United States Court of Appeals
For the First Circuit
No. 99-1258
COMMERCIAL UNION INSURANCE COMPANY,
as Successor in Interest to
Employers' Surplus Lines Insurance Company,
Plaintiff, Appellee,
v.
SEVEN PROVINCES INSURANCE COMPANY, LTD.,
Defendant, Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Nancy Gertner, U.S. District Judge]
Before
Selya, Stahl and Lipez,
Circuit Judges.
Mark V. Dugan, with whom H. Fred Northcraft, Blackwell Sanders
Peper Martin LLP, Jason W. Morgan, and Day, Berry & Howard were on
brief, for appellant.
Bruce M. Friedman, with whom Lori M. Meyers, Kroll, Rubin &
Fiorella LLP, Rodney S. Dowell, and Berman & Dowell were on brief,
for appellee.
July 6, 2000
LIPEZ, Circuit Judge. Seven Provinces Insurance Company,
Ltd., appeals from a judgment in favor of the Commercial Union
Insurance Company. The district court found for Commercial Union
on its claims that Seven Provinces breached a reinsurance contract
and committed an unfair trade practice in violation of
Massachusetts General Laws Chapter 93A ("93A"). See Commercial
Union Ins. Co. v. Seven Provinces Ins. Co., 9 F. Supp. 2d 49 (D.
Mass. 1998). We affirm.
I
In the 1960s, Employers' Surplus Lines Insurance Company
("ESLIC") issued several insurance policies to Teledyne, Inc.
("Teledyne"), a California manufacturing company. ESLIC covered a
portion of the risk that it faced from one of those policies ("the
semiconductor policy") by purchasing a facultative reinsurance
certificate from Seven Provinces.1
Although the particulars are somewhat more complicated,
the facultative reinsurance certificate essentially provided that
if Teledyne filed a valid claim with ESLIC under the semiconductor
policy for up to $450,000 in excess of the first $50,000 of loss,
Seven Provinces would reimburse ESLIC for half of the covered
1
"Reinsurance is a contractual arrangement whereby one insurer
. . . transfers all or a portion of the risk it underwrites . . .
to another insurer . . . ." Barry R. Ostrager & Thomas R. Newman,
Handbook on Ins. Coverage Disputes § 15.01[a], at 776 (9th ed.
1998). Whereas facultative reinsurance covers the risk that an
insurer bears with respect to a specific policy, treaty reinsurance
cedes the risks that an insurer carries on any number of policies
within a designated line of its underwriting business. See id.
§ 15.03[a], at 780-81.
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amount, up to $225,000. The policy also contained a "net
retention" provision that restricted ESLIC's ability to purchase
additional reinsurance to cover the other half of the potential
exposure--that is, the remaining $225,000 of a $450,000 loss:
Being a reinsurance of and warranted same NETT
rate, terms and conditions as and to follow
the settlements of the EMPLOYERS' SURPLUS
LINES INSURANCE COMPANY and that the local
office of the said Company retains during the
currency of this insurance at least
$225,000.00 BEING 50% OF $450,000.00 EXCESS
$50,000.00 COMBINED SINGLE LIMIT (subject to
reduction by any general excess loss or excess
catastrophe reinsurance whether effected by
the head office or local office of the
Company) on the identical subject matter and
risk and in identically the same proportion on
each separate part thereof, but in the event
of the retained line being less than as above,
[ESLIC's] lines to be proportionally reduced.
In 1982, Teledyne discovered environmental contamination
at several of its plants and filed claims with its insurers to
cover the resulting liability. In 1993, ESLIC's successor in
interest, Commercial Union, settled its share of these claims for
$2.2 million.2 After concluding that $843,000 of the $2.2 million
settlement pertained to environmental contamination at the site
that was covered by the semiconductor policy, Commercial Union
billed Seven Provinces for $225,000 as its half of the first
$450,000 of the loss in excess of $50,000. Of the remaining
$225,000 of the $450,000 portion of the loss, Commercial Union
billed $180,000 to a pool of reinsurers from whom it had purchased
quota share treaty reinsurance.
2
As a matter of convenience, we will refer to Commercial Union
instead of to its predecessor in interest, ESLIC.
-3-
Because Commercial Union could not produce a copy of the
reinsurance certificate, Seven Provinces initially questioned
whether a reinsurance agreement existed between them at all. Once
proof of a reinsurance relationship was discovered, Seven Provinces
raised other defenses to coverage, including the argument that by
ceding $180,000 of its potential exposure through quota share
treaty reinsurance rather than retaining its entire share of the
risk, Commercial Union violated the net retention provision in the
policy.
Frustrated at its inability to obtain redress, Commercial
Union filed this lawsuit in May 1995, alleging that Seven Provinces
was obligated to provide $225,000 in reinsurance coverage and that
its conduct constituted an unfair or deceptive business practice
under Chapter 93A. After a bench trial, the district court ruled
in Commercial Union's favor, finding (1) that Seven Provinces
should have provided coverage; and (2) that its bad-faith conduct
in failing to do so violated 93A and warranted the imposition of
double damages and attorneys' fees. See 9 F. Supp. 2d at 66, 70.
