Trial Court: San Francisco City & County Superior Court Trial Judge: Honorable Charlotte Walter Woolard Super. Ct. No. CGC-06-448898)
The opinion of the court was delivered by: Richman, J.
CERTIFIED FOR PUBLICATION
(San Francisco City & County
This appeal involves the esoteric subject of reinsurance. We resolve it on well-known principles of appellate review.
Appellant Transport Insurance Company (Transport) insured Aerojet-General Corporation (Aerojet) under a liability policy issued in 1973, and that same year entered into the three reinsurance contracts pertinent here. Numerous suits were brought against Aerojet, and as early as 1980 it begin submitting claims for property damage to Transport, which it denied based on a policy exclusion. Notwithstanding that denial, Transport began paying some investigative expenses, and began to submit claims to the reinsurers. A December 1997 decision by the California Supreme Court held that site investigative expenses could be covered, and in late 1999 Transport finalized a settlement with Aerojet, agreeing to pay $26.6 million. Transport claimed that over $12 million of this was the responsibility of the reinsurers, and in December 1999 submitted its billing and final proof of loss to them.
Years went by without resolution, and in 2006 Transport filed separate lawsuits against each reinsurer, which lawsuits were consolidated. Following an 17-day trial, the jury quickly answered "No" to special verdict questions whether the lawsuits were timely filed, and judgment was entered against Transport.
Transport appeals, an appeal that has generated over 8,000 pages of appendices, 35 volumes of reporter's transcripts, and 425 pages of well-written briefing, including a 180-page appellant's reply brief. And, Transport tells us, the appeal presents two issues of first impression in California, issues "that when decided by this court, will have an impact far beyond the confines of the specific dispute in this case. . . . [T]his court's opinion is likely to become the lead authority on issues involving the statute of limitations in reinsurance claims, not only in California, but possibly throughout the nation"--apparently inviting us to publish some lengthy opinion addressing the claimed issues. We decline the invitation, and resolve the appeal under well-settled principles of appellate review, most fundamentally the doctrine of invited error. And we affirm.
In July 1973, Transport's predecessor, Transport Indemnity Company, issued to Aerojet a blanket excess liability insurance policy, providing coverage from July 15, 1973 to July 15, 1976. The pertinent limit of liability was "the difference between $1,000,000.00 as a result of any one occurrence or in the aggregate and underlying self-insured retention of $50,000.00 each occurrence." Transport also agreed to defend Aerojet and pay litigation expenses, a defense obligation that had no policy limit.
Following issuance of the policy to Aerojet, Transport entered into three contracts of reinsurance, the contracts pertinent here. The first two reinsurance contracts were with International Surplus Lines Insurance Co., a predecessor to TIG Insurance Company (TIG), one of the two respondents here; the third reinsurance contract was with Unigard Mutual Insurance Co., a predecessor to Seaton Insurance Co. (Seaton), the other respondent. For consistency with the proceedings below and the briefing, we will refer to TIG and Seaton.
"Reinsurance contracts are classified as either 'facultative' or 'treaty.' Reinsurance is facultative if it covers the reinsured's risk on an individual policy. The majority of reinsurance contracts are placed under a treaty, which covers the reinsured's risk for an entire class of policies." (Prudential Reinsurance Co. v. Superior Court (1992) 3 Cal.4th 1118, 1126.) As Justice Croskey's treatise explains, "Facultative and treaty reinsurance agreements may be further classified as to the distribution of risk between the original insurer and reinsurer." (Croskey et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 2011) [¶] 8:365, p. 8-73.) "Under pro-rata reinsurance, the reinsurer assumes a specified percentage of the risk (and premiums) associated with the particular percentage of the risk (and premiums) associated with the particular policy or class of policies covered." (Ibid.) "Under excess-of-loss reinsurance, the reinsurer pays losses only after they exceed a specified amount (the 'retention')." (Ibid.)
The coverage details of the reinsurance contracts are not germane to our discussion and will not be set forth in detail. Suffice it to say that the classification of coverage as "pro rata" or "excess of loss" was germane to some of the issues between Transport and the reinsurers, and the subject of much testimony at trial.
One provision in each of the reinsurance contracts is germane, however: when loss was to be paid. As to this, the TIG contracts stated that "Payment of its proportion of loss and expense paid by [Transport] will be made by [TIG] to [Transport] promptly following receipt of proof of loss." The Seaton contract stated that "[p]ayment of [Seaton's] proportion of loss and expense incurred by [Transport] will be made to [Transport] promptly upon receipt and approval by [Seaton] of proof of loss in form satisfactory to [Seaton]."
