USCA1 Opinion

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

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

plainti

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,
___________________

Attisani, Choate, Hall & Stewart, David S. Mortensen

________ ________________________ ___________________

David
______

and Tedesc
______

Grasso & Mortensen were on brief for defendants.

__________________
Allan B. Taylor,
________________

with

whom

William Shields,
_______________

Kenneth W. Ri
______________

Matthew E. Winter, Mary Theresa Kaloupek and Day, Berry & Howard w
_________________ _____________________
____________________
on brief for plaintiffs.

____________________

____________________

____________________

*Of the District of Maine, sitting by designation.

CAMPBELL, Senior Circuit Judge.

____________________

This is an appeal

from

a final

brought

by

companies

judgment of

number

and pools

as

At

they

defendant New

court in

reinsurance

syndicates,

reinsurance company

are

known)

under

which

plaintiffs,

D'Ile de France, et al.,1 agreed to

of risks selected, and

England

an action

issue are reinsurance contracts (or

Compagnie De Reassurance

reinsure portions

foreign

against a domestic

and related parties.

"treaties,"

of

the district

also reinsured, by

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

violations

of

Organizations

Defendants

of Mass.

the

Act

Gen. L.

Racketeer

("RICO"),

ch.

93A,

2, and

Influenced

and

Corrupt

18

counterclaimed, alleging

violations of Mass. Gen. L. ch. 93A,

U.S.C.

1961-1968.

breach of

2.

contract and

Following a 30-day

____________________

1.

The

plaintiffs

opinion.

are

listed

the

district

court's

See Compagnie de Reassurance D'Ile de France v. New

___ ________________________________________
___

England Reinsurance Corp.,

__________________________
Mass. 1993).
Pohjola

in

during the

Supp. 370,

Plaintiffs Pohjola Insurance

Insurance

motion of

825 F.

Company (UK)

Limited

373 n.2

(D.

Company Ltd. and

were dismissed

on

the defendants, with the consent of the plaintiffs

trial, and the

Dismissal dated

May 5,

parties entered a

Stipulation of

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.

-4-

bench trial, the district

all but the RICO claims.

court found for the

plaintiffs on

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

at 12 percent.

received, plus prejudgment interest

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

plaintiffs on the fraud,

claims.

Plaintiffs

appealed

below, we

rulings on

erroneous

have cross-appealed

absent.

judgments

from the

For the

district court's

certain matters; reverse others

that require

now

RICO claim.

sustain the

or legally

and

judgments

contract and Mass. Gen. L.

court's dismissal of their

forth

from the

incorrect;

for

ch. 93A

district

reasons set

findings and

as being clearly

and identify

still others

the district court to make findings and rulings

We,

therefore,

remand

for

vacate

further

the district

proceedings

court's

consistent

herewith.

Our specific

dispositions are summarized on pages

98-100 of this opinion.

I.

Background
Background

The following is an

will

be related as needed

overview.

More specific facts

in our discussion

-5-

of the various

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

based

a Boston-based reinsurer.

in

underwriting,

NERCO.

Boston,

provided

and other

services

Neither First State

Cameron &

Colby, also

management,

marketing,

to both

nor NERCO had

First State

and

employees of its

own; their businesses were carried on by employees of Cameron

& Colby.

1979 as

became

Graham

Graham

Watson, Inc.,3 not a party,

an unincorporated

the

latter's

Watson's

underwriting

role

services

was created in

division of Cameron

wholly owned

was

in

to

the

subsidiary

provide

& Colby;

in mid-1980.

marketing

facultative4

it

and

reinsurance

venture that is the subject of this litigation.

____________________

2.

The

relationship

between

these

corporate parents, the Hartford and

district court's opinion, 825

defendants

and

their

ITT, is described in the

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

reinsurance, the
Latin word for
speaking,

other being

treaty reinsurance.

"ability" or "power,"

connotes

the two major types of

the option

particular risk, as contrasted

to

"facultative," broadly
reinsure,

defendants

this case is
was

whether the

"facultative,"

Treaties.

-6-

or not,

each

with a binding arrangement to

reinsure all risks of a particular sort.

issue in

From the

as

See infra.
___ _____

A major

reinsurance provided
promised

in

the

by
SANS

The

to

underlying casualty and property risks germane

this case were located in North America.

entities

wishing

to

insure

against

these

policies of insurance from primary insurers.

purchased

reinsurance

from

NERCO

in

order

Individuals and

risks procured

The latter then

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

assumed as a reinsurer, NERCO itself

through

Graham Watson

insurance

sought

market, resulting

this lawsuit is concerned.

-- the

many

often acting with and

reinsurance on

the London

in the arrangements

with which

Under these reinsuring agreements

so-called System and Non-System

syndicates

that it had

at Lloyd's

of

London

("SANS") Treaties --

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

"retrocedent,"

"retrocessionaires," and

the

the

plaintiffs

agreements between

became

them

were

"retrocessional" treaties.

agreed to indemnify NERCO

might sustain

return,

NERCO

("underwrite"),

in its

The plaintiff

for a portion of any

reinsurance of

promised

and price

retrocessionaires

to

acquire

primary insurers.

("produce"),

("rate") the

-7-

losses NERCO

risks and

In

evaluate

to share

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

1979 a

document

his associates drafted

document

known as

stated that

the

Cameron

and circulated in

Placing Information.

& Colby

had established

late

This

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 division was:

The

stated purpose of

1.

To participate in
casualty

the property

facultative

business

which

and

reinsurance

is

currently

dominated by the direct writers.

2.

To rationalise [sic] the facultative

placements of both the
the

First

Hartford and

State not

only

from an

administration

[sic] point

of view

but

to

also

provide

the

retrocessionaires with a broad cross

section

of facultative

reinsurance

emanating from these two companies.

According

to

the

Placing Information,

Graham

Watson

was

significantly

on

____________________

5.

Plaintiffs'

fraud

representations made

claims

rely

in the Placing

Information, especially

those pertaining to Graham Watson's intention to procure nonbrokered, "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.

-8-

charged

with

professional

penetrating the

reinsurance

reinsurance emanating

[to] continue

been

market,"

leaving

. .

Placing Information was circulated

for

. . .

through NERFAC," the

existing in-house entity that

writing reinsurance

direct

"[f]acultative

from reinsurance intermediaries

to be written separately

latter being an

time,

"non-brokered

the

had, for some

defendants.

The

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

sub-broker Sedgwick

head underwriter

employee.

Aided

by employees of

Payne, they approached Ralph Bailey, the

for plaintiff Terra Nova

Insurance Company

Limited, and described to

him the proposed reinsurance plan.

Sedgwick-Payne's

thereafter negotiated

brokers

the "slips" spelling

out the

Bailey agreeing to act as

market companies,

underwriter for

terms of the

treaties.

"lead underwriter" for the

the brokers

approached

plaintiff B.P.D. Kellet &

syndicate, with the

with Bailey

request that he act as

Ron Kellet,

With

London

head

Others, a Lloyd's

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

suit.

-9-

are parties

to this

on

behalf of all other Lloyd's syndicates.7

had

stamped

and

initialed

proportion of the total

slips

were

underwriters

each

slips,

indicating

risk they were bound to

separately

for

the

After the leads

presented

of

for

indicated his or her acceptance of a

accept, the

approval

the plaintiffs,8

the

each

to

of

the

whom

portion of the risks by

____________________

7.

lead

underwriter

negotiating the
SANS Treaties.

terms of

is

initially

responsible

for

reinsurance contracts such

as the

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

reinsurers, who

are referred

Members

following

of the

of other

to as the

market rely

participating

"following market."
on the

underwriting

skill

and judgment of the

deciding whether
reinsurance

how much

obligations.

underwriter
ability

and by

lead as an

as

lead can

to

Thus,
have a

important factor when

commit themselves
having

London

treaty.

two lead underwriters in this case:

market

companies

and

reputable

significant effect

to fully place a retrocessional

actually

Kellett

on

on the

There were

Bailey for the

for

the

Lloyd's

syndicates.

See Edinburgh Assur. Co. v. R.L. Burns Corp.,

___ _____________________
_________________

479

138,

F.Supp.

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

years

of

of the 31
the

SANS

participated in

plaintiffs participated
Treaties.

the 1980

(28

of

the

SANS Treaties; 29

1981; 27 participated in 1982;

in all

four

plaintiffs

participated in

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

each individual plaintiff.

We

to

also note that the plaintiffs

were not the only retrocessionaires participating in the SANS

Treaties;

in

all,

accepted portions
question.

of

approximately

100

these risks

over

separate
the four

entities
years

in

-10-

initialing the slip.9

These

contracts

slips constituted, in

between

retrocessionaires.10

provided

that

the

the

cedent

Briefly

subject

abbreviated form, the

NERCO

and

summarized,

matter

of

the

the

various

the

Treaties

slips

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

was

as

to retain a minimum of

respects system

State and

of the formal contract.

NERCO

$250,000 of each risk ceded, and

business (i.e.,

other Hartford entities,

risks written

by First

infra), was not

_____

to cede

more than 50 percent of the original reinsurance limit of any

given risk to

the Treaties,

percent participation

specified

the

conditions of the

on

and was to

each such

commission

Treaties.

risk.

structure

The

co-reinsure for

and

10

The slips

also

various

other

slips did not

incorporate

the Placing Information as such.

Each

underwriter

subsequently

signed

Treaty

____________________

9.
the

For a

detailed discussion

London insurance

of the business

market, see
___

practices of

Edinburgh Assur.,
________________

479 F.

Supp. at 144-46.

10.

We

place in the appendix portions of one of the typical

slips utilized here.

-11-

Wordings,

formal

statement

contracts

of the parties'

containing

agreements.

more

These

the slips, and

the parties agreed that, in the

inconsistency,

the slips

would control.

elaborate

were based on

event of any

The first

set of

SANS Treaties ran for the eleven month period from February 1

through December 31, 1980.

Thereafter, those plaintiffs who

desired

another

to

continue

willingness to

for

join by initialling new

executing new Treaty Wordings

were entered

plaintiffs

year

into

for

for 1981.

1982 and

for

indicated

their

slips and ultimately

Successive Treaties

1983.

Some

of

the

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

renegotiation each year, and

Treaties

were

open

to

certain changes, e.g., relating

to commission structure and the like, were in fact made.

For each Treaty year

prepared,

business.

divided

one for

property

The business

into

there were actually two slips

business and

covered by

"system business"

"System business"

the Hartford itself.

by any

participation,

contracts, Bailey

casualty

slip was

further

"non-system business."

denoted risks written by

of the Hartford, and included,

written

and

each

one for

member companies

among others, First State and

"Non-system business" referred to risks

other primary

although

not

insisted that

insurer.

included

no

As a

in

condition of

the

written

non-system business

be

-12-

ceded to the SANS Treaties for the first year.

in

his deposition

system

business

that this

was

"the

was because

steadier,

He testified

he felt

better

part

that the

of

the

portfolio."

B.

Performance of the Treaties

Performance of the Treaties

Once the

Treaties were

fully placed for

the 1980

treaty

year,

portions

NERCO

of the

plaintiffs'

began

risks it

percent

as ceded

of

However,

the

Hartford companies

favor

obtain

of

State.

NERCO's

year, over

system

risks reinsured

other than First

the proportion

was

more

that NERCO

reinsurance

95

business.

were

from

In

the ensuing

of system business

declined in

that defendants had hoped

grow and

to the

district court's

first

ceded

the

Central

and nature of

In the

so

plaintiffs

of non-system business to less than 50 percent.

was evidence

would

them.

any,

the

to the

are the source

business

few, if

three years,

to

to

was reinsuring.

present complaint, and

finding of liability,

business

retroceding

and its

There

that system business

retrocessionaires would

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

kind which plaintiffs contend,

was

different

from

that

was of a

and the district court found,

represented

-13-

in

the

Placing

Information.

The court

construed the Placing Information as

representing

"that Graham Watson

reinsurance

business

directly

would produce 'non-system'

from

primary

companies without the use of intermediaries."

insurance

In support

of

the court's construction, plaintiffs point to representations

in the Placing Information that Graham Watson did

to seek

reinsurance

sundry" but

"with

over

a wholesale

basis

develop a close

selected primary companies."

stated

the

rather to

"on

from

not intend

all

and

working relationship

The Placing Information

that non-brokered business "placed significantly with

direct

professional

80 percent

The Placing

reinsurance market"

of United

Information also

States

characterized

facultative reinsurance.

stated that Graham

Watson was

"charged

with

business."

the

responsibility

of defendants' growing

after the end of

intermediaries

("MGAs").

this

1980 was, in

non-system

fact, obtained from

to wit, brokers and Managing General Agents

MGAs serve as agents of primary insurance carriers

with authority

the insurers'

to underwrite

behalf.

and place certain

business on

Defendants received the

majority of

their non-system business, portions

to the

penetrating

Notwithstanding these announced intentions in the

Placing Information, most

business

of

plaintiffs under

Shoop Insurance

the SANS

Services, an

primary insurance companies.

of which were then ceded

Treaties, from

MGA representing a

Baccala &

variety of

Baccala & Shoop worked closely

-14-

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

from

in the present

litigation stems

the fact that, during the annual periods covered by the

Treaties,

almost

all

of

the

non-system

business

that

defendants

produced, and

underwritten

using

facilities."

(A

what

with

are

"facility"

among other things,

reinsure

shared

the plaintiffs,

called

was

"semi-automatic

is an

agreement setting

out,

the rules under

which a reinsurer

will

risks ceded by the other party.)

Defendants insist

that semi-automatic facilities were perfectly consistent with

the

representations

reinsurance

to be

in

the

ceded

slips and

Treaties

that

to plaintiffs

would be

"business

classified by the Reassured

Facultative
___________

Plaintiffs

Assumed

sharply

underwriting the

the

[NERCO] as Property and Casualty

business."

dispute

"fundamental

(Emphasis

supplied.)

Calling

facultative

this.

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

risk-by-risk individual certificate basis in advance, i.e., a

certificate of reinsurance is issued

reinsurer has first looked

for each risk after the

into and approved reinsuring that

particular risk.

-15-

Under

mostly used

in

underwriters

of

the

of a

in

policy of

contracts

insurer

reinsurance upon

conditions and

defendants'

reinsurance on

called

that

the

latter

"Master

with

certain limits,

attached to

each

each risk.

Facultative

with an MGA, broker, or

entity

risks of described types,

underwriters' scrutiny and approval

reinsurance

risks,

defendants

did not evaluate risks one at a time in advance

Certificates" ("MFCs"), NERCO agreed

primary

method that

underwriting non-system

the issuance

Instead,

semi-automatic

could

issue

and upon certain

prior

to

defendants'

of the risk.

risk, however,

After the
_____

the agent

or

ceding company would send to Graham Watson a "risk bordereau"

document

identifying

and

providing

summary

of

information as to that, and any other, risks reinsured within

the

reporting period.

after receipt of

Graham Watson then had a brief period

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

specified

period, say, 14 days.

