Contract Interpretation

COURT REJECTS JURY VERDICT TO GRANT JUDGMENT IN PUBLIC ENTITY REINSURANCE LAWSUIT

January 26, 2012 by Carlton Fields

A dispute arose between the Alabama Municipal Insurance Corporation and Alliant Insurance regarding the latter’s public entity reinsurance program. AMIC purchased $650 million in reinsurance, received a binder on the program, paid almost half a million dollars in premium, but did not receive a written policy until over a year later. According to AMIC, the two parties had agreed that AMIC must transmit timely loss notices to Alliant. Subsequently, during a round of golf between two senior executives from the parties, the two companies entered a “Gentlemen’s Agreement” that AMIC would not submit reinsurance claims for the 2000-01 treaty year. Five years later, AMIC submitted its 2000-01 claims which Alliant passed on to Lloyd’s, the reinsurance underwriter, which denied payment. At a trial of the dispute, a jury awarded AMIC just under $400,000 for breach of contract.

On Alliant’s motion for judgment as a matter of law, the federal district court found that the evidence so weighed in Alliant’s favor that no reasonable jury could find that AMIC had successfully proven a legally enforceable contract existed. AMIC could not demonstrate whether Alliant was acting as managing general agent for AMIC or for the reinsurance underwriters. Moreover, the claims had not properly been submitted in any case. The court further concluded that the equities barred recovery. Alabama Municipal Insurance Corp. v. Alliant Insurance Services, Inc., Case No. 09-928 (USDC M.D. Ala Jan. 10, 2012).

This post written by John Black.

See our disclaimer.

ENGLISH COURT HOLDS INSURANCE “TOWER” OF MULTIPLE LAYERS OF EXCESS OF LOSS INSURANCE INCURRED SIMULTANEOUS LIABILITY

January 24, 2012 by Carlton Fields

An English court held that a professional indemnity insurance “tower” of multiple excess of loss policies incurred liability simultaneously, rather than sequentially as each policy’s limits were exhausted. The tower consisted of a primary professional indemnity policy upon which were three layers of excess of loss insurance written by the insured’s captive insurer, Teal Insurance. Above the excess of loss policies was a “top and drop” policy written by Teal and reinsured by W.R. Berkley Insurance providing additional coverage once the excess of loss policies were successively exhausted. All policies provided worldwide coverage except the top and drop policy, which excluded North American claims. When the insured incurred multiple American and non-American claims, Teal argued it was entitled to ignore the order in which claims were incurred, and elected to exhaust the tower’s coverage with only the American claims, so as to pass the non-American claims to the reinsured top and drop policy. Teal contended that each policy in the tower incurred liability only after the lower layer policy accepted and exhausted liability. The court disagreed with Teal, holding that liability for the tower occurred simultaneously based on the top and drop policy’s provision that the policy would “continue in force as Underlying policy” (i.e., the top and drop policy would “become” the first layer policy) once the tower was exhausted. Any other conclusion would mean Teal “could determine when they (Teal) admitted liability further up the layer and could themselves organise the lower levels to pay American claims, leaving reinsurers to face non-American claims where those claims should otherwise have exhausted the tower.” Teal Assurance Co. v. W.R. Berkley Insurance (Europe) Ltd., [2011] EWCA Civ 1570 (Eng. Ct. App. Dec. 15, 2011).

This post written by Michael Wolgin.

See our disclaimer.

COURT DISMISSES FRAUD AND UNJUST ENRICHMENT CLAIMS IN DISPUTE OVER ALLEGEDLY IMPROPER DRAW ON REINSURER’S LETTER OF CREDIT

January 12, 2012 by Carlton Fields

A court dismissed reinsurer Assurecare Corp.’s counterclaim for fraud and unjust enrichment against reinsured Arrowood Indemnity Company for drawing on Assurecare’s letter of credit for the allegedly improper purpose of collecting a disputed reinsurance claim. After engaging in a choice of law analysis, the court found that Assurecare’s fraud claim, which Assurecare sought to replace with a claim that Arrowood tortiously interfered with Assurecare’s relationship with the bank that issued the letter of credit, failed because no effect on the banking relationship was alleged. Assurecare’s unjust enrichment counterclaim failed because an enforceable contract (the Assurecare-Arrowood reinsurance agreement) existed between the parties. The court rejected Assurecare’s argument that Arrowood’s conduct related exclusively to the letter of credit, holding that the reinsurance agreement governed “the conditions under which Arrowood could draw on the Letter of Credit.” Arrowood Indemnity Co. v. Assurecare Corp., Case No. 11-5206 (USDC N.D. Ill. Dec. 15, 2011).

