                             Illinois Official Reports

                                    Appellate Court



                  Continental Casualty Co. v. MidStates Reinsurance Corp.,
                                 2014 IL App (1st) 133090



Appellate Court         CONTINENTAL CASUALTY COMPANY, Plaintiff-Appellant, v.
Caption                 MIDSTATES REINSURANCE CORPORATION, Defendant-
                        Appellee.



District & No.          First District, Second Division
                        Docket No. 1-13-3090




Filed                   December 16, 2014




Decision Under          Appeal from the Circuit Court of Cook County, No. 12-CH-42911; the
Review                  Hon. Mary L. Mikva, Judge, presiding.




Judgment                Affirmed.




Counsel on              William M. Sneed and Lisa M. Schwartz, both of Sidley Austin LLP,
Appeal                  of Chicago, for appellant.

                        Mark G. Sheridan, of BatesCarey LLP, of Chicago, for appellee.
     Panel                    PRESIDING JUSTICE SIMON delivered the judgment of the court,
                              with opinion.
                              Justices Neville and Liu concurred in the judgment and opinion.

                                                OPINION

¶1         Plaintiff Continental Casualty Company filed a complaint for declaratory judgment and
       other relief on November 30, 2012, seeking a declaration of the rights and obligations arising
       under multiple facultative reinsurance contracts issued to plaintiff by defendant MidStates
       Reinsurance Corporation. Defendant reinsured plaintiff for shares of policies between 1981
       and 1984, under which plaintiff sought coverage in 2003-05 as a result of numerous claims
       resulting from environmental liabilities covered under the policies. Defendant made payments
       on the claims for what it claims were the total amount of reinsurance limits provided by each
       certificate. Plaintiff sought declaratory relief, alleging that defendant had breached its
       contracts by failing to pay the amounts due, and damages.
¶2         Defendant sought judgment on the pleadings, asserting that the certificates were not
       ambiguous and clearly provided limits on the amount reinsured. The trial court granted
       defendant’s motion for judgment on the pleadings, finding the reinsurance certificates were not
       ambiguous and limited both losses and expenses assumed by defendant. Plaintiff appeals,
       arguing that the certificates are not facially clear, complete, and unambiguous contracts and do
       not provide a limit of coverage as found by the circuit court. For the following reasons, we
       affirm the judgment of the circuit court.

¶3                                          I. BACKGROUND
¶4         This case involves the interpretation of five reinsurance policies issued to plaintiff by
       defendant. One reinsurance policy related to an excess third-party liability policy plaintiff
       issued to RSR Corporation in 1981. The remaining four reinsurance policies covered a 1979
       commercial casualty policy that plaintiff issued to Borg-Warner Corporation. All of the
       certificates issued by defendant, through the agent for its predecessor, are two-page documents
       with specific policy information on the first page and an identical list of 12 policy “Provisions”
       on the second page.
¶5         Paragraph 7 of the certificates contains the key language in this case, with that paragraph
       being amended by the parties by endorsement to two of the certificates. Paragraph 7 of each
       certificate, as amended, provides in full:
            Item A               Item B                   Item C                        Item D
        Description of      Original Policy       Reinsured’s Retention Reinsurance Assumption
           Coverage              Limits
          [Account /
          Certificate
              No.]
       Excess general $500,000 each occ / $100,000 each occ /                45% p/o $400,000 each
       liability [RSR / $500,000 agg csl        $500,000 agg csl             occ / nil agg excess
       DAR 13894]                                                            $100,000 each occ /
                                                                             $500,000 agg csl

