Contract Interpretation

Following New York High Court’s Answer To Certified Question, Second Circuit Remands Reinsurance Dispute To District Court

June 4, 2018 by Rob DiUbaldo

The Second Circuit vacated and remanded for reconsideration a district court opinion in a dispute concerning the limits available under certain facultative reinsurance certificates after the New York Court of Appeals answered a certified question on that issue. Specifically, the Second Circuit had questioned whether Excess Insurance Co. v. Factory Mutual Insurance Co. imposed a rule of construction or a presumption that the per occurrence liability caps in facultative reinsurance certificates strictly limit the reinsurance coverage regardless of whether the operative language is understood to cover defense costs or other expenses. The N.Y. Court of Appeals answered there is no such rule of construction or presumption, and instead, reinsurance agreements are governed by standard contractual interpretation principles that place utmost importance on the language of the contract. Given that answer, the Second Circuit remanded the case to the district court to interpret, in the first instance, the reinsurance contracts terms as they relate to liability caps.

Global Reinsurance Corp. of Am. v. Century Indemn. Co., No. 15-2164 (2d Cir. May 9, 2018).

This post written by Thaddeus Ewald .

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Ninth Circuit Upholds Denial Of Judgment Creditor’s Request For Rescission Of Quota-Share Reinsurance Agreement

May 30, 2018 by Michael Wolgin

Defendant National Farm Financial Corp. agreed to sell Business Alliance Insurance Co. (BAIC) to PSM Holding Corp. After National Farm walked away from the deal, PSM sued National Farm, BAIC, and BAIC’s president, Larry Chao, in the District Court for the Central District of California alleging breach of contract. A jury found in favor of PSM and awarded it $40 million.

After taking possession of BAIC, PSM and BAIC entered into an intercompany quota share reinsurance agreement (QSA). The district court’s ruling was then reversed on appeal and remanded, and upon remand, the court concluded that the defendants were entitled to specific restitution of the BAIC shares and an accounting of the profits earned while PSM held BAIC, diminished by expenses necessarily incurred in the protection of the property and the payment of taxes and liens. Thereafter, the defendants filed a motion for an award of PSM’s profits totaling $14 million. PSM opposed the motion, arguing that it actually suffered a $1.5 million loss as a result of its temporary possession and control of BAIC and sought to rescind the QSA. The court decided that defendants would receive the return of BAIC’s shares, but that PSM would receive restitution of $1.1 million. The court also held that PSM could not rescind the QSA.

The parties cross-appealed to the Ninth Circuit, which concluded that the district court erred in allowing PSM – the judgment creditor – to recover in restitution. Regarding rescission of the QSA, however, the Ninth Circuit affirmed, agreeing with the district court that the QSA could not be rescinded since it was “an improvement” to BAIC rather than a necessary cost of protecting BAIC. PSM Holding Corp. v. Nat’l Farm Fin. Corp., Case Nos. 15-55026, 15-55941 (9th Cir. Mar. 7, 2018).

This post written by Gail Jankowski.

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California Federal Court Remands Fraud Claims in Workers’ Compensation Reinsurance Action To State Court

April 12, 2018 by John Pitblado

In a March 15, 2018 order, noting that only state law claims remained in the case, a California federal court remanded to state court a lawsuit against an insurance company and its affiliates, which alleged that they fraudulently marketed and sold a workers’ compensation program.

This case involves a matter that plaintiff BSA Framing Inc. (“BSA”) filed against defendants Applied Underwriters, Inc. (“AUW”), Applied Underwriters Captive Risk Assurance Company, Inc. (“AUCRA”), California Insurance Company (“CIC”), and Applied Risk Services, Inc. (“ARS”) (collectively, the “Applied Defendants”). BSA entered into the Applied Defendants’ EquityComp workers’ compensation package, which consists of three consecutive one-year workers’ compensation policies issued by defendant CIC, an affiliate of AUW, and a “Reinsurance Participation Agreement” with defendant AUCRA (the “RPA”). According to the complaint, over the course of its three-year participation in the EquityComp program, BSA paid the Applied Defendants a total of $2,133,345 in premiums and defendants paid $352,623 in BSA-related workers’ compensation claims pursuant to the terms of the workers compensation policies and the RPA. BSA also alleges that defendants made misrepresentations or omissions that led it to believe that its participation in the EquityComp program would be more financially favorable to BSA than it was. Specifically, BSA alleges that it expected to pay “at least $868,583” less than it actually paid in premiums over the course of its participation in the EquityComp program. BSA also alleges that the RPA was “purposefully written to be as vague as possible and to obfuscate and hide the manner in which an insured’s payment obligations are to be determined.”

BSA first filed its suit against the Applied Defendants in California state court, asserting several California state law claims and federal RICO claims. The Applied Defendants removed the case, invoking the district court’s federal-question jurisdiction on the basis of BSA’s RICO claims. In a November 28, 2017 order, the California district court granted the Applied Defendants’ motion to dismiss the RICO claims, but allowed BSA to file an amended complaint. BSA then filed an amended complaint, in which it again asserted RICO claims against the Applied Defendants, which again moved to dismiss the RICO claims. On February 27, 2018, the California district court granted the Applied Defendants’ motion without leave to amend and also ordered the Applied Defendants to show cause why the action, which now involves only state claims, should not be remanded to state court. The Applied Defendants did not file a response, and thus, the California district court remanded the case to state court.

