Stratford v. Employers

• Court: Court of Appeals for the First Circuit
• Decided: December 18, 1998
• Docket: 98-1194
• Status: Published

Opinion

USCA1 Opinion

                 United States Court of Appeals

                     For the First Circuit


No.  98-1194



              STRATFORD SCHOOL DISTRICT, S.A.U. #58,



                       Plaintiff, Appellee,



                                v.



                EMPLOYERS REINSURANCE CORPORATION,



                      Defendant, Appellant.


APPEAL FROM THE UNITED STATES DISTRICT COURT 



                FOR THE DISTRICT OF NEW HAMPSHIRE



          [Hon. Paul J. Barbadoro, U.S. District Judge]


Before



           Coffin and Campbell, Senior Circuit Judges,

                                

and Gertner, U.S. District Judge.


Charles W. Grau, with whom Upton, Sanders & Smith was on brief

for appellant.

     Bruce W. Felmly, with whom Jeanmarie Papelian and McLane,

Graf, Raulerson & Middleton were on brief for appellee.


December 17, 1998


CAMPBELL, Senior Circuit Judge.  Employers Reinsurance

Corporation ("Employers") appeals from the district court's grant

of attorneys' fees and costs against Employers in favor of its

insured, Stratford School District ("Stratford").  Stratford

incurred these fees and costs in the course of its successful

prosecution of a declaratory judgment action against Employers and

several other insurance companies.  The issue before us is whether

Employers' insurance contract required it to reimburse Stratford

for them.  Employers was contractually bound to pay the fees and

costs only if Stratford had no "other insurance," and it is

Employers' contention that Stratford had, in fact, two other

sources of insurance.  The district court ruled that neither source

of funds available to Stratford was "insurance" within the meaning

of Employers' contract.  We remand for additional findings.



                         I. BACKGROUND

  In January, 1994, a high school student and her father

sued Stratford in the New Hampshire state court ("the underlying

action"), claiming that Stratford was liable for sexual misconduct

against the student by one of Stratford's teachers.  Stratford gave

notice of the suit to its five insurers,  Employers,

Coregis/International Insurance Company ("Coregis"), National Union

Insurance Company ("National Union"), New Hampshire Indemnity

Company ("New Hampshire Indemnity"), and Reliance Insurance Company

("Reliance").  Each of the insurers denied coverage.  

  On September 2, 1994, Stratford sued the insurers in New

Hampshire state court ("the declaratory judgment action"), seeking

a declaration that they were obligated to defend and indemnify

Stratford in the underlying action.  The insurers removed the suit

to federal district court.  The district court subsequently granted

summary judgment in favor of National Union, New Hampshire

Indemnity, and Reliance.  Then, in June, 1995, Stratford and

Coregis entered a stipulation that effectively settled Stratford's

claim against Coregis.  Under the stipulation, Coregis agreed to

provide a defense and coverage, subject to a so-called $75,000

"self-insured retention" in Stratford's Coregis policy. 

  Stratford had received its insurance policy with Coregis

through its membership in the New Hampshire School Boards Insurance

Trust ("the Insurance Trust").  The Insurance Trust is a compendium

of participating school districts from across the state that

participate as members, and the Insurance Trust purchases insurance

for them and otherwise tends to their insurance needs.  After

Stratford and Coregis entered their stipulation, the Insurance

Trust amended the terms of its obligations to Stratford via an

"Endorsement."  The Endorsement stated:

          THIS ENDORSEMENT CHANGES THE POLICY.  PLEASE READ IT

          CAREFULLY.  It is understood and agreed that the $75,000

          Property deductible for [Stratford] under [the Coregis

          policy] is reduced to $1000, and that the New Hampshire

          School Boards Insurance Trust will pay any covered claim

          of less than $75,000 and greater than $1000 for

          [Stratford].

            

  Coregis' stipulation with Stratford left Employers as the

sole remaining defendant in Stratford's declaratory judgment suit. 

On May 3, 1996, the district court granted summary judgment in

favor of Stratford and against Employers.  As the prevailing party,

Stratford then moved for the award of its attorneys' fees and costs

against Employers.  Stratford sought the fees and costs it had

incurred both in the underlying action and in the declaratory

judgment action.  Employers lodged numerous objections to the

motion (most of which are not relevant to this appeal), and the

district court appointed a special master to hear evidence and

issue a report and recommendation.  

  On December 8, 1997, the special master ultimately

recommended that Stratford was entitled overall to $111,973.51 in

attorneys' fees for the underlying case, $41,560.13 in attorneys'

fees for the declaratory judgment action, and $9,000 in attorneys'

fees for preparing the motion.  The special master further

recommended that, pursuant to Coregis' stipulation, both Coregis

and Employers were partially responsible for these payments.  The

special master concluded that Employers was obligated to pay

$101,880.65 for the underlying case, $37,638.63 for the declaratory 

judgment action, and $9,000 for the motion.