This post written by Michael Wolgin.

See our disclaimer.

NEW YORK COURT FINDS DISPUTED ISSUE OF FACT REGARDING WHETHER $600 MILLION SETTLEMENT WAS MADE IN GOOD FAITH, POSSIBLY IMPLICATING EXCEPTION TO FOLLOW-THE-FORTUNES DOCTRINE

January 11, 2012 by Carlton Fields

A New York appellate court decided an appeal of a grant of summary judgment and dismissal of an action relating to a 1993 settlement of massive coverage litigation regarding the manufacture of polychlorinated biphenyl (PCB). After the 1993 settlement, the underlying insured who manufactured the PCB became the subject of claims for bodily injury and property damage related to PCB. The insured settled those cases for roughly $600 million, $150 million of which was paid by National Union and its affiliates. National Union turned to its reinsurers for reimbursement; the reinsurers refused to pay. Normally, reinsurers are bound by settlements entered into by a ceding insurance company in good faith. Here, however, the appeal court found that there were issues of fact related to whether National Union settled in good faith. Though there was no evidence that National Union negotiated in bad faith, a 1993 Delaware superior court decision called into question the propriety of National Union’s dealings. Accordingly, the grant of summary judgment was overturned. American Home Assurance Co. v. National Union Fire Insurance Co. of Pittsburgh, No. 06-6430 (N.Y. App. Div. Dec. 27, 2011).

This post written by John Black.

See our disclaimer.

SUIT BASED ON REINSURERS’ FAILURE TO MAINTAIN REINSURED’S REQUIRED RESERVES SURVIVES DISMISSAL

January 10, 2012 by Carlton Fields

In a suit between a life insurer, Security Life Insurance Company of America, and producer-owned reinsurance companies (PORCs) and their organizer/administrator, Southwest Reinsure, Inc. (SRI), Security Life’s complaint that SRI and the PORCs (SRI Defendants) failed to maintain a trust account containing Security Life’s required reserves largely survived dismissal. The parties had entered into a number of agreements, including various reinsurance agreements between Security Life and the PORCs, and an agreement between Security Life and SRI whereby the latter would administer the insurance covered by the reinsurance agreements. Under the reinsurance agreements, if Security Life’s reserves account was deficient, the PORCs would pay Security Life a fee equal to an amount needed to satisfy the deficiency. When a deficiency arose, SRI arranged for a letter of credit in lieu of the fee, and subsequently, the creation of a trust account. The trust agreement gave Security Life control over disposition of the trust and required the trustee to keep Security Life informed about trust activity. Without Security Life’s knowledge, SRI allegedly transferred the trust to another bank, and ultimately depleted the account. Security Life alleged that it consequently could not use the account to meet its statutory capital requirements, prompting the instant suit against the SRI Defendants for breach of contract, breach of fiduciary duties, fraud and conversion, among other counts.

Security Life’s breach of contract claim survived dismissal in the face of the SRI Defendants’ argument that Security Life did not either “charge a fee” or “terminate the agreement,” which were the only two actions contemplated by the relevant reinsurance agreement. The court found that factual questions arose regarding whether the agreement was modified pursuant to the parties’ course of dealing, namely, that in lieu of charging fees, the parties would use letters of credit and a trust account. Security Life’s alleged damages based on risk of “adverse regulatory action” or downgraded rating were not too speculative to defeat the contract claim. As to the fiduciary duty count, the court found it also survived dismissal, as “the complex relationships between and among Security Life, SRI, and the reinsurers call into [] question the arm’s length nature of the various agreements between the parties.” Security Life’s fraud claims also survived dismissal. Security Life’s claim for conversion failed, however, because Security Life did not allege that it had an immediate right to possess the funds in the trust account. Security Life Ins. Co. of Am. v. Southwest Reinsure, Inc., Case No. 11-1358 (USDC D. Minn. Dec. 20, 2011).

This post written by Michael Wolgin.

See our disclaimer.