Compagnie de France v. New England Corp

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.

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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



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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.

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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



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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.


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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.

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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.

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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.

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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



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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



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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



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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.



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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



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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.

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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



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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,



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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



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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.

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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


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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.").

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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.

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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



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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.



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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



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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


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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



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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,



-83-













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, ___________________________________________



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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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