  On January 21, 1998, the district court adopted the

special master's report and recommendation in its entirety. 

Employers appeals, objecting only to the district court's ruling

regarding fees for the declaratory judgment action.  The sole issue

in this appeal is whether the district court correctly interpreted

a provision in the contract between Stratford and Employers as

requiring Employers to pay for a portion of Stratford's attorneys'

fees in the declaratory judgment action.  That provision, Section

V of Employer's insurance contract, provides:

          OTHER INSURANCE.  If, but for the insurance afforded by

          this policy, the insured would have other insurance

          against a loss otherwise covered hereby, the insurance

          afforded by this policy shall be excess over such other

          insurance.

     

  The crux of Employers' argument is that Section V

absolves it from paying Stratford's attorneys' fees because

Stratford had two types of "other insurance"   the stipulation with

Coregis and the Endorsement from the Insurance Trust.  The district

court disagreed, adopting in its entirety the report and

recommendation of the special master, who had concluded that

neither the Coregis policy to the extent of the $75,000 retention,

nor the Insurance Trust's Endorsement paying most of that

retention, constituted "other insurance." 



                         II. DISCUSSION

               A. Coregis' Self-Insurance Policy

  Employers argues that Stratford's $75,000 self-insurance

retention, for which Coregis assumed no liability, was nevertheless

a species of "other insurance".  Stratford makes the rejoinder that

its retention of responsibility to pay for claims against it below

the limit of $75,000 was no "insurance" at all.  It seems obvious

that Stratford wins this argument.

  New Hampshire law governs this diversity action.  The New

Hampshire courts have not addressed whether retained self-insurance

under a deductible, or in some analogous situation, constitutes

"insurance" for the purposes of a separate policy's "other

insurance" clause.  We must predict, therefore, how the Supreme

Court of New Hampshire would resolve this issue, relying on

guidance from analogous decisions in other states and other legal

authorities.  See Moores v. Greenberg, 834 F.2d 1105, 1107 (1st Cir.

1987).  

  Black's Law Dictionary 802 (6th ed. 1990) defines

"insurance" as 

          [a] contract whereby, for a stipulated consideration, one

          party undertakes to compensate the other for loss on a

          specified subject by specified perils.  The party

          agreeing to make the compensation is usually called the

          "insurer" or "underwriter;" the other, the "insured" or

          "assured;" the agreed consideration, the "premium;" the

          written contract, a "policy;" the events insured against,

          "risks" or "perils;" and the subject, right, or interest

          to be protected, the "insurable interest."

          

     In contrast, Black's Law Dictionary defines "self insurance" as a

"[p]lan in which the insured (e.g., business) places aside in a

fund sufficient sums to cover liability losses that may be

sustained.  Commonly, under such plan the business will self-insure

itself up to a certain amount and then carry regular liability

insurance to cover any excesses."  Id. at 806.

  The difference between these two concepts -- "insurance"

and "self-insurance" -- is self-evident.  "[T]he plain and ordinary

meaning of the term 'insurance' contemplates a written contract  

an insurance policy   issued by one individual or entity to

compensate another for loss in exchange for a premium. . . .

[U]nder a self-insurance scheme, no written insurance policy is

issued by another individual or entity nor is a premium paid

because obviously a business which is self-insured does not need to

pay itself to protect against its own risk of loss."  Wake County

Hosp. System, Inc. v. National Casualty Co., 804 F. Supp. 768, 775

(E.D. N.C. 1992), aff'd, 996 F.2d 1213 (4th Cir. 1993).  This view

has been adopted by a clear majority of courts confronted with the

question.  See id. at 774 (collecting cases from New York, Texas,

Missouri, Indiana, California, Iowa, Arizona, Florida,

Pennsylvania, Alaska, and Ohio).  The distinction applies equally

within one insuring agreement, the terms of which provide insurance

coverage only above a stated amount, therefore requiring the

insurer to self-insure, or look to other sources, for the lesser

sum.  Here, to be sure, Stratford did not literally pay from its

own pocket, being covered in large measure by the Insurance Trust

under its Endorsement, see infra, but its insurer, Coregis, lacked

any responsibility within the $75,000 limits, and, as discussed

below, the Insurance Trust's contribution appears not to have been

insurance either.

     We hold that Stratford's $75,000 so-called self-insured

retention under its agreement with Coregis was not "other

insurance" within the context of its policy with Employers.   

              B. The Insurance Trust's Endorsement

     Employers contends that the Insurance Trust's agreed

payment of all except $1,000 of the $75,000 Coregis deductible

under the Insurance Trust's Endorsement constituted "other

insurance."  This presents a knottier question than the previous

one. 

