Contract Interpretation

COURT TOSSES TIME-BARRED RICO CLAIMS ALLEGING CAPTIVE REINSURANCE KICKBACK SCHEME

December 22, 2016 by Michael Wolgin

Plaintiffs asserted class claims for RICO violations based on allegations that Bank of America referred borrowers to private mortgage insurance providers in exchange for kickbacks, funneled through a captive reinsurance company. Bank of America argued that plaintiffs’ lack of due diligence precluded them from tolling the four-year statute of limitations under the “injury discovery rule.” The Court found that Bank of America met its initial burden to establish the existence of “storm warnings” of the alleged wrongs, shifting the burden to plaintiffs to show that they exercised reasonable due diligence but were nevertheless unable to discover their injuries. The Court noted that before closing on their loans, plaintiffs received a disclosure explaining that their reinsurance could be placed with a lender-affiliated company, and plaintiffs were given the opportunity to opt out of reinsurance. However, the plaintiffs took no steps to investigate the reinsurance. Since plaintiffs did not exercise reasonable due diligence, the Court held that they had constructive notice of all facts that could have been learned through diligent investigation during the limitations period.

Plaintiffs also attempted to delay the accrual of the limitations period based on the “separate accrual rule.” Plaintiffs argued that each transmission of a periodic account statement was in furtherance of the RICO scheme and constituted a new predicate act of mail and wire fraud, which in turn, resulted in the payment of illegal kickbacks. The Court disagreed, concluding that the present account statements – even if each prompted and caused plaintiffs to make a payment – arose from obligations and facts already known and acknowledged at the time of the parties’ mortgage agreements and thus were not “new and separate.” As such, the Court granted summary judgment in Bank of America’s favor, holding the RICO claims were time-barred.

Weiss v. Bank of America Corp., Case No. 15-62 (USDC W.D. Pa. Nov. 22, 2016).

This post written by Gail Jankowski.

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SOUTH CAROLINA FEDERAL COURT MAKES TWO RULINGS ON MOTIONS TO DISMISS IN DISPUTE INVOLVING REINSURANCE TRUST AGREEMENTS

December 14, 2016 by John Pitblado

This case was previously reported by us on our blog on January 5, 2016, June 28, 2016 and July 20, 2016. For the full procedural background, we refer to the recent November 3, 2016 and November 16, 2016 decisions. In sum, Plaintiff Companion Property and Casualty Insurance Company (“Companion”) participated in a fronted insurance program with two reinsurers, Redwood and Freestone. Reinsurance collateral trusts were established for Companion’s benefit and maintained by defendant U.S. Bank as trustee. Companion authorized Redwood and Freestone to administer the trusts’ assets by giving direction to U.S. Bank. One such direction was to authorize certain third-parties who could act for Redwood and Freestone with regard to each trust account. Through the direction of Redwood, Freestone and their authorized third-parties, U.S. Bank made certain investments which were ultimately to the detriment of the trusts.

U.S. Bank then made claims against the third-parties for apportionment, contribution and indemnification for its liability to Companion. The third-parties moved to dismiss U.S. Bank’s claims, which was granted except for U.S. Bank’s claim for contribution. U.S. Bank then filed an amended third-party complaint, adding Aon Insurance Managers (Cayman) Ltd. (“Aon”) as a third-party defendant. One of the third-parties, Alexander Chatfield Burns (“Burns”) also filed an answer to U.S. Bank’s third-party complaint, which contained seven counterclaims against U.S. Bank. U.S. Bank then moved to dismiss Burns’ counterclaims. Aon also moved to dismiss the third-party complaint by U.S. Bank on the basis that the court lacked personal jurisdiction over it. Burns also filed a fourth party complaint against U.S. Bank Trust National Association (“USBT”) for contribution. USBT also moved to dismiss the complaint by Burns on the basis that the court lacked personal jurisdiction over it.

The South Carolina federal court recently ruled on the motions to dismiss by U.S. Bank, Aon and USBT. On November 3, 2016, the court granted in part and denied in part U.S. Bank’s motion to dismiss Burns’ counterclaims. First, the court noted that Burns’ contribution counterclaims were premised on its liability to either U.S. Bank or Companion. The court dismissed Burns’ contribution counterclaim against U.S. Bank premised on Burns’ liability to U.S. Bank as contribution is not available in such case. As for Burns’ contribution counterclaim premised on its liability to Companion, even though Companion had not yet formally sued Burns, that counterclaim remained. The court noted that the torts giving rise to U.S. Bank’s and Burns’ liability to Companion have already occurred and thus, Burns’ cause of action for contribution had accrued. Burns’ remaining counterclaims sounding in contract and tort, however, were dismissed because through those claims, Burns was seeking to recover damages on behalf of Redwood and Freestone, and thus ran afoul of the prudential standing doctrine.

On November 16, 2016, the South Carolina federal court granted the motions to dismiss by Aon and USBT. With respect to USBT’s motion to dismiss Burns’ fourth party complaint, the court found that Burns failed to meet his burden that USBT, which is incorporated and has its principal place of business in Delaware, should be subject to the court’s general or specific personal jurisdiction, and thus the complaint against USBT was dismissed. With respect to Aon’s motion to dismiss U.S. Bank’s third-party complaint, the court found that U.S. Bank also failed to meet its burden that Aon, which is incorporated and has its principal place of business in the Cayman Islands, should be subject to the court’s specific personal jurisdiction, and thus the complaint against Aon was dismissed.

Companion Property and Casualty Insurance Co. v. U.S. Bank Nat’l Association, No. 3:15-cv-01300 (USDC D.S.C. Nov. 3, 2016 and Nov. 16, 2016).

