Contract Interpretation

DISTRICT COURT AWARDS SWISS RE REPAYMENT OF FUNDS ASSOCIATED WITH DEFENSE OF UNDERLYING LITIGATION

December 29, 2010 by Carlton Fields

On cross-motions for summary judgment, a federal court in Minnesota ruled that an indemnitor, SuperValu, was in breach of an indemnity agreement it had entered with the now-defunct Amwest Surety Insurance Company. The suit arose out of a multi-million dollar jury verdict obtained against Tidyman’s Management Services on whose behalf Amwest issued an appeal bond of over $5 million. Swiss Re subsequently entered into a reinsurance agreement to secure and guaranty Amwest’s performance of the appeal bond obligations. At issue was whether Swiss Re was entitled to be reimbursed by SuperValu for payments to the persons who obtained the original jury verdict. Swiss Re was entitled to recover over $100,000, but was not entitled to attorneys’ fees. Amwest’s insolvency did not change the fact that the claims were made “relative to the bond,” the equities favored Swiss Re’s recovery, and Swiss Re acquired Amwest’s right by assignment. Swiss Reinsurance America Co. v. SuperValu, Inc., Case No. 09-3083 (USDC D. Minn. Oct. 15, 2010).

This post written by John Black.

COURT COMPELS ARBITRATION OF PAST DISPUTE UNDER ARBITRATION CLAUSE COVERING FUTURE TRANSACTIONS

December 28, 2010 by Carlton Fields

In a suit over an energy developer’s alleged failure to pay for energy services, a court has granted a motion to compel arbitration based on an arbitration clause in a contract that was made after the transaction in dispute, and despite the contract’s express application to future transactions between the parties. The court reasoned that, despite the bulk of the agreement’s application to future contingencies and dealings, some of the agreement’s provisions, including the arbitration clause, evidenced a present agreement that would take effect immediately. The court further held that, given that the arbitration clause at issue was a broad one and that federal and Oklahoma policies favor arbitration, the clause would apply “despite the fact that the dealings giving rise to the dispute occurred prior to the execution of the agreement.” Warrior Energy Services Corp. v. Last Run, LLC, Case No. CIV-10-0961 (USDC W.D. Okla. Dec. 1, 2010).

This post written by Michael Wolgin.

ADMINISTRATIVE SERVICES AGREEMENT PROVIDES FOR PERMISSIVE ARBITRATION; PLAINTIFF PERMITTED TO AMEND COMPLAINT

December 22, 2010 by Carlton Fields

PCH Mutual Insurance Company (“PCH”), a risk retention group providing insurance to assisted living facilities, entered into an Administrative Services Agreement with Casualty & Surety, Inc. (“CSI”), a wholesale insurance broker and program manager. The Agreement’s arbitration provision stated that: “Any disputes . . . may be submitted to binding arbitration. The prevailing party shall be entitled to recover all costs incurred, including reasonable attorneys fees.” After PCH filed suit (alleging breach of contract, breach of fiduciary duty, and unjust enrichment), CSI moved to compel arbitration. The court denied the motion to compel arbitration, holding the arbitration provision was ambiguous and could be read to contemplate permissive arbitration. The court focused on the use of the term “may,” which indicated that arbitration was not required, particularly when juxtaposed with the term “shall,” which signaled that payment of costs to the prevailing party was compulsory. The court also cited the lack of specifics regarding arbitration procedure in the Agreement, further indicating ambiguity to the court. For example, the Agreement did not identify an arbitrator or provide a method for choosing one.

In a separate order issued the same day, the court granted PCH’s motion to amend the complaint to add a claim that CSI had improperly issued occurrence based endorsements, in contravention of underwriting guidelines that limited PCH’s coverage to claims made policies. The court rejected CSI’s argument that PCH’s motion to amend should be denied because of CSI’s “contractual expectancy for arbitration,” finding that it was “dubious” whether a pending motion to compel arbitration could constitute grounds for rejecting a motion to amend the complaint, and, furthermore, CSI had failed to establish that the parties had agreed to mandatory arbitration. The court also held that the proposed amendment would not be futile, and was not offered in bad faith or untimely. PCH Mutual Insurance Co., v. Casualty & Surety, Inc., Case No. 08-00282 (USDC D.D.C. Nov. 11, 2010).

This post written by Ben Seessel.

SECOND CIRCUIT AFFIRMS WAIVER OF REMOVAL BASED ON SERVICE OF SUIT PROVISION IN REINSURANCE TREATY

December 14, 2010 by Carlton Fields

In two prior posts (December 8, 2009 and February 11, 2010), we reported on Dinallo v. Dunav Ins. Co., a case between a liquidator of an insurance company and the company’s reinsurer, Dunav Re. The Southern District of New York had remanded the action to New York State Court and denied reconsideration, holding that Dunav Re waived removal based on a service of suit provision in its reinsurance treaty with the insurer. Dunav Re appealed to the Second Circuit Court of Appeals, which, after de novo review, has now affirmed “substantially for the same reasons articulated by the district court.” In other cases, some parties have persuaded courts that the service of suit clause does not waive a right to arbitrate under an arbitration provision, because it merely provides for consent to jurisdiction and venue to enforce such an agreement to arbitrate. The same kind of argument was not persuasive in the context of this case. Dinallo v. Dunav Ins. Co., No. 09-5235 (2d Cir. Dec. 1, 2010).

This post written by Michael Wolgin.

YOU SNOOZE YOU LOSE: “ACCOUNT STATED” DOCTRINE BARS RECOUPMENT OF PAST AMOUNTS PAID UNDER VOIDED FACULTATIVE AGREEMENT

November 29, 2010 by Carlton Fields

Seaton Insurance Company sued its reinsurer, Yosemite Insurance Company, for breach of contract. Seaton alleged that Yosemite breached two facultative reinsurance agreements the parties entered into in the 1970s. Yosemite paid claims under the agreements until 2008, when it notified Seaton of its belief that the agreements were void because Seaton had violated the agreements’ retention warranties. When Seaton sued, Yosemite counterclaimed, seeking repayment of funds paid since inception. Both parties moved for summary judgment. The court agreed with Yosemite as to one of the facultative agreements, finding that Seaton breached the retention warranty, voiding that agreement and precluding any future payments due. Disputed factual questions, however, impacted proper interpretation of the other agreement, so summary judgment was improper. However, citing California’s “account stated” doctrine – a waiver principle applied to certain contractual arrangements – the court denied that aspect of Yosemite’s counterclaim seeking repayment of past amounts paid under both agreements, noting that “acquiescence to the debt arises from a failure to object within a reasonable time such that the law implies an agreement that the account is correct as rendered.” Yosemite did not identify any issue with its liability until 2007, and thus could not recoup payments made under either agreement before that time. Seaton Ins. Co. v. Yosemite Ins. Co., No. 08-542-S (USDC D.R.I. Nov. 4, 2010).

This post written by John Pitblado.