This appeal followed.
II
Before reaching the merits, we must consider Commercial
Union's claim that Seven Provinces' appeal is untimely.
Under Rule 4 of the Federal Rules of Appellate Procedure,
"a notice of appeal in a civil case must be filed within thirty
days of entry of the judgment or order from which the appeal is
taken." See Piazza v. Aponte Roque, 909 F.2d 35, 38 (1st Cir.
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1990). Commercial Union contends that we lack jurisdiction to hear
this case because the district court ruled in its favor on June 15,
1998, and Seven Provinces failed to note its appeal until February
24, 1999. See Scola v. Beaulieu Wielsbeke, N.V., 131 F.3d 1073,
1074 (1st Cir. 1997) (observing that the "30-day time limit is
mandatory and jurisdictional" (internal quotation marks omitted)).
Generally speaking, appellate review is available only
for "final decisions" from the lower federal courts. 28 U.S.C.
§ 1291. In all but a few situations, see, e.g., id. § 1292
(granting limited jurisdiction to hear interlocutory appeals); Fed.
R. Civ. P. 23(f) (authorizing discretionary appeals of class
certification orders), a party cannot initiate an appeal until a
"final decision" has been rendered--that is, "'one which ends the
litigation on the merits and leaves nothing for the court to do but
execute the judgment.'" Budinich v. Becton Dickinson & Co., 486
U.S. 196, 199 (1988) (quoting Catlin v. United States, 324 U.S.
229, 233 (1945)). The timeliness of the instant appeal, therefore,
turns on whether the district court's entry of judgment on June 15,
1998, constituted a "final decision" within the meaning of § 1291.
We conclude that it did not.
Although the district court's entry of judgment resolved
most of the issues in the case, its opinion and order specified
that there was more to be done before the lawsuit was over. The
court reserved jurisdiction to decide "the appropriate date and
rate for calculating pre-judgment interest" and ordered the parties
to submit further briefs on these issues. Unlike a collateral
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calculation of costs or attorneys' fees at the end of a case,3 the
determination of when pre-judgment interest began to run required
the court to determine when Seven Provinces should have recognized
its contractual obligation to provide Commercial Union with
reinsurance coverage. Because "[t]hese considerations [were]
intertwined in a significant way with the merits of [Commercial
Union's] primary case as well as the extent of [its] damages," the
district court's June 15, 1998 decision to rule in Commercial
Union's favor could not be considered a "final decision," and an
appeal could not be filed, until pre-judgment interest had been
decided. Osterneck, 489 U.S. at 176.
It was not until October 16, 1998, that the district
court ruled on the question of pre-judgment interest and issued an
amended judgment that conclusively resolved the merits of the case.
Seven Provinces responded by filing a timely motion for
reconsideration pursuant to Rules 52(b) and 59(e) of the Federal
Rules of Civil Procedure. The court denied that motion on January
26, 1999, and Seven Provinces noted its appeal within thirty days
3
In an earlier case, we likened the determination of pre-
judgment interest to the taxation of costs, the award of attorneys'
fees, and other collateral orders that do not affect the finality
of a judgment for the purposes of appeal. See Alman v. Taunton
Sportswear Mfg. Corp., 857 F.2d 840, 844 n.4 (1st Cir. 1988).
Since then, the Supreme Court has indicated that pre-judgment
interest actually "serves to 'remedy the injury giving rise to the
[underlying] action,' . . . and in that sense is part of the merits
of the district court's decision." Osterneck v. Ernst & Whinney,
489 U.S. 169, 176 n.3 (1989) (quoting Budinich, 486 U.S. at 200)
(alteration in original). Even if our opinion in Alman remains
valid in other respects, the Osterneck decision more closely
controls the issue at hand and makes clear that the district
court's June 15, 1998, ruling was not a "final decision" within the
meaning of 28 U.S.C. § 1291.
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thereafter, on February 24, 1999. As such, the case is properly
before us.
III
On the merits, we must first address the district court's
conclusion that Seven Provinces should have provided Commercial
Union with reinsurance coverage. The district court's
interpretation of the reinsurance agreement requires de novo
review. See Ferrara & DiMercurio, Inc. v. St. Paul Mercury Ins.
Co., 169 F.3d 43, 49 (1st Cir. 1999). If the policy is ambiguous,
we must consider the intentions of the parties, see Marston v.
American Employers Ins. Co., 439 F.2d 1035, 1040 (1st Cir. 1971),
based on the facts as the district court found them, see United
States Liab. Ins. Co. v. Selman, 70 F.3d 684, 687 (1st Cir. 1995).
We will defer to those factual findings unless they were clearly
erroneous. See id.