     We begin by assuming for purposes of this section of the

opinion, against Employers' objection, that the Insurance Trust was

at all relevant times a pooled risk management program ("PRMP")

established under N.H. Rev. Stat. Ann.  5-B:5.  The special master

found that the Insurance Trust was a PRMP and the district court

adopted his report.  We shall return to Employers' objection to

this characterization in the concluding section of this opinion,

see infra; but assuming, arguendo, as determined below, that the

Insurance Trust was a PRMP, we hold that the financial assistance

it furnished Stratford in paying claims within the $75,000 Coregis

deductible was not "other insurance." 

     New Hampshire law specifically declares that PRMPs are

not insurers.  N.H. R.S.A.  5-B:6(I) states:

          Any pooled risk management program meeting the standards

          required under this chapter is not an insurance company,

          reciprocal insurer, or insurer under the laws of this

          state, and administration of any activities of the plan

          shall not constitute doing an insurance business for

          purposes of regulation or taxation.

          

     The New Hampshire courts have not considered whether, given the

above statutory exception, the benefits paid by a PRMP should

nonetheless be considered as "insurance" for the purposes of an

insurer's "other insurance" clause.  We think it likely that were

the Supreme Court of New Hampshire presented with the question, it

would answer in the negative.

     Employers claims that the limiting language, "for

purposes of regulation or taxation," implies that the legislature

intended PRMPs to be treated as insurers for all purposes except"regulation or taxation."  However, while presumably the New

Hampshire statutory law on PRMPs would not prohibit private parties

from expressly contracting to treat pooled risk agreements as a

form of "other insurance," it certainly suggests that the products

of PRMPs are outside of the ordinary meaning of the undefined term

"insurance" in New Hampshire.  The first clause of the statute

declares without qualification that a PRMP is not an insurance

company nor an insurer under the laws of the state, while the

second clause says that the administration of any activities of a

PRMP shall not constitute doing an insurance business for state

regulation and tax purposes.  As the statute places PRMPs beyond

the ken of state insurance, it behooves insurers and others who

wish nonetheless to include PRMPs and their products under the term

"insurance" to so provide by apt language. 

     Employers seeks to minimize the significance of the

statute by contending that the term "regulation" refers only to

promulgated administrative regulations.  The ordinary meaning of

"regulation," however, is "a rule or order prescribed for

management or government."  See Black's Law Dictionary at 1286.

That the legislature intended this more expansive definition of

"regulation" is clear from the statute's preamble.  There, the

legislature stated its findings that 



          insurance and risk management is essential to the proper

          functioning of political subdivisions; that risk

          management can best be achieved through purchase of

          traditional insurance or by participation in pooled risk

          management programs established for the benefit of

          political subdivisions; . . . that the resources of

          political subdivisions are presently burdened by the

          securing of insurance protection through standard

          carriers; and that pooled risk management programs which

          meet the standards established by this chapter should not

          be subject to insurance regulation and taxation by the

          state.

     

N.H. R.S.A.  5-B:1.  This section indicates that the legislature

sought to facilitate risk protection coverage for political

subdivisions by granting PRMPs special status, and treating them

differently from providers of traditional insurance.  

     Employers nonetheless urges that the benefits provided by

PRMPs operate like insurance, hence should be treated the same. 

PRMPs obviously do have insurance-like qualities. In N.H. R.S.A. 

 5-B:2(IV), the legislature defined "risk management" as 

          the defense of claims and indemnification for losses

          arising out of the ownership, maintenance, and operation

          of real or personal property and the acts or omissions of

          officials, employees, and agents; the provision of loss

          prevention services including, but not limited to,

          inspections of property and the training of personnel;

          and the investigation, evaluation, and settlement of

          claims by and against political subdivisions.

          

     The above functions are often carried on by insurance companies

(though also by self-insurers).  But while the program may have

some insurer-like aspects, which is presumably why statutory

exemption from insurance regulation was deemed necessary, the

legislature has expressly removed it from the category of

insurance.  By so doing, it abolished any normal expectation in New

Hampshire that the undefined term "insurance" would, without more,

include PRMPs.  

     Had Employers wanted its insurance obligation to be

excess to funds that Stratford might receive from a third party

such as the Insurance Trust's pooled arrangement, Employers could

and should have so specified in the policy rather than relying on

the term "insurance."  See Trombly v. Blue Cross/Blue Shield of New

Hampshire/Vermont, 423 A.2d 980 (N.H. 1980) (holding that

ambiguities in insurance contracts are construed against the

drafter); see also RCI Northeast Serv. Division v. Boston Edison

Co., 822 F.2d 199, 205 (1st Cir. 1987)("In the arena of commerce,

it avails us little to stand language on its ear in an effort to

rescue a firm from a sinkhole of its own design.  It is no

appropriate part of judicial business to rewrite contracts freely

entered into between sophisticated business entities.").