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     Excess general   $1,000,000           NIL this layer                 25% p/o $500,000 ea
     liability        occ/4,500,000 agg bi                                occ/NIL agg bi & pd
     [Borg-Warner /   $1,000,000 occ /                                    separately excess $500,000
     DAR 14263]       $4,500,000 agg pd                                   ea occ/$4,500,000 agg bi &
                                                                          pd separately
     Excess general   $1,000,000           20% p/o the difference         20% p/o difference
     liability        occ/4,500,000 agg bi between $500,000               between $500,000 occ/NIL
     [Borg-Warner /   $1,000,000 occ /     occ/NIL agg bi & pd            agg bi & pd separately and
     DAR 14265]       $4,500,000 agg pd    separately and $350,000        $350,000 occ inclusive of
                                           occ inclusive                  expense/$4,500,000 agg bi
                                           expense/$4,500,000 agg         & pd separately
                                           bi & pd separately
     Excess general   $1,000,000           10% p/o the difference         22.5% p/o difference
     liability        occ/4,500,000 agg bi between $500,000               between $500,000 occ/NIL
     [Borg-Warner /   $1,000,000 occ /     occ/NIL agg bi & pd            agg bi & pd separately and
     DAR 16674]       $4,500,000 agg pd    separately and $350,000        $350,000 occ inclusive
                                           occ inclusive                  expense/$4,500,000 agg bi
                                           expense/$4,500,000 agg         and pd separately
                                           bi and pd separately
     Excess general   $1,000,000           NIL this layer                 25% p/o $500,000 ea
     liability        occ/4,500,000 agg bi                                occ/NIL agg excess
     [Borg-Warner /   $1,000,000 occ /                                    $500,000 ea
     DAR 16676]       $4,500,000 agg pd                                   occ/$4,500,000 agg bi &
                                                                          pd separately


¶6       The Provisions of the reinsurance certificates were provided on the second page of each
     certificate, the relevant Provisions providing:
                  “A. The Company warrants to retain for its own account or that of its treaty
             reinsurer(s) the amount of liability specified in Item 7C unless otherwise provided
             herein, and the liability of the Reinsurer in Item 7D shall follow that of the Company,
             except as otherwise specifically provided herein, and shall be subject in all respects to
             all the terms and conditions of the Company’s policy. The Company shall furnish the
             Reinsurer with a copy of its policy and all endorsements thereto which in any manner
             affect this certificate, and shall make available for inspection and place at the disposal
             of the Reinsurer’s authorized representatives at reasonable times any of its records
             relating to this reinsurance or claims in connection therewith.
                  B. Prompt notice shall be given to the Reinsurer by the Company of any claim,
             occurrence or accident which appears likely to involve this reinsurance and while the
             Reinsurer does not undertake to investigate or defend claims or suits it shall
             nevertheless have the right and be given the opportunity to associate with the Company
             and its representatives at the Reinsurer’s expense in the defense and control of any
             claim, suit or proceeding involving this reinsurance, with the full cooperation of the
             Company.
                  ***

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                    D. All claims involving this reinsurance, when settled by the Company, shall be
                binding on the Reinsurer, which shall be bound to pay its proportion of such
                settlements, and in addition thereto, in the ratio that the Reinsurer’s loss payment bears
                to the Company’s gross loss payment with respect to business accepted on an excess of
                loss basis and in the ratio that the Reinsurer’s limit of liability bears to the Company’s
                gross limit of liability with respect to business accepted on a pro rata basis, its
                proportion of expenses, other than Company salaries and office expenses, incurred by
                the Company in the investigation and settlement of claims or suits and, with the prior
                consent of the Reinsurer to trial court proceedings, its proportion of court costs and
                interest on any judgment or award.”
¶7         In the 1990s and early 2000s, RSR and Borg-Warner became the subject of numerous
       claims for injuries from environmental concerns related to hazardous waste or asbestos issues
       at the insured’s properties. Plaintiff defended RSR, litigated coverage of RSR, and paid to
       settle claims against RSR. Plaintiff submitted billings and proofs of loss to defendant related to
       two separate occurrences. Defendant made payments of $180,000 for each occurrence in 2004,
       remitting payment along with a letter and legal memorandum explaining its view of its liability
       under the reinsurance certificate.
¶8         Following years of litigation concerning plaintiff’s coverage of Borg-Warner, a settlement
       agreement was entered between the parties. Plaintiff submitted billings to defendant under the
       terms of the reinsurance polices related to these claims. In 2004, defendant made payments to
       plaintiff up to the amount that defendant claimed was the limit on each reinsurance certificate.
¶9         Plaintiff did not receive payment of all amounts billed and disputed defendant’s claims
       concerning the limits under the reinsurance certificates. Plaintiff filed the underlying
       complaint asserting breach of contract claims against defendant. Plaintiff sought declaratory
       relief that the reinsurance certificates did not include limits on expenses, that defendant
       breached the agreements, and damages. Defendant filed a motion for judgment on the
       pleadings, asserting that the reinsurance certificates were unambiguous and defendant properly
       paid the limit on each of plaintiff’s claims.
¶ 10       In a written opinion, the circuit court granted defendant’s motion for judgment on the
       pleadings. The court found that Provisions A and D of the reinsurance certificates did not
       remove expenses from the amount of reinsurance assumed, but also did not specifically
       indicate that expenses were not subject to those limits. Citing to defendant’s principle
       authority, Bellefonte Reinsurance Co. v. Aetna Casualty & Surety Co., 903 F.2d 910 (2d Cir.
       1990), and the line of cases that followed the “Bellefonte principle” that facultative reinsurance
       certificate limits cap reinsurance for both indemnity and expenses, the court found that the
       reinsurance certificates were not ambiguous and limited both losses and expenses assumed by
       defendant to the limits stated in the certificates. This appeal followed.