Under Massachusetts law, Commercial Union had the initial
burden to prove that it had suffered a loss within the scope of its
reinsurance coverage. See id. at 688. This prima facie case was
easily established because (1) Commercial Union paid Teledyne $2.2
million to settle environmental contamination claims under a number
of different insurance policies; and (2) at least a portion of the
settlement covered losses under the semiconductor policy that Seven
Provinces had agreed to reinsure. Under these circumstances, a
threshold basis for reinsurance coverage was sufficiently clear.
As a result, Seven Provinces had to raise a valid defense to
coverage by, for example, showing that an exclusion in the
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reinsurance agreement applied or that Commercial Union had failed
to fulfill a condition precedent to its recovery under the terms of
the policy. See id.
Seven Provinces claimed that its obligation to provide
coverage should have been reduced because Commercial Union violated
the net retention provision in the reinsurance agreement by ceding
part of its share of the potential exposure to quota share treaty
reinsurers.4 More specifically, because Commercial Union had
obtained additional reinsurance to cover $180,000 of its $225,000
share of the risk from the Teledyne semiconductor policy, Seven
Provinces sought to have its own liability lowered by the same
amount, for a resulting obligation of $45,000.
As the district court observed, however, see 9 F. Supp.
2d at 53-54, the meaning of the net retention provision in the
facultative reinsurance certificate was far from clear. Although
the policy called for Seven Provinces' liability to be
"proportionally reduced" to the extent that Commercial Union's
"local office" retained less than "$225,000.00 [of risk] BEING 50%
OF $450,000.00 EXCESS $50,000.00 COMBINED SINGLE LIMIT," it
permitted Commercial Union to obtain "general excess loss or excess
catastrophe reinsurance whether effected by the head office or
local office of the Company" without violating the net retention
requirement. In other words, while the policy restricted
Commercial Union from using some forms of reinsurance to cover its
4
Although Seven Provinces raised other defenses to coverage
before the district court, as we explain below in connection with
the 93A claim, it only presses the net retention issue on appeal.
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residual share of the risk of loss, other forms of additional
reinsurance were permissible.
The policy attempted to define the types of additional
reinsurance that Commercial Union could have without violating the
net retention provision--that is, "general excess loss or excess
catastrophe reinsurance." Although "excess of loss reinsurance"
was a term of art that referred to a particular kind of coverage,
the parties acknowledged that "general excess loss or excess
catastrophe reinsurance" apparently was not a common term in the
industry. See, e.g., Ostrager & Newman, supra, § 15.02-03, at 777-
83 (describing various classes and subclasses of reinsurance,
including "excess of loss" coverage, without mentioning "general
excess loss or excess catastrophe" policies). Under these
circumstances, the facultative reinsurance certificate was
ambiguous as to whether Commercial Union could use quota share
treaty reinsurance to cover its share of the risk of loss or
whether doing so would violate the net retention requirement and
entitle Seven Provinces to a concomitant reduction in its coverage
obligation.
In the face of this ambiguity, the district court
properly considered extrinsic evidence to determine what the
parties meant by the phrase "general excess loss or excess
catastrophe reinsurance." See Affiliated FM Ins. Co. v.
Constitution Reins. Corp., 626 N.E.2d 878, 881 (Mass. 1994) ("[T]he
primary objective [is] that a contract is to be construed to
reflect the intention of the parties."). Because the policy was
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several decades old, evidence of the parties' actual intent was
unavailable, but each side proffered an expert who worked in the
insurance business and could testify to what the terms in the
policy must have meant in light of industry practice. See id.
("Where, as here, the contract language is ambiguous, evidence of
trade usage is admissible to determine the meaning of the
agreement."); cf. Samuel Hazard's Adm'r v. New England Marine Ins.
Co., 33 U.S. 557, 586 (1834) ("[T]he terms of the application are
to be understood according to the ordinary sense and usage of those
terms . . . unless the underwriter knows that a different sense and
usage prevail . . . [or] that the [insured] uses the words in a
different sense and usage . . . .").
Seven Provinces' expert, Austin Thornton, argued that the
phrase "general excess loss or excess catastrophe reinsurance"
probably was meant to prohibit Commercial Union from using quota
share treaty reinsurance and to permit only the use of additional
"excess loss" or "excess catastrophe" coverage. Thornton admitted,
however, that reasonable minds could differ on this issue, and
Commercial Union's expert, George Gottheimer, took the opposite
view of the policy language. Gottheimer explained (1) that
industry custom long has permitted treaty reinsurance on a risk
insured by a facultative certificate absent unequivocal language to
the contrary; (2) that because the facultative certificate only
imposed a net retention requirement "on the identical subject
matter and risk and in identically the same proportion," it did not
preclude the use of a qualitatively different kind of additional
-10-
coverage such as quota share treaty insurance; and (3) that while
the contract was ambiguous, it probably was meant to authorize
"general" as well as "excess of loss" reinsurance--in which case
the use of quota share treaty reinsurance would have been
permissible without triggering a reduction in coverage.