Defendants

trial,

that

classified

"facultative"

individually

and

presented

semi-automatic

facility

industry today as

a form

the

in the

reinsurance.

contend,

They

was

concede

term

that,

applied

in

only

evidence

is

at

commonly

of facultative

an

earlier

to

era,

reinsurance

underwritten on a risk-by-risk basis in advance

-16-

of binding.

to

reject

But

while accepting that the

individual risks

remains

reinsurer's right

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

few

instances,

variation known as

of

facility,

an "automatic facility."

rather

individual risk,

than

having the

the reinsurer has

since

agree to

the

risk,

cancel an

cancel the

Even without the right

reinsured would,

cancel individual

the freedom

which

is

not

to cede

the

in

treaty

reinsurance.

business,

which

____________________

was

than face

a particular

only a small portion

of

a practical

to cede

Automatics comprised

most

this was

Moreover, the reinsured

or not

case

as

risks rather

cancellation of the entire facility.

retained

to

particular risk, defendants argue that

"facultative,"

matter,

right

the right to

entire facility on very short notice.

to cancel a

Under this type

of the non-system

underwritten

using

semi-

11.

Because of

the cedent's right of

reinsured's right
contend

that

facultative

exclusion

not to cede, defendants

the

semi-automatic

reinsurance,

reinsurance.

The

for

cancellation, and the

SANS

"assumed

and

facility

is

not

Treaties
treaty"

and their experts

is

forbidden

contained
business.

an
In

form

of

"treaty"
express
"treaty"

reinsurance, the reinsurance arises solely as the consequence

of the terms of

a prior general contract,

the reinsurer's part

the

terms

of the

to reject a particular
contract, and

without

with no right

on

risk that meets

any right

on the

reinsured's part to decline to cede a particular risk, always

assuming that the risk

in question conforms to the

the prior contract.

-17-

terms of

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

nor

bordereau,

contractual

did

arrangement

they ever

spelling

enter

out

into

First

formal

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,

initially

First

State's

underwriters

had

the

power

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

State

prepared; each

risk that

NERCO

layoff sheet identified

and the

Treaty signatories

reinsure, and

provided a brief summary

that risk.

packet containing many of these

was periodically

provided by

whose underwriter could

a First

were to

of information about

First State to

study the risks

layoff sheets

Graham Watson,

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

information provided on the layoff sheets

phone

and face-to-face

inquiries, as

on

the

and by follow-up

well as

by

means of

-18-

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.

because

and Graham

under

First

State's

the same roof and

They point

Watson's

answerable to the

out that

employees were

same bosses, the

latter's

not

underwriters could informally influence First State

to cede

evidence

business the

of their facultative

absence of a written

First

State, the

evidence,

that,

business' .

method

business

latter did

of

. .

control.

as further

Notwithstanding the

understanding between Graham Watson and

district

"Graham

court found,

Watson

underwriting."

First

underwriting with the

Since

after hearing

underwrote

by the 'automatic'

was with

not wish,

all

the

"'system

and/or 'semi-automatic'

practically

State, this

all

finding grouped

explicit semi-automatic and

system

that

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

actually

rejected a

risk listed

sheet.

Plaintiffs

also

information

in

the

when

sharply

bordereaux

in a

defendants

bordereau or

questioned

and

had

layoff

ever

layoff

whether

the

sheets

was

sufficient to allow for adequate underwriting (evaluation) of

individual

risks.

Defendants responded by emphasizing that,

-19-

whether

or

not

existed, and

used, the

by pointing

right

to

reject

to evidence that

at all

its underwriters

adequately reviewed the risks and had other means

inquiries,

times

personal

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

order to

underwriting practices of

assess

facilities.

defendants

compliance with

The

had

district

rejected any

MGAs and others

the terms

court found

risks

and

of the

no

various

evidence

found that

in

that

Graham

Watson's underwriting of individual risks was inadequate.

In

percentage of

any

case,

while defendants

reinsurance under

wrote

the SANS Treaties

some small

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

described.

the informal in-house

And, as

procedures previously

mentioned above, over the four

years of

the SANS Treaties, one MGA, Baccala & Shoop, furnished almost

all

of the

business was

non-system business

found by the court

to defendants.

Non-system

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

-20-

Watson, whose employees

felt that non-system business

be a steadier source of income for the Treaties.

made

MGA

known his dislike of

business to

testified

risk,

be

ceded to

that, because

they

did

MGAs and his

not

MGAs

the

underwrite

Bailey also

reluctance to allow

SANS Treaties.

did not

as

would

Bailey

themselves bear

carefully

as

any

did

underwriters on

hence the

business

quality.12

Watson;

the payrolls

of the primary

produced through

Again, this

one internal

was not

to

memorandum,

them

companies, and

was of

lower

the liking

of Graham

dated December

11, 1980,

stated that "Ralph Bailey has an aversion to MGAs and he will

have to be

of

approached rather delicately because

the business going into this facility will be on business

which is designed

single

source."

of Hodson, would

attempt to

to provide a real flow of

This memorandum also

travel to

overcome this

during

the first

business from a

noted that Tom Hearn,

London on December

aversion.

requests from Graham Watson

time

a good deal

year

Responding

15, 1980

to

to repeated

employees, Bailey agreed at some

to

begin allowing

non-system

____________________

12.

Conflicting points

experts

at trial

of view were expressed

about

the relative

by insurance

effectiveness of

MGA

underwriting, as filtered through

semi-automatic facilities,

and

on

risk-by-risk

underwriting

Defendants offered evidence

the

SANS

Treaties were

reinsurance
Plaintiffs
insisted

industry
did

that

not

"direct"

basis.

that the losses sustained

less

as a

than

whole

attempt

those suffered
during

to disprove

the defendants

never

reinsurance business they had promised.

-21-

the same
this

provided

but

under
by

the

period.
rather

the type

of

business to be

ceded to

agreed

cession of

to the

first year (from

so only with great

or

insert

the Treaties.

certain

While he

MGA business

an MGA known as the London

reluctance.

an exclusion

business

during the

Agency), he did

However, he did

for MGA

expressly

not request

in the

Treaty Wordings for subsequent years, as he could

slips or

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

December 31,

allowed

"upon

1980 or

120

days prior

any subsequent December

any desired adjustments to

the Treaties

on a

written

yearly basis.

be made in

In practice,

notice

31st."

at

This

the terms of

all of

the

retrocessionaires

cancelled

during

the

120-day

period

preceding December 31, 1980 and then initialled new slips for

the next calendar year.

Watson, again

In order to induce

through Hodson and

renewal, Graham

the European

sub-brokers,

disseminated a

document referred to as

the 1981 Anniversary

Information.

In addition

losses in

to listing

$50,000 reported through September

summary

of

the business

ceded

excess of

30, 1980, and providing a

thus

far, the

Anniversary

Information included the following statements:

To

date,

business

the
has

preponderance

been

assumed

State Insurance Company

pro

rata

basis.

represents a

of

from

the
First

and written on a

Non-System

business

relatively small proportion

of the total and what has been written is

-22-

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
develop

States, Non-System
more

anticipated.
posture
business
to

of

slowly
It

business will

than

originally

continues to

Graham-Watson

not

be
to

the
seek

on a wholesale basis but rather

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.

were Ralph Bailey and several

Watson.

attendance

employees of Hodson and Graham

One major topic of conversation was the inclusion of

MGA business.

for

In

Bailey

their opinion of

Wright, the

asked the Graham

Baccala & Shoop,

property underwriter,

Watson underwriters

and was told

that Wright knew

by Bob

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

by

not, however,

inserting

make

this a

an exclusion for MGA

next renewal.

contractual requirement

business in the

slip at the

At the close of the second year, a 1982 Anniversary

Information was disseminated, which

losses and a

included

figures

September 30,

were

summary of

losing

as

to

1981, which

money.

again provided a list of

the business.

overall

loss

This document

experience

disclosed that the

Indeed, the

-23-

loss

also

through

SANS Treaties

ratio for

the 1980

Treaties

the

was an

1982

alarming

Anniversary

248.65 percent.13

Information

included

In

addition,

the

following

statements:

The

rating

being

basis of

amended

January 1982 to
the

basis

these

with

treaties is

effect

from

more accurately

used by

1st

reflect

Graham-Watson.

All

business other than that assumed from the

First

State which is

is being written on

a "system" company
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

Insurance Services
ST. PAUL FIRE & MARINE
NORTHBROOK
CRUM & FORSTER

Shoop

CNA
ROYAL INS. CO.
CHUBB AND SON
AETNA CASUALTY & SURETY

Plaintiffs point

than in

out defendants'

the case of

failure to

Twin City, that

mention, other

certain of

the listed

primaryinsurersactedthroughBaccala &Shooporotherintermediary.

It appears

was

that no formal

prepared for 1983, the

although

letters

were

anniversary information

last year of

sent

to

the

the SANS Treaties,

retrocessionaires

____________________

13.

Loss

incurred

ratio
losses.

profitable treaty;

is

the
A

ratio of

loss

net

ratio under

a loss ratio greater

earned

premium

to

100%

indicates

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

notification of various

past year, none

of which

retrocessionaires

were

business, and

changes that had been made

are material here.

told

that

the

over the

However,

treaties

the

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

The

losses were

corresponding losses incurred by NERCO.

considerable, as

insurance industry at this

fourth quarter

ceased

of 1982,

time.

they were

Beginning as early

however, certain of

paying losses.14

There

throughout the

was evidence

as the

the plaintiffs

that some

of

the plaintiffs (in addition to Terra Nova, through Bailey, as

related

use

above) began to inquire

of MGAs

to

obtain business

as early as

(rather

1982 about the

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

The plaintiffs

introduced evidence

which showed

last quarter in which

each plaintiff made

a payment to

the Defendants.
made

its last

The

earliest was Kansa

payment in

the fourth

quarter of

latest were nine plaintiffs including Uni

and the
all

seven companies

bound through

Reinsurance, which
1982; the

Storebrand, Sampo,
Aurora Underwriters,

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

right

purpose

the

of inspection

"at

reasonable times

for

the

of obtaining information concerning this contract or

subject matter

thereof."

preliminary inspection

then

all

arose between

NERCO

in the fall

the

parties

allowed

of 1985,

a seven

but a

concerning the

day

dispute

conditions

under which any further inspection was to be conducted.

Evidently

inspection, and

dissatisfied with

concerned about

the SANS

Treaties, a

seven are

no longer

NERCO

on January

the

the growing loss

group of sixteen

They

alleged

this

ratios of

plaintiffs (of

parties) commenced this

6, 1987.

results of

whom

action against

that they

had a

contractual

records, and

seven

was

right

under

that although

day inspection, a

needed.

inspection.

the treaties

They

inspect

they had previously

an

order

13, 1987,

voluntary stipulation allowing,

of his employees.

court entered

an order

conducted a

the

compelling

and establishing

On February 27,

new

parties entered

for, a further inspection to be conducted by

four

NERCO's

further, more exhaustive evaluation

sought

On February

to

procedures

Roy T. Ward and

1987, the district

allowing the inspection

to continue

pursuant to that stipulation.

Meanwhile,

reinsurers that had

in

late

1986

continued to pay

second

group

losses to NERCO

of

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

inspection;

action

and

was

methods of

required

this

to

resolve these

however, no

disputes,

and

court

Mr.

Palange completed his inspection in the spring of 1988.

Following these inspections, on July

original

plaintiffs,

now joined

by

the

present plaintiffs, moved to amend their

12, 1988, the

remainder of

complaint.

the

The new

complaint omitted the substantive allegations of the original

complaint,

and deleted

treaties be enforced.

the

treaties

rescinded.

had

been

the

plaintiffs'

request

that

Instead, the plaintiffs asserted that

induced

by

fraud

and

should

Gen. L. ch. 93A,

2, and

the Racketeer

Influenced and Corrupt Organizations Act ("RICO"), 18

1961-1968.

for recovery

be

They also asserted claims for breach of contract,

violation of Mass.

the statute

the

U.S.C.

Denying these allegations, defendants asserted

of limitations

under the

as a defense

and counterclaimed

challenged treaties, and

for treble

damages, costs

93A,

and attorneys

fees under

Mass. Gen.

L. ch.

2.

____________________

15.

A commutation

obligation

to pay

payment.

It does

is a method of
future claims
not

terminating a reinsurer's
in return

necessarily

involve

admission of wrongdoing by the reinsured.

-27-

for a

lump sum

any claim

or

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.

written

order

summary judgment

dated

January

16, 1992,

on the statute of

the

court

In a

denied

limitations ground, with

no explanation.

statute of

court

were."

jury-waived trial began

limitations was raised

on April 5,

1993.

again during trial.

The

The

delayed ruling until it could "find out what the facts

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

evidence

defendants argued

after

it

a deposition into

was

relevant to

the

statute of limitations.

The

district court

1993.

that

trial

concluded

entered a

on

May 19,

memorandum and

See 825 F. Supp. 370 (D.

___

1993,

order

Mass. 1993).

and

on June

the

7,

The court held

the defendants had induced the plaintiffs to enter into

the treaties

by means of fraudulent

breached their contracts with

unfair and

Gen. L.

deceptive trade

ch. 93A.

misrepresentations, had

plaintiffs, and had engaged in

practices in violation

The RICO count

was rejected.

of Mass.

The court

-28-

made

no

mention

of

defendants'

statute

of

relief,

district

of

limitations

defenses.16

By

rescission

way

of

the

challenged

the

reinsurance

court

ordered

contracts

and

ordered defendants to repay to plaintiffs all sums plaintiffs

had

previously

paid

out

on losses

incurred

under

those

contracts with

plus

credit for

prejudgment

premiums paid to

interest

at

12 percent.

entered for the plaintiffs in June 30, 1993

$37,501,701.12

Following

plus

several

postjudgment

motions to

the plaintiffs,

amend

Judgment

in the amount of

interest

this

and

September 21, 1993 in the

$38,118,940.07,

listed

the

costs.

judgment, a

judgment was entered on

which

was

amount

new

amount of

due

to

each

____________________

16.

The district

court also made no

its

judgment

defendants'

of

implied, however,
the court

as defendants

dismissed the

counterclaims sought

to

specific resolution in

counterclaims.

It

state in their

can

brief, that

counterclaims "sub silentio."

____________
hold plaintiffs

be

liable

for

The
their

unperformed reinsurance obligations imposed by

the treaties.

