Contract Interpretation

Second Circuit Rejects Claims Against Insurer for Settlement Using Policy Funds

March 5, 2019 by Carlton Fields

Three plaintiffs—a subcontractor (HBI), an affiliated entity (Keller Foundations), and their parent (Keller Group)—brought a claim against Zurich, which had issued a liability policy (the Policy) to the Keller Foundations for which HBI was an additional insured. A general contractor (Diaz) sued HBI in one lawsuit and Zurich in another, claiming that Zurich should defend it in the first lawsuit because it was an additional insured under the Policy. Zurich settled the lawsuit by paying Diaz $450,000. Zurich then sought and received reimbursement from Capital, a captive reinsurer owned by plaintiff Keller Group. Claiming that Zurich’s payment to Diaz was not covered by the Policy, plaintiff brought causes of action for breach of contract, breach of the duty of good faith, and declaratory relief. Zurich filed a motion to dismiss all claims, which the trial court granted, and plaintiffs appealed.

The Second Circuit affirmed the dismissal. First, the court found that plaintiffs had not plausibly alleged a breach of the Policy, as Zurich had broad discretion to settle claims and plaintiffs were not directly harmed by Zurich’s decision to settle the claim, even if they had to reimburse Capital for its reimbursement of Zurich. As the court explained, plaintiffs’ payments to Capital did not relate to Zurich’s duties under the Policy, but instead “flow from Capital’s choice to reimburse Zurich under the Reinsurance Agreement, as well as whatever arrangements exist for inter-company reimbursements between Keller Group and its subsidiaries.” Any complaint regarding Capital’s obligation to reimburse Zurich was Capitals’ to make, not Plaintiffs’.

Second, as to the claim for breach of the duty of good faith, the court found that Zurich’s decision to settle the Diaz claim was not arbitrary and unreasonable, and again emphasized that plaintiffs had not plausibly alleged that this decision deprived them of the benefits of the Policy. Finally, the court rejected the request for declaratory relief, finding that plaintiffs had failed to plead any facts demonstrating even a possibility that Zurich’s payment to Diaz would cause the Policy’s $5 million cap to be exhausted and thus cause plaintiffs to lose the benefit of the Policy.

Keller Foundations, LLC et. al v. Zurich American Insurance Company, 18-1280-cv (2d Cir. Dec. 6, 2018)

Applied Underwriters Defeats Class Certification in Long-Running Worker’s Compensation Reinsurance Dispute

February 27, 2019 by Benjamin Stearns

Applied Underwriters beat back an attempt by plaintiffs to certify a class in their lawsuit related to Applied Underwriters’ “EquityComp” and “SolutionOne” workers’ compensation programs. We previously reported on this case, which involves a disputed Reinsurance Participation Agreement used to control worker’s compensation rates, on July 21, 2016, December 1, 2016, November 15, 2017, January 31, 2018, and August 30, 2018. The court has now determined that plaintiffs failed to demonstrate that a class action would be “superior” to individual actions, as required by four factors under Federal Rule 23(b)(3), and denied class certification.

In determining that the first factor of the class members’ interest in individually controlling the litigation, weighed against certification, the court noted that the individual damages alleged by claimants in this action were large and there was no evidence that any class member would be unable to bring an action absent class certification. The second factor of the extent and nature of any litigation concerning the controversy already begun by class members, weighed “strongly” against certification, as more than “100 separate arbitrations, lawsuits, and California Department Insurance appeals involving 67 California participants in the program” were already pending. On that basis, the court determined that a substantial number of putative class members had an interest in controlling their own litigation and that “realistic alternatives” to a class action exist.

The third factor of the desirability of concentrating the litigation in the particular forum, weighed “slightly” against certification, where the remaining claims were all brought under California law (which weighed in favor of certification), but the many potential claimants were “located throughout the state,” including some that were “far from this court.” Additionally, certifying the class would automatically select federal court as the preferred forum for all class members even though the previously filed actions discussed above had demonstrated otherwise.

Finally, the court determined the “manageability” factor of the likely difficulties in managing a class action, also weighed against certification, where the court would have to determine the extent of overlap between the class action and the many previously filed actions, as well as how to properly formulate a class notice that accounts for the potentially overlapping and differing claims brought in the various actions and the class action. “These difficulties would only be magnified where many similar actions have already concluded and others have progressed substantially.”

Shasta Linen Supply, Inc. v. Applied Underwriters, Inc., Case No. 2:16-cv-1222-WBS-AC (USDC E.D. Cal. Jan. 29, 2019).

DC District Court Permits Vantage Commodities To File Amended Complaint And Denies Reinsurer Defendants’ Motion For Interlocutory Appeal

February 7, 2019 by Benjamin Stearns

The District Court for the District of Columbia issued an order denying a motion to reconsider its prior order allowing Vantage Commodities to file an amended complaint and denying the reinsurer defendants’ motion for interlocutory appeal. In the underlying decision, the court determined that, while Vantage had not stated a claim for breach of contract because it had failed to allege facts showing a contractual relationship, the complaint adequately stated claims for breach of implied contract, promissory estoppel, and unjust enrichment.

The court found that Vantage had alleged enough facts to survive a motion to dismiss, noting that the court was required to draw all reasonable inferences in Vantage’s favor at the motion to dismiss stage. That determination was limited to the specific allegations in Vantage’s amended complaint, and did not “create new law.”

