Contract Interpretation

Federal Court in Puerto Rico Voids Marine Insurance Policy Based Upon Misrepresentation in Insurance Application

September 5, 2018 by John Pitblado

QBE Seguros brought a successful action declaring a marine insurance policy was void ab initio under the doctrine of uberrimae fidei and the breach of the warranty of truthfulness in the application for insurance.

In Morales’ application for insurance, he did not include the fact that he had previously grounded a 40’ yacht and listed only two of the seven vessels that he had owned and operated when asked. Following an endorsement, Morales held hull insurance for a vessel named Making Waves, which sustained damage as a result of a fire. Thereafter, QBE rescinded the policy.

The Court first looked at uberrimae fidei, or the duty of utmost good faith, which requires the insurer to show that the insured misrepresented a material fact. Having determined Morales misrepresented his prior boating history and prior loss history on his application, the Court looked at whether such misrepresentation was material. “A fact is material if it can possibly influence the mind of a prudent and intelligent insurer in determining whether it will accept the risk.” QBE testified that prior loss history is an important factor to take into consideration when evaluating the risk posed by issuing a particular policy. The Court determined this information was material: “it is entirely logical that an insured’s loss history would affect their premiums and whether an insurance company would want to accept the risk of issuing them a policy.”

The Court then looked at whether the contract between the parties included a warranty of truthfulness, and if so, the insured’s misrepresentation of fact in that contract will also excuse the insurer from the policy contract. The insurance application stated the information provided therein is warranted by the applicant “to be true and correct in all respects.” The Court found the “warranty of truthfulness was material to the risk assumed by QBE in issuing the policy.” The Court rejected Morales’ affirmative defenses, finding that “Morales breached the warranty of truthfulness in the QBE Application and policy by failing to disclose his prior loss history and his prior boating experiences. His breach gives QBE the right to void the policy.”

The Court denied Morales’ counterclaims for breach of contract and consequential damages due to QBE’s bad-faith adjustment.

QBE Seguros v. Morales-Vázquez, No. 15-2091 (USDC D.P.R. Aug 7, 2018)

This post written by Nora A. Valenza-Frost.

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Special Focus: Follow the Fortunes Doctrine

September 4, 2018 by John Pitblado

The follow the fortunes (or follow the settlements) doctrine has been an important part of many reinsurance relationships. This Special Focus article focuses on divergent case law as to whether the doctrine is purely a matter of contract, or whether it should be implied into every reinsurance contract, whether or not the contract refers to the doctrine.

This post written by Rollie Goss.
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Florida Federal Court Dismisses Reinsurer’s Agent From Breach of Contract Lawsuit

August 14, 2018 by John Pitblado

In this case, the ceding company, VIP Universal Medical Insurance Group Ltd. (“VIP”), brought an action in Florida federal court against its reinsurer, BF&M Life Insurance Company Ltd. (“BF&M”), and International Reinsurance Managers LLC (“IRM”), BF&M’s agent, alleging breach of a reinsurance contract, in which BF&M reinsured VIP for medical claims in excess of $200,000. It was alleged that BF&M refused to pay a claim for $139,000 and that IRM had “directed the non-payment” of such claim. IRM moved to dismiss, arguing that it cannot be held liable for breach of contract, where it is not party to a contract.

The Florida federal court agreed with IRM, noting that under Florida law, “an agent for a disclosed insurer is not liable to the insured on the insurance contract.” The court noted that even taking the allegations — that IRM acted as agent and “directed” the non-payment of the claim — as true, they do not state a claim for breach of contract against IRM. The court then held that IRM, as agent to the reinsurer, was not a proper party in VIP’s breach of contract claim because IRM was not a party to the reinsurance contract at issue. Thus, IRM’s motion to dismiss was granted.

VIP Universal Medical Insurance Group Ltd. v. BF&M Life Insurance Company Ltd., et al., No. 17-24633 (USDC S.D. Fla. July 18, 2018).

This post written by Jeanne Kohler.

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New York’s First Department Upholds Fraud Claim Involving Alleged Sham Reinsurance Scheme

July 2, 2018 by John Pitblado

In an action alleging claims for fraud and conspiracy to commit fraud (among others), a New York appellate court upheld the trial court’s conclusion that the “defendants are subject to jurisdiction under New York’s long-arm statute because they were part of a conspiracy that involved the commission of tortious acts in New York,” including agreements between defendants relating to Plaintiff.

The conspiracy’s overt acts included defendant Weston Capital Management’s “approval of a Gerova proxy statement on which they are listed and which seeks approval of the sham acquisition of a reinsurance company, their receipt of ‘hush money’ to ignore certain red flags and Gerova, and their failure to correct misrepresentations or disclose material information to the public.” The Court also found that, even if the individual defendants – directors of Gerova – did not themselves include misrepresentations in the public filings, by their positions “one can rationally infer… they knew of the falsity of the facts therein, did not disclose material information, and allowed the misrepresentations to be publicly stated.”

Plaintiff, the alleged target of the conspiracy, had standing to bring the fraud claim, as it sought recovery for damages for the theft of its assets.

Wimbledon Financing Master Fund, Ltd. v. Weston Capital Mgmt. LLC, et al., No. 653468 (N.Y. App. Div. April 26, 2018)

This post written by Nora A. Valenza-Frost.

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Court Rejects Defendant’s Objections to Subpoenas as Untimely and Baseless in Fraudulent Transfer Default Judgment Spat

June 27, 2018 by Rob DiUbaldo

In a dispute previously reported on this blog, the Southern District of California overruled a defendant’s objections to subpoenas served on a former expert witness in defendant’s unrelated divorce case and to a bank for account information for a non-party corporate entity.

Regarding the former expert’s subpoenas, the court held that defendant waived her challenges. Plaintiff had served the subpoenas duces tecum to the defendant’s former expert witness in February 2018, with which the witness complied and produced hundreds of thousands of documents in March 2018. Defendant filed her objections in April 2018.

First, the court noted the difference under the Federal Rules between objections permitted by the non-party subject of the subpoena and motions to quash by parties who are not the subject of the subpoena. The defendant was not the subject of the subpoenas and thus could move to quash the subpoena. However, even interpreting defendant’s objections as a motion to quash, the court held they were untimely because they were filed a month after the subpoenas’ compliance date and the date on which the subject produced the documents. Additionally, the court held that even if defendant was technically able to object to the subpoenas, such objections were untimely filed after the statutory 14-day objection period.

The court next found there were no unusual circumstances or good cause to justify the untimeliness of defendant’s objections. Although defendant asserted a work product privilege regarding her former expert’s documents, that privilege was waived because the former expert was a testifying expert in her divorce case whose work is not protected by the privilege (compared to a consulting expert’s work). Defendant also failed to provide any explanation for her significant delay in filing objections.

Lastly, the court concluded that defendant lacked standing to quash a third-party subpoena for the former expert’s deposition testimony. Because it had already rejected defendant’s privilege claim, it found only the non-party witness could move to quash the subpoena prior to the deposition and defendant thus lacked standing to challenge the deposition.

Regarding the bank subpoena, the court overruled defendant’s objection to the subpoena pertaining to the non-party corporate entity’s account on relevance grounds. Although the corporate entity was an “uninvolved corporation,” newly-discovered emails indicated defendant created the corporate entity specifically to shield money from judgment creditors, making them highly relevant.

Odyssey Reinsurance Co. v. Nagby, Case No. 16-3038 (S.D. Cal. Apr. 26, 2018).

This post written by Thaddeus Ewald .

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