Contract Interpretation

COURT DISMISSES SUIT BY REHABILITATOR FOR PMI INSURER AGAINST CAPTIVE REINSURER AND AFFILIATED BANK

September 29, 2017 by Carlton Fields

A district judge in the Northern District of Illinois has dismissed all claims brought by the Illinois Director of Insurance, acting as rehabilitator for Triad Guaranty Insurance Corporation and Triad Guaranty Assurance Corporation (collectively “Triad”), after it was placed in rehabilitation, against AAMBG Reinsurance, Inc. and Bank of America (“BOA”).

The dispute arose out of an arrangement under which AAMBG provided reinsurance to Triad for private mortgage insurance (PMI) provided by Triad to borrowers with mortgages from a set of lenders that were affiliates of AAMBG. The complaint alleged that AAMBG and BOA breached a contractual duty to disclose to borrowers any benefits the loan originators received from PMI premiums, breached the duty of good faith and fair dealing by only referring borrowers with the highest default risk to Triad, violated RESPA by accepting excessive reinsurance premiums, and were unjustly enriched by these practices. AAMBG and BOA moved to dismiss, and the court dismissed the complaint in its entirety.

In dismissing the breach of contract claim, the court found that the plaintiff had not pointed to anything creating a duty on the part of AAMBG to make any disclosures to borrowers. The court also found that the complaint failed to “allege who the affected borrower was, the specific regulation violated, how it was violated, and, most important, how Triad was damaged.” The court found that the good faith and fair dealing claim was “totally implausible,” as it did “not make economic sense” for AAMBG to send poor risks to Triad when, under a hypothetical offered by the plaintiff, AAMBG would actually be responsible for a larger portion of the loss than would Triad. Fourth, the court found that the plaintiff had made no attempt to show that the safe harbor provision of RESPA Section 8(c) did not apply to AAMBG’s reinsurance contract with Triad, as the complaint did not allege that the agreement to provide reinsurance was illusory. The court also found that the RESPA claim was barred by the statute of limitations, rejecting a “continuing violation” theory put forth by the plaintiff and finding that the limitations period began to run when Triad last purchased reinsurance from AAMBG. Finally, the court rejected the unjust enrichment claim because the parties’ relationship was governed by a contract.

People ex rel. Dowling v. AAMBG Reinsurance, Inc., 16 C 7477 (N.D. Ill. June 1, 2017)

This post written by Jason Brost.
See our disclaimer.

SOUTH CAROLINA FEDERAL COURT ORDERS SEPARATE TRIALS OF PRIMARY AND THIRD-PARTY CLAIMS IN REINSURANCE TRUST INVESTMENT DISPUTE

September 26, 2017 by Carlton Fields

A federal district court in South Carolina recently granted motions to bifurcate a trial involving various claims, crossclaims, and counterclaims between an insured, reinsurers, and a reinsurance agreement trustee. Companion Property and Casualty Insurance Co. (“Companion”) was the beneficiary of a reinsurance collateral trust for which U.S. Bank served as a trustee. Under the trust agreement, the reinsurers could direct U.S. Bank to substitute assets according to certain specifications with appropriate notification to Companion. Alexander Burns founded a number of corporate entities (“Southport”) which acquired the relevant reinsurance companies and therefore managed the trust’s asset allocation strategies through appropriate direction to U.S. Bank.

The lawsuit filed by Companion against U.S. Bank alleges certain trust investments violated the terms of the trust agreement. U.S. Bank subsequently asserted counterclaims against Companion as well as claimed that Burns and Southport (“third-party defendants”) were the cause of any alleged injuries. Companion and Burns filed separate motions requesting the Court bifurcate the trial: one proceeding to adjudicate the claims between Companion and U.S. Bank and a second proceeding to adjudicate the third-party claims if Companion were to prevail in the first proceeding.

Ultimately, the Court granted both motions for separate trials after finding that bifurcation would serve the “objectives of promoting convenience and achieving an expeditious and economical resolution” to the various claims asserted by the parties. It noted that cases involving third-party claims are particularly suitable for bifurcation given that resolution of the primary claims may obviate the need for trial of third-party claims, such as contribution or indemnification, and also reduce the amount of discovery needed overall.

Because the adjudication of U.S. Bank’s third-party claims is contingent upon Companion prevailing in its primary claims, trying the primary claims first would either eliminate the need for trial of the third-party claims, or alternatively, encourage settlement negotiations between U.S. Bank and the third-party defendants. Additionally, bifurcation in complicated cases such as this one involving multiple claims, crossclaims, and counterclaims, can avoid prejudice stemming from jury confusion from being presented contingent and contradictory claims simultaneously. The Court acknowledged the slight risk of inefficiency should U.S. Bank be required to litigate two separate trials which might include some overlapping evidence, but concluded that the efficiency gains outweighed that risk and granted the motions.

Companion Prop. and Cas. Ins. Co. v. U.S. Bank National Assn., Case No. 15-1300 (USDC D.S.C. Aug. 23, 2017).

This post written by Thaddeus Ewald .
See our disclaimer.

LENDER-AFFILIATED CAPTIVE REINSURER OBTAINS DISMISSAL OF MORTGAGE INSURANCE LAWSUIT BROUGHT BY ILLINOIS DIRECTOR OF INSURANCE

September 21, 2017 by Carlton Fields

The suit arose out of an arrangement where lenders would refer borrowers to (now-defunct) Triad Guaranty Insurance Company (Triad) to obtain private mortgage insurance. The lender-affiliated captive insurance company would then reinsure the policies issued by Triad. The Illinois Director of Insurance, who brought the suit on behalf of Triad, alleged that the captive insurer had (1) breached the reinsurance contract by failing to provide certain disclosures required by law, (2) breached the covenant of good faith and fair dealing by referring only the mortgages with the highest risk of default to Triad, (3) violated the Real Estate Settlement Procedures Act (RESPA) by accepting “kickbacks” in connection with the referral of business incident to a real estate settlement service, and (4) was unjustly enriched because the reinsurance premiums grossly exceeded the value of the reinsurance provided.

