                                                              NOT PRECEDENTIAL

                      UNITED STATES COURT OF APPEALS
                           FOR THE THIRD CIRCUIT
                                ____________

                                    No. 14-2045
                                   ____________

                    MUNICH REINSURANCE AMERICA, INC.

                                         v.

                AMERICAN NATIONAL INSURANCE COMPANY,
                                                 Appellant
                             ____________

                     On Appeal from United States District Court
                           for the District of New Jersey
                             (D.C. No. 3-09-cv-06435)
                      (District Judge: Hon. Freda L. Wolfson)
                                   ____________

                          Argued December 10, 2014
             Before: FUENTES, FISHER and KRAUSE, Circuit Judges.

                              (Filed: February 3, 2015)

Joel M. Eads, Esq.
Trenk, DiPasquale, Webster, Della, Fera & Sodono, P.C.
32 Parking Plaza
Suite 402, The Times Building
Ardmore, PA 19003

Andrew J. Mytelka, Esq., ARGUED
Greer, Herz & Adams
One Moody Plaza
18th Floor
Galveston, TX 77550
Angela Olalde, Esq.
Greer, Herz & Adams
2525 South Shore Boulevard
Suite 203
League City, TX 77573

                            Counsel for Appellant

Paul M. Hummer, Esq., ARGUED
Amy S. Kline, Esq.
Sean T. O'Neill, Esq.
Saul Ewing
1500 Market Street
Centre Square West, 38th Floor
Philadelphia, PA 19102

                            Counsel for Appellee



                                        OPINION*


FISHER, Circuit Judge.

       Appellee Munich Reinsurance America, Inc. (“Munich”), provided reinsurance

coverage to a workers compensation insurer. Acting through an independent underwriter,

Appellant American National Insurance Co. (“ANICO”) agreed to reinsure part of

Munich’s coverage. ANICO’s and Munich’s relationship broke down, and Munich

ultimately sued ANICO for breach of contract. ANICO counterclaimed to rescind their

reinsurance contracts on the basis that Munich did not provide ANICO with all material



       *
        This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7
does not constitute binding precedent.

                                             2
information about the underlying workers compensation insurer. After a bench trial, the

District Court entered judgment in Munich’s favor on its breach of contract claim and

ANICO’s rescission counterclaim. We will affirm.

                                              I.

       We write principally for the parties, who are familiar with the factual context and

legal history of this case. Therefore, we will set forth only those facts that are necessary

to our analysis.

       Everest National Insurance Co. (“Everest”) is a workers compensation insurer.

Beginning in 1997, Everest and Munich entered into a reinsurance relationship. For

workers compensation claims made to Everest between $250,000 and $1,000,000,

Munich agreed to pay Everest’s obligations under the program less $250,000, known as

the “750 excess of 250” layer.1 Munich sought out its own reinsurance for the Everest

program. Munich entered into an agreement with Continental Casualty Insurance Co.

(“Continental”), in which for claims made to Everest between $500,000 and $1,000,000,

Continental agreed to pay Everest’s obligations under the program less $500,000, known

as the “500 excess of 500” layer. An independent underwriter, IOA Re, Inc. (“IOA”),

represented Continental each time Munich and Continental renewed the reinsurance

contract.




       For claims that exceeded $1,000,000, Munich’s total payment was capped at
       1

$750,000.

                                              3
       Under this contractual scheme, Everest would cover the first $250,000 of every

claim against its workers compensation insurance. If the claim exceeded $250,000,

Munich would cover the next $250,000 of the claim. And if the claim exceeded

$500,000, Continental would cover the next $500,000 of the claim.

       In late 2000, IOA told Munich that IOA did not underwrite coverage for

Continental anymore and suggested replacing Continental with ANICO. Munich gave

IOA the same underwriting files that Munich received from Everest. IOA analyzed those

underwriting files and eventually agreed on ANICO’s behalf (1) to reinsure the “500

excess of 500” layer in part during the last two months of the year 2000 and (2) to

reinsure the layer in its entirety in 2001. However, Munich had not provided IOA with

information about its own losses, its relationship with Everest, certain unreported but

expected claims, the break-even price Munich calculated for the layer, a claims audit of a

new claims agent joining the Everest program, and the rate Munich charged Everest.

