Contract Interpretation

UK COURT DETERMINES THAT INSURED CAN GIVE EFFECTIVE NOTICE OF POTENTIAL CLAIMS FOR PROFESSIONAL NEGLIGENCE BY APPRISING INSURER OF GENERAL CIRCUMSTANCES THAT MIGHT LEAD TO SUCH CLAIMS

March 6, 2009 by Carlton Fields

In this action for declaratory relief, the UK Court of Appeal issued a judgment on the construction and application of notification provisions in a claims made policy, which may be of interest in interpreting similar provisions in reinsurance agreements. The court held that where a professional indemnity insurance policy required the insured to notify the insurers of potential claims against the insured “as soon as practicable,” the insured could satisfy this requirement by notifying the underwriters of circumstances which might give rise to claims for professional negligence, if made within the insured period, even if the notification of the claim itself was not given until after the policy period. However, notification of such circumstances given after the policy expired relating to new potential claims was not effective.

The essential issue was whether Kidsons gave the underwriters effective notification of the circumstances that might lead to subsequent claims for professional negligence within the policy period. The policy provided no details as to how a notification was to be made, other than that it must be in writing and given as soon as practicable after awareness of circumstances which might give rise to a claim. This was a factual issue, requiring an analysis of various letters and presentations. The court held that the “as soon as reasonably practicable” language was, in effect, a condition precedent in the claims-made policy. This result was not undone by another policy provision stating that “Where the assured’s breach of or non-compliance with any conditions of this Insurance has resulted in prejudice to the handling or settlement of any loss or claim the indemnity afforded . . . shall be reduced to such sum as in the underwriters’ opinion would have been payable by them in the absence of such prejudice.” Although the provision referred to “any conditions of this Insurance,” it did not in terms refer to – and therefore modify – conditions precedent. One Justice dissented, agreeing with the judge below that the letter relied upon as providing notice of the circumstances was incapable of constituting an effective notification because it was too nebulous. HLB Kidsons v. Lloyd’s Underwriters [2008] EWCA Civ 1206 (Ct. App. Nov. 5, 2008).

This post written by Brian Perryman.

COURT RULES ON DIRECT ACTION ISSUES RELATING TO TWO LEVEL REINSURANCE RELATIONSHIPS

March 3, 2009 by Carlton Fields

Guarantee Trust Life Insurance Company (“GTL”) sells health insurance to college students, and obtained reinsurance from First Student Programs, LLC (“FSP”). The reinsurance agreement required that FSP obtain reinsurance, and it purportedly reached an agreement to reinsure its risks with American United Life Insurance Company (AUL), which also provided excess reinsurance directly to GTL. When AUL failed to pay claims, GLT sued FSP for breach of the reinsurance requirement of their agreement, and FSP filed a third-party complaint against AUL. AUL moved to dismiss. In an earlier dispute between GTL and AUL, which was arbitrated, an arbitrator found that AUL was not contractually bound to provide excess reinsurance to GTL. AUL contended that this prior adjudication precluded FSP’s claim against it based upon the doctrine of res judicata.

Applying Pennsylvania law, the US District Court for the Northern District of Illinois granted AUL's motion to dismiss in part, and denied it without prejudice in part. The court determined that FSP's breach of contract action should not be dismissed because it was not clear, as a matter of law, that FSP was acting merely as an agent for GTL when it allegedly contracted with AUL so the rule that agents may not sue for contracts entered into on behalf of a principal should not be applied here. The court further held that FSP sufficiently pleaded a claim for promissory estoppel but applied Pennsylvania's “gist of the action” doctrine to dismiss the fraud claim. The court surmised that the fraud claim was inextricably tied to the breach of contract claim so it was barred as a matter of law under the doctrine. The court also dismissed the indemnification and contribution claims as they were expressly conditioned upon a finding that FSP is liable to GTL, and those parties had settled the matter as between them.

Finding that the third party excess reinsurance agreement was not actually intended to benefit FSP, the court dismissed FSP's Third-Party Beneficiary claim. AUL’s res judicata defense remains pending. Guarantee Trust Life Ins. Co. v. First Student Programs, LLC, Case No. 05-1261 (USDC N.D.Ill. Jan. 28, 2009).

This post written by John Black.

UK COURT OF APPEALS DISMISSES REINSURER’S APPEAL OF DECISION FINDING CREATION OF REINSURANCE CONTRACT PRIOR TO CASUALTY

January 27, 2009 by Carlton Fields

We previously posted on November 12, 2008 about a British court’s decision holding that a reinsurance contract was created prior to a putatively covered ocean-going casualty, based on certain written exchanges between the parties reflecting their negotiations. The reinsurer, Aigaion Insurance Company S.A. (“Aigaion”), appealed, arguing that the lower court’s decision was unclear, and that even if a contract had been formed, it contained a warranty provision allowing the policy to lapse without notice in the case of non-payment of premium (the parties did not dispute that the reinsured, Allianz Insurance Company of Egypt, forwarded timely premium payment to an intermediary broker, who failed to then forward payment to Aigaion).

The Court of Appeals disagreed with Aigaion, finding no basis for its appeal, which it dismissed. The Court found that whether or not the parties negotiated the warranty provision Aigaion sought, it was nonetheless not explicitly included in the terms of the agreement that the lower court had found the parties made by a date certain which, at the latest, preceded the casualty. Allianz Insurance Company of Egypt v. Aigaion Insurance Company, S.A. [2008] EWCA Civ 1455 (Court of Appeals, Civ. Div. Dec. 19, 2008).