Although the district court acknowledged that Seven
Provinces' expert had presented a plausible explanation of what the
net retention requirement meant, it found that Commercial Union's
expert had provided a more credible interpretation of the relevant
language. See 9 F. Supp. 2d at 56. In support of this finding,
the court emphasized that Gottheimer had more extensive experience
in the reinsurance industry than Thornton, that his testimony
remained consistent on direct and cross-examination, and that
Gottheimer explained his reasoning more comprehensively in light of
the language of the policy, the principles behind underwriting, and
the practices of the industry. See id. The court also explained
that Thornton had been involved in this dispute long before it came
to court and therefore might have developed a bias in favor of
Seven Provinces, while Gottheimer was an outside expert whose
relationship with Commercial Union was less entrenched. See id.
In other words, after recognizing the ambiguous language
of the facultative reinsurance certificate, and after considering
two plausible explanations of what that language meant, the court
chose one explanation over another based on its assessment of the
credibility of the witnesses. Although Seven Provinces disputes
that assessment and has attempted to clarify what its insurance
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expert was trying to say, we cannot say, after a careful review of
the record, that the district court committed clear error in
crediting Gottheimer's views over Thornton's and consequently
finding for Commercial Union on the issue of coverage. "[W]hen the
district court's [interpretation of an ambiguous contractual
provision] rest[s] not on plain meaning but on . . . extrinsic
evidence as to the parties' intent . . . appellate review proceeds
under the 'clearly erroneous' standard," United States Liab., 70
F.3d at 687, and "[w]here there are two permissible views of the
evidence, the factfinder's choice between them cannot be clearly
erroneous," Anderson v. City of Bessemer City, 470 U.S. 564, 574
(1985).
IV
We must also determine whether the district court erred
in concluding that Seven Provinces's conduct constituted an unfair
trade practice under Massachusetts law. See Mass. Gen. Laws ch.
93A, §§ 2, 11. The district court's factual findings are reviewed
for clear error and its conclusions of law are reviewed de novo.
See Arthur D. Little, Inc. v. Dooyang Corp., 147 F.3d 47, 54 (1st
Cir. 1998). "Although whether a particular set of acts, in their
factual setting, is unfair or deceptive is a question of fact, the
boundaries of what may qualify for consideration as a c. 93A
violation is a question of law." Schwanbeck v. Federal-Mogul
Corp., 578 N.E.2d 789, 803-04 (Mass. App. Ct. 1991) (internal
citation omitted), rev'd on other grounds, 592 N.E.2d 1289 (Mass.
1992).
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Chapter 93A proscribes those engaged in trade or commerce
from employing "[u]nfair methods of competition and unfair or
deceptive acts or practices" in business transactions. Mass. Gen.
Laws ch. 93A, § 2. It was "designed to encourage more equitable
behavior in the marketplace." Arthur D. Little, 147 F.3d at 55.
Even so, it "does not contemplate an overly precise standard of
ethical or moral behavior. It is the standard of the commercial
marketplace." Ahern v. Scholz, 85 F.3d 774, 798 (1st Cir. 1996).
To trigger liability under 93A, courts have said that the conduct
in question "must attain a level of rascality that would raise an
eyebrow of someone inured to the rough and tumble of the world of
commerce," Quaker State Oil Ref. Corp. v. Garrity Oil Co., 884 F.2d
1510, 1513 (1st Cir. 1989); have "an extortionate quality that
gives it the rancid flavor of unfairness," Atkinson v. Rosenthal,
598 N.E.2d 666, 670 (Mass. App. Ct. 1992); or fall "'within at
least the penumbra of some common-law, statutory, or other
established concept of unfairness' or [be] 'immoral, unethical,
oppressive or unscrupulous,'" Cambridge Plating Co. v. Napco, Inc.,
85 F.3d 752, 769 (1st Cir. 1996) (quoting PMP Assocs., Inc. v.
Globe Newspaper Co., 321 N.E.2d 915, 917 (Mass. 1975)). These
traditional formulations of the standard for 93A liability are
notably imprecise. Indeed, the Massachusetts Supreme Judicial
Court has now said that "[w]e view as uninstructive phrases such as
'level of rascality' and 'rancid flavor of unfairness' in deciding
questions of unfairness under G.L. c. 93A. We focus on the nature
of challenged conduct and on the purpose and effect of that conduct
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as the crucial factors in making a G.L. 93A fairness
determination." Massachusetts Employers Ins. Exch. v. Propac-Mass,
Inc., 648 N.E.2d 435, 438 (Mass. 1995) (internal citations
omitted).
