Princeton Insurance Company v. Converium Reinsurance North America Inc

The Honorable A. Wallace Tashima, Senior United States Circuit Judge,*
United States Court of Appeals for the Ninth Circuit, sitting by designation.
NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 08-2136
PRINCETON INSURANCE COMPANY,
v.
CONVERIUM REINSURANCE (NORTH AMERICA) INC.,
Appellant
On Appeal from the United States District Court
for the District of New Jersey
(D.C. No. 06-cv-00599)
District Judge: Honorable Mary L. Cooper
Argued March 12, 2009
Before: Fuentes, Chagares, Tashima, Circuit Judges*
(Filed: September 14, 2009)
OPINION
Thomas S. Novak (Argued)
Joshua N. Howley
Sills Cummis & Gross P.C.
One Riverfront Plaza
Newark, NJ 07102

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Counsel for Appellant
William E. McGrath, Jr. (Argued)
Smith, Stratton, Wise, Heher & Brennan, LLP
2 Research Way
Princeton, NJ 08540
Counsel for Appellee
TASHIMA, Circuit Judge:
Defendant-Appellant Converium Reinsurance (North America), Inc.
(“Converium”) appeals the District Court’s grant of summary judgment in favor of
Plaintiff-Appellee Princeton Insurance Co. (“Princeton”). The District Court ruled that
Converium was liable for $1.5 million, plus $207,000 interest, under the terms of its
workers’ compensation and employers’ liability (“EL”) reinsurance treaty with Princeton.
We will vacate the judgment of the District Court and remand.
I.
Because we write for the parties, we recite only those facts necessary to our
analysis of the issue presented on appeal.
Princeton and Converium signed a contract (the “Reinsurance Treaty” or the
“Treaty”) in 1995, according to which Converium agreed to provide reinsurance to
Princeton on Princeton’s workers’ compensation insurance policies. The contract was
drafted by First Reinsurance Intermediaries Corp. (“First Re”), which acted as an agent of
Princeton.
In the Treaty, Converium agreed that it would reimburse Princeton’s workers’

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compensation and EL claims on an excess loss basis. If a claim exceeded $1 million,
Converium would reimburse Princeton’s additional costs, up to a maximum liability of
$1.5 million. For example, if an insured party made a claim to Princeton for $500,000,
Converium would owe nothing because the liability would not exceed the $1 million
threshold. If an insured party made a claim for $2.5 million or more, Converium would
pay Princeton the maximum $1.5 million provided under the Treaty. Most important for
the case at bench, payments under the treaty were “subject to,” among other provisions,
“warranties of ARTICLE V.” Article V included four warranties, one of which read as
follows: “[Princeton] warrants that the maximum Employers’ Liability limits are as
follows, or so deemed: i. Bodily Injury by Accident–$100,000 each accident . . . .” The
$100,000 limit was subsequently increased to $500,000. Initially, the Treaty covered only
policies written in New Jersey, but it was later expanded to include other states, including
New York, which was added in March, 1998.
In August, 1998, Princeton issued an insurance policy to 1st Choice Metal & Steel
Co., Inc. (“1st Choice Metal”). The policy included a $100,000 limit for EL claims, but
unbeknownst to Princeton, this limit was unenforceable under New York law. In
September, 1998, Xing Zhang, the president and an employee of 1st Choice Metal,
suffered a catastrophic injury when he fell while working on the roof of a building in
Brooklyn. He filed a claim for workers’ compensation under his policy with Princeton,
and he also sued the owner of the house for damages in New York state court. The owner

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of the house filed a third-party complaint against 1st Choice Metal for indemnification.
In most circumstances, the workers’ compensation claim would preclude Zhang from
filing an additional suit, but the state court ruled that because Zhang may have been
“gravely injured” while working on a multifamily dwelling, he was permitted to sue under
New York law. Because this suit was outside the workers’ compensation system,
Princeton was liable under its EL policy, and because the policy was written in New
York, the $100,000 limit on coverage was unenforceable. Princeton settled the case in
2002 for $4.4 million. The settlement provided that it would “fully and finally dispose of
[Zhang’s] workers’ compensation claim, as well as the matter pending before the Court.”
The settlement did not require that Zhang refrain from filing future workers’
compensation claims, but provided that any subsequent workers’ compensation claim
would be “subject to a credit in an amount equal to the net recovery from this settlement.”
Presumably, if Zhang were awarded workers’ compensation benefits in excess of the
settlement amount, he would be able to recover additional money from Princeton in the
excess amount. The lawyers who recommended this form of settlement regarded the
possibility of future workers’ compensation payments to Zhang as remote: they told
Princeton that, with this settlement, “further liability before the Workers’ Compensation
Board is terminated.”
Princeton filed a claim with Converium, which Converium denied twice – in
September, 2003, and again in August, 2004. Converium cited the warranty provision of