¶ 11                                         II. ANALYSIS
¶ 12       Plaintiff argues on appeal that the trial court erred in granting defendant judgment on
       pleadings pursuant to section 2-615(e) of the Code of Civil Procedure. 735 ILCS 5/2-615(e)
       (West 2010). Judgment on the pleadings is similar to summary judgment in that judgment is
       proper where there is no genuine issue of material fact and the moving party is entitled to
       judgment; however, it is limited to the pleadings. Allstate Property & Casualty Insurance Co.
       v. Trujillo, 2014 IL App (1st) 123419, ¶ 15. The moving party concedes the truth of all

                                                    -4-
       well-pleaded facts in the complaint, and the court must construe the evidence, and reasonable
       inferences, in favor of the nonmoving party. Id. A reviewing court reviews the grant or denial
       of judgment on the pleadings de novo. Id.
¶ 13       The trial court considered the five reinsurance certificates issued to plaintiff by defendant.
       In interpreting contracts such as the reinsurance certificates, we follow the “four corners”
       approach, presuming the document speaks for itself and the intentions of the parties must be
       determined from the language they have used in drafting the agreement. Air Safety, Inc. v.
       Teachers Realty Corp., 185 Ill. 2d 457 (1999). An ambiguity does not exist in a contract simply
       because the parties disagree on the meaning of a provision, but when the contract contains
       language susceptible to more than one reasonable interpretation. Ringgold Capital IV, LLC v.
       Finley, 2013 IL App (1st) 121702. Only then may extrinsic evidence be considered to establish
       the intent of the parties. Id.
¶ 14       In the instant matter, the circuit court found the language in the reinsurance certificates was
       clear and unambiguous and that the “reinsurance assumed” provision of Item D created an
       overall limitation on the obligation to reinsure both losses and expenses. The court then found
       the Bellefonte case and following cases interpreting this same, or similar, language persuasive.
       We agree with the circuit court and hold that the certificates provided a clear policy limit,
       inclusive of expenses, and judgment on the pleadings was properly granted.
¶ 15       In Bellefonte, the Second Circuit considered six reinsurance agreements between the
       plaintiff and six reinsurers that contained substantially similar terms. Bellefonte, 903 F.2d at
       911. The agreements articulated that reinsurance was provided “subject to the terms,
       conditions and amount of liability set forth herein” and a “Reinsurance Accepted” provision
       that called for a per-occurrence amount of coverage. (Internal quotation marks omitted.) Id.
       The agreements also contained third and fourth provisions containing “follow the form” and
       “follow the fortunes” clauses. Id.
¶ 16       The court found that the first two provisions provided an express cap for the certificates
       and the plaintiff could not recoup defense costs beyond that cap as “the limitation is to be a cap
       on all payments by the reinsurer.” (Internal quotation marks omitted.) Id. at 913. The court
       reasoned that any other conclusion would effectively eliminate the stated limitation on the
       reinsurer’s liability and the “follow the fortunes” clause requires the reinsurer to bear the risks
       of the insurer, but only to that stated limit. Id. Furthermore, the court found that the phrase “in
       addition thereto” in the “follow the fortunes” clause was included “merely to differentiate the
       obligations for losses and expenses. The phrase in no way exempts defense costs from the
       overall monetary limitation in the certificate. *** In our view, the ‘in addition thereto’
       provision merely outlines the different components of potential liability under the certificate. It
       does not indicate that either component is not within the overall limitation.” Id.
¶ 17       This analysis and conclusion by the Bellefonte court that reinsurer “liability for defense
       costs will not extend beyond the limit of liability as stated in the reinsurance agreement” has
       been widely accepted and cited by the courts and experts. 1A Steven Plitt et al., Couch on
       Insurance 3d § 9:29 (rev. 2014); Unigard Security Insurance Co. v. North River Insurance Co.,
       4 F.3d 1049 (2d Cir. 1993); Pacific Employers Insurance Co. v. Global Reinsurance Corp. of
       America, No. 09-6055, 2010 WL 1659760 (E.D. Pa. Apr. 23, 2010). The contract terms
       involved in Bellefonte are similar to the provisions involved in the instant reinsurance
       certificates. Provision A, the “follow the form” provision, provides that, “except as specifically
       provided herein” the reinsurance certificate was to mirror the underlying insurance policies.