A mere breach of contract does not constitute an unfair
or deceptive trade practice under 93A, see Ahern, 85 F.3d at 798,
unless it rises to the level of "commercial extortion" or a similar
degree of culpable conduct, Anthony's Pier Four, Inc. v. HBC
Assocs., 583 N.E.2d 806, 821 (Mass. 1991). For example, we upheld
a finding that a defendant violated 93A by withholding payment and
"stringing out the process" with the intent to "force [the
plaintiff] into an unfavorable settlement." Arthur D. Little, 147
F.3d at 55-56. Similarly, the Massachusetts Appeals Court upheld
a finding of 93A liability for extortionate conduct when a
defendant raised "specious defenses" to payment and engaged in
"foot dragging" and "a pattern of stringing [the plaintiff] along."
Community Builders, Inc. v. Indian Motorcycle Assocs., 692 N.E.2d
964, 978-79 (Mass. App. Ct. 1998).
An insurance carrier "which in good faith denies a claim
of coverage on the basis of a plausible interpretation of its
insurance policy is unlikely to have committed a violation of G.L.
c. 93A." Gulezian v. Lincoln Ins. Co., 506 N.E.2d 123, 127 (Mass.
1987). But "unlikely" does not mean "never." The possession of a
plausible defense does not automatically preclude a finding of a
93A violation; the defense must be clearly articulated and asserted
in good faith. See Arthur D. Little, 147 F.3d at 56.
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Commercial Union claimed that Seven Provinces violated
93A by its overall pattern of conduct during the period from the
submission of the $225,000 Teledyne reinsurance bill in August 1993
to the trial in January 1998. The district court concluded that
"[a]lthough Seven Provinces' objections to payment bore the
hallmarks of bad faith almost from the outset," 9 F. Supp. 2d at
70, its conduct was only egregious enough to warrant 93A liability
in the period after the facultative reinsurance certificate was
discovered in August 1995. On appeal, Seven Provinces argues that
it did not violate 93A at any time. Its principal argument is that
its interpretation of the net retention provision, discussed above,
was plausible, and that this plausible defense shields it from 93A
liability.5 If Seven Provinces had asserted the net retention
defense in good faith as the basis for the denial of coverage, it
might be right. The detailed factual findings of the district
court, however, tell a different story.
In the post-August 1995 period, the court found that
Seven Provinces never communicated to Commercial Union a decision
to deny coverage. Instead, it engaged in a pattern of "evasiveness
and obstructionism," id. at 63, without ever refusing to pay. This
5
Seven Provinces also argues that it cannot be held liable
under 93A because the case was in litigation from May 1995 onwards,
i.e., for the entire period after the facultative certificate was
discovered in August 1995. This contention is without merit. It
is settled law that conduct during litigation can constitute a 93A
violation. See Schubach v. Household Finance Corp., 376 N.E.2d
140, 141-42 (Mass. 1978); see also Refuse & Envtl. Sys., Inc. v.
Industrial Servs. of America, Inc., 932 F.2d 37, 43 (1st Cir. 1991)
(stating that "bringing [a] lawsuit in spite of the evidence" can
be a 93A violation).
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finding is amply supported by the record, especially the testimony
of Seven Provinces's Martin Rebisz, who was in charge of handling
Commercial Union's claim. The court specifically found that it
"did not find credible Rebisz's denial that Seven Provinces had
deliberately avoided coming to a decision on whether to pay CU's
bill." Id. at 64. This avoidance continued through the trial:
"Rebisz evaded the direct issues of whether he believed Seven
Provinces was obligated to CU and, if so, for how much." Id.
Instead, Rebisz said that Commercial Union could be owed "anything
from $225,000 to nothing," an answer the court justifiably found
exasperating because "Seven Provinces had at no time since the fac.
cert. had been found offered any argument that there was a valid
defense to the entire bill." Id. The court also found that "the
length of time that has elapsed without Seven Provinces coming to
a decision on whether to pay"--almost two and a half years from the
discovery of the facultative certificate to the trial--"is far
outside normal industry practice," id. at 65, which Rebisz admitted
is to pay reinsurance claims within ninety days.
The court further found that Seven Provinces pursued its
deliberate avoidance strategy by raising a series of "constantly
shifting defenses and objections to payment." Id. at 64. One of
these defenses was Seven Provinces's interpretation of the net
retention provision, an interpretation that the court found
"plausible." Id. at 56. Even under this interpretation, however,
Seven Provinces would have owed Commercial Union $45,000--an amount
that it never paid. Moreover, instead of being asserted as a
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reason to refuse coverage, this plausible defense was raised along
with three others which were not plausible. Foremost among these
was a challenge to Commercial Union's allocation of the Teledyne
settlement among various sites and policies. Seven Provinces
repeatedly demanded explanations of Commercial Union's allocation
decisions even though Commercial Union had provided a full and
convincing explanation from the start and repeated it consistently.
At trial, Seven Provinces devoted much effort to offering
alternative allocations of the settlement. The court supportably
called this effort "disingenuous," id. at 64, noting that under the
law of reinsurance the allocation could only be challenged on
grounds of bad faith or unreasonableness. Seven Provinces
presented "no evidence" of such grounds. Id. at 60. In the
absence of such evidence, the fact that alternative allocations
were "possible," id. at 59, was legally irrelevant.
