Contract Interpretation

SUMMARY JUDGMENT GRANTED FOR REINSURER DUE TO LACK OF PRIVITY WITH DIRECT INSURED

June 5, 2013 by Carlton Fields

Plaintiff Backups Plus Computer Services, LLC (Backups) owned hard drives which failed. Plaintiff GF&C Holding Company (GF&C) was a client of Backups and stored its data on Backup’s servers. After the failure of the hard drives, Backups and GF&C both submitted claims to Harford Casualty Insurance Company (Hartford), which had issued policies to both companies. Hartford submitted a claim to its reinsurer, Hartford Steam Boiler Inspection & Insurance Company (HSB). HSB then engaged an independent analyst, LWG, to examine the hard drives and determine the cause of the failure. LWG determined that the damage was the result of normal wear and tear, not a covered risk under the policy. HSB advised Hartford that it would not pay a claim under the reinsurance agreement, and Hartford denied the claims submitted by Backups and GF&C.

Plaintiffs sued both Hartford and HSB. The district court granted the reinsurer’s motion for summary judgment on all claims. The court noted that plaintiffs’ counsel acknowledged at oral argument that there was no privity between the plaintiffs and the reinsurer. Consequently, there was no contract that could be breached and no implied covenant of good faith and fair dealing or bad faith. GF&C Holding Co. v. Hartford Casualty Insurance Co., Case No. 11-236 (USDC D. Idaho March 15, 2013).

This post written by Rollie Goss.

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COURT DISMISSES ALL CLAIMS IN PRIVATE MORTGAGE REINSURANCE “KICKBACK” SCHEME RESPA SUIT

May 30, 2013 by Carlton Fields

As we reported yesterday , a number of suits in recent years have been filed challenging lender and insurer practices regarding private mortgage insurance. This practice has come under attack in suits alleging that privage mortgage insurers and lenders (and/or their captive reinsurers) have unlawfully entered into reinsurance arrangements between the primary insurers that issue the insurance, and captive reinsurers of the lender, that amount to “kickbacks” to the lenders violating the Real Estate Settlement Procedures Act (“RESPA”), among other causes of action.

A California federal court has granted motions to dismiss filed by each of the defendants, including the lender, primary insurers, and reinsurer. The court found that the plaintiff acquiesced in the dismissal of the bank defendants. The court also found the plaintiff had no standing to sue one of the primary insurers, which had not insured the named plaintiff’s mortgage, but had allegedly insured some putative class members’ mortgages. Finally, the court dismissed all the claims under RESPA’s statute of limitations, finding that the “discovery rule” did not apply, and the plaintiffs were not otherwise entitled to equitable tolling. Samp v. J.P. Morgan Chase Bank, N.A., Case No. 11-civ-1950 (USDC C.D. Cal. May 7, 2013).

This post written by John Pitblado.

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CLASS CERTIFICATION RECOMMENDED IN ALLEGED PRIVATE MORTGAGE REINSURANCE “KICKBACK” SCHEME

May 29, 2013 by Carlton Fields

When prospective home buyers cannot make a down payment at a certain level (usually twenty percent of the purchase price), lenders often require them to purchase private mortgage insurance, to cover the risk of default. Typically, the lender places the insurance on behalf of the borrower. The premium is charged to the borrower along with other escrow items, such as property tax and homeowners insurance premiums. This practice has come under attack in suits in recent years – often class action suits – alleging that private mortgage insurers and lenders (and/or their captive reinsurers) have unlawfully entered into reinsurance arrangements between the primary insurers that issue the insurance, and captive reinsurers of the lender, that amount to “kickbacks” to the lenders violating the Real Estate Settlement Procedures Act, among other causes of action.

In the long-running Munoz v. PHH Corp. case pending in the Eastern District of California, a federal magistrate recommended a partial grant of class certification, which would certify a class of “all persons who obtained residential mortgage loans originated and/or acquired by PHH and/or its affiliates on or after June 2, 2007, and, in connection therewith, purchased private mortgage insurance and whose loans were included with PHH’s captive mortgage reinsurance arrangements.” Munoz v. PHH Corp., Case No. 08-cv-0759 (USDC E.D.Cal. May 15, 2013).

This post written by John Pitblado.

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REINSURER CAN DENY COVERAGE BASED ON INSURER’S LATE NOTICE

May 28, 2013 by Carlton Fields

AIU brought an action against TIG asserting breach of contract and seeking a declaratory judgment as to coverage under nine certificates of facultative reinsurance issued by TIG’s predecessor in interest in the late 1970s and early 1980s. The parties’ dispute arose in 2007 after AIU sought coverage from TIG regarding a multimillion dollar settlement AIU had reached with its insured Foster Wheeler relating to Foster Wheeler’s exposure to numerous asbestos-related lawsuits. TIG contested coverage under the certificates, arguing that AIU had failed to provide prompt notice of Foster Wheeler’s demand for payment which AIU had received in 2003 but did not report to TIG until early 2007.

AIU contended that New York law applied, under which a reinsurer must demonstrate prejudice due to late notice in order to avoid coverage. TIG argued that prejudice to TIG need not be shown in order for it to deny coverage based on late notice under applicable Illinois law. The court determined that Illinois law applied because the certificates were issued in Illinois and AIU was required to perform under the certificates in Illinois by submitting claims to TIG’s Chicago-based intermediary. The court granted TIG’s motion for summary judgment. AIU Insurance Co. v. TIG Insurance Co., Case No. 07-civ-7052 (USDC S.D.N.Y. Mar. 25, 2013).

This post written by Ben Seessel.

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EIGHTH CIRCUIT AFFIRMS DISMISSAL OF CONTRACT DISPUTE BETWEEN INSURER AND REINSURANCE BROKER

May 20, 2013 by Carlton Fields

In a contract dispute between an insurer and its reinsurance broker on which we previously reported, the Eighth Circuit affirmed the district court’s dismissal of the insurer’s complaint for failure to state a claim. The brokerage sharing agreement at issue required the reinsurance broker to pay an annual fee to the insurer in exchange for status as the insurer’s exclusive broker and included a forfeiture provision which discontinued the broker’s obligation to make the annual payment upon notice of the insurer’s decision to terminate or replace the broker. The insurer replaced the reinsurance broker, the broker refused to pay the annual fee, and the insurer sued for breach of contract. On appeal, the insurer argued that the district court misconstrued several key terms in the agreement, that the terms were ambiguous, and that theories of equity therefore applied. Applying Minnesota law, the Eighth Circuit determined that an “integrated definition” of a key term and the forfeiture provision were unambiguous, the broker was no longer obligated to make annual payments after receiving notice from the insurer that the broker was being replaced, and equitable relief was not available since the contract was clear and unambiguous. Olympus Ins. Co. v. AON Benfield, Inc., No. 12-1974 (8th Cir. Ap. 1, 2013).

This post written by Abigail Kortz.

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