While it would

the court

have denied

have been

better practice for

to

the counterclaims expressly, its intent to do so

is apparent from its rescision of the treaties as having been

induced

by

actions.

defendants' fraud

and

breached

by defendants'

We have held, in parallel circumstances,

elliptical judgments will be

that such

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.
___
same token, we hold

P. 54(b); 28 U.S.C.

1291.

By the

that defendants, having acted reasonably

by focussing their appeal on the district court's findings of

liability, did not
their

counterclaims

district

court's

forfeit the
by

right to

not expressly

unspecified

counterclaims.

-29-

seek relief
appealing

dismissal

from
of

under
the
those

individual plaintiff, as

the

first judgment.

opposed to the

The defendants' filed

appeal

from

the fraud,

contract,

October

19,

1993; the

plaintiffs'

appeal from

the adverse

Motions relating

lump sum stated

and

RICO finding

their notice of

ch. 93A

filed

claims

on

their notice

of

on November

to the plaintiffs' requests

in

2, 1993.

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

district

court

memorandum and order

found

that

of June 7,

the defendants

plaintiffs

relied upon,

"four material

secure the

plaintiffs' participation

made,

1993, the

and

the

representations" to

in the SANS

Treaties.

These were:

1.

That Graham Watson would produce and

underwrite

property

facultative
___________

and

casualty

reinsurance.

This

representation mean[t] that Graham Watson

would

underwrite

individual,
__________

reinsurance

risk-by-risk,

on

an

certificate

basis.
2.

That

Graham

Watson

would

produce

such reinsurance directly from system and

________
non-system original
use

of

any

insurers without the

intermediaries.

This

representation mean[t] that Graham Watson

would

be a direct

from

the

reinsurance

writer of reinsurance

original

insurer,

cessions

would

which
not

be

brokered.
3.
with

That

the Hartford

First State,

business"

Companies, along

would be

original

the "system

insurers.

This

representation mean[t]

that the Hartford

Insurance

be the

source of

The

Hartford

"system

Group would
business."

Insurance Group

is made

up

of the

so-

called

Hartford Companies
___________________

and

First
_____

-30-

State,
_____

an

excess

and

surplus

line

Watson

would

seek

business

from

carrier.
4.

That

Graham

facultative
selected
on

reinsurance

primary companies,
_______
wholesale

basis.

rather than
This

representation mean[t] that Graham Watson

would

assume

insurance

companies,

companies
that

reinsurance from

or

is,

Managing

from

not

selected

reinsurance

General

risk-bearing

Agents,
insurance

entities.

825

F. Supp. at 376-77 (emphasis in original).

court

found that

several

Hartford

of the

although

business had

Hartford Companies,

Specialty Company,

Twin City Insurance

been assumed

including First

from

State,

Nutmeg

Insurance Company,

and

Company, all of

this business with

the

exception of the First State business had

non-system business.

The district

The court

been classified as

listed, as sources

of non-

system business, a number of primary insurance companies, but

also

a number

majority of

Shoop,

of brokers

and found

that "[t]he

'non-system business' emanated from

Baccala and

a Managing

and MGAs,

General Agent,

through the

intermediary

G.L.

Hodson."

Id.
___

After a

further discussion

Watson's underwriting practices, the court stated:

Upon a review
Court

finds that

facultatively
underwrite

of the evidence,
Graham Watson

underwrite,
on

an

did not

that

is,

individual

certificate basis as represented,

risk
any of

the "system business"

nor virtually

of

business";

the

Watson

"non-system
underwrote all

and

virtually all

by

the

the

any

Graham

"system business"

"non-system business"

"automatic"

and/or

automatic" method of underwriting.

-31-

"semi-

of Graham

The Court also

finds, on the

basis

most of the

"non-

of the evidence, that

system

business"

through

the

from

use

emanated

from

of intermediaries

intermediaries themselves,

not

produced

insurance

from primary

entities

directly.

Baccala and Shoop, an

SANS

and

and was

risk-bearing
Although

the plaintiff reinsurers were

the

MGAs

aware that

MGA, had ceded

Treaties

approximately

to
five

percent of the

total business during the

first

1980,

year,

they

apprised that, during

years, Baccala
majority

of

in

the

three

cede the

business"

and

intermediaries would

conjunction

SANS

the ensuing

"non-system

Shoop, most of the

to

never

and Shoop would

that other MGAs and

cede,

were

with Baccala

and

"non-system business"

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

traditional

its

"standard

and

underwriting on a risk-by-risk

sense,

certificate basis."

namely,

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

special

a special

meaning"

therefore a knowing

to

sense without

the

plaintiffs,

misrepresentation.

ever disclosing

and

As to

that

this

such

was

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

sitting

reviewing the

without

undertake

jury,

to decide

"'the

factual

Harvard Univ., 900 F.2d

______________

findings of

court

of

district court

appeals

issues afresh.'"

464, 466

(1st Cir.

cannot

Jackson
_______

v.

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

whether

aside findings

based

on

oral

of fact

by the

or documentary

"clearly erroneous," and with

district court,

evidence,

only

if

due regard "to the opportunity

of the trial court to judge of the credibility of witnesses."

Fed. R. Civ. P. 52(a).

"'although

there is

A finding is clearly

evidence to

support it,

erroneous when,

the reviewing

court

firm

on the entire evidence

conviction that

is left with

a mistake

the definite and

has been committed.'"

Anderson v. City of Bessemer City, 470 U.S. 564,

________
______________________

(quoting

See
___

573 (1985)

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

"[I]f

the trial

of

legal

court bases

rulings

is,

its findings

-33-

however,

upon

de novo.
_______

a mistaken

impression

court

is

of applicable

not

bound

legal

by the

principles,

clearly

the

erroneous

reviewing

standard."

Inwood Lab., Inc. v. Ives Lab., Inc., 456 U.S. 844, 855 n.15
_________________
________________

(1982)

174,

(citing United States v. Singer Mfg. Co.,

______________
________________

194 n.9

(1963));

Puerto Rico, 902

___________

extent

accord Cumpiano
______ ________

F.2d 148, 153 (1st

that findings

of

fact can

v. Banco Santander
________________

Cir. 1990).

be

374 U.S.

shown to

"[T]o

the

have

been

predicated upon, or induced

accorded diminished

Inc.
____

by, errors of law, they

respect on

appeal."

will be

Dedham Water Co.,

__________________

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

the

present

several key

case

by

principles is complicated

the district

areas, of Rule 52(a)'s

court's

disregard,

in

in

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

Rule 52(a) imposes

ensure

that its

law thereon."

Fed.

on the district

ratio decidendi

R. Civ.

P. 52(a).

court "an obligation

is

set forth

to

with enough

_______________

clarity to enable

function."

754, 759

to perform its

Touch v. Master Unit Die Products, Inc., 43 F.3d

_____
______________________________

(1st Cir. 1995).

rulings whatsoever

issues

a reviewing court reliably

discussed

The court

on the important

infra,
_____

nor,

-34-

in

made no

findings and

statute of

limitations

general,

did

it

make

subsidiary

findings

finding that

resolving disputed

defendants

had committed

evidence.

fraud

Thus in

in

promising

"facultative" reinsurance, the court stated that all

understood

that

term

to

certificate underwriting,

mean

risk-by-risk,

parties

individual

but made no attempt to distinguish

or explain

the great body

meaning.

Its finding

of evidence indicating

that

all plaintiffs

Placing Information is similarly

a broader

relied

on the

bereft of explanation as to

how this could be, given the absence of

proof of reliance in

a number of instances.

These

certain

omissions

have required

additional findings.

Where

us

to remand

possible,

for

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

law

the application of Massachusetts

to plaintiffs' common law fraud and contract claims.

In

fact, Article XVIII of the SANS Treaties merely provides that

if

a dispute

jurisdiction of

is

litigated, plaintiffs

any court

will submit

to the

of competent jurisdiction

in the

-35-

United States, and "all matters hereunder shall be determined

in accordance

while

with the law and practice of such court."

But

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

plaintiffs' common law claims."

Given the parties'

to

(and the

lower

court's)

albeit

on

general

different

acceptance

theories,

and

of

in

Massachusetts

the absence

law,

of

preferable choice, we shall apply Massachusetts law except as

otherwise

noted.

228,

n.5 (1st

231

See Bird
___ ____

Cir.

v. Centennial Ins. Co., 11 F.3d

____________________

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

court

stated, that

fraud

by "clear

respond

the

plaintiffs were

and convincing

that under

strenuously, and the district

required to

evidence."

prove

The plaintiffs

applicable Massachusetts law

fraud need

not be shown by anything more than the ordinary preponderance

of

the

evidence

general.

standard

Review

of

applicable

Massachusetts law

to

civil

cases

indicates that

in

the

plaintiffs are right.17

____________________

17.

Defendants

adopted "clear
burden of proof

also
and

now too

late for

that,

because

convincing evidence"

in the

when defense counsel

is

argue

the

plaintiffs

as the

applicable

district court, and

did not

stated their burden in those

them to

contest the burden

-36-

object

terms, it
of proof.

In Callahan v. Westinghouse Broadcasting Co., Inc.,

________
___________________________________

372 Mass. 582, 363 N.E.2d 240 (Mass. 1977), the Massachusetts

Supreme

proof

Judicial Court

applicable

to a

("SJC") commented

libel

Robert Welch, Inc., 418 U.S.

___________________

Co. v. Sullivan, 376

___
________

Supreme

action governed

323 (1974) and

U.S. 254 (1964).

Court required

on the

"clear

by

words

had

not

"clear and
been

Recognizing

and convincing

in

our

cases

[other than in the libel context] because

the phrase had

not been used theretofore

in this Commonwealth.

that the

proof" in

convincing proof"

discussed

Gertz v.
_____

New York Times

______________

libel case, the SJC nonetheless noted that,

the

burden of

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.

________

found

any

convincing"

case,

at 583, 363 N.E.2d at 241.

Massachusetts

case

stating that

"clear

and

standard should be applied in a common law fraud

nor have

since Callahan,
________

we found

any indication

looked with

exists.

See
___

that the

greater favor on

"clear and convincing" standard of

otherwise

We have not

Paul

SJC has,

introducing a

proof to cases where none

J.

Liacos,

Handbook of
____________

Massachusetts Evidence 38-39 (5th ed. 1981) (stating that the

______________________

burden

of

proof

in

____________________

Massachusetts

civil

cases is

"by

However,

while

perhaps even

parties

to the

may

stipulate to

law, in different

the

facts

(and

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

higher standard

including fraud,

including

where a

proof of a gift

is required,

causa mortis, contents

of a lost

will, irregularity

of official proceedings, and

defamation action);

see also 9 John

________

in Trials at Common Law

________________________

that "clear

cases

of

malice in a

Henry Wigmore, Evidence

________

2498 (Chadbourn rev. 1981) (noting

and convincing" standard is

commonly applied in

of fraud, but failing to cite, in a comprehensive list

authorities,

any

Massachusetts

standard).

We conclude, therefore,

not adopted

a "clear

case

applying

that Massachusetts

and convincing" standard

in cases

this

has

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

utmost good faith ("uberrimae fidei").

________________

the plaintiffs of

The defendants refer

to the same standard.

having

risks

to

obtained by

We agree

that a reinsurer like NERCO,

treaty the

power to

impose significant

and liabilities upon plaintiff retrocessionaires, owed

them

treaties.

the utmost

good faith

in

its dealings

under the

See generally Unigard Sec. Ins. Co., Inc. v. North

_____________ ___________________________
_____

River Ins. Co., 4 F.3d 1049 (2d Cir. 1993).

______________

This means

recognized, defendants

that,

as the

district court

owed plaintiffs a

good faith and to disclose all

duty "to

material facts."

-38-

properly

exercise

In the non-

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
falsity
plaintiff

for the purpose

to act

plaintiff relied

knowledge of its
of inducing the

thereon, and

that the

upon the representation

as true and acted upon it to his damage.

Kennedy v. Josephthal & Co., Inc., 814 F.2d

_______
________________________

Cir.

798, 805

(1st

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

concealment exists and avoids

risks,

the policy

where the insured has knowledge of a fact

material

to the risk which honesty, good

faith, and
should
which

fair dealing require

communicate
he

designedly

to

that he

the insurer
and

but

intentionally

withholds.

George J. Couch, Cyclopedia of Insurance Law

____________________________

ed. 1985) (Couch).

38:2 (2nd

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

disclosing a material

that

simple

negligence

fact does not constitute

in

not

bad faith so

as to avoid a policy of reinsurance).

III.

The Fraud Claims

The Fraud Claims

We

turn

initially, to the

now

to

the

fraud claim

substantive

issues,

which is pivotal

-39-

to all

and,

the

district

court's

findings.

The district

court

saw

two

fundamental

issues in the case, both of them relevant to its

finding

fraud.

of

underwrite

system

One was

"whether

facultative reinsurance"
___________

business.

produced

The

other was

'non-system

relationships

with

business'

primary,

Graham

Watson

on the system

"whether

by

did

and non-

Graham

Watson

establishing

direct

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

["facultative"]

in

its

standard

and

meaning of that

traditional

term

sense,

namely, underwriting on a risk-by-risk certificate basis, the

classic

meaning

According

to

of

the

the

term."

court,

understood "'facultative'

sense of risk-by-risk

aware

that

825

"NERCO

in

F.

knew"

its standard

Supp.

was secretly

using

382.

that

plaintiffs

and

traditional

certificate underwriting and

it, itself,

at

was well

the term

in a

special sense without ever disclosing such special meaning to

the Plaintiff

defendants'

underwritten

reinsurers."

representation

Thus, the court

that

on a risk-by-risk

was "knowingly false when made."

1.

the

concluded, the

business

would

be

individual certificate basis

Id.
___

No Express Misrepresentation
No Express Misrepresentation

-40-

We hold that

insofar

or

express representation that they would engage exclusively

in

The

that

they

attribute

risk-by-risk,

to defendants

an

erroneous

implicit

classic

as

these findings are clearly

individual certificate

underwriting.

record is without evidence from which a court could find

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

Huntington-Whitely,

SANS

Payne,

indicated that

sense.

Nigel

the employee principally assigned to the

Treaty placements by

testified

certificate

to

it "may

defendants' sub-broker, Sedgwick-

having

this understanding.

have just

But

been an assumption,"

he

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

-41-

he states

in passing

that "Graham Watson is underwriting

each risk individually."

However, this statement clearly did not induce the plaintiffs

to

enter into

timing.

the 1980

Moreover,

and 1981

it is

SANS Treaties,

arguable that

given its

the semi-automatic

facilities, because they allowed Graham Watson's underwriters

to reject

individual risks, were

underwriting and thus not

a form of

individual risk

necessarily inconsistent with this

statement.

Plaintiffs

Information,

"Graham Watson

also

point

to

the

which

states

that,

on

is

quoting

their

price

commission is required by the

1982

Anniversary

non-system

and

if

business,

ceding

original company, this is then

added to the premium required by Graham Watson."