       Eventually, Munich’s and ANICO’s relationship broke down. In December 2009,

Munich sued ANICO for breach of contract. ANICO counterclaimed to rescind the 2000

and 2001 reinsurance contracts. ANICO claimed that Munich breached the duty of

utmost good faith that Munich owed ANICO by withholding material information from

ANICO. The District Court held a bench trial on the parties’ claims. On February 27,

2014, the District Court issued an opinion finding that ANICO breached the parties’

contracts and that ANICO was not entitled to rescind the contract. Munich Reinsurance

Am., Inc. v. Am. Nat’l Ins. Co., 999 F. Supp. 2d 690, 761-62 (D.N.J. 2014). The District

                                             4
Court found that Munich had not breached its duty of utmost good faith because,

although Munich withheld some information from ANICO, that information was not

material to ANICO’s decision to reinsure Munich’s coverage and did not need to be

disclosed. Id.at 741-48. On May 27, 2014, the District Court entered judgment in

Munich’s favor in the amount of $5,621,669.66. ANICO filed a timely appeal.

                                             II.

       The District Court had jurisdiction over this action under 28 U.S.C. § 1332, and

we have jurisdiction over this appeal under 28 U.S.C. § 1291. ANICO challenges the

District Court’s findings that the information Munich withheld was not material to

ANICO’s decision to reinsure Munich’s coverage and, therefore, Munich did not breach

its duty of utmost good faith. Materiality is a question of fact or a mixed question of fact

and law. See Porter v. Traders’ Ins. Co. of Chi., 58 N.E. 641, 642 (N.Y. 1900).

Accordingly, in considering ANICO’s appeal from the District Court’s bench trial ruling,

we apply a mixed standard of review: we first exercise plenary review over the legal

standard for materiality the District Court identified, and then we review the District

Court’s application of that legal standard for clear error. See Travelers Cas. & Sur. Co. v.

Ins. Co. of N. Am., 609 F.3d 143, 156 (3d Cir. 2010).

                                             III.

       We first determine whether the District Court applied the proper legal standard to

ANICO’s counterclaim. We conclude that it did. We then determine whether the District

Court clearly erred in applying the legal standard to the facts. We conclude that it did not.

                                              5
                                               A.

       Under New York law, which all parties agree applies here, a reinsured owes a duty

of utmost good faith to its reinsurer, and a breach of the duty of utmost good faith

justifies rescinding the reinsurance contract. See Christiania Gen. Ins. Corp. of N.Y. v.

Great Am. Ins. Co., 979 F.2d 268, 278 (2d Cir. 1992). The duty of utmost good faith

requires a reinsured to disclose to the reinsurer “all facts that materially affect the risk of

which it is aware and of which the reinsurer itself has no reason to be aware.” Id.

       The District Court defined materiality as follows: “‘A fact is material . . . if, had it

been revealed, the insurer or reinsurer would either not have issued the policy or would

have only at a higher premium.’” 999 F. Supp. 2d at 737 (quoting Christiania, 979 F.2d

at 278). Additionally, the District Court held (1) that information was material only if an

objectively reasonable reinsurer would consider the information material and (2) that

material information only needed to be disclosed if a reasonable reinsured would know it

was material. Id. at 741.

       ANICO says this standard is too harsh; ANICO says information is material if it

would “likely” influence the reinsurer’s decision, relying on Matter of Liquidation of

Union Indemnity Insurance Co. of New York, 674 N.E.2d 313, 319 (N.Y. 1996).

Although in that case the Court of Appeals of New York said that “[m]aterial facts are

those likely to influence the decision of [reinsurers],” the court explained that those are

“facts which, had they been revealed by the reinsured, would have either prevented a




                                               6
reinsurer from issuing a policy or prompted a reinsurer to issue it at a higher premium.”

Id. (emphasis added).