In a variant on its spurious allocation defense, Seven
Provinces challenged Commercial Union's failure to allocate any of
the settlement to a "difference in conditions" policy it had issued
to Teledyne, even though Teledyne had never made a claim on this
policy and it was generally understood to be inapplicable to
hazardous waste claims. Seven Provinces raised this argument as
early as 1995. Despite Commercial Union's clear explanations,
Rebisz continued to raise it up to and including the time of trial
--not, the court's findings suggest, with any prospect of success
(Seven Provinces's own expert dismissed the argument), but as one
more aspect of the "moving target" strategy. Id. at 64.
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Perhaps the most egregious manifestation of this
obstructionist strategy occurred when Seven Provinces claimed for
the first time at trial that coverage for the underlying hazardous
waste claim was barred by the "owned property" exclusion in the
Teledyne policy. This argument was plainly barred by the "follow
the settlements" doctrine that was written into the facultative
certificate. Its use at trial was further confirmation of Seven
Provinces's bad-faith pattern of constantly shifting objections to
payment. On this point, as on all aspects of the moving target
strategy, the district court's factual findings are well-supported
by the record, including the testimony at trial and the voluminous
correspondence between the parties.6
The district court further found that Seven Provinces's
strategy of constantly shifting defenses was intended to pressure
Commercial Union into a settlement. "I find that Seven Provinces'
intent in its dealings with CU was to delay and object to payment
so that CU would compromise the Teledyne bill and agree to a global
commutation of all the business between the parties." Id. at 65.
Since the "global commutation" was only pressed before August 1995,
it could not be a substantive basis for 93A liability because of
the court's determination that 93A liability was only warranted for
6
Nor are the court's findings regarding Seven Provinces's
shifting defenses undermined by the fact that its expert, Austin
Thornton, testified in support of some of those defenses. As the
court pointed out, Thornton's credibility was suspect because he
was involved in the case since early 1995 and hardly qualified as
impartial. See 9 F. Supp. 2d at 56. It is one thing to rely in
good faith on the advice of outside consultants; it is quite
another to suggest that an insurer insulates itself from 93A
liability merely because a hired expert maps its battle plan.
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Seven Provinces's conduct after the discovery of the facultative
reinsurance certificate. Nevertheless, the court was entitled to
rely on evidence of Seven Provinces's bad faith in the period
before the facultative certificate was found in assessing its
intentions thereafter. Moreover, Seven Provinces's attempts to
force a settlement of the Teledyne bill continued after August
1995, even to the time of trial. The court's findings about Seven
Provinces's intent were based in large part on the testimony of its
own witnesses. "Thornton testified that the purpose of presenting
the alternative allocations to CU was strategic: to lead to a
negotiated compromise." Id. at 59-60. "Rebisz maintained that
Seven Provinces was not refusing to pay, but merely would prefer to
mediate or arbitrate in an attempt to compromise the bill." Id. at
64.7
Having concluded that the district court's 93A findings
are not clearly erroneous, we must next determine if those findings
are legally sufficient to support the imposition of 93A liability.
As noted, a 93A fairness determination focuses on the nature,
purpose, and effect of the challenged conduct. See Mass. Employers
Ins. Exch., 648 N.E.2d at 438. Seven Provinces's conduct was
unfair in nature--raising a series of constantly shifting defenses
7
To be sure, we understand that negotiations are part and
parcel of the settlement of insurance claims. In most instances,
negotiations--even hard-line negotiations--will not subject a party
to 93A liability. There is a line, however, that divides run-of-
the-mill negotiating tactics from those that border upon the
extortionate. The evidence of a pattern of evasiveness and the
district court's well-documented findings place Seven Provinces's
tactics on the "wrong" side of this line.
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while never coming to a decision about coverage; in purpose--to
force a settlement of Commercial Union's claim regardless of its
merits; and in effect--causing, at great expense to Commercial
Union, a delay of over three years from discovery of the
facultative certificate to final judgment (and over five years from
the initial billing).8
"We emphasize that this case did not involve a good faith
dispute over billing or a simple breach of contract, each of which
is an insufficient basis for 93A liability." Arthur D. Little, 147
F.3d at 55. We emphasize, too, that this case did not involve a
party whose only miscue was to decide (incorrectly, as matters
turned out) to let the courts resolve a good faith disagreement or
to rely mistakenly on faulty legal argumentation. Instead, Seven
Provinces's conduct--raising multiple, shifting defenses (many of
them insubstantial) in a lengthy pattern of foot-dragging and
stringing Commercial Union along, with the intent (as its own
witnesses admitted) of pressuring Commercial Union to compromise
its claim--had the extortionate quality that marks a 93A
violation.9
8
Commercial Union's attorneys' fees of $234,702.08, as awarded
by the district court under 93A, exceeded its $225,000 reinsurance
claim. If 93A recovery were denied, therefore, Commercial Union
would suffer a net loss from having brought a meritorious claim.