Plaintiffs

argue

that

this

negotiation.

refer to

However,

it is

the

individual

just as easily

quoting a

leading to

Thus,

describes

it could

Graham Watson

negotiations

facility.

specifically

be read

price during the

formation of

not an explicit

representation,

like

Whitely's letter, was made

fraudulently

induced

the

initial

promise to

statement

in

perform

Moreover,

Huntington-

in 1981, and thus could

the plaintiffs

to

a semi-automatic

individual risk-by-risk certificate underwriting.

this

risk

not have

to participate

in the

1980 and 1981 SANS Treaties.

Defendants'

testified

at

the

chief

trial to

executive,

having

-42-

told

Graves

one

Hewitt,

of the

lead

underwriters, Bailey, in 1979, about his dissatisfaction with

the method of using

and his intention,

a separate certificate as to

in connection with the

each risk,

SANS Treaties, to

use a single controlling facility for multiple risks, as

later

done by means of the semi-automatic MFCs.

district

that

court found

-- contrary

defendants had not disclosed

to Hewitt's

was

Because the

testimony --

their intent to use semi-

automatics,

testimony,

mention

we

must

assume

although nowhere

in its

findings

premised

did

not

credit that

findings did

and reject the testimony.

rely upon Hewitt's testimony

fraud

that it

We do

the court

not, in any case,

in determining that the court's

on

the

term

"facultative"

were

erroneous.

Bailey

deposed and

himself did

his deposition was read.

meeting with Hewitt in

having

Treaties

been

made

on the

He testified

not attend

the trial

but was

He did not describe a

1979 nor any specific representations

to him

prior

character of the

to

the

execution of

the

facultative underwriting.

generally to "understanding" that Graham Watson

would assess and underwrite each risk separately, but did not

refer to any conversation or

promised.

binding

occasion where any defendant so

Asked if he would

authorities to be

have considered semi-automatic

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

-43-

he came to

suggesting that he was

or

told by someone (defendants, brokers,

others?) that facultative meant what the judge found.

think

this

vague testimony,

specific sources,

defendants
__________

which

falls short

expressly

makes

no reference

of supporting a

promised

to

engage

We

to

finding that

in

risk-by-risk

underwriting only or knew that plaintiffs misunderstood their

intentions in this regard.

2.

The Intended
The Intended

Meaning
Meaning

of
of

the Term
the Term

"Facultative"
"Facultative"

We similarly

that

defendants

"facultative"

underwriting.

correspondence

hold

clearly erroneous

"knew"

to

be

There

by

that

limited

is

no

plaintiffs

to

the

finding

plaintiffs

understood

risk-by-risk

certificate

evidence

or their

of

statements

or

representatives

to

defendants,

informing

prior to

defendants

execution of

that

the

the slips

plaintiffs

and treaties,

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

by-risk underwriting,

to individual certificate, risk-

then defendants would

knowledge of that ordinary meaning.

be charged with

However, as the evidence

clearly showed, that term, both standing alone and as used in

the

Placing

encompasses

propriety of

Information,

a variety

which the

of

slips,

and

underwriting

parties and their

-44-

Treaty

Wordings,

methods, about

the

experts disagree.

Whether or not

a term as

used by parties

ambiguous is

a question

ITT Corp. v.
_________

LTX Corp., 926 F.2d 1258, 1261

_________

(citations omitted);

Corp.,
_____

language

880 F.2d

is

of law subject

to a contract

see also
________

1491,

considered

to plenary

is

review.

(1st Cir. 1991)

In re Navigation Technology
_____________________________

1495 (1st

ambiguous

Cir. 1989)

where

the

("Contractual

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,

omitted),

557,

591

N.E.2d

165,

172

(1992)

(citations

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

"standard and traditional

risk-by-risk

others

the

term

sense, namely,

certificate basis."

like it, the district

legally unambiguous,

If

its

underwriting on

by this

finding, and

court meant that

the term was

being limited

one type of underwriting,

"facultative" in

in meaning to

it was wrong as

only that

a matter of

law.

Expert

support

today,

testimony

the

has

and

view that

been

notwithstanding

treatises

the term,

broadened

plaintiffs'

presented

as

beyond

by

used in

its

insistence

both

the industry

classic

that

sides

the

roots,

classic

method is alone the proper one.

Most likely

the court

-45-

did not

mean the term

was

unambiguous

basis

of

as a matter of law, but rather concluded, on the

all the

circumstances,

ascribed.18

it gave

evidence, that,

it

Yet

should

restricted the term.

London

some

it did.

from defendants'

had as

good

possessing such

English

witnesses

understood to mean

meaning

Nor did

why

it

it may have been

principal, Graves

an understanding

insurance market as any American.

felt that,

limited

offered no reasons

On the latter point,

said he

the present

defendants "knew" that plaintiffs so

by testimony

who

used in

the

limited reading

explain why it believed

Hewitt,

given

the district court

the term the

influenced

be

as

of the

The judge may have

insight, Hewitt "knew"

testified, "facultative"

that, as

would

be

risk-by-risk certificate underwriting

in

that market.

and

But absent evidence that

believed this,

such

a leap

Hewitt actually knew

would be

pure speculation

given Hewitt's own contrary testimony.

Moreover,

evidence

by

plaintiffs'

English

plaintiffs

witnesses, the

treatises

indicate

introduced

that,

into

notwithstanding

reinsurance industry

in England

____________________

18.

"When the

matter, is in

written agreement, as applied

to the subject

any respect uncertain or equivocal in meaning,

all the circumstances of the parties leading to its execution

may

be

shown for

the purpose

of

contradicting or changing its terms."

elucidating, but

not of

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

Robert Indus., Inc. v. Spence,

____________________
______

362 Mass.

121 (1987) (quoting

751, 753-54,

291

N.E.2d 407 (1973)), review denied, 400 Mass. 1104, 511 N.E.2d
_____________
620 (1987).

-46-

recognizes types of

risk-by-risk

on

certificate variety.

reinsurance,

treatise

facultative

facultative reinsurance

Golding,

(introduced

by

reinsurance

the

A leading English writer

describes

in

plaintiffs)

other

other than

than

his

authoritative

various

the

types

of

risk-by-risk

certificate variety.

One variation Golding describes is the

so-called "cover in course of post."

It
the

labour

method

necessary

will be clear
involved in

is

He states:

connected
initials

that much of

the facultative

with
on

getting

the

slips.

In

the

modern

practice

this

can

avoided

by the

system

of

be

largely

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

facilities with a
whereby

it may

number of
issue

reinsured,

arrange

reinsurers,

request notes

post, for one or more

be

will

by

lines of a risk to

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
post".

As a

rule

"in course
limit is

of

fixed,

within which this must be notified say 48

hours
this

after
is

receipt,

extended up

though
to

as

sometimes
much as

fortnight to allow for possible delays in

transmission.

If

no declinature is made

within the period, the reinsurer is bound

in

the ordinary

save a

great deal

way.

The

system does

of work, and

favored by reinsureds

is much

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

w[ould]

not

reference
called

of facultative

be

to

complete

the

form

"facultative

reinsurance
without

of

some

reinsurance

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

defined risks, which share

certain

the reinsurer

is bound obligatorily to accept.

arrangement thus partakes
nature of a

partly of

the

facultative reinsurance

and

partly of a treaty.
is

facultative

To the reinsured it

because

cessions

optional at its discretion.

reinsurer the open

applies not to

but

to all

open cover may be

has

none

books, it
of

the

an

cases of

given class that may be ceded.

reinsurer's

in the

The obligation is an

obligatory one and it

individual case

are

. . . To the

cover is more

nature of a treaty.

how the

Such an

No matter

regarded in a

is clear

that it

characteristics

of a

facultative reinsurance and in particular

it

lacks

power,

the

fundamental feature,

inherent

reinsurer,

in

to decline

the

facultative

a risk

if though

fit.

Golding,

supra,

at

46-47.

The

open

cover,

as Golding

_____
describes

it,

facility,

except that

lacks

seems

similar

under the

to

the

open cover,

automatic

the reinsurer

the ability to cancel the contract on short notice, as

it may under the

cover is
might

somewhat

the

automatic.

As the somewhat

"generally regarded"
automatic

anomalous open

as facultative, so

facility

be

so

regarded,

much more
since

it

-48-

But

custom and

even ignoring

practice

these indications

have gone

beyond

classic

that English

facultative

methodology, it is the American,

seems

to

us key.

contracted

The

in the

not the English, usage that

underwriters

slips with

in London

defendant NERCO,

and Europe

an American

company, for reinsurance "classified by the Reassured [NERCO]

___________________________

as

Property

produced and

Cameron

&

and

Casualty Facultative
___________

underwritten by

Colby,

Inc."

Assumed

the Graham Watson

(Emphasis

Business

division of

supplied.)20

The

____________________

explicitly includes a right to reject

entire facility.
of

defendants'

risks by rejecting the

Automatics were, in any event, a minor part

business,

semi-automatics

having

been the

predominant mode.

20.

At footnote 7 of its opinion, the court stated that this

language

was

understood

contract

as

by

the

providing

parties
NERCO

to the
with

limited

discretion

in

types of

reinsurance

Court's

interpretation

classifying
and that

the

is

on the

this

basis of

the evidence.

It is

unclear precisely what the

statement.

There was

court had in mind

testimony that the

by this

contract language

meant that NERCO had discretion to classify a particular risk

as

either a

testimony

that it

discretion to
plain

property or
was

standard language

the language

reasonable, though

business

"facultative"

"Property
. .
as

Casualty

Determining

well

as

facultative.
us to

The

allow NERCO

to decide what

be included.

Facultative

whether the

whether

at 1052 (citing Jiminez v.

_______

Navigation Co., 974

______________

NERCO

within the stated classification -and

."

"casualty" would all

F.3d

seems to

was other

which gave

not unlimited, discretion

types of reinsurance fit

as

risk; there

determine what business was

meaning of

namely,

a casualty

it

was

"property"

or
7

Peninsular & Oriental Steam

___________________________

260 F.2d

-49-

business was

See Commercial Union,

___ ________________

F.2d 221, 223 (1st Cir.

v. Insurance Co. of N. Am.,

_________________________

Assumed

523,

1992); Feinberg
________
527 (1st

Cir.

facultative reinsurance NERCO

in

the

American,

not

the

was to classify covered

English,

market.

expressly delegated the right to "classify" the

See supra
___ _____

course,

note 20.

held

to

In exercising

a standard

of

risks

NERCO

was

reinsurance.

that right, NERCO was, 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

under

duty to

the hands of one party, that party is

exercise

that

power reasonably);

Johnson v. Educational Testing Serv., 754

_______
__________________________

accord
______

F.2d 20, 26

(1st

Cir. 1985), cert. denied, 472 U.S. 1029 (1985).

____________

Nonetheless,

being

NERCO

an

American

obviously be

company

expected to

American,

not English,

there is

any difference

American

views

of

operating

here,

classify its business

terminology.

what

Hence, to

between the prevailing

kind of

underwriting

would

pursuant to

the extent

English and

the

market

regards as "facultative," the parties would have intended the

American interpretation to

contrary intent.

Cf.
___

control, absent evidence

of some

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
effect

construing a

to all

whenever possible.");

give reasonable
id. at
___

1052-53

(citing Liberty Mut. Ins. Co. v. Gibbs, 773 F.2d 15,

_____________________
_____

17 (1st

Cir. 1985)

terms

contract, we must

(where unambiguous, contract terms

their plain meaning).

-50-

must be given

To

tending

be sure,

plaintiffs'

experts

gave

testimony

to show that the American market understood the term

"facultative

reinsurance"

underwriting.

One

to mean

might argue that

risk-by-risk certificate

the district judge

was

entitled to believe plaintiffs' experts over defendants' (who

testified

that

to the

opposite

the ordinary

therefore,

understanding),21

and to

infer

meaning

of the

term "facultative"

was,

the traditional

one of

risk-by-risk certificate

underwriting.

But

within

the

the

evidence

American market,

individual risk

that

the

term

"facultative,"

embraces

more

than just

certificate method

is simply too

the

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

included reinsurance underwritten

related

methods.

Inzerillo,

the

that

"facultative"

by the semi-automatic

One

of defendants'

former

president

experts
of

was

Munich

and
James

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"

of
and

the only form

facultative reinsurance, and that MFCs and semi-automatic

automatic

reinsurance.

facilities

were

all

plaintiffs/

of

facultative

Moreover, he testified that the largest direct-

writing professional reinsurers in

facilities

forms

in

their

facultative

the country all used such

operations.

experts categorically denied

None

of

the widespread use

of such facilities in facultative operations.

-51-

the

facultative

facilities

issue.

operations

of

American

like the semi-automatics

Plaintiffs' experts did

reinsurers,

and automatics

not, in fact,

the ordinary meaning of the term in the American

industry

was limited to

of

here in

testify that

reinsurance

individual certificate risk-by-risk

underwriting.

Rather they intimated that

their own opinion,

Yet, the question

whether NERCO

Wordings

other

the term properly

is not

this was what, in

meant or should

the abstract use

of language

mean.

but

having discretion under the slips and Treaty

could reasonably classify the semi-automatic

and

methods it used in its own operations as "facultative"

and whether it committed fraud when it did so.

The best

in the

realities of

Ins., 416 Mass

____

the contract

is admissible

approach to answering this

industry practice.

at 845, 626

Cf.
___

Affiliated FM
_____________

N.E.2d at 881 ("Where,

language is ambiguous, evidence

to determine the meaning

Plaintiffs' expert, Phelan,

question lies

as here,

of trade usage

of the agreement.").

conceded that American companies

commonly

used

automatics

facilities

and

departments.

similar

automatics

within

He regarded this

practical considerations which

of

this

type

defendants'

their

semi-

facultative

as anomalous, and pointed out

had led to that

But while disapproving, he admitted

facilities

to

within

-52-

development.

to the widespread use of

the

industry

under

the

facultative designation.22

American

English

writers

substantial,

treatise

from whom

writers,

we

have

even predominant,

moreover,

like

the

quoted, acknowledge

modern trend towards

use of

facultative facilities similar to the semi-automatics here in

question.23

We

think

it is

substantially

beyond

____________________

22.

Phelan testified, on cross-examination:

Q:
Ritt's

Now you

said

question,

correctly,
reinsurers

in
if

that
in

facultative
semiautomatic

this

Mr.

understood

you

the

professional

country

departments
and

response to

in

their

commonly

write

automatic

facilities

cavil

and

call

them

facultative; isn't

you

have

that

right?
A:

Yes.

Q:

And

testified,

if

understand it, that there is nothing, per

se,

wrong

with

doing

so;

isn't

that

right?
A:

23.