       Information is also material only if it “might reasonably affect [the reinsurer’s]

choice.” Geer v. Union Mut. Life Ins. Co., 7 N.E.2d 125, 127 (N.Y. 1937) (emphasis

added). In other words, it must be objectively reasonable that a reinsurer would consider

the information material. And the reinsured must “‘have reason to believe the fact . . . is

material’” before disclosure is required. Gulf Ins. Co. v. Transatlantic Reinsurance Co.,

886 N.Y.S.2d 133, 151 (N.Y. App. Div. 2009) (quoting Christiania, 979 F.2d at 279).

       ANICO suggests that we should apply the “total mix” test for materiality used in

securities fraud cases. However, “as a federal court sitting in diversity, we are bound to

follow the pronouncement of a state’s highest court on an issue of state law.” City of

Phila. v. Lead Indus. Ass’n, 994 F.2d 112, 119 (3d Cir. 1993). The Court of Appeals of

New York defined materiality, so we are bound by that definition. And the District Court

did not impose a duty to inquire, as ANICO argues. The District Court merely considered

whether ANICO inquired about information as one factor in deciding whether Munich

had reason to believe the information was material. 999 F. Supp. 2d at 747 n.84.

       Accordingly, the District Court’s legal standard was correct, and we must review

the District Court’s ultimate conclusion on materiality for clear error.

                                             B.

       Under clear error review, we must affirm “[i]f the district court’s account of the

evidence is plausible in light of the record viewed in its entirety.” Anderson v. City of

                                              7
Bessemer City, 470 U.S. 564, 573-74 (1985). The District Court’s conclusion that the

withheld information was not material is plausible, particularly in light of the testimony

of the IOA employee responsible for underwriting ANICO’s coverage of the “500 excess

of 500” layer.

       With respect to Munich’s past losses and expected losses, IOA’s underwriting

process did not take Munich’s profits or losses on the Everest program into account in

calculating a premium for the “500 excess of 500” layer. Therefore, even if Munich’s

losses were disclosed, the disclosure may not have changed ANICO’s decision. Similarly,

with respect to a related deal between Munich and Everest, ANICO’s decision to reinsure

the “500 excess of 500” layer depended on whether Munich would agree to a premium

that would compensate ANICO for the risk of paying claims at the “500 excess of 500”

layer. The reason why Munich agreed to reinsure Everest would not have changed the

risk that a claim would reach the “500 excess of 500” layer. With respect to unreported

expected claims, ANICO has not shown that those claims fell within the “500 excess of

500” layer, and Munich disclosed the past claims in the “500 excess of 500” layer. And

with respect to Munich’s evaluation of a new claims agent, although Munich’s reviewer

doubted the accuracy of the estimates Everest provided, Munich provided ANICO with

enough information that ANICO came to the same conclusion about those estimates.

ANICO also argues that Munich should have disclosed that the break-even price Munich

calculated for the “500 excess of 500” layer was higher than the price ANICO ultimately

agreed to. However, the duty of utmost good faith only requires disclosure of material

                                             8
facts that affect the risk. Christiania, 979 F.2d at 278. A price does not affect the risk; it

reflects the risk. ANICO did not show that Munich failed to disclose the facts affecting

the risk that underlay its calculation of the break-even price.

       ANICO asked for the premium that Munich charged Everest and all loss histories

for the new claims agent. However, Munich did not provide its own premium, and

although Munich sent an underwriting review of the new claims agent, it did not send a

claims audit that it had for a previous period. When a reinsurer specifically requests

information, that information is material and must be disclosed if nondisclosure

“substantially thwarts” the reinsurer’s purpose in asking. Geer, 7 N.E.2d at 127. Here,

nondisclosure did not substantially thwart ANICO’s purpose in asking. With respect to

Munich’s premium, ANICO has not shown how IOA’s underwriting process would have

taken Munich’s premium into account. Additionally, IOA underwrote coverage despite

knowing it did not have Munich’s premium. These facts suggest that not knowing

Munich’s premium did not substantially thwart ANICO’s purpose in asking. With respect

to the claims audit, the information the claims audit revealed about the new claims agent

was that before the claims agent joined the Everest program, the agent stair stepped its

reserves—that is, it raised its estimate of the value of a possible claim over time, which

has a tendency to understate possible liabilities and to overstate assets. However, at trial

the IOA underwriter agreed that the fact that the claims agent stair stepped its reserves

before joining the Everest program “would not affect [her] calculations in any fashion.”

J.A. VIII.53:4-9. Accordingly, Munich’s nondisclosure of these two items of information

                                               9
did not substantially thwart ANICO’s purpose in asking.

      Therefore, the District Court did not clearly err in finding that the withheld

information was not material to ANICO and did not need to be disclosed.

                                           IV.

      For the reasons set forth above, we will affirm the District Court’s judgment.




                                            10