BSA Framing, Inc. v. Applied Underwriters, Inc. et al., No. CV-17-1836 (USDC C.D. Cal. Feb. 27 and Mar. 15, 2018)

This post written by Jeanne Kohler.
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ON RECONSIDERATION, APPLIED UNDERWRITERS AGAIN LOSES ARGUMENT TO ENFORCE MANDATORY FORUM SELECTION CLAUSE IN REINSURANCE CONTRACT

April 4, 2018 by Rob DiUbaldo

As we previously reported, the District of Connecticut in September denied a motion to transfer based on a mandatory forum selection clause in a reinsurance contract in a dispute between Applied Underwriters, Inc. and its affiliates, and Aiello Home Services (“Aiello”), over a workers’ compensation insurance product. There, the court held the forum selection clause did not bind Aiello relative to defendants other than Applied affiliate Applied Underwriters Captive Risk Assurance Company (“AUCRAC”), did not apply to Aiello’s specific claims against AUCRAC, and was generally unenforceable under Nebraska and federal law. In the present opinion, the court granted a motion for reconsideration to clarify its prior ruling, but denied the requested relief.

The court addressed whether the claims and parties are subject to the forum selection clause and whether the resisting party showed that the enforcement of the clause would be unjust or the clause was otherwise invalid.

On reconsideration, AUCRAC first argued that the claims, while not “arising out of” the contract, are “related to” the reinsurance contract. Noting that the Second Circuit interprets the language “related to” broadly, the court reaffirmed its original ruling the claims fall outside the scope of the forum selection clause. Aiello’s statutory claims concern deceptive behavior that predated the reinsurance contract and the court was unable to determine the extent to which the alleged misrepresentations induced the parties to agree to the contract, concluding that those claims were not “related to” the contract.

Despite not needing to reach the enforceability of the forum selection clause because the court held Aiello’s claims did not “relate to” the reinsurance contract, the court analyzed the clause’s enforceability to clarify statements from its September ruling. Because Second Circuit precedent for evaluating enforceability provides that federal law controls, the court clarified that although it found the forum selection clause is unenforceable under Nebraska law, it did not ground the decision on the motion to transfer on state law. The court then doubled-down on its assessment that the forum selection clause was unenforceable under federal law because of the accompanying inefficiencies and risk of inconsistent judgments. However, it specified that it was not suggesting inefficiency alone renders the clause unenforceable, but rather in the circumstances here the inefficiency constituted sufficient injustice.

Charter Oak Oil Co. v. Aiello Home Servs., Case No. 17-689 (D. Conn. Feb. 26, 2018).

This post written by Thaddeus Ewald .

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REINSURER PREVAILS IN DISMISSING BREACH OF CONTRACT, BAD FAITH CLAIMS ASSERTED BY UNDERLYING POLICYHOLDER

March 12, 2018 by Rob DiUbaldo

A federal district court in Pennsylvania recently dismissed all claims asserted by an insured against a reinsurer in a coverage dispute over an explosion at plaintiff Three Rivers Hydroponics (“Three Rivers”)’s commercial greenhouse. Three Rivers’s greenhouse was insured by Florists’ Mutual Insurance Co. (“Florists”), which in turn reinsured that policy through Hartford Steam Boiler Inspection and Insurance Company (“HSB”). Three Rivers’s amended complaint alleged breach of contract, bad faith, and civil conspiracy claims against both Florists and HSB. In this opinion the court granted defendants’ motion to dismiss aimed at removing HSB from the lawsuit and dismissing the civil conspiracy claim against both.

First, the court dismissed the breach of contract claim against HSB because there was no privity of contract between it and Three Rivers and Three Rivers was not a third-party beneficiary of the reinsurance agreement. Simply put, Three Rivers was not a party to the reinsurance agreement between HSB and Florists and HSB was not a party to the insurance policy between Three Rivers and Florists; nor had HSB assumed Florists’ obligations under the insurance policy. Additionally, Three Rivers was not a third-party beneficiary of the reinsurance agreement because the parties did not express an intention to benefit Three Rivers anywhere in the relevant contract and there were no compelling circumstances to grant third-party beneficiary status. In particular, the court rejected Three Rivers’s argument the implied covenant of good faith evidences intent to benefit third-parties because allowing it would mean that every reinsurance agreement necessarily intends to benefit individual underlying policyholders, an untenable result under Pennsylvania law.

Second, the court dismissed the bad faith claim against HSB after finding it was not an “insurer” under Pennsylvania’s bad faith statute. HSB was not identified as an insurer in policy documents, was not a party to the policy, and did not act as an insurer. Furthermore, Pennsylvania courts have held that parties lacking contractual relationships with the insured (such as reinsurers) cannot be sued under the bad faith statute.

Third, the court dismissed the civil conspiracy claim against both defendants. The court side-stepped deciding plaintiff’s argument that bad faith can be the predicate tort for a civil conspiracy claim by holding that the conspiracy claim failed to allege the required malice element where it could not allege defendants acted without a business motive.

Finally, the court partially granted Florists’ motion to strike. It struck the complaint’s introduction because it technically violated the requirement for numbered paragraphs, but denied the requested strikes otherwise because the procedural device was not intended to address the merits and defendants failed to satisfy the heavy burden required for a motion to strike.

Three Rivers Hydroponics, LLC v. Florists’ Mut. Ins. Co., Case No. 15-809 (W.D. Pa. Feb. 8, 2018).

This post written by Thaddeus Ewald .

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