That is correct.

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

main,

Reinsurance

is

Companies

transacted

somewhat

similar to

offices

ceding

prepare

binders

under

in

the

Agreements

the enclosed.

the

business

and/or

The
either

certificates

supplied by the Reinsurer or, if equipped

to

do so,

business

will furnish

reports of

the

on an itemized bordereau, . . .

. It is, however, the invariable right of

the Reinsurer (or should
the

cancellation,

receipt

of advices,

be) to ask

for

within

5 days

after

of

any cession

or

cessions submitted under the terms of the

agreement,

otherwise the

reinsurance is

-53-

____________________

considered binding
should

be

privilege

on both parties.

noted that
is

be

possible to

extract

one

this cancellation

worthless unless

reports are received,

or

itemized

from which it will

review the
more

It

for

cessions and
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
of

advices

. .

days after
upon

receipt

notice to

the

Ceding Company.

Id.
___

at 106.

clauses

This

clause is not

found in the MFCs

dissimilar to cancellation

used by the

defendants to assume

business.

The district court quoted

et

al.,

from 2 Klaus Gerathewohl

Reinsurance Principles and

Practice
_______________________________________

(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.

a general proposition,
covers

a single

risk."

Gerathewohl does state, as

that facultative reinsurance

However, he

states, in

"always
a section

entitled

"The

management

business,"

that "[i]n

management

and

business

rationalize
___________

the

ie

as far

reinsurance
methods

reinsurance

order

at

[sic]
as

minimum,

the individual

it

for
is

insurer's
facultative

essential

that

by

operational

nature of

facultative

large

specialize in

the

Conditions

of
of

General
Facultative

containing general principles

to all cessions
and

made.

facultative

agreements

-54-

and

Reinsurance
applicable

Such streamlining

standardization

reinsurance

Terms

of

facultative
avoids

Among

professional

business," id. at 13, is the following:

___

Application

to

all

Id. at 12 (emphasis added).

___

"particularly

companies

reinsurance

the direct

operations

standardize

will allow."
used

facultative

to keep

administration

reinsurance

processes

of

the

that, in

recent times,

includes methods,

certificate

in

the term

"facultative reinsurance"

addition to

traditional

underwriting, similar

in

risk-by-risk

concept to

the semi-

automatics.

Given this body of evidence,

expert's

concession

adequate basis,

judge

to

plaintiffs

in

infer

as to

the

including plaintiffs'

classification,

from the term "facultative"

that

defendants

would or should

we see

no

itself, for the

necessarily

knew

that

interpret "facultative," as used

the slips and Treaty Wordings, as limited solely to risk-

by-risk certificate

underwriting.

original and classic method, see

___

other

"streamlined" forms

within the

here

are

While the latter

is the

Unigard, 4 F.3d at 1053-54,

_______

clearly

industry under the rubric

and abroad, including types in

now being

utilized

of "facultative," both

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

conditions
also

negotiate

on

excludes

owing

to

the

terms

each individual
possible

the

case and

cases of

absence

of

and

doubt
express

stipulations.

Id.
___

at 14-15.

a definition
but

Thus, Gerathewohl cannot stand as support for

of facultative

individual

underwriting that

risk-by-risk

negotiation.

excludes all
Moreover,

Gerathewohl

is

German

reinsurance company.

author,

for

German

His views, while probably authoritative

in that context, cannot be taken

of writers

writing

more intimate with

as authoritative over those

the common

practices of

the

American reinsurance market.

-55-

contract requires

the

the reinsured

to report the

placement of

reinsurance to the reinsurer via a bordereau; and it may

give the reinsurer the right,

within a specified time frame,

to

reject

any

necessarily

particular

ab initio.
_________

were designed

The

The

evaluation

of

right

to

exposure

is

cancel

is

in

hallmark

each

not

issue here

Facilities employing this

certificate facultative

negotiated

basis.24

but

to offset the paperwork and high costs

associated with classic

individually

thereafter

semi-automatics in

along these lines.

method were developed

underwriter

risk

risk

advance

of

on

facultative

separately

by

sought to be preserved

after the

fact.

created during

which

risk-by-risk

reinsurance

the

reinsurer's

by maintaining the

Although

the

reinsurance

a window

reinsurer is

of

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

conditions which

reinsurer to

of

prevent

the exposure

and

reinsured

from

the

predescribed types of risks

by

contract

binding

the

the reinsurer does

____________________

24.

The

First

State

reinsurance, as

the

district

court

found, fell within the automatic and/or semi-automatic method

of

underwriting.

supports that

although

section

finding, in the

understanding between
generally

See supra
___ _____

analogous
the close

First
to

I.B.2.

sense that the

State and

those under

employment

the

practices and
Watson

formalized

settings may

greater de facto underwriting control.

________

-56-

Graham

The record

were
MFCs,

have indicated

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

to

receive

misrepresented

one type

certificate form

of reinsurance

does,

(the

that

they

indeed,

all along

(semi-automatic and automatic).

support

would

classic risk-by-risk

of facultative), while intending

to provide another type

evidence

plaintiffs

the court's

finding

The

that

defendants intended to supply reinsurance underwritten by the

semi-automatic

(although

and (to

not

to

minor degree)

the

complete

automatic

exclusion

of

methods

classic

facultative, a small amount of which was also produced).

the record

does not support the finding

But

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

underwriting

court

differed

facultative method

found

from

in that

the

that

semi-automatic

classic

"the 'right to

risk-by-risk

cancel' and

the

'right to reject' are effective only at the time the right is

___________

exercised by
reinsured

risks had attached

rights were
a

the reinsurance underwriter and

price the

not effective ab initio.

_________
industry

streamlined operation,
at

42 ("Yet

facultative
deprived

to the SANS

it

has

been

well after the

_____

Treaties."

These

But this appears to be

willing

to

pay

for

the

as Golding notes, see Golding, supra,

___
_____

may be

reinsurance,

emphasized
for the

that it
reinsurer

still
is

remains

in no

way

of its power to decline, even though it must accept

__________________________

responsibility in the meantime.")

______________________________

-57-

Before leaving this

alternate

theory

"facultative," a

of

fraud

subject, we shall consider

based

on

use

of

theory which, arguably, might

the

an

term

enable us to

uphold the district court's result.

Defendants

forms of

under

doubtless

knew

facultative underwriting

indicated as much.

business

in

underwritten

wanted

method

the

they intended

streamlined

to provide

the SANS Treaties were not the same as the traditional

form of facultative underwriting.

He

that

in

associated

He testified that most of the facultative

his

company's

in the

order to

the

NERFAC

division

classic individual

Graham Watson

with

Graves Hewitt's testimony

to

get rid

classic

switch

of

been

certificate manner.

to the

semi-automatic

the paperwork

method.26

had

The

and expense

record

also

bears

the inference (assuming, as we

court discredited

Bailey in

1979)

plaintiffs

Hewitt's

infer, supra, that the

_____

testimony that

that defendants

not

he

so

only did

or their own sub-brokers

informed

not

inform

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 . . . .

made it clear to

not interested in doing business that way."

Ralph we were

The court, as it

was entitled to, apparently rejected Hewitt's testimony.

accepted, it
intentional
indicates

occasional

seriously undermined any

misrepresentation.)
that

accompanying
departure

would have

Hewitt was

modes

from past

well

The

testimony

aware

that the

of underwriting
practice. There

use by NERFAC in

were

in

theory of
at
MFCs

and
a

of their

most of NERFAC's

underwriting was by the traditional facultative method.

-58-

least

some sense

was evidence

the past, but

(If

to streamline their

to

themselves.

negotiating the

underwriting, but kept this

Does

it

follow

to plaintiffs

facts

i.e.,

intention

use

underwriting

this

SANS Treaties, defendants

to volunteer

their

from

to

type
____

"which honesty, good faith

that,

while

designedly failed

material to

this

information

of

the risk

facultative

and fair dealing

require[d] that [they] should communicate to the insurer"?

Couch

38:2.

Although argued by plaintiffs, the above theory was

not

adopted by the district court.

that

defendants

"knowingly

underwriting

underwriting."

had

false"

would

misled

Instead, the court found

plaintiffs

representation

be

individual

While there

by

making

that

"reinsurance

risk

is insufficient

certificate

record support

for such an express misrepresentation, it can be

defendants, being under

the

argued that

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

streamlined facultative underwriting procedures

the traditional method.

utilization of

going beyond

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

to deceive,

untrue, with intent

or where

positively as true

it

states a

fact

without knowing it to

-59-

be true, and which tends

to mislead, the

policy is avoided where such statement or

fact materially affects
any

undue

withholding
risk,

the risk;

concealment
of

facts

which ought in

the

intentional

material

to

the

good conscience to

be communicated by the
avoids

or

also,

original insurer,

contract, without

regard to

whether the knowledge or information with

respect to material facts was acquired by
the

original

subsequently

insurer
to

the

previously
writing

of

or
the

original contract.

19 Couch

between

general

80:77.

While the above speaks of the relationship

original insurer

principles

apply

and reinsurer,

between

retrocessionares in a reinsurance treaty.

down to whether a

we think

retrocedant

and

The question boils

failure to disclose plans to

traditional risk-by-risk underwriting,

the same

should be

deviate from

considered

"undue

concealment

material

or

intentional

to the risk, which

communicated. . . ."

Id.
___

withholding

ought in good

of

facts

conscience to be

We answer in the negative for two

reasons.

First,

in

determining

what

material as to require disclosure by

information

is

so

the insured sua sponte,

__________

courts recognize that the insured need not disclose "what the

insurer

It is

already knows or ought

said that

circumstance is

"[a]

to know."

minute disclosure

not required."

9 Couch

of every

material

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

38:15.

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 . . . .

Couch

[the

38:58.

insured's

inquiry

insurer."

and

Id.

There is a "wide distinction . . . between

duties in]

those where

those

questions

cases where

are

there

propounded by

is no

the

___

Here there

is no indication that

defendants during the negotiation

to

describe

proposed

what

to

contracts

engage

expressly

discretion in

type

types

in.

of the first SANS Treaties

facultative underwriting

To the

allowed

this regard.

of underwriting

of

plaintiffs asked

contrary,

defendants

And as we

methods they

the

they

executed

reasonable

have just

held, the

utilized, while

not the

classic form of facultative reinsurance, fell within industry

parameters.

The

parties here

knowledgeable.

by

and

between

were of

equal power

and highly

The slips and Treaty Wordings were negotiated

sophisticated

Without first being asked

reinsurance

professionals.

by the other party, one

would not

expect defendants to volunteer a plethora of details on their

proposed

underwriting practices.

different had defendants

Matters

would have

affirmatively misrepresented

intended underwriting practices or given

answers to questions asked.

infer "undue

concealment" from

-61-

their

incomplete, evasive

or incorrect

their

been

We see no basis to

failure to

volunteer

further

information

about

characteristics where, for all

facultative

underwriting

that appears, the subject was

not broached.

The

slips,

as said,

discretion in NERCO as

were

worded so

to the business it would

"facultative," indicating a willingness

to

NERCO.

reasonable

to vest

classify as

to leave this choice

As previously discussed, NERCO's choice had to be

and exercised in

Mass. at 106, 176 N.E.2d

But, within those

hands.

as

To say

good faith.

at 32-33; Johnson, 754 F.2d at

_______

limits, the decision

that

Salem Glass, 343

____________

NERCO

plaintiffs, unasked, the nature

had

was left in

duty to

of its proposed

26.

NERCO's

volunteer

to

facultative

underwriting facilities and, in

approval, goes

beyond the parties'

plaintiffs

had wished

facultative

method,

inserted in

the contract.

good

turns

faith should

sour,

bargained

effect, secure their advance

to

to limit

that

defendants to

requirement

It

expand the

The

Given

of

the

have

bargain later

an original,

equal

been

duty of utmost

a party, whose

terms

If

a particular

should

was not.

not enable

contract.27

bargain as written.

fairly

strength

and

____________________

27.

To argue

that the plaintiffs'

into not asking because they did not

meaning of

"facultative"

acuity of the London

the world.

As

Golding, supra,
_____
streamlined

is

surely

underwriters were lulled

understand the American
to

underestimate

underwriters who write insurance around

already mentioned, English

indicate that,

methods

the

of

even in the

authorities like
British market,

facultative underwriting

are

well

known.

But assuming different

risks in other

considerations in reinsuring

parts of the world, underwriters are expected

-62-

sophistication of the parties, and the fact that underwriting

considerations

inquiry

had

convinced that

methods

now in

dispute were

plaintiffs wanted

the

of proposed

record

to

such obvious

know

establishes

more, we

that

facultative underwriting

the

topics of

are

not

intended

were material

items of the type

defendants were required, without inquiry,

to disclose.

However, even if the materiality of the information

were

such that

record

defendants should

lacks evidence

have volunteered

from which

to find

recognizing its materiality, withheld it

than through

reinsurers

oversight.

cannot

concealment.

Claims in

rest

on

Unigard, 4
_______

methods employed

accepted

parameters of

that defendants,

deliberately rather

fraud against non-marine

showing

F.3d at 1069.

and like

were, as above

of

mere

such

facilities

negligent

The semi-automatic

indicated, within

facultative classification,

contract left their use to defendants' discretion.

use

it, the

were

not

so

abnormal

as

and the

Plans to

to

imply

fraudulent intent from the mere fact

argument

that

plans

to

use

disclosed because that method

risky is belied by

of non-disclosure.

semi-automatics

had

to

Any

be

of underwriting was especially

the absence of evidence linking

the SANS

____________________

to

seek information

insured's

market

as to

if

they

the terms

and practices

are interested.

Cf.
___

("Underwriters are presumed

in the
Hazard's
________

Adm'r., 33
______

U.S. at 564

the usages

and customs of all of the places from or to which

they make insurances.").

-63-

to know

Treaty losses with the

contrary,

method of underwriting used.

defendants presented evidence

could indicate that

the losses under the

than

averages

the

industry

for

the

To the

which, if believed,

Treaties were less

period.28

It

is

undisputed, as the judge stated, that the market in which the

losses

occurred

contrary

was

evidence

"disastrous" generally.

was

not

introduced,

substantial evidence of large Treaty

Substantial

nor

was

there

losses from risks of

type that would likely not have been reinsured under the more

deliberate

classic

record inadequate

facultative

to support

procedures.

a finding that

We

find the

in failing

to

disclose

their

underwriting

plans

to

use

semi-automatic

and

related

methods, defendants were acting with fraudulent

intent.

We

affirming

thus

the

reject,

court's

fraudulent withholding

that

the

finding

fraud

on

an

alternative

"facultative"

fraud

means

of

finding,

the

theory above discussed.

court clearly

of

as

erred to

the

We conclude

extent it

defendants' promise

to

based its

produce

and

underwrite "facultative" reinsurance.29

____________________

28.