9
From this discussion it should be clear that we do not
suggest, as the dissent says we do, that Seven Provinces was
obligated to pay Commercial Union's claim in full as soon as the
facultative certificate was found. Seven Provinces was obligated,
however, to deal with Commercial Union in good faith. The district
court supportably found, as detailed above, that Seven Provinces's
course of conduct after August 1995 was marked by bad faith. It is
only by ignoring these findings--in particular, the finding that
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Importantly, Seven Provinces's actions also fell within
an "established concept of unfairness." Cambridge Plating Co., 85
F.3d at 769. As the district court explained, reinsurance
relationships are governed by the traditional principle of "utmost
good faith" ("uberrima fides"). See 9 F. Supp. 2d at 69; see also
Compagnie de Reassurance D'Ile de France v. New England Reins.
Corp., 57 F.3d 56, 72 (1st Cir. 1995). "Utmost good faith . . .
requires a reinsurer to indemnify its cedent for losses that are
even arguably within the scope of the coverage reinsured, and not
to refuse to pay merely because there may be another reasonable
interpretation of the parties' obligations under which the
reinsurer could avoid payment." United Fire & Cas. Co. v.
Arkwright Mut. Ins. Co., 53 F. Supp. 2d 632, 642 (S.D.N.Y. 1999)
(citing Christiana Gen. Ins. v. Great Am. Ins. Co., 979 F.2d 268,
280-81 (2d Cir. 1992)); see also White v. Western Title Ins. Co.,
710 P.2d 309, 316-17 (Cal. 1985) (holding that fiduciary
relationship between insurer and insured does not terminate when
litigation commences). The court noted that Commercial Union's
expert "testified to the traditional mores of the industry: that
reinsurance is 'an honorable engagement,' in which 'gentlemen's
agreements' were secured by a handshake. Under this view, the
reinsurer and the reinsured are 'partners,' who owe each other a
duty of 'utmost good faith.'" 9 F. Supp. 2d at 69. Viewed in light
of the exacting standard of uberrima fides, Seven Provinces's bad
Seven Provinces never communicated to Commercial Union a decision
to deny coverage--that the dissent can conclude that the court
erred in imposing 93A liability.
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faith tactics were wholly alien to the usual course of dealings
between an insurer and a reinsurer, and thus were even more clearly
removed from an ordinary breach of contract. The district court
did not err in concluding that these tactics to avoid reinsurance
liability were "unfair" within the meaning of 93A.
Affirmed.
CONCURRING/DISSENTING OPINION FOLLOWS
STAHL, Circuit Judge, concurring in part and dissenting
in part. Although I agree with the majority that this appeal is
properly before us, see ante Part II, and that Seven Provinces
should have provided Commercial Union with reinsurance coverage,
see ante Part III, I believe that the district court erred in
finding that Seven Provinces' conduct warranted liability under
93A. Thus, with respect to Part IV of the majority opinion, I
respectfully dissent.
Massachusetts courts have held, without fail, that
Chapter 93A does not apply to a mere breach of contract. See
Ahern v. Scholz, 85 F.3d 774, 798 (1st Cir. 1996) (citing Pepsi-
Cola Metro. Bottling Co. v. Checkers, Inc., 754 F.2d 10, 18 (1st
Cir. 1985)). In the context of insurance, while a carrier may not
stubbornly refuse to pay a claim once liability has become
“reasonably clear,” it can continue to deny coverage based upon a
“plausible interpretation” of a policy without violating 93A.
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Ferrara & DiMercurio, Inc. v. St. Paul Mercury Ins. Co., 169 F.3d
43, 56 & n.23 (1st Cir. 1999). The assertion of a reasonable
defense to coverage does not constitute an unfair settlement
practice even if the basis for that defense turns out to be wrong.
See Premier Ins. Co. v. Furtado, 703 N.E.2d 208, 210 (Mass. 1998).
With these considerations in mind, let us examine the
facts as the district court found them. The court predicated the
imposition of 93A liability on Seven Provinces' purported pattern
of delay in handling Commercial Union's claim for coverage. The
court observed, for example, that upon receiving an initial demand
for coverage in August, 1993, a “pattern quickly developed by which
[Commercial Union] would seek payment . . . and Seven Provinces
would respond only after some delay, and then by requesting further
information.” Commercial Union Ins. Co. v. Seven Provinces Ins.
Co., 9 F. Supp. 2d 49, 60 (D. Mass. 1998). But then, after
criticizing Seven Provinces' conduct since August, 1993, the
district court concluded that 93A liability was unwarranted until
after August, 1995. This inconsistency -- between the period of
time for which the court assailed the company's conduct, see id. at
65 (“Seven Provinces has delayed payment for over four years after
receiving the bill, and over two years since locating the
[facultative reinsurance certificate].” (emphasis added)), and the
period of time for which the court actually found a 93A violation
to have occurred -- requires us to scrutinize the 93A ruling.
