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Contract Interpretation

UK COURT DENIES REINSTATEMENT COVERAGE FOR SAME CLAIM

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The UK Commercial Court recently considered the ambit and extent of insurance coverage between Flexsys America LP and XL International Corp. In particular, the court was left to interpret whether a reinstatement provision (which are sometimes found in reinsurance agreements) in the master insurance policy should be made to provide additional coverage for a claim governed by a local policy extended to Flexsys by a company related to XL. In 2006, a Korean company (KKPC) filed a complaint alleging improper and illegal conduct by Flexsys. Flexsys claimed indemnity under a provision in the local policy. Flexsys settled the claim and incurred legal costs of over $2 million. The local policy carriers (who expressly denied liability) settled with Flexsys for the policy limit of $1 million. Flexsys sought recovery of the balance from the master policy insurers (the Defendants) alleging that the “Drop Down Clause” included in the master policy provided “umbrella” coverage that would provide a higher limit of indemnity.

The judge, Lord Tomlinson, rejected Flexsys’ argument, and interpreted the language of the Drop Down Clause to provide for a reinstatement of the local policy for “subsequent claims” and not, as Flexsys asserted, for the same claim. Further, the judge rejected Flexsys’ position that such a low level of coverage ($1M) was commercially unreasonable. The court could not address this question without dramatically altering the scope of the lawsuit to determine the range of commercial considerations necessary for such a decision. Finally, Lord Tomlinson concluded that Flexsys would not be reimbursed for additional legal expenses under the local policy because the claim at issue by the Korean company (product disparagement) was subject to an exclusion under the local policy. Flexsys Am. L.P. v. XL Ins. Co. Ltd., [2009] EWHC 1115 (Comm. Ct. May 20, 2009).

This post written by John Black.

ANTECEDENT DEBT IS “FAIR CONSIDERATION” FOR REINSURANCE CONTRACT

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The Rehabilitator of Frontier Insurance Company challenged a New York federal court to reconsider summary judgment rulings that dismissed claims against Everest Reinsurance Company. The Rehabilitator’s claims against Everest sounded in fraudulent conveyance on the theory that payments made to Everest under a reinsurance contract it issued to Frontier were not based on fair consideration because no risk was transferred under the contract. The Court had previously ruled that there was fair consideration due to an antecedent debt at the time the parties entered into the reinsurance contract. The Court allowed reconsideration, but upon review maintained its prior ruling. Mills v. Everest, Case No. 05-8928 (USDC S.D.N.Y. June 8, 2009). Further background to supplement the brief opinion is found in a related Memorandum of Law.

This post written by John Pitblado.

BREACH OF ORAL PROMISE TO SIGN REINSURANCE AGREEMENT DOES NOT REMOVE THE AGREEMENT FROM THE STATUTE OF FRAUDS’ SIGNING REQUIREMENT

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ACE Capital Title Reinsurance Company (“ACE”) proposed a joint venture for insurance and reinsurance with Olympic Holding Company, L.L.C., (“Olympic”), but, before signing any agreements, ACE backed out of the venture, and Olympic brought suit. The trial court granted summary judgment for ACE on the breach-of-contract and breach-of-fiduciary-duty claims, but the appellate court reversed, finding that ACE should be equitably estopped from using the statute of frauds as an affirmative defense and that parties to an implied joint venture may incur fiduciary obligations. In reversing the appellate court’s judgment and remanding the action to the trial court, the Ohio Supreme Court held that: (1) the breach of oral promise to sign an agreement did not remove the statute of frauds’ signing requirement, and, thus, promissory estoppel may not be used to bar the statute of frauds; (2) the agreement was unenforceable; and (3) no fiduciary duties were imposed on the parties. Finally, the Ohio Supreme Court stated that Olympic’s claim for reliance damages, still pending in state court, was an adequate remedy to recover damages from relying on an allegedly false promise. Olympic Holding Co., L.L.C., v. ACE Ltd., No. 2009-2057 (Ohio May 7, 2009).

This post written by Dan Crisp.

EIGHTH CIRCUIT AFFIRMS BANKRUPTCY APPELLATE PANEL’S INTERPRETATION OF REINSURANCE AGREEMENT

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As previously reported (3/17/08 post), this case involves the interpretation of the terms of a reinsurance contract and the duties of the parties under that contract. In the most recent development, the Eighth Circuit affirmed the Bankruptcy Appellate Panel’s judgment affirming in part, and reversing in part, a prior decision of the bankruptcy court regarding the reinsurance contract at issue. The Eighth Circuit determined that appellant/debtor Acceptance Insurance Company (“AIC”) was a part to the reinsurance contract, however, the language in the reinsurance provision of the contract was ambiguous and susceptible to two alternate interpretations. Accordingly, extrinsic evidence was both appropriate and necessary to interpret the language of the provision and to ascertain the intent of the parties. Citing evidence before the bankruptcy trial court, the Court affirmed the bankruptcy panel's decision that the parties intended the reinsurance provision to provide reinsurance coverage. The Eighth Circuit also found that appellee Granite Re was entitled to the full $15 million premium payment, and AIC was not discharged of its duty to pay the premium by the frustration of fundamental purpose defense. In Re Acceptance Ins. Co. Inc., No. 08-1933 (8th Cir. May 18, 2009).

This post written by John Black.

EIGHTH CIRCUIT AFFIRMS BANKRUPTCY APPELLATE PANEL'S INTERPRETATION OF REINSURANCE AGREEMENT

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As previously reported (3/17/08 post), this case involves the interpretation of the terms of a reinsurance contract and the duties of the parties under that contract. In the most recent development, the Eighth Circuit affirmed the Bankruptcy Appellate Panel’s judgment affirming in part, and reversing in part, a prior decision of the bankruptcy court regarding the reinsurance contract at issue. The Eighth Circuit determined that appellant/debtor Acceptance Insurance Company (“AIC”) was a part to the reinsurance contract, however, the language in the reinsurance provision of the contract was ambiguous and susceptible to two alternate interpretations. Accordingly, extrinsic evidence was both appropriate and necessary to interpret the language of the provision and to ascertain the intent of the parties. Citing evidence before the bankruptcy trial court, the Court affirmed the bankruptcy panel's decision that the parties intended the reinsurance provision to provide reinsurance coverage. The Eighth Circuit also found that appellee Granite Re was entitled to the full $15 million premium payment, and AIC was not discharged of its duty to pay the premium by the frustration of fundamental purpose defense. In Re Acceptance Ins. Co. Inc., No. 08-1933 (8th Cir. May 18, 2009).

This post written by John Black.