Cf.
___

Unigard, 4
_______

years, the
participants

F.3d at

1054 (noting

reinsurance market
and

a decline

environmental losses")

that "in

has witnessed an
in

profitability

recent

increase in
due to

huge

29.

For reasons set out in our discussion of the plaintiffs'

contract

claims,

infra,
_____

determination of fraud
defendants did

not, in

we

reject

the

district

insofar as based on its

fact, "produce" or

court's

finding that

"underwrite" the

-64-

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

reinsurance

directly from selected

intermediaries.

that it

Graham

would "produce

it

General

produced

intermediaries

companies

of such

through

themselves,

to

the

obtain

from primary,

directly"; (2)

that

business

[Managing

from

intermediaries

and

to

(1) NERCO represented

'non-system business'

most

Agents]

intent

primary insurers without

The court found that

risk-bearing, insurance

fact,

Watson's

yet

never

and

"in

from

disclosed these

material

matters

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

supposed

representations

representation

underwriting,

rejected

of

(as well

individual

above);

(4)

risk

that

as upon

the

certificate

the

inducing

representations

selected

to produce

and underwrite

primary sources,

and by

a direct

reinsurance from

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

others.

-65-

to

findings.

First,

1979

wrote

they

containing

them.

that defendants

and

circulated

the challenged

Second,

Treaties,

it

that when

became

never intended,

the

Placing

representations,

later, during

apparent

that

when in

Information

to live

the course

"direct"

up

to

of the

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.

The

Fraud in the Inducement

Fraud in the Inducement

first

theory

amounts

to

fraud

in

the

inducement.

as

to a

While the misrepresentations were of intentions

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.

such intention

does not exist, .

When
. . 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,
_______

(1926),

quoted in Barret Assoc., Inc. v. Aronson, 346 Mass.

_________ ____________________
_______

150,

190 N.E.2d

Information

was

254

Mass. 480,

867, 868

(1963).

never

incorporated

481-82,

150 N.E.

It is true

into

the

329

the Placing

contracts

(consisting

defendants

of

the

slips

prepared and

specifically

to

induce

and

Treaty

Wordings).

circulated the

persons

and

But

Placing Information

entities

like

the

-66-

plaintiffs

material

to

enter into

statements

actionable fraud.30

the

therein

Treaties.

inducing

Knowingly

reliance

false

would

be

Defendants respond that

Placing

Information

working

relationship with

selected

primary companies"

related

statements

accurate

reflections

intentions

evidence

into

of an

the representation in

were

when made.

of their

to

develop

In

intention

support of

efforts after

to

working

"develop a

the Treaties

relationship

companies.

They

also argue that at all times

an ongoing

direct relationship with First

brokers and

MGAs to provide NERCO

was said to

have occurred

close

of

this, they

the

and

their

point to

were entered

with

primary

they did have

State.

Utilizing

with reinsurance business

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).

there was

Before

the Placing

Information

evidence that NERCO commonly

Statements by

of defendants'

used intermediaries.

defendants' witnesses at trial

planning documents

Treaties suggest an

intention to

was written,

and in certain

issued prior to

continue to do

the SANS

so in

the

____________________

30.

Defendants challenge

all

plaintiffs

relied

the district court's

on

these

misrepresentations.

discuss reliance in the following section.

-67-

finding that
We

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

the

Placing

representations,

calculated

Information.

it

effort to

Treaties than honestly

plans.

might

entice

The

Placing

be inferred,

more

plaintiffs to

in

Information

reflected

enter into

to project defendants' real

the

business

While susceptible of another construction, the record

adequately

in

the

supports the court's finding that representations

Placing Information

as

to

Graham Watson's

direct

writing intentions were knowingly misstated.

Defendants argue

used

intermediaries,

representation

relationship

that

that even

it

it

though NERCO

nonetheless

would

develop

with primary companies.

for

the

most

insurance companies.

enabled them

was

entitled

inconsistent

from

close

with

its

working

point out

aid of intermediaries

highly

regarded

primary

They also argue that the intermediaries

to develop

that might, in time,

did,

part,

Defendants

that the reinsurance it wrote with the

came,

complied

may have

relationships with

become "direct."

to

read

with the securing

the

these companies

But the

Placing

of business

court, as it

Information

as

through brokers

and MGAs.

The Placing

"[f]aculative

Information says, for

reinsurance

emanating

from

example, that

reinsurance

-68-

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

Graham Watson.

intermediaries

And

would

not

there were other

be

handled

by

statements supporting

the same impression.

The court was entitled

significant

between

differences

NERCO

relationship by

and

to conclude that there were

between

selected

brokers and

"direct"

primary

MGAs.

relationship

insurers

These

and

differences could

affect the quality of the business, at least in some people's

minds, and might

aware

of

have caused some plaintiffs,

defendants'

actual

plans,

to

reevaluate

decision to participate in the SANS Treaties.

business

obtained

underwrote the risk

through

MGAs,

for the primary

for

had they been

their

In the case of

instance,

the

insurer (as opposed

MGA

to

the

underwriting

itself);

being

communications,

performed

by

premiums,

the

primary insurer

and

reporting

accounting documents were routed through the broker.

was not

at risk should an actual loss arise.

and

The MGA

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

-69-

the Placing

Information.

We,

therefore,

material and

affirm

knowing

the

district court's

misrepresentations were

finding

made

that

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

required to do."

the

duty

This appears to

Treaties were in

to

disclose

to

attention material to

be a finding that,

effect, NERCO violated

plaintiffs

the risk

it was

matters

while

its good faith

coming

most notably its

to

its

growing

use

of

intermediaries

abandonment of the

for

non-system

plans set out in

business

and

its

the Placing Information

to establish direct relationships with primary insurers.

See
___

Unigard,
_______

not

4 F.3d

at

totally unannounced

1069.

defendants

preponderance

of that

this

time,

In

revealed

year's

the 1981 Anniversary

that,

business was

although

the

system business

from Baccala

Bailey was

written on an excess of

and Shoop

already well

finally went along for that

loss basis

Insurance Services."

aware that

receiving the Baccala and Shoop business.

but

was

State, a "relatively small proportion of the non-

system business had been

emanating

trend, however,

by defendants.

Information,

from First

This

year.

At

NERCO was

He objected to it,

Because Bailey was a

lead

underwriter,

decide)

put all

this

conceivably

the plaintiffs

(although

for whom

we

he was

do

not

acting on

-70-

notice that more

following year,

simple

such business could

yet

precaution of

neither he

inserting

nor

be anticipated in

the

anyone else

the

a prohibition

took

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,

apprised that, during

years,

of

"non-system

that other MGAs and

in

three

would cede the

business"

and

intermediaries would

conjunction

Shoop, most of the

were never

the ensuing

Baccala and Shoop

majority

cede,

they

with Baccala

and

"non-system business"

to the SANS Treaties.

This

finding

others,

does

not

explain, however,

why

Bailey

and

once on notice that business was being accepted that

was contrary

to representations in the

Placing Information,

did

not

acceptance

made

continue

to

of further

no reference

plaintiffs may

to

protest

and

try

such business.

other evidence

to

head

Moreover,

that

have learned a considerable

SANS

Treaties.

Such

evidence

is

the

the court

certain of

the

amount about the

nature and source of defendant's business during

the

off

the life of

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

-71-

recovery rights

sustained

the

deliberately

of individual plaintiffs.

district

misstated

court's

their

Although we have

finding

business

that

plans

defendants

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

to their right

recover at all, on some theory of acquiescence or waiver.

These matters require

what

information

determination

of

the making of

became

known

the legal

further findings as

to

effect

whom,

of

and

when,

any such

to

and

knowledge

and/or notice.

Therefore, although we affirm the

finding

that

knowing misrepresentations

district court's

were

made

Placing Information, we direct that reconsideration

on

remand

revealed in

to

the

legal significance

the

the 1981 Anniversary Information,

information the court finds

plaintiffs, or

rights

of

some of

to abandon

in the

be given

information

and any other

was subsequently received by the

them, as it

relates to

their reinsurance

plaintiffs'

obligations under

SANS Treaties,

and recover damages for

In considering

such matters, the district

the

losses already paid.

court should take

into account, among other

good faith, the

things, defendants' duty of utmost

identity of those plaintiffs affected by the

-72-

particular

information,

information possessed

as

the legal

effect on

by Bailey because of

a lead underwriter, and

the fact that

plaintiffs of

his special role

the Treaties were

renewable annually.

The district court

make findings on these matters.

on

remand,

disapproving)

district

we

vacate

and

court,

leave

the

court's

or

So as to leave a clear field

(without,

for

did not discuss

however,

further

finding

necessarily

evaluation

that

NERCO

by

the

"never

disclosed these material matters to the plaintiff reinsurers,

as it was required

to do."

court's

that

finding

However, we

the

affirm the district

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

to consider exactly

necessary for the court

which of the SANS Treaties were infected

by the

misrepresentations made in

This question may be

the Placing

affected not only by which

Information.

information

came to what plaintiffs during the term of the SANS Treaties,

but

also by

State was

the fact

that the

business produced

obtained directly, without the

intermediary.

No part

of

that

by First

involvement of any

business, therefore,

was

seemingly affected by these misrepresentations although we do

not

court

foreclose the issue.

made

no subsidiary

In

addition, because the district

findings

-73-

concerning the

various

arrangements

under

business,

which Graham

we cannot

tell

Watson

whether

all

assumed non-system

of that

business

involved the use of brokers and/or intermediaries, or whether

some

portion

insurers.

account

of

it

On remand,

all

such

was

obtained

the district

issues

directly

from

court should

in determining

primary

take into

assuming

the

statutes of limitations and other matters do not stand in the

way of recovery

C.

what relief to provide.

Reliance
Reliance

The district court properly listed reliance as

one

of the

law.

elements of

a common law

fraud under

Massachusetts

825 F. Supp. at 380 (stating that plaintiffs must prove

that they "relied upon that representation as true and

upon it to their detriment").

acted

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

Treaties, and,

in reliance on
______________

to enter into the

said . .

SANS

. representation[],

the Plaintiff reinsurers did enter into

the SANS Treaties to

their detriment."

825 F. Supp. at 383

(emphasis supplied).

The court

subsidiary findings which

what

made no

evidence

it credited

plaintiffs31 relied.

in finding

that

would indicate

all of

the 32

____________________

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

Massachusetts,

Mass. at

is

as the

an element

district

8, 429 N.E.2d at

of

court stated.

insurance context.

Meritor Sav. Bank,

___________________

910

law fraud

in

Danca,
_____

385

1133 (citations omitted).

"general insurance law" that reliance

in the

common

It is

is an element of fraud

E.g., Foremost Guar. Corp.

____ _____________________

F.2d 118,

Plaintiffs nonetheless argued below

123

(4th

Cir.

v.

1990).

and on appeal that proof

of

reliance was not needed,

Assur. Co., 584 F.

__________

the district

Supp. 1245 (D. Mass. 1984).

court said that "[t]he

authority does not consider

which an

insurer

insurance

policy."

must

Mass.

78,

in

Id. at 1250.
___

206

In Shapiro,
_______

weight of Massachusetts

'reliance' as a separate element

prove

cited therein, see Pahigian

________

349

citing Shapiro v. American Home

_______
_____________

order

to

invalidate

an

But Shapiro, and the cases

_______

v. Manufacturers' Life Ins. Co.,

____________________________

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

distinguishable

predecessors

from

Connecticut

the present

dealt with

application for a policy

then

attached

Shapiro,
_______

or

to and

law),

case.

are

factually

Shapiro and
_______

misrepresentations

made on

its

a form

of insurance, which application was

became

part of

the application stated on its

action arising [from an

the

policy.

In

face that "any claim

incorrect answer to the previous

question in

the application] is excluded

coverage."

Shapiro, 584 F. Supp. at 1247.

_______

of

cases

relate to

insurance law.

See
___

what have

9 Couch,

from this proposed

The Shapiro line

_______

been called

"warranties" in

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

circumstances, or

is

essential to

supplied).

reliance.

as to

the

existence

conditions, the literal truth

the validity

of the

Warranties are typically

In the

not a warranty.

of certain

facts,

as to which

contract.") (emphasis

enforced regardless of

present case, the Placing Information

was

It was neither incorporated in, nor attached

to, the contracts eventually

themselves

obtain

contain

business

Pahigian, and
________

promise that

directly from

Graham

L. ch.

175,

Watson

primary insurers.

Davidson were, in addition,

________

under Mass. Gen.

statute not at

any

executed, nor did the contracts

186,

would

Shapiro,
_______

all cases decided

a consumer

protection

issue here, and arguably inapplicable to this

-76-

situation.

Cf.
___

Liberty Mut.,
____________

apply Mass. Gen.

statute,

in

contract

of reinsurance

than

the

L. ch.

175,

reinsurance

112,

18 (refusing

a consumer

context, and

is more

a policy of insurance).

found

773 F.2d at

protection

noting

"a contract

to

that

of indemnity"

Finally, in Shapiro, the court

_______

that even if reliance were a required element of proof

under

186,

such reliance

before

the court.

Shapiro,
_______

would be found

584 F.

on the

Supp. at

evidence

1249.

This

obviously cannot be said here of those plaintiffs who did not

present individual evidence of reliance, infra.

_____

counsel

conceded in

closing

argument that

Plaintiffs'

what he

called

subjective reliance by the underwriter who wrote the risk was

not

proven here in many

basis

in

Shapiro
_______

for

instances.

making

Massachusetts requirement

an

We,

therefore, find no

exception

that a plaintiff

here

to

the

seeking recovery

in fraud must prove reliance on the misrepresentations made.

As

lacking as

direct

to many

evidence

for the

reliance

plaintiffs, the question

there may be circumstantial

the gap.

of

is

admittedly

arises whether

evidence of reliance to

We cannot find such evidence.

most part, unrelated entities

were approached

fill in

The plaintiffs were,

from several European

nations.

They

brokers.

Defendants, it is true, concede in their brief that

the SANS

"placing materials

sub-brokers to prospective

by no fewer

than five

were distributed by

sub-

the London

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

the fact

that certain other plaintiffs read

the placing

materials evidence

relied upon them.

Nor is

and relied upon

that all plaintiffs

did so.