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the Treaty and argued that it was responsible for only $500,000 in EL coverage. Up to
that point, Zhang had recovered less than $300,000 in workers’ compensation benefits.
Because Converium was liable only for claims in excess of $1 million, it claimed that it
did not owe Princeton anything under the treaty. Princeton disagreed and sued in New
Jersey state court. Converium removed the case to federal court and filed a counterclaim,
asking for a declaratory judgment that it was free of liability to Princeton. Both parties
moved for summary judgment. The district court granted Princeton’s motion, and
Converium appealed.
II.
The District Court had jurisdiction pursuant to 28 U.S.C. § 1332, and we have
jurisdiction pursuant to 28 U.S.C. § 1291. We review the District Court’s grant of
summary judgment de novo, applying the same standard that the District Court used.
Lawrence v. City of Philadelphia, 527 F.3d 299, 310 (3d Cir. 2008). That is, we view the
evidence in the light most favorable to the party opposing summary judgment and draw
all justifiable, reasonable inferences in its favor. Id. We will affirm if “the pleadings, the
discovery and disclosure materials on file, and any affidavits show that there is no
genuine issue as to any material fact and that [Princeton] is entitled to judgment as a
matter of law.” Fed. R. Civ. P. 56(c). The same standard applies when there are cross-
motions for summary judgment. Lawrence, 527 F.3d at 310.
III.

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A.
The first question we must address is choice of law. The case was filed in New
Jersey, but it involves conduct in both New York and New Jersey, and the Treaty does not
include a choice-of-law provision. The District Court applied New Jersey law because it
saw no difference affecting the outcome of the case whether New York or New Jersey
law applied. See Lebegern v. Forman, 471 F.3d 424, 428 (3d Cir. 2006) (noting that
under New Jersey law, if the outcome of a case would be the same under New Jersey law
and that of another state, New Jersey law applies).
We agree with the District Court on this point. Both New York and New Jersey
apply the same principles of contract law relevant to this case. In both states, whether a
contract is ambiguous is a question of law. Grow Co. v. Chokshi, 959 A.2d 252, 272
(N.J. Super. Ct. App. Div. 2008); Kass v. Kass, 696 N.E.2d 174, 180 (N.Y. 1998). Only
if a court determines that a contract provision is ambiguous – that is, that it is subject to at
least two reasonable interpretations – should the issue be left to a jury. Bedrock Founds.,
Inc. v. George H. Brewster & Son, Inc., 155 A.2d 536, 541 (N.J. 1959); State v. Home
Indem. Co., 486 N.E.2d 827, 829 (N.Y. 1985).
There is one difference between New Jersey and New York law relevant to this
case, but it ultimately has no effect on our decision. Under New York law, “[a]mbiguity
is determined by looking within the four corners of the document, not to outside sources.”
Kass, 696 N.E.2d at 180. A court should not consider the meaning of contract terms in

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isolation, but rather in the context of the document as a whole and the circumstances in
which it was executed, attempting to understand the parties’ intentions as expressed in the
document. Id. at 180-81. New Jersey law appears to take a somewhat broader view.
Extrinsic facts may be considered, albeit “only for the purpose of interpreting the writing
– not for the purpose of modifying or enlarging or curtailing its terms, but to aid in
determining the meaning of what has been said.” Atl. N. Airlines v. Schwimmer, 96 A.2d
652, 656 (N.J. 1953). Because we conclude that the contract is ambiguous on its face,
and that extrinsic evidence does not unequivocally resolve the ambiguity, this distinction
is not determinative.
B.
The central issue in this case is whether the warranty provision in the Treaty limits
Converium’s liability for EL claims. The District Court held that the contract was
unambiguous and contained no such limitation. The District Court pointed out that the
central contract provision that created liability for Converium occurred in Article III, in
which Converium agreed
to reimburse [Princeton], on an excess of loss basis, for the amount of
ultimate net loss which [Princeton] may pay as a result of losses . . .
covering Workers’ Compensation and Employers’ Liability classes of
business as identified in APPENDIX A, subject to the underwriting criteria
of ARTICLE IV, the underwriting guidelines of APPENDIX B, warranties
of ARTICLE V and exclusions of ARTICLE VI.
The Treaty defined “ultimate net loss” as “the sum actually paid by [Princeton] in
settlement of losses for which it is held liable.” This was in turn limited so that