This post written by Jeanne Kohler.

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UK COURT CONSIDERS WHETHER LATER CONDUCT STEMMING FROM A LOSS EVENT SHOULD BE CONSIDERED A LOSS UNDER AN EXCESS OF LOSS REINSURANCE POLICY

December 7, 2016 by Rob DiUbaldo

This case considers an appeal against an arbitration award concerning whether health claims from persons involved in cleaning up the 9/11 World Trade Center site should be considered to be multiple claims or should be aggregated as losses or liabilities arising from the terrorist event. The underlying health claims were submitted by workers who became ill after they were not provided respirators or “properly trained” in the conduct of cleanup of debris from the World Trade Center site. The court described the claims as “a single event disassociated from the negligence which gave rise to the underlying liability claims.” The appeal described the issue on appeal as being: “Where the insured’s liability arises as a result of a continuing state of affairs (the failure to provide a safe system of work and equipment to multiple workers, working in disparate places over an extended period) is this to be treated as “a single event” of negligence or does the relevant event only arise when the harm giving rise to the insured’s liability occurs?”

The arbitrators concluded that the health claims could be aggregated under the applicable reinsurance contract and that the reinsurers would bound to indemnify with respect to paid health claims. The arbitrators’ analysis of the issue, and the court’s discussion, focused on the nature of the causal link between the terrorist attacks and the health claims of the cleanup personnel. The arbitrators employed a “but for” causation test rather than a “proximate cause” test, and looked to determine whether the terrorist event was a “significant cause” of the losses. Determining whether there was a “sufficiently significant causal connection” between the terrorist attack and the health injuries involved an exercise of judgment by the arbitrators. The court found that the arbitrators carefully considered the facts, the applicable law and the contracts in making their decision, and that they could have properly reached the decision they reached. Therefore, the appeal was not allowed.

Simmonds v. Gammell, [2016] EWHC 2515 (Commercial Court, Queen’s Bench Division Oct. 14, 2016).

This post written by Rollie Goss.
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ARBITRATION CLAUSE IN BODY OF REINSURANCE AGREEMENT GOVERNS OVER PROVISION IN ENDORSEMENT

December 5, 2016 by Rob DiUbaldo

In a dispute between First Mutual, a ceding company, and its reinsurer, Infrassure, over which of two competing arbitration clauses in a reinsurance contract governed, the Second Circuit affirmed a lower court decision in favor of the reinsurer and found the arbitration provision contained in the body of the operative agreement controlling over a second provision located in an endorsement.

First Mutual, the insurance arm of New York’s Metropolitan Transit Authority, sought to resolve its claims against Infrassure arising from damage caused by Superstorm Sandy in a London arbitration. The endorsement relied upon by First Mutual contained the second arbitration clause, which was titled “LONDON ARBITRATION AND GOVERNING LAW (UK AND BERMUDA INSURERS ONLY).” Infrassure argued the endorsement was inapplicable because it was not a UK or Bermuda insurer. Another provision in the agreement, the so-called ‘Titles Clause,’ provided that titles in the agreement existed for convenience and were not deemed to limit or affect the provisions they titled. First Mutual argued that the endorsement’s title limiting the provision to UK and Bermuda Insurers could not limit the substance of that provision.

The Second Circuit ruled that the reinsurance agreement was unambiguous in this respect, and that the arbitration clause contained in its body controlled, because the second clause was contained in a section expressly limiting its effect to UK and Bermuda insurers. Furthermore, the court noted that First Mutual’s construction of the Titles Clause would render several critical clauses within the reinsurance agreement meaningless because the titles provided critical context regarding what the language therein governed.

Infrassure, Ltd. v. First Mut. Transp. Assurance Co., No. 16-306 (2nd Cir. Nov. 16, 2016).

This post written by Thaddeus Ewald, a law clerk at Carlton Fields in Washington, DC .

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COURT UPHOLDS PRIOR RULING THAT UNFILED RATES CHARGED UNDER REINSURANCE AGREEMENT WERE NOT VOID

December 1, 2016 by Michael Wolgin

On July 21, 2016, we reported on a putative class action filed in a California U.S. district court by Shasta Linen Company against Applied Underwriters, Inc. and its affiliate entities, alleging that the “EquityComp” workers’ compensation insurance program marketed and sold by Applied Underwriters violated California insurance law and regulations. Shasta asserted that the defendants unlawfully used a Reinsurance Participation Agreement (RPA) to control workers’ compensation rates (and thus, charge higher rates) without first having the RPA filed and approved by the department of insurance as required by law. The court dismissed Shasta Linen’s claims to the extent that they sought to invalidate the RPA’s rates on the theory that the RPA was an unfiled plan pursuant to section 11735 of the California Insurance Code. The court reasoned that the use of a rate that has not been filed is not an unlawful rate unless and until the commissioner conducts a hearing and disapproves the rate.

Subsequent to the court’s ruling, the California Commissioner issued an order in an administrative proceeding, finding that the RPA was void because it had not been filed and approved by the department. Shasta Linen then sought reconsideration of the court’s prior dismissal, arguing that the Commissioner’s Order was a “change in controlling authority meriting reconsideration” by the court. On October 17, 2016, the court held that the Commissioner’s order misinterpreted the law, and was not “controlling.” The court denied reconsideration, but it did so “without prejudice as to attempts by plaintiff to invalidate the [RPA] on grounds other than the theory that defendants violated” section 11735. Shasta Linen Supply, Inc. v. Applied Underwriters, Inc., Case No. 2:16-cv-00158 (USDC E.D. Cal. Oct. 17, 2016).

This post written by Michael Wolgin.

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