Houston Casualty Co v. Certain Underwriters

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

_____________________

No. 00-20406
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HOUSTON CASUALTY COMPANY,

Plaintiff-Appellant–
Cross-Appellee,

versus

CERTAIN UNDERWRITERS AT
LLOYD’S, subscribing to
reinsurance policy no. 839/DA44790,
and COLIN BAKER

Defendants-Appellees–
Cross-Appellants.
_________________________________________________________________

Appeals from the United States District Court for the
Southern District of Texas
USDC No. H-97-CV-1381
_________________________________________________________________
April 5, 2001

Before FARRIS*, JOLLY, and DAVIS, Circuit Judges.

PER CURIAM:**

In this appeal we are presented with the question whether the

Underwriters may avoid the reinsurance policy because the Houston

Casualty Company, acting through Fenchurch Insurance Brokers,

misrepresented a material fact that induced the making of the

*
Circuit Judge of the Ninth Circuit, sitting by designation.
**
Pursuant to 5TH CIR. R. 47.5, the court has determined that
this opinion should not be published and is not precedent except
under the limited circumstances set forth in 5TH CIR. R. 47.5.4.
policy. The resolution of this issue depends largely upon whether

Texas law or English law applies. We have reviewed the district

court’s choice-of-law determination de novo, see Arochem Corp. v.

Wilomi, Inc., 962 F.2d 496, 498 (5th Cir. 1992), and agree fully

with the district court’s careful application of the “most

significant relationship” test as set forth in the Restatement

(Second) of Conflict of Laws. We further agree that England has

the more significant relationship to the transaction and the

parties.

Applying English law, the district court held that the

doctrine of uberrimae fidei allowed the Underwriters to avoid the

policy because Fenchurch’s unintentional misrepresentation (that

the original insurance policy contained language similar to LSW

507) was material and induced the Underwriters to agree to the

reinsurance policy. The district court’s conclusion was correct.

The Underwriters reasonably believed–based on Fenchurch’s negligent

misrepresentation embodied in Endorsement 3–that the LSW 507

language was already part of the original insurance policy and

would thus “follow through” to the reinsurance policy. Moreover,

the evidence fails to show that any policy would have been issued

without the misrepresentation embodied in Endorsement 3.

HCC argues, however, that even if uberrimae fidei applies to

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this case,1 the Underwriters are entitled to avoid liability based

on only Endorsement 3 and not based on the entire contract.

Specifically, HCC contends that Fenchurch’s misrepresentation could

not have induced the Underwriters to enter into this reinsurance

contract because the misrepresentation occurred approximately one

year after the slip was scratched. However, if the Underwriters

were permitted to avoid only Endorsement 3, we would be left with

a slip whose terms were so unclear with respect to the basis of

loss that Fenchurch and the Lloyd’s Policy Signing Office agreed

that a policy could not be assembled. The Fenchurch employees who

drafted and approved Endorsement 3 on behalf of HCC evidently

understood the endorsement to do nothing more than clarify an

ambiguous term already contained in the slip. Under these

circumstances, it is, as a matter of contract construction, legally

improper to treat the slip, the endorsement, and the final policy

as discrete and severable agreements. The district court thus did

not err in concluding that the Underwriters were entitled to avoid

the reinsurance agreement in its entirety.

With respect to the contract reformation issue raised on

cross-appeal, we must determine “only whether the court clearly

erred in its finding as to whether there was clear and convincing

1
Contrary to HCC’s suggestion at oral argument, there is no
indication that the English doctrine of uberrimae fidei (as opposed
to the American version of this doctrine) has been limited to
maritime contracts.

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evidence of mutual mistake.” Enserch Corp. v. Shand Morahan & Co.,

Inc., 952 F.2d 1485, 1502 (5th Cir. 1992). We conclude that the

district court did not err in refusing to reform the contract

because the weight of the evidence supports the conclusion that the

parties had not reached a definitive and explicit agreement as to

the basis of loss.

A F F I R M E D .

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