     Assuming, therefore, that the Insurance Trust was a PRMP,

we hold that -- as the Insurance Trust's Endorsement did not

constitute "insurance" as that term is usually understood under New

Hampshire law -- it was not "other insurance" under Stratford's

contract with Employers.

           C.  Whether the Insurance Trust was a PRMP

     Employers argues that the record before the special

master, whose report and findings were confirmed by the district

court, does not support the master's finding that the Insurance

Trust was a PRMP within the meaning of N.H. Rev. Stat. Ann.  5-

B:5.  Stratford first raised the defense of the Insurance Trust's 

PRMP status in its supplemental brief filed after the special

master's hearing.  Previously, Stratford had simply argued in more

general terms that the Insurance Trust's Endorsement was not "other

insurance."  As soon as Stratford raised in its post-hearing brief

the issue of PRMP status, Employers objected in its own brief on

the ground that Stratford had not tendered any evidence to confirm

that the Insurance Trust was, in fact, a PRMP.  Notwithstanding

this objection, the special master determined in his report that

"New Hampshire School Board's [sic] Insurance Trust is a pooled

risk management program organized under N.H. Rev. Stat. Ann. 5-B

(1988)."  Employers presented a similar objection to the district

court, which nonetheless confirmed the special master's report

without comment on the point.

     Our review of the record supports Employers' contention

that there is insufficient record support from which to find that

the Insurance Trust is a PRMP.  About all that appears on this

score is the parties' apparent acceptance that the Insurance Trust

was some kind of entity comprised of participating school districts

(Stratford being one) formed for the purpose of acquiring and

managing insurance for its member districts.  While this suggests

PRMP status, it falls short of establishing it.  Neither Stratford

nor anyone else put into evidence the Insurance Trust's charter,

by-laws, and any other necessary papers from which it could be

determined that the Insurance Trust met the legal requirements of

a PRMP as these are set out in the New Hampshire statute granting

such entities exemption from insurer status.  See N.H. Rev. Stat.

Ann.  5-B:5.  Specifically, nothing showed, as the statute

requires, that the Insurance Trust (1) is organized under New

Hampshire law; (2) is governed by a board of elected or appointed

public officials; (3) returns all earnings and surpluses; (4)

prepares and files an annual audit; (5) is governed by written by-

laws; and (6) prepares an annual actuarial evaluation.  See id. 

Nor was alternative evidence of PRMP status tendered, for example,

that some state official qualified to do so had certified that the

Insurance Trust was a PRMP.  And, contrary to Stratford's present

contention, Employers never waived its present objection on this

score.  Rather, as soon as Stratford raised the argument that the

Insurance Trust was a PRMP, hence could not be an insurer,

Employers objected that the record did not support a finding of

PRMP status.  

     On the other hand, common sense, buoyed by the little we

can glean from the record, suggests that the Insurance Trust is

probably a PRMP. Employers, indeed, has never claimed that the

Insurance Trust is not a PRMP but simply says that Stratford failed

to meet its burden of presenting sufficient formal proof for the

special master and the district court to find that it is.  The

special master and the district court may have concluded that the

Insurance Trust's status was self-evident and that Stratford, a

school district member of the Insurance Trust, would surely know

whether the Insurance Trust was a PRMP, and let matters go at that. 

Still, while Employers' insistence on proof may seem technical, it

was Stratford's responsibility to have offered evidence sufficient

to establish PRMP status if it wished to assert such status over

Employers' objection, as a reason the Endorsement could not be

insurance.  While the general sense we get from the record is that

PRMP status was assumed as never being seriously in doubt, the

district court erred in overlooking the absence of formal proof

when it confirmed the special master's finding of PRMP status over

Employers' specific objection on this score. 

     We think, however, that to reverse on the basis of this

deficiency would be to elevate form over substance, given the

murkiness of the situation after the special master's hearing and

the ease with which the deficiency in proof can even now be

corrected.  We accordingly remand rather than reverse.  

     We vacate the judgment below and remand to the district

court with instructions to reopen the record to the extent

necessary to determine if the Insurance Trust was at relevant times

a New Hampshire PRMP.  If the district court finds, on the basis of

suitable proof, that the Insurance Trust was a New Hampshire PRMP,

the court is instructed to enter judgment for Stratford consistent

with this opinion.  If, however, adequate evidence that the

Insurance Trust is a New Hampshire PRMP is not produced, causing

the district court to find that Stratford has not met its burden in

this regard, the court will need to reconsider the nature of the

Insurance Trust's Endorsement and determine anew whether or not it

constitutes 'other insurance' under Stratford's contract with

Employers.  In such circumstances, it may conduct such future

proceedings, and make such further findings and rulings and

judgment in the cause, as it deems appropriate.

     So ordered.  Each party to assume its own costs.