Transport represents that "reinsurance issues . . . are rarely seen in appellate courts," and its lengthy briefing refers to the claimed dearth of authority pertinent to what it claims are the issues here. We thus digress to discuss reinsurance, and some of the features attendant to it.
Reinsurance is defined in Insurance Code section 620: "A contract of reinsurance is one by which an insurer procures a third person to insure him against loss or liability by reason of such original insurance." As described in a leading insurance treatise, reinsurance is a contract by which one insurer transfers to another insurer "all or part of the risk it has assumed under a separate . . . policy or group of policies in exchange for a portion of the premium. In essence, reinsurance is insurance for insurance companies. Reinsurance provides insurers with the ability to spread the risk they have assumed, thereby preventing any one insurer from suffering a catastrophic loss." (1A Couch on Insurance 3d (2010 revised ed.) Reinsurance, § 9.1, pp. 9-3-9-5 (Couch).) The insurer obtaining the reinsurance is called the "ceding insurer."
Our colleagues in Division Four described it this way: " 'Reinsurance is a special form of insurance obtained by insurance companies to help spread the burden of indemnification. A reinsurance company typically contracts with an insurance company to cover a specified portion of the insurance company's obligation to indemnify a policyholder in the event of a valid claim. . . . When a valid claim is made, the insurance company pays the first level insured, and the reinsurance company pays the insurance company. The reinsurance company's obligation is to the insurance company, and the insurance company vis-a-vis the reinsurer is thus the insured, or more appropriately the ' "reinsured." ' " (Ascherman v. General Reinsurance Corp. (1986) 183 Cal.App.3d 307, 311-312, fn. 5; accord, Catholic Mutual Relief Society v. Superior Court (2007) 42 Cal.4th 358, 368.)
One aspect of reinsurance that distinguishes it from other insurance is that reinsurance contracts have no limitation provision, no reference to when suit has to be brought on the reinsurance contract. According to Couch, "[A]s there is typically no special statute of limitations for reinsurance contracts, the statute of limitations for contracts generally will apply." (Couch, supra, § 9.33, p. 9-135.)
Among the other distinguishing attributes of reinsurance are the sophistication and expertise of the insured--more accurately, reinsured--which are themselves insurance companies. Another is that the reinsurer does not itself investigate or adjust claims, but relies on the ceding insurer to do that. So, as Transport's briefing repeatedly tells us, the parties are essentially aligned--not adverse. This passage is illustrative: "[R]einsurers must treat their reinsureds with 'utmost good faith.' [Citation.] This duty of extreme good faith arises out of 'the traditional mores of the industry' under which reinsurance is seen as 'an honorable engagement' where 'gentlemen's agreements' were often secured by a handshake. [Citation.] Indeed, case law has referred to reinsurers and their cedents as 'partners' rather than adversaries. [Citation.] Because of this venerable history, '[d]efences [sic] based on available periods of limitation usually have not been taken by insurers in the London [reinsurance] market, and some participants in the market feel that it is a custom not to assert them.' [Citation.] Moreover, this duty of utmost good faith does not terminate when litigation commences. [Citation.]." Indeed, Transport asserts, "Seaton and TIG can hardly feign ignorance of their duty to treat Transport at all times with 'utmost good faith,' as that duty was the subject of considerable expert testimony and argument at trial." (Fns. omitted.)
Apparently alluding to this concept in her closing argument at trial, Transport's counsel quoted a "statement that [she] saw written in a reinsurance book, a book that was a whole catalog of cases about reinsurance and how reinsurance works . . . . The quote goes like this: 'Reinsurance is insurance between consenting adults.' "
Seemingly based on the above principles, Transport infers that it is unseemly, if not downright inappropriate, for reinsurers to even think of asserting such a thing as a limitations defense. What might have been, might have been. It is no longer.
The introduction to the chapter on reinsurance in the most recent edition of the other leading insurance treatise makes the point this way: "Reinsurance has emerged from the shadows in the last 20 years. At the time of the publication of the prior edition of this volume and for many decades before that, the reinsurance relationship was a quiet, low-profile backstage business transaction between insurers and their reinsurers. That transaction was carried out as an 'honorable undertaking' or a handshake-based 'gentleman's agreement.' Policyholders and their attorneys saw no reason to probe those relationships, and courts had few occasions to interpret reinsurance contracts or adjudicate responsibility for the payment of losses. For a variety of reasons, including the sheer enormity of actual and potential liability for environmental and other claims and a series of insolvencies hitting both insurers and reinsurers, all that now has changed." (14 Holmes' Appleman on Insurance 2d. (2000) § 102.1, pp. 2-3, fns. omitted (Appleman).)