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Converium “shall not be liable for any loss until [Princeton’s] ultimate net loss in each
occurrence exceeds $1,000,000 and then [Princeton] shall be liable for the amount of
[Princeton’s] ultimate net loss in each occurrence in excess of $1,000,000 but
[Princeton’s] liability shall not exceed $1,500,000 in each occurrence.”
Article V, the portion of the Treaty dealing with warranties, stated that,
“[Princeton] warrants that the maximum Employers’ Liability limits are as follows, or so
deemed: i. Bodily Injury by Accident–$100,000 each accident . . . .” According to the
District Court, the warranty section did not alter the basic analysis under which
Converium was liable for up to $1.5 million for claims paid by Princeton in excess of $1
million. Although Converium’s liability was “subject to . . . [the] warranties of
ARTICLE V,” this meant only that Princeton pledged that it would issue EL insurance
subject to the limits described in the warranties. In the District Court’s view, Princeton
complied with the warranties, offering a policy to 1st Choice Metal with EL coverage
limited (on its face) to $100,000. If the parties had intended to limit Converium’s EL
liability to $500,000 per incident, they would have done so explicitly in the section that
contained the other limitations on Converium’s liability, not in the warranty section. To
construe the warranty section as imposing a limitation on coverage would require denying
the common understanding of the word “warranty.” Therefore, the District Court held,
the contract unambiguously does not limit EL coverage, and Converium was liable for the
full $1.5 million in coverage, plus interest.

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As we previously noted, this limit was subsequently raised to $500,000.1
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The problem with the District Court’s analysis is that it fails to account for the
phrase “or so deemed” in the warranty section. The warranty provision in question states,
“[Princeton] warrants that the maximum Employers Liability limits are as follows, or so
deemed: i. Bodily Injury by Accident–$100,000 each accident . . . .” (emphasis added).1
We follow the parties usage and use the somewhat inelegant term “Deemer Clause,” to
refer to this phrase. Converium proposes that the Deemer Clause, which was included in
the Treaty at Converium’s insistence, means that, if Princeton fails to include an
enforceable limit on liability pursuant to the Treaty, the limit will nevertheless be deemed
to have been included, and the policy will be covered under the Treaty as if the limits
were in place.
Princeton advocates a slightly different interpretation. According to Princeton, the
Deemer Clause comes into effect only if Princeton issues an insurance policy with no
stated limits on EL coverage. In such a case, the policy is covered under the Treaty as if
it included warranty limits, just as Converium suggests. Princeton does not believe the
Deemer Clause is implicated in the current case, however, where the insurance policy at
issue complies on its face with the warranty requirement. The 1st Choice Metal policy
did include a limit on EL coverage – it just so happened that the limit was unenforceable.
On either understanding of the Deemer Clause, the warranty provision cannot be
interpreted as the District Court saw it, solely as a promise or guarantee. In a typical