Several of

the

the plaintiffs were

unable to produce

Placing Information from their

unable

copies of

own files, and many were

to present the testimony of anyone who could say that

the Placing

Information was seen

and relied upon

the decision to enter into the SANS Treaties.

evidence that, at

least as

sub-broker soliciting

made the

to some of

There was also

the plaintiffs,

participation and the

decision to participate were

in making

the

underwriter who

corporate affiliates,

thus raising the possibility of some motive for participation

unrelated to the defendants' inducing statements.

finding

In

light

that

all

statements

in

the

of

these

plaintiffs

Placing

facts,

had

the district

relied

Information

upon

is

court's

the

legally

false

and

factually insupportable and must be vacated.

directions for the

plaintiffs

have

requirements of

We remand with

district court to determine which

proven

reliance

Massachusetts law,

in

conformity

and to deny

with

Contract Claims
Contract Claims

We turn to the plaintiffs' contract claims.

-78-

the

recovery in

fraud to any plaintiff who has not met this burden.

IV.

of the

(1) The slips called for the cession of "[b]usiness

classified

Assumed

by the

Reassured [NERCO]

business produced

Watson division of

and

as

. .

. Facultative

underwritten by

Cameron & Colby

Co., Inc."

the

As we

Graham

have

held, the character of the business ceded could reasonably be

classified

record

as facultative

support

contracted under

for

the

business.

court's

We find

finding

the SANS Treaties that

insufficient

that,

"NERCO

Graham Watson would

examine each individual risk submission by the ceding company

on

a risk-by-risk basis and, if the

would

then issue

an

risk be accepted, . . .

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

obligation
casualty

to

automatic"

produce

facultative

for under the

its

contractual

property

assumed

business,

"automatic" and/or

method

of

and

"semi-

underwriting

the

reinsurance business is actually produced

by the ceding source companies and not by
the original reinsurer.

We

hold this

primary insured

finding to

be clearly

or its agent

erroneous.

may indeed have

While the

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.

defendants

The

reinsurance

by negotiating and

was clearly

"produced"

setting up the

by

MFCs or other

arrangements under which the business was assumed.

(3)

breached its

The

district

contractual

court

also

found

representation that

that

the

NERCO

business

would be "underwritten" by Graham Watson.

found

and/or

contractual

breach because,

semi-automatic

delegated

source

its

company

methods

reinsurance

to

The

under

semi-automatic

the

company, or

initially to assign

plaintiffs,

However,

into with

underwriting

district court

the MGA

like

this was done

to

methods,

to

the

the

SANS

right that

the

ceding

given the

to NERCO, and

right

through it

to

Watson's underwriters.

under facilities

Graham Watson, containing

Watson

authority

it, was

by Graham

automatic

"Graham

was undoubtedly

and

the risks

the

cede risks

representing

before review

under

employed,

automatically

Treaties."

The district court

previously entered

underwriting terms

requirements satisfactory to the latter.

and

And, in the case of

most

of the business, Graham

stated

or

Watson had the

right within a

time to reject any risk upon receipt of the bordereau

lay-off sheet disclosing it, if the risk did not meet its

underwriting approval.

Graham Watson

business,

the streamlined

albeit using

was underwriting

facultative methods

discussed earlier in

the opinion.

methods

the industry's purview

fall within

-80-

the

As we

have held,

these

of "facultative

underwriting."

of

the

Our decision on that point dictates rejection

district

court's

essentially

on

the

facilities

defendants

above

erroneous

were

finding,

view

using

unacceptable underwriting vehicles.

that

were

which

the

rests

types

illegitimate

of

and

We hold, therefore, that

this finding, too, was clearly erroneous.

Having

evidence, and the

said

this,

we

remain

court's findings,

inadequacies

in the quality
_______

of the

Conceivably,

underwriting could

be

troubled

of possible

by

the

systematic

underwriting performed.

so deficient

tantamount to a breach of the duty to underwrite.

as to

be

Plaintiffs

insisted, with support from their experts, that Graham Watson

was less

than diligent in its underwriting

risks were reported

bordereau.

to it by means of the

There was evidence

underwriting data.

of delay

efforts once the

layoff sheets and

and of

inadequate

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

finding was,

narrow

risks

to be

definition

support of

ceded to

sure, based

its finding

view of

SANS Treaties."

on the

of facultative

facultative underwriting.

different

the

that Graham

the propriety of

court's incorrectly

reinsurance,

Watson did

Whether, under

This

and

was in

not perform

this court's very

defendant's streamlined

-81-

facilities,

found

to

Graham Watson's "underwriting" could possibly be

have

been

so

inadequate

contractual duty to "underwrite"

position

court, on

to answer.

remand, with

We

as

to

violate

is a question we are

leave this

issue to

instructions to also

its

in no

the district

decide whether

other considerations

limitations

such as

the statute

of

leave it viable.

(4) The district

its contractual

obligation

participation on

required by

the bar of

court found that NERCO

to 'co-reinsure

all 'System Business'

Warranty No.

2 in

"violated

for 10

percent

ceded hereunder,' as

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

Slips at Bailey's

term was

inserted into

the

insistence because he wanted NERCO to keep

significant risk in

the business, thus

providing it with

"an increased incentive to exercise care and prudence in risk

selection."

10

They then argue that in fact, NERCO did not keep

percent

reinsurance of

risk it

words,

retention,

that 10 percent

kept for itself to

they

read

the

unreinsured retention.
___________

also

read

but

the warranty

instead

outside

which reduced the

amount of

a "minuscule" amount.

In other

Warranty to

The

obtained

10

percent

district court appears

to have

in this

-82-

require

manner;

this is

the only

reasonable reading of the court's statement,

evidence

that NERCO

did not

initially

as there was no

retain at

least 10

Bailey's

testimony

was not

that NERCO

percent of each risk it ceded.

The

shows

that the

defendants

intent of

respond

that

the Warranty

could not obtain any reinsurance of its retention, but rather

that NERCO should have

or

exposure to losses that was

greater than Bailey's

firm's exposure.

They

equal to

point out

that the evidence shows that, in fact, "NERCO's actual losses

on

the portion of the

SANS risk portfolio

(unreinsured) was $105,000,000

to

all of

the losses

of all

that it retained

an amount virtually equal

of the

plaintiffs combined."

___

(Emphasis in original.)

We

evidence on

NERCO

believe

the court

this point as

did reinsure

some

was

it did.

entitled

to view

There is no

portion of

the

doubt that

its retention;

Hewitt

admitted as much, and the plaintiffs introduced into evidence

some of the reinsurance

the retention.

question

There

whether

contracts used by NERCO to

was also evidence on both sides of the

the parties

require NERCO to keep an

are

no

witnesses,

pivotally

intended

documents

retention" or words

including

involved

Nigel

in

Warranty

unreinsured retention.

contemporaneous

"unreinsured

reinsure

the

using

No. 2

to

While there

the

phrase

of similar import, several

Huntington-Whitely,

negotiation

of

who

this

was

point,

-83-

testified

that

an

unreinsured

retention

was

what

was

intended by

this

intended.

The

language is an

clear error.

issue of

issue of

what

the parties

fact, which we

must uphold

See Commercial Union, 412 Mass.

___ _________________

absent

at 557,

591

N.E.2d at

172.

finding of

We,

therefore, affirm the

breach of

contract on

district court's

this ground, subject,

course, to any relevant findings the district

of

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

plaintiffs' claims should have

statute

noted,

of limitations

we

have not

explanation by

view

of

the

dispositive

issues.

"virtually"

been

and

able to

The

facts

below.

find

judge of

the

all

of

been barred by the applicable

defenses raised

the district

law

that

in the

As already

record any

his reasoning or

on

these

possible effects

his

potentially

of the

various

statutes

of limitations

reviewed without

on the

findings and

different claims

rulings based on

cannot be

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

-84-

the

date

from which

to

measure the statutes

the

of limitations is

July 12, 1988,

when

plaintiffs first raised their claims of fraud and breach

of contract,32 by adding these claims to their Second Amended

Complaint.

is three

The applicable statute of

years, Mass.

Gen. L. ch.

Himmer, 949 F.2d

______

1, 4 (1st

contract is

years, Mass.

(1992).

six

limitations for fraud

260,

Cir. 1991);

Gen.

2A;

Tagliente v.
_________

that for breach

L. Ann.

ch.

260,

of

The plaintiffs argue that each of these statutes is

subject to the discovery rule, meaning that a cause of action

did

not accrue

should

until the

have learned of

plaintiffs learned

the factual basis

or reasonably

for their claims.

White
_____

v. Peabody Const. Co., Inc., 386 Mass.

_________________________

N.E.2d

Inc.
____

1015, 1020

v.

F.2d at 4

(1982); see also Cambridge Plating Co.,

_________ _______________________

Napco, Inc.,
___________

(discussing

991 F.2d

Massachusetts

(same).

121, 129, 434

21,

discovery

26-28 (1st

Cir. 1993)

rule); Tagliente,
_________

If plaintiffs' claims

949

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

alleged

causes

of action

beyond

these

the

dates, then

those

if proven

to the

claims would have been barred.

There

are various

____________________

facts which,

32.

As

we say

below, the

district court erred

liability under Mass. Gen. L. ch.

discuss the

statute of

93A.

in finding

Therefore, we do not

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.

-85-

satisfaction

of

of the factfinder, might necessitate evaluation

whether any

other,

or all

claims were

time

of

plaintiffs' fraud,

barred.

There

and possibly

is, for

example,

uncontroverted

Bailey, had

use

of

evidence that

lead

personal knowledge prior to

the MGA

examined

the

is

Baccala

the

&

Shoop.

disclosure

Information, distributed

in

underwriter,

Ralph

1981 of defendants'

Another

the

1981

to the plaintiffs in

matter

to be

Anniversary

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

what effect.

For

was triggered at those

example, some

of the

moments and with

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'

Inc.
____

See Contractors Realty Co.,

___ ________________________

v. Insurance Co. of N. Am., 469

_________________________

(S.D.N.Y. 1979) (noting

the insurer to deal

policy").

suggesting

F. Supp.

1287, 1294

the "reciprocal duty on

the part of

fairly, to give the assured

fair notice

of his obligations, and

of

fraud.

Also

to furnish openhandedly the benefits

there

were

letters and

testimony

that certain people connected with plaintiffs had

-86-

knowledge as to various matters early in the 1980's.33

We

these

direct the

district court

items, and any others

such findings

circumstances.

instance,

to evaluate

it deems relevant,

and rulings as it believes

We

leave

entirely to

and how to calculate,

rule or

and to make

appropriate in the

it,

the determination of whether and

Massachusetts discovery

in

the

first

how to apply the

other relevant rule

on this record, the proper

the applicable statutes of limitations.

all of

of law

running of

VI.

The Chapter 93A Claims

The Chapter 93A Claims

In

a footnote,

more, that "the

Chapter

93A,

Commonwealth of

Mass.

of

the district court

found, without

conduct of NERCO constitutes

a violation of

Section

of

the

Massachusetts."

Gen. L. ch. 93A,

93A,

any trade or

11 provides for the

victim

however,

of such

practices.

"unless the

825 F.

Laws

Supp. at

of

the

383 n.9.

2 declares unlawful "unfair methods

competition and unfair or

the conduct of

General

deceptive acts or practices in

commerce."

Mass. Gen. L.

ch.

bringing of a civil action by the

An action

actions and

may not

be brought,

transactions constituting

____________________

33.

For

example, Eric

D'Ile de France

Verhes

apparently knew

of Compagnie
of the use

de Reassurance
of Baccala

and

Shoop

by

series of

mid-1982; and

Imperio

Re exchanged

letters with NERCO via the sub-broker Carter Brito

E Cunha Ltd.
Shoop,

plaintiff

in late 1984 discussing the use

of Baccala and

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."

-87-

the alleged unfair

deceptive

act

method of

or

practice

competition or

occurred

the unfair

primarily

or

and

substantially within the commonwealth."

The defendants

argued below

Id.
___

as they do

on appeal

that the acts and practices said to constitute a violation of

2 did

not

occur primarily

commonwealth,

however,

made

closest the

occurred

as

no

required by

finding

on this

was a statement, in

The

district court,

important

"there were

the course of

point.

The

a colloquy with

was "implicit . . . activities

been found in Massachusetts."

constitute

11.

within the

court came to finding where the critical conduct

counsel, that it

while

and substantially

activities

a violation of

The court went on

within the

93A, as I

more important activities, more crucial

had to have

to say that

state that

found . .

would

. there are

activities that took

place overseas."

We are thus left without a specific finding

and with considerable confusion

mind.

had in

Given the absence of guidance -- indeed, with guidance

that points in

best

as to what the court

opposite directions --

we can whether

the

11

we must determine

locus requirement

as

was met on

this record.

In insisting

constitute

violation

substantially within the

as follows:

that the

The

did

acts and practices

not

occur

said to

primarily

and

commonwealth, the defendants assert

Placing Information

-88-

was prepared by

G.L.

Hodson in

New York.

brokers in

London

It was

London, and communicated by

to the

plaintiffs

at their

London and continental Europe.

they

then transmitted

relied on

any

financial

places

of business

in

The plaintiffs, to the extent

misrepresentations, did

injury in

sub-

the sub-brokers from

signed the slips and Treaty Wordings in Europe,

any

to the

Europe.

As

the

so in

Europe,

and suffered

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

award double or treble

11.

refuse to

damages, a discretionary matter under

Defendants argue that

this shows a misreading of the

statute, because if the district court found that the crucial

actions creating liability had

not

have

occurred

occurred overseas, they could

primarily

and

substantially

in

Massachusetts, hence he should have found no liability at all

under

ch.

93A.

statements

relied

Defendants

are made

upon

outside

insist

in Massachusetts

the

that

if

but are

commonwealth,

there

misleading

received and

can

be

no

liability under ch. 93A.

The

implicitly

plaintiffs

found that

reply

that

the defendants

the

district

failed to

court

meet their

statutory burden of proving that their fraudulent conduct did

not occur

Plaintiffs

primarily and substantially

disagree that

the only

in the

commonwealth.

relevant conduct

is the

-89-

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

emanated

all

subsequent false

from Boston,

(4)

and

certain

deceptive information

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.

argue that Massachusetts case law does not provide a

They

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.

statutory

finding

burden

transactions

whether

of

the

proving

occurred

defendant

that

primarily

its

and

has

met

its

activities

and

substantially

in

Massachusetts is a matter of law, subject to plenary

review.

Clinton Hosp. Ass'n v.

____________________

Corson Group, Inc., 907

___________________

1264

(1st Cir. 1990).

In Bushkin Assoc., Inc. v. Raytheon

_____________________
________

Co.,
___

393

Mass. 622,

473

N.E.2d

-90-

662

(1985)

F.2d 1260,

the

Supreme

Judicial Court determined,

to

the

transmission of

violation did

York

the

fraud

not occur "primarily

the commonwealth."

New

on facts bearing much

Ch. 93A,

resident, based

11.

his

ch.

claims

similarity

here, that

the

and substantially within

The plaintiff, Bushkin, a

93A claim

on

"alleged

representations made during a telephone call or calls in 1975

between a

New

York."