In other words, all issues are fair game, including statutes of limitations, which brings us to the case at the heart of much discussion below, and here: Continental Cas. Co. v. Stronghold Ins. Co., Ltd. (2d Cir. 1996) 77 F.3d 16 (Stronghold).
Stronghold, decided in 1996 by the Second Circuit Court of Appeals, was an action by Continental Casualty Co. (Continental), a reinsured, against several reinsurers that had refused to pay based on the statute of limitations. The district court ruled against the reinsurers, and they appealed. The Second Circuit affirmed, holding that the causes of action accrued when Continental notified the "reinsurers of its losses under the reinsurance policies and the reinsurers subsequently denied coverage." (Stronghold, supra, 77 F.3d at p. 18.) But the Court of Appeals went on: "The timeliness of Continental's claim thus turns on a fairly simple question: when were its losses due and payable under the reinsurance policies? The representative policy offered by the parties is hardly a paragon of clarity. But, we are able to discern at least one condition that Continental had to satisfy before its right to indemnity could mature. 'Loss, if any under' the policy is 'to be reported to [the reinsurer] as soon as practicable.' . . . [W]e construe the notice provision to mean that Continental had to report any actual losses--i.e., payments made on its underlying insurance policies--within a reasonable period of time under the circumstances. [Citation.] We also conclude that Continental was entitled--indeed probably obligated--to wait a reasonable time for the reinsurers to decide whether they would pay or not, and, if so, how much." (Id. at p. 20.)
Finally, and apropos Transport's "utmost good faith" assertions here, the court said this: "Although it has been said that the relationship between a reinsured and its reinsurer is not technically a fiduciary one [citation], centuries of history have treated both as allies, rather than adversaries. [Citation.] It is customary, for example, for both to share the premium paid by the underlying insured for coverage. [Citation.] Often they jointly prepare and defend unfounded claims by overreaching insureds. [Citation.] [¶] Because custom and usage have established a gentility and unity of interest between the reinsured and its reinsurer, [citation], a generation ago, we doubt that the defendants would even have considered asserting a statute of limitations defense. [Citation.] With the collapse of prominent British reinsurers, and the financial distress of Lloyd's of London, times may have changed. [Citations.] As Francois Villon sighed: Ou sont les neiges d'antan? ('Where are the snows of yesteryear?')." (Stronghold, supra, 77 F.3d at pp. 21-22.)
As noted, Stronghold was decided in 1996. This is how Appleman described the case in 2000: "The Second Circuit held that, where a reinsurance contract required that losses be reported to a reinsurer, the loss did not become due and payable by the reinsurer and the statute of limitations on an action against the reinsurer did not commence to run until a reasonable time elapsed after the ceding insurer gave notice of the loss to the reinsurer."*fn1 (14 Appleman on Insurance 2d, supra, § 107.1, p. 534.)
That, then, was the setting when the state of affairs between Transport and its reinsurers reached some significant milestones arising out of Aerojet's claims against Transport.
Aerojet's primary business was the development and production of missile and rocket motors for NASA and the armed forces. Aerojet was sued in a number of actions alleging damages caused by toxic contamination of groundwater involving pollution at Aerojet sites in Rancho Cordova and Azusa, California, and began submitting claims to Transport as early as 1980, including for both loss and expense. Though Transport did start paying some expenses, it denied the claims for loss based upon a pollution exclusion. This ultimately led to much litigation, including, most significantly, the case leading to the opinion filed by the Supreme Court on December 29, 1997: Aerojet-General Corp. v. Transport Indemnity Co. (1997) 17 Cal.4th 38 (Aerojet). There, following long and tortuous litigation through the lower courts (id. at pp. 47-50), the Supreme Court held that while Transport had no duty to pay Aerojet's losses at Rancho Cordova, if certain criteria were met site investigation expenses might constitute defense costs covered under the policy. The Supreme Court remanded the case to the Court of Appeal, to be sent back to the trial court. (Aerojet, supra, 17 Cal.4th at p. 61, 77.)
Following a mediation, in September 1999 Aerojet and Transport entered into a settlement by which Transport agreed to pay $26,655,000 in exchange for a release of all claims under the Aerojet policy, including for both Rancho Cordova and Azusa. The settlement agreement did not allocate the amount between loss and expense, or between Rancho Cordova or Azusa.