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warranty, the warrantor agrees to fulfill a promise, and any failure to comply with the
promise would represent a breach of the contract. See BLACK’S LAW DICTIONARY 1725
(9th ed. 2009) (defining “warranty” as a type of promise or representation whose breach
will not be lightly excused: “a warranty is conclusively presumed to be material . . . and . .
. must be strictly complied with”). Under either proposed interpretation of the Deemer
Clause, the warranty in the Treaty functions differently. The consequence of Princeton’s
failure to comply with the warranty is that, at least in some circumstances, Princeton is
deemed to have complied. Effectively, the Deemer Clause redefines the EL limits in
Princeton’s policies in a way that limits Converium’s liability under the Treaty.
The District Court, by viewing the warranty provision solely as a traditional
warranty, effectively rendered the Deemer Clause meaningless. The principle that, in
interpreting a contract, “‘all parts of the writing and every word of it, will, if possible, be
given effect,’” Krosnowski v. Krosnowski, 126 A.2d 182, 188 (N.J. 1956) (quoting 9
WILLISTON ON CONTRACTS § 46 (rev. ed. 1945)); accord Cumberland County
Improvement Auth. v. GSP Recycling Co., 818 A.2d 431, 438 (N.J. Super. Ct. App. Div.
2003), is especially relevant here, where Converium insisted that the Deemer Clause be
inserted into the Treaty that Princeton’s agent had drafted. The District Court erred in
concluding that the warranty clause, because of its label as a warranty, unambiguously did
not limit Converium’s liability under the contract.
C.

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If the warranty section placed some limitation on Converium’s liability to
Princeton, the question remains whether the meaning of the limitation is unambiguously
defined in the Treaty. If so, the case can be decided at the summary judgment stage;
otherwise, we must remand it for trial. See Pennbarr Corp. v. Ins. Co. of N. Am., 976
F.2d 145, 149-50 (3d Cir. 1992); Bedrock Founds., 155 A.2d at 541. Each party contends
that its interpretation is the only reasonable one, and that summary judgment should be
granted to it.
The strongest argument for Converium’s position is common sense. It would be
strange for the parties to have meant to exclude New York policies from a limitation on
EL coverage that applied to every other state in which Princeton wrote insurance policies.
Both parties understood that the Treaty limited EL coverage to $500,000, and they
presumably priced the coverage accordingly. If Princeton were able to escape the
limitations of the Treaty by writing an insurance policy that conformed with the Treaty
warranties in form but not in substance, the parties’ intentions at the time of signing the
contract would be defeated.
To bolster its argument, Converium turns to evidence of internal communications
in which Princeton employees seem to have acknowledged that a $500,000 limit would
apply. Converium calls these conversations “contemporaneous” with the contract, but in
fact, the earliest cited communication came from 2002, seven years after the Treaty was
signed and four years after it was amended to include New York. Only slightly more

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helpful for Converium is deposition testimony from Paul Curtis, the drafter of the Treaty
on behalf of Princeton’s agent, First Re. Curtis testified that he understood the warranty
provision as establishing a limit on coverage. This testimony is far from conclusive,
however, because it was not given until 12 years after the Treaty was drafted, and Curtis
understandably does not appear to have remembered the details of drafting the Treaty.
Converium further contends that the court should adopt its interpretation because the
Treaty was drafted by Princeton’s agent, and contracts should be interpreted strictly
against the drafter. See City of Orange Twp. v. Empire Mortgage Servs., Inc., 775 A.2d
174, 181 (N.J. Super. Ct. App. Div. 2001). But this argument is undercut by the fact that
the Deemer Clause itself was inserted into the contract at Converium’s insistence.
Princeton’s position depends primarily on the structure of the contract. If the
parties intended to place a blanket limit on Converium’s EL liability, one might have
expected them to include an explicit limit in the portion of the Treaty dealing with
liability limits, rather than to create an oblique limit in the warranty section. It is
plausible that a contract would be structured to require Princeton to do its best to establish
a limit on its EL liability, but to assign to Converium the risk that a good-faith attempt to
establish a limit would be invalidated by operation of law. If the parties had intended to
draw such a distinction, the structure of the Treaty would be a logical way to achieve this
end.
To drive home the point that the Treaty does not directly state what Converium

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believes it does, Princeton produced several other Converium contracts that established
limits on EL coverage more explicitly than the Treaty did. But the lack of parallelism
between these other documents and the Treaty can be explained by the fact that
Converium did not draft the Treaty. Furthermore, at least one of these Converium
contracts defined the limitations on coverage in the warranty section, suggesting that the
Treaty was not unusual in this regard.
The language of the Treaty thus admits of more than one interpretation, and
extrinsic evidence does not provide much help. In short, the contract is ambiguous, and
the District Court should not have granted summary judgment in favor of either party.
See Pennbarr, 976 F.2d at 149-50.
IV.
For the reasons discussed above, the judgment of the District Court will be
vacated, and the case will be remanded for further proceedings consistent with this
opinion. Each party shall bear its own costs on appeal.

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