Between August, 1993 and August, 1995, Seven Provinces
was entitled to question its obligation to provide reinsurance
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coverage because the very existence of a reinsurance relationship
was unclear. As the district court acknowledged, Seven Provinces
had “legitimate reasons” to doubt whether a reinsurance
relationship actually existed at all. Id. at 70. By the time the
facultative reinsurance certificate was found, litigation already
was underway and Seven Provinces was entitled to raise any
reasonable defenses to coverage that emerged from the terms of the
policy. Among these defenses, Seven Provinces argued (1) that
Commercial Union's allocation of liability among its Teledyne
policies inflated the amount of loss that this particular
reinsurance agreement covered, and (2) that Commercial Union's use
of quota share treaty reinsurance violated the net retention
requirement in the facultative reinsurance certificate. The
district court conceded that these defenses were, respectively,
“possible,” see id. at 59, and “plausible,” see id. at 56.
While it is true that Seven Provinces' attorney asked
about another defense to coverage for the first time at trial, he
did so only in the form of a single question about an “owned
property” exclusion in one of the insurance policies. This
question did not delay the proceedings because the court curtailed
the inquiry. When the issue briefly resurfaced later on in the
trial, Commercial Union did not object and the court did not
intervene. There may be litigation strategies that are so abusive
as to warrant 93A liability, but there is no authority for
grounding 93A liability on an attorney's decision “to test the
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waters” briefly when a new issue emerges during the six-day trial
of a complicated case.
In any event, Seven Provinces' insurance expert, Austin
Thornton, was prepared to testify and in fact did testify in
support of the company's defenses to coverage. Armed with that
expert advice, the company proceeded on the reasonable belief that
its liability genuinely was unclear. See Ferrara & DiMercurio,
Inc., 169 F.3d at 56 (“Insurers are both encouraged and entitled to
rely . . . on the advice of expert consultants in evaluating
liability [on a demand for coverage].”); see also Van Dyke v. St.
Paul Fire & Marine Ins. Co., 448 N.E.2d 357, 361-62 (Mass. 1983).
Although these defenses to coverage may have taken time to
litigate, and although none of these defenses ultimately prevailed,
the record simply does not suggest that Seven Provinces acted with
the kind of culpability that 93A requires. See Cambridge Plating
Co. v. Napco, Inc., 85 F.3d 752, 769 (1st Cir. 1996).
The majority takes a different view, suggesting that as
soon as the facultative reinsurance certificate was found, Seven
Provinces should have paid Commercial Union's claim in full rather
than continuing to raise new issues and questions. In particular,
the majority contends that it was normatively unfair for Seven
Provinces to demand additional documentation and to ask for further
explanations once the existence of a reinsurance relationship was
established. But if anything, the discovery of the facultative
reinsurance certificate reasonably justified some delay on Seven
Provinces' part because once the certificate was found, the company
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was entitled to pause in order to determine whether any other
defenses to coverage appeared from the language of the certificate
or from the factual circumstances surrounding the claim.
The majority cites no authority -- and I know of none --
to support the proposition that a reinsurer must provide coverage
in full, without delay, and without limitation, simply because some
kind of policy has been found. If that were the law, an insurer
could face 93A liability whenever it assumed coverage pursuant to
a “reservation of rights” letter rather than waiving its defenses
from the onset. But that is not the law. Although the reinsurance
industry holds itself to high standards of conduct that weigh in
favor of coverage under the policy in a doubtful case, those
standards do not justify liability under 93A simply because a
reinsurer pauses to uncover and to raise a variety of “plausible”
and “possible” defenses to coverage. Moreover, while it is true
that Massachusetts courts might permit 93A liability when a
plaintiff initiates litigation solely to burden another, see
Schubach v. Household Fin. Corp., 376 N.E.2d 140, 142 (Mass. 1978)
(suggesting that a finance company might violate 93A by suing
debtors in distant jurisdictions so that they would be more likely
to default), they have stopped short of saying that a defendant
risks 93A liability simply because it raises a vigorous defense
that fails to succeed on the merits. The district court erred in
imposing liability under 93A.
Setting aside the facts of this particular case, what
troubles me most about the majority's approach is that it truly has
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no bounds. Although the majority opinion says that “[t]here is a
line . . . that divides run-of-the-mill negotiating tactics from
those that border upon the extortionate,” it offers no indication
of where the line should be drawn when imposing 93A liability for
conduct during litigation. Every commercial litigant appearing in
federal court in Massachusetts must now fear that if it raises
plausible defenses against a debatable claim rather than agreeing
to pay the claim at the outset, it will risk 93A liability simply
because it chose to fight and lost. Massachusetts law has never
reached that far.
For the foregoing reasons, I respectfully dissent with
respect to Part IV of the majority opinion.
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