.2d at ________________
171-72, a recovery which seemingly bears more resemblance to
restitution than to money damages.
X. Conclusion Conclusion
Appeal No. 93-2339 __________________
We sustain the district court's findings and
rulings on certain matters; reverse others either as being
clearly erroneous or legally incorrect; and identify still
others that require the district court to make findings and
rulings now absent. We, therefore, vacate in its entirety
the judgment awarding a total of $38,118,940.07 to the
plaintiffs and remand with directions that the district court
hold further proceedings and take such further actions as are
necessary to comply with this opinion.35 We summarize our
____________________
35. As a matter of consistency, we likewise vacate the
court's other directives not incorporated in its judgment
purporting to afford relief, such as its equitable rescission
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specific dispositions as follows:
(1) We reverse as being clearly erroneous the
district court's finding of fraud premised upon defendants'
promise to cede "facultative" reinsurance.
(2) We sustain the court's finding that the
defendants made misrepresentations in the Placing Information
to the effect, inter alia, that they would obtain business __________
directly from primary insurers. However, the claim of fraud
based on this finding must be given further consideration on
remand in light of our direction to reconsider the
defendants' defense based on the statute of limitations; to
revisit the reliance element and deny recovery to any
plaintiff unable to satisfy its burden of proof on this
point; and to reconsider the possible effects of any notice
and knowledge obtained by any of the plaintiffs during the
lives of the SANS Treaties and determine whether these defeat
or limit the duration of any plaintiffs' continuing rights of
recovery in fraud.
(3) We reverse the district court's finding of
breach of contract based upon the supposed non-facultative
character of the retroceded reinsurance. We also reverse the
district court's finding of breach of contract based upon
failure to "produce" the retroceded reinsurance. We reverse
____________________
of the SANS Treaties. Such orders should be revisited on
remand and reissued, modified, or not as the court determines
in light of this opinion and its own findings and rulings.
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the district court's breach of contract finding based on the
promise that Graham Watson would "underwrite" the retroceded
reinsurance, except we leave open for the court to consider,
on remand, whether the underwriting might have been so
entirely inadequate as to violate that provision. We affirm
the district court's finding of breach of contract based upon
the violation of Warranty No. 2 in the slips, subject to
further findings on the effect of the statute of limitations
and any other bar to recovery.
(4) We direct the court to consider and make
specific findings and rulings as to the statutes of
limitations defenses and to find the dates that each of the
relevant statutes began to run as to each of the plaintiffs.
(5) We direct the court to recalculate the proper
amount of relief and prejudgment interest to the extent its
other determinations on remand are consistent with the
awarding of relief to any of the plaintiffs. We have upheld,
as a remedy, the cancellation of any reinsurance infected by
fraudulent representations and leave to the court on remand
the determination of any other theories of relief that may
become appropriate.
(6) We reverse the court's allowance of plaintiffs'
claims under Mass. Gen. L. ch. 93A, 2 insofar as they are
based on fraud in the inducement. However, we remand for the
district court's further consideration whether any other
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conduct, as mentioned in this opinion, might support a
finding of liability under that statute.
Appeal No. 93-2338 __________________
We affirm the district court's dismissal of
plaintiffs' claims under the Racketeer Influenced and Corrupt
Organizations Act, 18 U.S.C. 1961-1968.
So ordered. Each side to bear its own costs on ___________________________________________________
appeal. _______
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Related
Hazard's Administrator v. New England Marine Insurance
33 U.S. 557 (Supreme Court, 1834)
New York Times Co. v. Sullivan
376 U.S. 254 (Supreme Court, 1964)
Gertz v. Robert Welch, Inc.
418 U.S. 323 (Supreme Court, 1974)
Inwood Laboratories, Inc. v. Ives Laboratories, Inc.
456 U.S. 844 (Supreme Court, 1982)
Anderson v. City of Bessemer City
470 U.S. 564 (Supreme Court, 1985)
Morris Feinberg, Treasurer v. Insurance Company of North America
260 F.2d 523 (First Circuit, 1958)
Joseph E. Bennett Co., Inc. v. Trio Industries, Inc.
306 F.2d 546 (First Circuit, 1962)
Joseph T. Bouley v. Continental Casualty Company
454 F.2d 85 (First Circuit, 1972)
Susan E. Johnson v. Educational Testing Service
754 F.2d 20 (First Circuit, 1985)
Liberty Mutual Insurance Company v. Carol A. Gibbs
773 F.2d 15 (First Circuit, 1985)
Blue Sky L. Rep. P 72,496, Fed. Sec. L. Rep. P 93,186 Thorburn Kennedy, Trustee v. Josephthal & Company, Inc., Edward M. Swartz and Fredric Swartz
814 F.2d 798 (First Circuit, 1987)
Rci Northeast Services Division v. Boston Edison Company
822 F.2d 199 (First Circuit, 1987)
In Re Navigation Technology Corporation, Debtor. Victor W. Dahar, Trustee v. Raytheon Company
880 F.2d 1491 (First Circuit, 1989)
Barbara Jackson v. Harvard University
900 F.2d 464 (First Circuit, 1990)
Wilma Cumpiano A/K/A Wilma Cumpiano Sanchez v. Banco Santander Puerto Rico
902 F.2d 148 (First Circuit, 1990)
Clinton Hospital Association v. The Corson Group, Inc.
907 F.2d 1260 (First Circuit, 1990)
Lloyd T. Danielsen v. Burnside-Ott Aviation Training Center, Inc.
941 F.2d 1220 (D.C. Circuit, 1991)
Clarissa Miranda A/K/A Clarissa Miranda Rodriguez v. Ponce Federal Bank, Etc.
948 F.2d 41 (First Circuit, 1991)
Teresa Tagliente, Trustee of the Tagliente Family Trust v. David C. Himmer
949 F.2d 1 (First Circuit, 1991)
Richard C. Fiore v. Washington County Community Mental Health Center
960 F.2d 229 (First Circuit, 1992)
Cite This Page — Counsel Stack
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Compagnie de France v. New England Corp, Counsel Stack Legal Research, https://law.counselstack.com/opinion/compagnie-de-france-v-new-england-corp-ca1-1995.