The court disagreed on all counts. The breach of contract claim failed because the reinsurance contract did not require that the disclosures at issue be provided; and even if the contract did require the disclosures, the Director failed to specify the damages that resulted from the alleged lack of disclosure. Regarding the good faith and fair dealing count, the captive insurer did not breach the covenant because the contract did not contain any express provisions relating to the discretion the captive insurer allegedly failed to exercise in good faith. Regarding the RESPA count, the claim was time barred because it accrued years earlier at the time each underlying mortgage was executed, and not at the time each allegedly illegal “kickback” was made. Finally, regarding the unjust enrichment count, the claim was precluded because a contract (the reinsurance agreement) governed the relationship between the parties. Illinois ex rel Hammer v. Twin Rivers Ins. Co., Case No. 16-C-7371 (USDC N.D. Ill. July 5, 2017).

This post written by Benjamin E. Stearns.
See our disclaimer.

FOURTH CIRCUIT REVERSES RULING THAT REINSURANCE AGREEMENT IS AN “INSURANCE CONTRACT” UNDER VIRGINIA LAW

September 14, 2017 by John Pitblado

Applying the doctrine of judicial estoppel, a district court refused to compel arbitration finding that the arbitration clause in a reinsurance agreement was unenforceable under a Virginia statute that voided a mandatory arbitration clause in an “insurance contract.” On appeal, the issue was whether an arbitrator can be delegated the authority to decide if a contract is an “insurance contract” under the statute. The Fourth Circuit held that the district court properly refused to compel arbitration, but committed reversible error by applying judicial estoppel to reach that conclusion.

The contract here was a Reinsurance Participation Agreement (“RPA”). An arbitration clause in the RPA had a “delegation provision” granting authority to resolve all questions of arbitrability to the arbitrator. This included the right to decide if the RPA was an “insurance contract” under Virginia law, and, in turn, whether the arbitration clause was void. The Fourth Circuit narrowed the issue to the enforceability of the delegation provision itself and applied a two-prong test: (1) did the insured specifically challenge the delegation provision, not the entire arbitration clause; and if so (2) was the provision unenforceable “upon such grounds as exist at law or in equity.”

The Court held that the first prong was satisfied because the insured challenged “any” arbitration provision in the RPA, and asserted that the delegation provision was unenforceable under Virginia law. It explained that, to grant an arbitrator the authority to answer a “core” question of Virginia insurance law—whether a contract is an “insurance contract”—would undermine “the precise outcome Virginia sought to prevent” in enacting the statute; namely, guaranteeing insureds access to Virginia courts. Thus, the Court found that delegation provisions in even “putative” insurance contracts governed by Virginia law are invalid, “at least to the extent such provisions authorize an arbitrator to resolve whether the contract at issue is an ‘insurance contract.’”

Finally, the Court held that the district court abused its discretion in applying judicial estoppel to preclude the insurer from arguing on the merits that the RPA was not an “insurance contract” for purposes of Virginia law. The Court therefore remanded the case for full briefing on that issue.

MinnieLand Private Dayschool, Inc. v. Applied Underwriters Captive Risk Assurance Company, Inc., No. 16-1511 (4th Cir. Aug. 11, 2017)

This post written by Alex Silverman.

See our disclaimer.

COURT FINDS THAT REINSURANCE TRANSACTION DID NOT BREACH INVESTMENT CONTRACT UNDERLYING AN ERISA PLAN

August 9, 2017 by Michael Wolgin

MetLife acquired the rights to a fixed investment option contract with Midco, a trust established to administer a retirement plan for the employees of Midco International, Inc. Midco plan participants received interest each year pursuant to a “declared rate” which would be determined at MetLife’s discretion “from time to time.” Several years later, MetLife sold its 401(k) administration business to Great-West Life & Annuity Insurance Company in the form of a 100% indemnity reinsurance transaction, whereby the Midco assets backing the Midco contract were transferred to Great-West, and MetLife delegated responsibility for setting the declared rate to Great-West. MetLife informed Midco that its business had been transferred to Great-West and that Great-West would provide “recordkeeping and administrative services” going forward, but did not disclose that Midco’s assets would be transferred to Great-West and that Great-West would be delegated the responsibility to set the declared rate. The declared rate selected by Great-West in the subsequent years continually decreased, falling from 6.7% in 2007 to 1.2% in 2016. Later, upon learning that Midco’s assets were no longer with MetLife, Midco filed suit, alleging that Great-West’s control over the declared rate amounted to a breach of MetLife’s obligation to set the rate in good faith.

MetLife moved for summary judgment, which the court granted. The Court found significant that Midco provided no evidence that the parties expected that MetLife would not transfer assets or rate-setting responsibility to a third party. The court rejected Midco’s claim that MetLife’s lack of full disclosure about Great-West’s role in investment decisions violated the contract, stating, “as long as MetLife exercised its discretion in good faith, its failure to disclose how it exercised its discretion is not a breach of the implied covenant.” The Court also noted that Midco failed to provide evidence of industry custom to “show that delegating assets and responsibility to a third party without policyholder consent was an unusual act for an insurance company….” Midco Int’l, Inc. Employees Profit Sharing Trust v. Metro. Life Ins. Co., Case No. 14-9470 (USDC N.D. Ill. July 5, 2017).

This post written by Gail Jankowski.

See our disclaimer.