Contract Formation

STATUTORY REQUIREMENT OF NOTICE TO INSURED OF NONRENEWAL IS NOT EXCUSED IF THE INSURED OBTAINS REPLACEMENT COVERAGE

March 23, 2010 by Carlton Fields

In an unpublished disposition, a California appellate court reversed a summary judgment order as to a reinsured’s claims for breach of contract and insurance bad faith where the policy period was extended by statute (California Insurance Code section 678.1) because the underlying insured was not provided with the requisite notice of nonrenewal, but affirmed the summary judgment order as to the reinsured’s negligence claim. The defendants reinsured plaintiff Norcal Mutual Insurance Company for any liability Norcal might incur under a managed health care professional liability policy for the initial policy period of August 1999 through August 2000. Although the claim by Norcal’s insured that created Norcal’s liability fell outside the period of the 1999/2000 policy, Norcal contended the policy period was extended until June 2001 because its insured was not provided with notice of nonrenewal of the 1999/2000 policy, as required by section 678.1.

On appeal, the court held that notice of nonrenewal was not excused by a statutory provision that notice is not required where the insured “has obtained replacement coverage or has agreed, in writing, within 60 days of the termination of the policy, to obtain that coverage.” Norcal’s insured agreed in writing to obtain replacement coverage, but section 678.1 “taken as a whole” compelled the conclusion that a “replacement” policy “is not synonymous with renewal of existing coverage.” The court found that “replacement” coverage referred to in one subsection of the statute means insurance obtained from a different insurer, while renewal of coverage referred to elsewhere in the same statute means coverage obtained from the same insurer for a subsequent policy period. The court, however, rejected Norcal’s negligence claim because section 678.1 “clearly” places the duty to provide notice of nonrenewal on the insurer, not a reinsurer. Norcal Mutual Insurance Co. v. Certain Underwriters at Lloyd’s of London, No. B213122 (Cal. Ct. App. Feb. 22, 2010).

This post written by Brian Perryman.

ANTECEDENT DEBT IS “FAIR CONSIDERATION” FOR REINSURANCE CONTRACT

July 22, 2009 by Carlton Fields

The Rehabilitator of Frontier Insurance Company challenged a New York federal court to reconsider summary judgment rulings that dismissed claims against Everest Reinsurance Company. The Rehabilitator’s claims against Everest sounded in fraudulent conveyance on the theory that payments made to Everest under a reinsurance contract it issued to Frontier were not based on fair consideration because no risk was transferred under the contract. The Court had previously ruled that there was fair consideration due to an antecedent debt at the time the parties entered into the reinsurance contract. The Court allowed reconsideration, but upon review maintained its prior ruling. Mills v. Everest, Case No. 05-8928 (USDC S.D.N.Y. June 8, 2009). Further background to supplement the brief opinion is found in a related Memorandum of Law.

This post written by John Pitblado.

NINTH CIRCUIT APPLIES OREGON LAW TO FIND CLASS ACTION WAIVER UNENFORCEABLE

May 1, 2009 by Carlton Fields

The Ninth Circuit recently concluded that a district court improperly dismissed a consumer class action pursuant to an arbitration agreement between a wireless provider and its customers, holding that the agreement’s class action waiver was unconscionable and therefore unenforceable under Oregon law. The court found that the waiver was substantively unconscionable for two reasons. First, the waiver was unilateral in effect: “It can hardly be imagined that T-Mobile or its suppliers would ever want or need to bring a class action against T-Mobile’s customers.” Second, the class action waiver created a disincentive to litigate since the actual damges alleged were below $700 a year. Given the small size of the individual claims covered by the agreement, the waiver made it impracticable for customers to vindicate their rights in court. The court also found that under the arbitration agreement the class action waiver was not severable since the agreement itself included a provision prohibiting severance of the waiver. Chalk v. T-Mobile USA, Inc., No. 06-35909 (9th Cir. Mar. 27, 2009).

This post written by Brian Perryman.

UK COURT OF APPEALS DISMISSES REINSURER’S APPEAL OF DECISION FINDING CREATION OF REINSURANCE CONTRACT PRIOR TO CASUALTY

January 27, 2009 by Carlton Fields

We previously posted on November 12, 2008 about a British court’s decision holding that a reinsurance contract was created prior to a putatively covered ocean-going casualty, based on certain written exchanges between the parties reflecting their negotiations. The reinsurer, Aigaion Insurance Company S.A. (“Aigaion”), appealed, arguing that the lower court’s decision was unclear, and that even if a contract had been formed, it contained a warranty provision allowing the policy to lapse without notice in the case of non-payment of premium (the parties did not dispute that the reinsured, Allianz Insurance Company of Egypt, forwarded timely premium payment to an intermediary broker, who failed to then forward payment to Aigaion).

The Court of Appeals disagreed with Aigaion, finding no basis for its appeal, which it dismissed. The Court found that whether or not the parties negotiated the warranty provision Aigaion sought, it was nonetheless not explicitly included in the terms of the agreement that the lower court had found the parties made by a date certain which, at the latest, preceded the casualty. Allianz Insurance Company of Egypt v. Aigaion Insurance Company, S.A. [2008] EWCA Civ 1455 (Court of Appeals, Civ. Div. Dec. 19, 2008).

This post written by John Pitblado.

U.K. COURT CONSTRUES PARTIES’ INTENT IN CREATING REINSURANCE CONTRACT AGAINST REINSURER

November 12, 2008 by Carlton Fields

Allianz Insurance Company of Egypt (“Allianz”) sued its reinsurer, Aigaion Insurance Company S.A. (“Aigaion”), for US $675,000 arising from the constructive loss of the oceangoing vessel “Ocean Dirk,” one of several scheduled ships under the reinsurance contract. Aigaion denied liability for the claim on the theory that the parties never arrived at consensus over the terms of the reinsurance contract, and thus it was null and void ab initio.

Allianz countered with evidence of communications by and between Allianz, Aigaion, and the intermediary broker who placed the risk, Chedid & Associates Ltd. (“Chedid”). The court held that these communications, consisting mainly of e-mail correspondence, indicated that the parties clearly intended for Aigaion to be bound as Allianz’s reinsurer for certain risks covered by Allianz’s underlying insurance. Aigaion took the position that the communications reflected a continued intent on the part of both parties to negotiate certain terms of the contract, even after the reinsurance contract had issued, but that the parties failed to reach consensus sufficient to create a contract. The court found in Allianz’s favor, noting that the communications reflected a resort to certain shorthand understood in the industry, and that Aigaion clearly communicated its intent to be bound by those terms with the same understanding as had Allianz, at the latest by a date certain which may have post-dated the contract, but nonetheless pre-dated the loss. The Court entered judgment in favor of Allianz for the net premium due. Allianz Insurance Company of Egypt v. Aigaion Insurance Company S.A. [2008] EWHC 1127 (Queen’s Bench Div. Comm. June 2, 2008).

This post written by John Pitblado.