The court refused to exercise its discretion to allow an interlocutory appeal of its non-final order, finding that the questions of law the reinsurers presented were “tied up in the specific facts of this case.” Furthermore, while the reinsurers argued that the court’s prior order “goes against the weight of authority in reinsurance law that an insured cannot maintain a direct action against a reinsurer,” they failed to cite any specific case law showing that the court’s order was in conflict with other authorities. The court concluded that the reinsurer defendants did not meet their burden of showing that the circumstances of this case justified a departure from the basic policy of postponing appellate review until after the entry of final judgment. For more information regarding this case, see our prior posts here and here.

Vantage Commodities Financial Services I, LLC v. Assured Risk Transfer PCC, LLC, Case No. 1:17-CV-01451 (USDC D.D.C. Jan. 17, 2019).

Fourth Circuit Holds Reinsurance Participation Agreement Is Insurance Contract Under Virginia Statute, Effectively Voiding Its Arbitration Clause

February 4, 2019 by Carlton Fields

On September 14, 2017, we reported on the Fourth Circuit’s reversal of a district court’s denial of a motion to compel arbitration, which found that a party was judicially estopped from arguing that a Reinsurance Participation Agreement (“RPA”) was not an insurance contract. (If the RPA is an insurance contract, its arbitration provision becomes invalid under state law.) Subsequent to that ruling, on remand, the district court held that the RPA is indeed an insurance contract and that the RPA’s arbitration clause is void.

The Fourth Circuit has now affirmed the district court. The circuit court explained that the RPA was part of a workers’ compensation insurance program that Appellee Minnieland Private Day School purchased from Appellant Applied Underwriters Captive Risk Assurance Company, Inc. (AUCRA) and its affiliated entities. Under this “EquityComp” program, the pooled companies provide workers’ compensation insurance coverage to employers and also mutually reinsure each other’s insurance business. A layer of reinsurance is also provided by AUCRA. AUCRA in turn enters into RPAs with EquityComp customers, under the terms of which each customer pays into a segregated “cell” or account that is then used to fund AUCRA’s liabilities. In this fashion, EquityComp customers participate in underwriting the risk of their own workers’ compensation insurance policies. Minneland sued AUCRA alleging that AUCRA was not authorized or licensed to act as an insurance company under Virginia law; that the RPA was an “insurance contract” and not a “reinsurance” agreement; and that AUCRA misrepresented the EquityComp program, and the RPA specifically, to circumvent Virginia insurance and workers’ compensation laws.

In affirming the denial of arbitration, the Fourth Circuit rejected AUCRA’s argument that the RPA was a standalone contract. Instead, the panel determined that the RPA was but one component of an integrated insurance sale because the documents, including the RPA, were intended to provide Minnieland with workers’ compensation insurance coverage.

Minnieland Private Day School v. Applied Underwriters Captive Risk Assurance Co. Inc., Case No. 17-2385 (4th Cir. Jan. 14, 2019).

English High Court Refuses to Set Aside an Order for Enforcement of an International Arbitration Award

January 9, 2019 by Jeanne Kohler

This case relates to a dispute between Eastern European Engineering Ltd. (“EEEL”) and Vijay Construction (Proprietary) Ltd. (“VCL”), both of which are incorporated in the Seychelles, arising out of the construction of a hotel resort and spa. In 2011, the parties had entered into six materially identical contracts. Disputes arose and EEEL eventually terminated the contracts. EEEL referred the disputes to an International Chamber of Commerce (“ICC”) arbitration seated in Paris. A sole arbitrator was appointed, who issued an award in November 2014 in EEEL’s favor (the “Award”).

VCL challenged the Award in the French courts on three grounds. The French court dismissed VCL’s challenge. Although VCL initially appealed that decision, it did not purse the appeal and it was subsequently dismissed in May 2017. Concurrently, in January 2015, VCL also initiated proceedings in the Seychelles, seeking to set aside the Award on essentially the same grounds as those on which the challenges were based in the French proceedings. In April 2017, the Seychellois court dismissed all of VCL’s challenges and held that the Award was enforceable. VCL, however, successfully appealed that decision because, under Seychellois law, there is no power to order enforcement on the basis that the New York Convention had been previously repudiated by the Seychelles. The merits of the substantive grounds of the lower court’s decision were not considered in the appeal.

In August 2015, EEEL successfully obtained an order from the English High Court to enforce the Award in England and Wales and to enter judgment against VCL (the “August 2015 Order”). In October 2015, VCL applied under section 103 of the Arbitration Act 1996 to set aside the August 2015 Order. That application was stayed while the French and the Seychellois proceedings were pending. EEEL argued that VCL’s application should be denied because of issue estoppel and public policy on finality. As to issue estoppel, EEEL argued that the conditions were satisfied because the decision of the French court was a final merits decision in a court of competent jurisdiction between the same parties.

The English High Court denied VCL’s application to set aside the August 15 Order. First, the English court agreed that, in relation to VCL’s challenge based on jurisdiction, VCL was estopped as VCL’s argument in the English proceeding appeared to be exactly the same as that which was made in the French proceeding. As to VCL’s challenge on the ground of procedural unfairness, the court found that VCL’s argument was “slightly different” in the English proceeding, and thus the court considered the merits of the challenges. In considering each of VCL’s challenges, the court found that they failed. Thus, the English court did not have to reach the question of public policy on finality. It, however, noted that it would “have concluded that the balance came down in favor of upholding the public policy on finality,” explaining that the facts here, where VCL had sought to raise substantially the same challenges to the Award in two other courts, one of which had a full evidentiary hearing, “are circumstances which would weigh very heavily against allowing VCL a third challenge.”

Eastern European Engineering Ltd. v. Vijay Construction (Proprietary) Ltd., [2018] EWHC 2713 (Comm) (Oct. 11, 2018).

This post written by Jeanne Kohler.

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