Raytheon officer

Id. at 638,
___

in Massachusetts and

473 N.E.2d at 672.

Bushkin in

As a result of

information Bushkin

Raytheon

learned

disclosed

that

Beech

possible acquisition target.

had

promised to

pay

acquiring Beech.

interested in

to Raytheon

him a

Aircraft

over the

Corporation

Bushkin alleged

fee

After telling

Beech, Raytheon

if it

phone,

was

that Raytheon

were successful

him that it

acquired it

in

was no

longer

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,

telephone calls

were between

deceptive statements

and acted on in New

New York.

Id.
___

the SJC noted that the

the two states,

the allegedly

were made in Massachusetts but received

York, and that any loss was

incurred in

Based on Bushkin, this court in Clinton Hosp.

_______
_____________

minimized the location of the dissembler at the time he makes

deceptive statement

for

substantially" analysis.

purposes of

"Rather," we

factor is the locus of the

the "primarily

said, "the

and

critical

recipient of the deception at the

-91-

time of the reliance."

Clinton Hosp., 907 F.2d

_____________

at 1265-66.

We likewise gave weight to the situs of the loss.

Viewing

the

conduct

misrepresentations in the

same result

as that

surrounding

the

Id.
___

fraudulent

Placing Information points

reached in Bushkin.
_______

to the

As in

that case,

here attempting

to recover

non-Massachusetts

residents are

for the allegedly

unfair trade practices of a corporation in

Massachusetts, under a

in-state frauds.

statute designed

to protect

against

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

originated

was

intended

in particular,

the Placing Information

in Massachusetts, but the

to

be,

and

was,

Placing Information

circulated

abroad,

and

plaintiffs

received and acted upon

the plaintiffs' losses was

with

respect

inducement,

under

11 of

to

also in Europe.

plaintiffs'

the defendants

it there.

claims

of

have met their

The situs of

It

follows that

fraud

the

statutory burden

proving that their fraudulent conduct

occur primarily and substantially

in

in Massachusetts.

did not

On this

point, we reverse the district court's ruling that defendants

are liable under Mass. Gen. L. ch. 93A,

This does

not, however, end

2.

the matter.

In this

opinion, we have sustained the district court's finding

of a

breach of contract stemming from defendants' violation of its

-92-

contractual obligation

ceded to

further

the SANS

to retain 10% of

Treaties.

consideration

on

all system business

We have also

remand,

left open,

contract

claim

possible failure to perform underwriting as promised.

have

left open the possibility,

fraudulent concealment

other conduct

Information,

of the

on remand, of

in

the years

following the

for

And we

a finding of

use of intermediaries

deviating from representations in

for

and of

the Placing

initial Treaties.

The

above activities,

support --

finding

of

occurring

within Massachusetts.

Placing

conceivably

this time --

primarily

Accordingly,

and

while we

the inducement based upon representations

Information

substantially within

foreclose

them, might

no position at

violations

hold that fraud in

the

some of

although we take

substantially

in

or

did not

Massachusetts, we

liability under

Mass. Gen.

occur

primarily

do not at

L. ch.

different conduct of the type mentioned above.

93A

and

this time

based on

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

Organizations

under the

Racketeer Influenced

Act ("RICO"), 18

U.S.C.

and Corrupt

1961-1968, stating

that,

Title

18,

United States

1961-1968 do not

apply to

Code, Sections
the facts

of

-93-

this

case

on

the

ground

that

the

Plaintiffs have failed to

they

suffered

an

establish that

"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

plaintiff must

to

recover in

"in

defendant's

civil RICO

action,

prove both that the defendant violated one of

the provisions of 18 U.S.C.

injured

his business

violation.

1962 and that the plaintiff was

or

18

property

U.S.C.

by

reason of"

1964(c).

Thus,

the

in

proving a right to recover for a RICO violation premised upon

____________________

34.

No judgment

dismissing the

RICO claims was

the

district court; the only disposition

the above-quoted language in the

and Order of June
judgment

7, 1993.

shall be

set

entered by

of those claims is

district court's Memorandum

See Fed.
___

forth on

R. Civ. P. 58

("Every

separate document.

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

that

to

order

had

dismissing the RICO claims.

included
See Fiore v.
___ _____

Community Mental Health Ctr., 960

_____________________________
Cir.

1992)

(en

banc)

requirement is waived
"The

'separate

document'

entering

that

236 n.10

separate

(1st

document

by filing of timely notice of appeal).

not suffer any prejudice

document

expressly

Washington County
_________________

F.2d 229,

(holding

rule

jurisdiction where a timely appeal

do

language

judgment

does

not

defeat appellate

is filed and the

parties

from the absence

of a separate

on

were

claims

that

clearly

disposed of in an earlier order."

Southworth Mach. Co., Inc.

__________________________

v.

37,

F/V Corey Pride,

_________________

994

F.2d

39

(1st

Cir.

1993)

(citations omitted); see also supra, n.18 (discussing failure

________ _____
of

district

counterclaims).

court

to

expressly

dismiss

defendants'

-94-

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.

to

do.

18 U.S.C.

Even assuming

1962(a), 1964(c).

that they had

This

they failed

been defrauded through

the use of the mails or international wires, see 18 U.S.C.

___

1961(1)(B), that alone is

harmed

additionally

not enough to show that

by NERCO's

use

or

they were

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

The plaintiffs

allegations

activity."

caused by

have simply

in

were

regard

acts themselves").

"repeat[ed] the crux

to

the

pattern

of

of [their]

racketeering

Id.
___

Under

they

the predicate

harmed

1962(b), the

by

reason

plaintiffs had to

of

NERCO's

show that

acquisition

or

maintenance

of control of an enterprise through a pattern of

racketeering activity.

Again,

proved the

underlying RICO

any

beyond

harm

constituted

the

that

even assuming that plaintiffs

violation, they failed

resulting

predicate act.

from

fraud

which

See, e.g., Danielsen

__________ _________

Burnside-Ott Aviation Training Ctr., Inc.,

___________________________________________

-95-

the

to prove

941 F.2d

v.

1220,

1231

(D.C.

Cir.

1991)

'acquisition' injury,

injury'

analogous

required under

1962(b)

("plaintiffs

to the

must

allege

'use or

an

investment

1962(a) to show injury by reason of

violation").

The

plaintiffs claimed that

were harmed by their participation

they

in the SANS treaties, not

by the defendants' acquisition or control of Graham Watson.

As

stated

that

persons."

to

"the

the

1962(c)

three

claim,

Defendants

the district

were

[not]

court

separate

In fact, however, NERCO, First State, and Cameron

& Colby were distinct corporate entities, with separate legal

identities.

The distinction

not, however, decisive

for

between those three entities is

1962(c) purposes.

The statute

requires that the person (i.e., the three defendants) engaged

______

in

racketeering be

distinct

from the

enterprise (in
__________

case, Graham Watson, not a defendant) whose activities

she

seeks

to

conduct

through racketeering.

this

he or

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

RICO

both

the

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,

finding.

Up

on the evidence presented, to

until mid-1980,

Graham Watson

unincorporated division of Cameron & Colby.

make such a

was merely

an

After that time,

although

it

became

separate

wholly-owned

subsidiary

-96-

corporation,

all

of its

employees were

Colby

employees, and

there is

Graham

Watson took

any actions

Cf.
___

Brittingham v.
___________

in fact

no evidence

whatsoever that

independent of

Mobil Corp., 943

___________

Cameron &

F.2d 297,

its parent.

302-303 (3d

Cir. 1991)

"when

(noting that

the

enterprise

distinct,

1962(c)

and

claims may

defendant,

be dismissed

although

facially

are in reality no different from each other").

accordingly

affirm

the district

court's

dismissal

We

of the

plaintiffs' RICO claims.

VIII.

Damages
Damages

The

district

court

circumstances of this case, it

calculate

damages

bargain' method

further

the

postjudgment

sum

interest

of

the

The court

entered

(which

that

"[i]n

the

is not feasible to reasonably

basis

of damages."

proceedings)

$38,118,940.07

plus

on

ruled

judgment

'benefit

accordingly (after

in

the

included prejudgment

and

costs.

of the

This

amount

of

interest),

sum

was

calculated to

be the difference

plaintiff reinsurers less the

the course of

announced

not

is

by the

premiums they received

during

Treaties.

in its Memorandum and

in any

remedy

the SANS

between claims paid

rescind the

district court

Order of June

separate judgment),

to

The

that "the

SANS

Treaties

also

7, 1993 (but

only appropriate

as

a matter

of

equity."

Defendants

complain

on

-97-

appeal

that

plaintiffs

should have been required

"benefit

to prove, and could

of the

bargain"

in

fact suffered

plaintiffs

damages.

no

only recover,

Defendants argue

damage

at all

as

that

"[t]he

results achieved under the SANS Treaties were poor, but

were

better

than

industry

Plaintiffs'

experts,

who

facultative

underwriting,

average

utilized

results

individual

reluctantly

view,

the

"extremely

losses

under

adverse market

the

SANS

conditions

unprecedented loss experiences."

Treaties

low

. . . .

certificate

admitted

operations lost money and were closed down."

they

their

own

In defendants'

were

due

premiums

to

and

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

from establishing

its opinion

damages

excused the

because, for

plaintiffs

plaintiffs to

have

done so,

it

would have

been necessary

to obtain

the financial records of the major direct

reinsurance
financial

companies
records

. . . which

are confidential

and

not accessible to third parties.

We find no

furnish

relief

legal error in the

for fraud

based

reinsurance obligations under the

on

court's decision to

cancelling plaintiffs'

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

-98-

relief.

N.E.2d

See, e.g., Century Indem., 333 Mass. at 504-05, 131

_________ ______________

at 769.

To

the extent

ceded shares in reinsurance

to

join,

and

continued

that these

plaintiffs were

under Treaties they were induced

to

participate

in,

because

of

defendants' fraud, the district

court was authorized,

where

otherwise appropriate, to provide the remedy of retroactively

cancelling

for

the

their

applicable Treaties,

net

losses,

and

reimbursing plaintiffs

absolving

them

from

their

unfulfilled reinsurance obligations thereunder.

In this opinion we

based on the

it

"facultative" representations, but

in respect

Placing

to reliance

Information

"directly"

have reversed the fraud finding

rather

on representations

regarding

than

have upheld

in the

securing nontreaty

through

business

intermediaries.

Thus

cancellation remedy for fraud may still be appropriate

reinsurance

that

fraud.

retroceded to plaintiffs

However,

we

have

which was

remanded

1979

as to

infected by

for

further

consideration

of

whether

including that for fraud,

any

or

all

the

of

limitations,

constitute a bar to the

plaintiffs.

consideration whether,

statutes

We

have

at least in some

also

claims of

remanded

for

cases, the original

fraud was dissipated, or its duration limited to a particular

year or years, by the receipt of knowledge of

the

earlier

Treaty

representations

or other

coupled

with

the falsity of

renewal

conduct indicating acquiescence

-99-

of the

or waiver.

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

upon remand.

If

appropriate for

of the other findings that

there are

instances

where

breach of contract only,

are made

recovery

is

rather than fraud,

the court should determine the proper measure of relief, and,

subject

to

our rulings

herein,

the

recalculate the proper award, if any

district court

shall

is due, on the basis of

its assessment of the law and facts.

IX.

Prejudgment Interest
Prejudgment Interest

The

order

defendants

rescinding

award, not an

the

argue

SANS

that

the

Treaties was

award of damages.

district court's

restitutionary

Thus, they say, the court's

assessment of prejudgment interest at the rate

set

by

Mass.

Gen. L.

ch.

231,

6B,

of 12 percent

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

election

of remedies,

and

argue

thus foregoing

contract

damages

that the

choosing rescission

their

and

plaintiffs

option to

interest

on

pursue

those

made an

express

and restitution,

the remedy

damages.

of

The

defendants contend that prejudgment interest should have been

-100-

applied at the

107,

rate of 6

percent set by

Mass. Gen. L.

ch.

3.

In light of the fact that we are vacating the award

and remanding

this case

to

the district

court, where

any

judgment eventually

resemblance

awarded to either party

to the judgment we vacate

defendants' invitation to

find

it

of

may bear little

today, we decline the

consider this point at length.

interest, however,

that

6C

has been

We

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

rulings on

sustain

the

certain matters;

clearly erroneous

district

court's

findings

reverse others either

or legally incorrect;

and

as being

and identify

still

others that require the

rulings now absent.

the

judgment

district court to make findings

We, therefore, vacate in

awarding

total of

and

its entirety

$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

court's

matter of

consistency,

other directives

not

we

likewise vacate

incorporated in

the

its judgment

purporting to afford relief, such as its equitable rescission

-101-

specific dispositions as follows:

(1)

We

district court's

reverse

as

being

finding of fraud

clearly erroneous

the

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

__________

directly from primary insurers.

based on

remand

they would obtain

However, the

business

claim of fraud

this finding must be given further consideration on

in

light

of

our

direction

to

reconsider

the

defendants' defense

revisit

plaintiff

the

based on the statute

reliance

unable

element

to satisfy

and

its

deny

of limitations; to

recovery

burden of

point; and to

reconsider the possible effects

and knowledge

obtained by any

proof

to

any

on this

of any notice

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)

breach of

We

reverse

contract based

the district

upon the

court's finding

failure to "produce" the

of breach

finding of

supposed non-facultative

character of the retroceded reinsurance.

district

court's

We also reverse the

of contract

based upon

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.

-102-

the district court's breach of contract

finding based on the

promise that Graham Watson would "underwrite"

reinsurance, except we leave open

the retroceded

for the court to consider,

on

remand,

whether

the

underwriting might

entirely inadequate as to violate

have

that provision.

been

so

We affirm

the district court's finding of breach of contract based upon

the

violation of

Warranty No.

2 in

further findings on the effect of the

the slips,

subject to

statute of limitations

and any other bar to recovery.

(4)

specific

We

direct

findings

and

the

court to

rulings

limitations defenses and to

as

consider

to

the

and

make

statutes

find the dates that each

of

of the

relevant statutes began to run as to each of the plaintiffs.

(5) We

amount

other

direct the court to

recalculate the proper

of relief and prejudgment interest

determinations

on

remand

are

to the extent its

consistent

awarding of relief to any of the plaintiffs.

with

the

We have upheld,

as a

remedy, the cancellation of any reinsurance infected by

fraudulent representations

the

determination of any

and leave to the

court on remand

other theories of

relief that may

become appropriate.

(6) We reverse the court's allowance of plaintiffs'

claims under Mass. Gen. L.

ch. 93A,

based on fraud in the inducement.

district

court's further

2 insofar as

However, we remand for the

consideration

-103-

they are

whether

any

other

conduct,

as

mentioned

in

this opinion,

might

support

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.
_______

-104-