According to Transport's brief, with this settlement "the reinsurers' contractual obligation to pay for their proportionate share of the Aerojet claims arose." And "[b]y letter dated December 20, 1999, Transport submitted its final billing in the Aerojet matter to TIG, seeking the full amount of its reinsurance claim, a total of $6,608,039. [Citation.] This was sent on Transport's behalf by Vito Peraino . . . . Peraino sent the letter to William Pascale, TIG's manager of assumed reinsurance claims. [Citation.] The letter stated: [¶] We have finalized our billings, having assembled all prior payments, and enclose our billing to you for this matter. As this matter was rather complex and carries with it a bit of history, we would like the opportunity to meet with you to present our claim, and to answer any questions you might have."
As to Seaton, Transport says that "On or about December 20, 1999, Mr. Peraino initiated the claims process with Seaton by submitting Transport's initial proof of loss," which proof of loss was accompanied by a letter with language identical to that quoted above. And, Transport says, "As with the TIG claim, it is this final billing that is controlling for the purpose of the causes of action asserted here."
Much of the testimony at trial focused on the numerous communications between Transport and the reinsurers that ensued, and hundreds of exhibits were introduced. Similarly, much of the parties' briefing sets out these communications in great detail.*fn2 We do not consider these communications pertinent to the issues before us, and do not recite them. However, a few facts are pertinent here, especially apropos Transport's "utmost good faith" assertions, facts that occurred primarily during the seven-plus years that the Aerojet coverage litigation was ongoing. Those facts include communications within Transport and with its counsel, and show that Transport was aware that the statute of limitations could be an issue--an awareness that existed even before Stronghold was decided. Here are some examples.
In 1994, Chet Nalepa, Senior Vice President at Transport's sister company, American Empire Surplus Lines Insurance Company, began to assist in Transport's collection efforts, and brought in outside counsel at Lord, Bissell & Brook, seeking advice regarding TIG's "consistent denials of liability." Nalepa also sought an update from Transport regarding its earlier threat of litigation, emphasizing that because of its size, the claim "is a matter of substance and requires attention to detail." Transport did not respond, and Nalepa ultimately closed his collection file.
In late 1996, Nalepa retained counsel at a second law firm, Deborah Cohen of Pepper Hamilton & Scheetz (Pepper Hamilton), which had assisted Transport in another matter. As his letter to Ms. Cohen put it: "We are getting involved in this effort because of [a prior] litigation you have filed . . . . I've spoken to Eve Rosen and she has blessed our involvement at this point. I am hopeful that your office will be able to assist Transport further in recovering what appears to be long overdue reinsurance proceeds." Nalepa's letter ends with this: "This file is troublesome from a number of aspects and your considered legal opinion will be helpful."*fn3
By November 1996, Pepper Hamilton had drafted a complaint against another of Transport's reinsurers, and a note on the front of the draft asked whether other reinsurers, such as Unigard, Seaton's predecessor, should be added as a defendant.
Ms. Cohen communicated with Transport several times about the statute of limitations, including, for example, in a July 1997 memorandum where she expressed concern about the possible application of the statute of limitations, and advised that the issue could "not sit." A November 19, 1997 letter from Ms. Cohen was similar, expressing "concern about the statute of limitations on some of these billings."
Following the December 1997 Supreme Court decision in Aerojet, supra, 17 Cal.4th 38, Ms. Cohen wrote Nalepa , advising Transport that it should update its billing to TIG, "provide a reasonable time period" for questions, and then demand payment; and "[i]f payment is not made, litigation should be commenced. . . ." In July 1998, Transport sent updated bills to TIG for expenses, stating that "all billings are due 30 days after receipt."
In June 1999, Transport sent another bill to TIG, accompanied by a cover letter drafted by Ms. Cohen, which letter she described as follows: "I have tried to 'wordsmith' the letter to set this up for litigation."
Following the September 1999 settlement with Aerojet, Transport brought in a third law firm, Luce Forward, Hamilton & Scripps (Luce Forward), to allocate the settlement between the Aerojet sites and between loss and expense, in order to bill the reinsurers. Some issues arose as to just how to apportion, and one attorney at Luce Forward told Transport that "it is unlikely that anyone is just going to write a check" regarding the proposed allocation, and another that his "expectation was that the matter was likely to go to litigation at the end of the day." They also warned Transport regarding the statute of limitations.*fn4 Transport's Rosen "understood [in 1999] ...