This post written by John Pitblado.

REINSURER ENTITLED TO A PREMIUM OFFSET AND THE RECOVERY OF A NON-RENEWAL CHARGE

January 15, 2009 by Carlton Fields

This dispute centered around a reinsurance contract between Imagine Insurance Company (“Imagine”) and American Superior Insurance Company (“American Superior”). In August of 2004, three months after the effective date of the contract and after only one premium payment, American Superior suffered a major hurricane loss and almost immediately experienced insolvency. A month later, pursuant to a consent order of rehabilitation, the Florida Department of Financial Services (the “Department”) was appointed as the receiver of American Superior. Imagine then gave 30 days’ notice of intent to terminate the contract pursuant to the special terminations provisions and advised that a non-renewal charge was due from American Superior. In December of 2004, the Department was appointed as the receiver for liquidation purposes. Shortly thereafter, in February of 2005, Imagine asserted the right to recover and retain the non-renewal charge. The Department denied this charge was payable and demanded repayment of unearned premium previously deducted by Imagine. The trial court denied Imagine’s motion for summary judgment, granted the Department’s motion for summary judgment, and concluded that Imagine wrongfully retained the premium offset and could not recover the non-renewal charge.

Applying a de novo standard of review, the appellate court analyzed the contract language applicable to the premium offset and determined that the trial court misinterpreted the word “outstanding” as meaning past due. According to the dictionary and in light of the phrase “due for the Contract Year,” the correct meaning was uncollected or paid. Thus, against any loss payments, Imagine would offset the uncollected or unpaid premium installments remaining for the contract year. Next, the appellate court looked to the non-renewal charge language that states: “Should the Reinsurer elect to decline to offer renewal terms as described above, the Reinsurer shall forfeit the Non Renewal Charge.” The trial court had used the language to find that Imagine was not entitled to a non-renewal charge, but the appellate court reasoned that the reference to contract renewal terms “as described above” implicated the contract renewal section, which was not applicable to the case. Furthermore, the plain language of the contract established Imagine’s entitlement to the non-renewal charge. The appellate court thus reversed the summary judgment order and found that Imagine properly offset the remaining premium installments from the loss payment and was entitled to the non-renewal charge. Imagine Insurance Co., Ltd. v. State of Florida ex rel. The Department of Financial Services, Case No. 1D07-6027 (Fla. Dist. Ct. App. December 16, 2008).

This post written by Dan Crisp.

AGREEMENTS REACHED REDUCING LITIGATION IN A PAIR OF LAWSUITS BROUGHT BY A REINSURER

December 22, 2008 by Carlton Fields

A group of litigants involved in two reinsurance-related lawsuits agreed to de-escalate the disputes by voluntarily withdrawing certain motions and claims in each case.

In the first lawsuit (National Indemnity Co. v. Stonewall Insurance Co., Case No. 08 Civ. 3718 (USDC S.D.N.Y.)), National Indemnity sued Stonewall Insurance and Seaton Insurance for allegedly violating confirmed arbitration awards and judgments by, among other things, demanding rearbitration of a claim for rescission of a reinsurance agreement. National Indemnity sought declaratory and injunctive relief precluding Stonewall and Seaton from further violating the awards and judgments and from rearbitrating the matter. In response, Stonewall and Seaton filed a motion to stay and to compel arbitration. The motion argued that “NICO’s complaint should be seen for what it is: an attempt to preempt arbitration by masquerading as arbitrable defense as an affirmative claim for relief.”

In the second lawsuit (National Indemnity Co. v. Greenwich Street Investments II, LLC, Case No. 08 Civ. 4067 (USDC S.D.N.Y.)), National Indemnity claimed that a group holding companies (collectively, the “Dukes Place” companies) operating under the domination of Greenwich Street Investments – a group of private equity/hedge fund investors – purchased Seaton during Seaton’s run-off, and agreed to purchase Stonewall if National Indemnity agreed to provide retroactive reinsurance agreements similar to that issued to Seaton. Although National Indemnity assumed Seaton’s and Stonewall’s liabilities, according to National Indemnity, Dukes Place and Enstar Group hatched a scheme to coerce National Indemnity into relinquishing its contractual right to be claims servicer of Seaton and Stonewall in the event of a change of control of Seaton or Stonewall, notwithstanding Duke Place’s and Enstar’s alleged fiduciary duties to National Indemnity.

In the second lawsuit,National Indemnity asserted claims for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, breach of contract, interference with a contract, and inducing a breach of contract. The defendants Dukes Place and Enstar subsequently filed a motion to dismiss the fiduciary duty claims.

As noted, however, agreements were reached to reduce the litigation. In the first lawsuit, the parties stipulated that any reply papers filed in support of the motion to stay and to compel arbitration would be adjourned until February 1, 2009, or fourteen days after a decision by the court on any motion to dismiss the counterclaims that would be filed in the second lawsuit. In the second lawsuit, National Indemnity agreed to withdraw its claim for inducing a breach of contract, and Dukes Place and Enstar withdrew their motion to dismiss the breach of fiduciary duty claims without prejudice.

This post written by Brian Perryman.