                                                    -5-
       Provision D, the “follow the fortunes” provision, provides that the reinsurer must pay its
       proportion of settlements, the ratio of losses to the insured’s gross loss payment, and the ratio
       that the reinsurer’s limit of liability bears as to its proportion of expenses and costs. More
       importantly, under Item D, reinsurance assumed, a ratio of total liability assumed is provided
       to calculate a monetary limitation.
¶ 18       As found by the circuit court, nothing in these provisions can be said to remove expenses
       from the overall liability cap provided in Item D, reinsurance assumed. Plaintiff asserts that the
       terms of reinsurance are ambiguous because in Items C and D, two of the five certificates
       include the language “inclusive of expenses,” while the other certificates are silent on this
       issue. While those two certificates contain that language, there is no other differentiation of
       these costs to separate expenses from the cap provided by Item D. While plaintiff takes issue
       with defendant’s labeling this “belt and suspenders” drafting, a plain reading of the terms in the
       certificates indicates this characterization is proper. By the language, and very nature of the
       excess of liability insurance, this inclusion clearly appears to be an abundance of caution rather
       than an intention to exclude expenses from the liability cap.
¶ 19       Plaintiff’s reliance on Penn Re, Inc. v. Aetna Casualty & Surety Co., No. 85-385-CIV-5,
       1987 WL 909519 (E.D.N.C. June 30, 1987), is misplaced. Penn Re was decided before
       Bellefonte and does not enjoy the same support in case law. The Penn Re court examined the
       provisions in the reinsurance certificates before it that was similar to the instant certificates and
       highlighted the “in addition thereto” language relating to costs to find that the reinsurer was
       liable for costs above the policy limit for losses. Id. at *8-10. As addressed above, we disagree
       with this reading and follow the reasoning in Bellefonte and following cases.
¶ 20       Likewise, plaintiff’s reliance on International Surplus Lines Insurance Co. v. Fireman’s
       Fund Insurance Co., No. 88 C 320, 1990 WL 141464 (N.D. Ill. Sept. 20, 1990) (ISLIC), is
       misplaced as that case is distinguishable. The ISLIC court did find a reinsurance contract with
       language similar to the instant matter to be ambiguous, with one key difference; there was no
       stated aggregate limit in that case. Id. at *4. Therefore, the court found the precise amount of
       coverage inherently ambiguous, whereas in the instant matter the parties included language
       establishing aggregate limits.
¶ 21       Furthermore, we will not consider extrinsic evidence to determine if a latent ambiguity
       exists under the provisional admission approach discussed in Air Safety, Inc. v. Teachers
       Realty Corp., 185 Ill. 2d 457 (1999), as that court did not rule on the issue and the four corners
       rule of contract interpretation remains the law in Illinois. River’s Edge Homeowners’ Ass’n v.
       City of Naperville, 353 Ill. App. 3d 874, 880 (2004). We have found the certificates clearly and
       unambiguously provide for an aggregate policy limit that includes both losses and expenses.
       For the foregoing reasons, we affirm the judgment of the circuit court granting plaintiff
       judgment on the pleadings.

¶ 22                                       III. CONCLUSION
¶ 23       For the reasons stated, we affirm the judgment of the circuit court.

¶ 24       Affirmed.




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