Contract Interpretation

COURT TO REINSURER: “FOLLOW THE FORTUNES”

September 2, 2008 by Carlton Fields

“The Corporation shall reimburse the Reinsured or its legal representative promptly for loss against which indemnity is herein provided.” Is this a “follow the fortunes” clause in a reinsurance treaty? Undoubtedly, a federal district court answered on Mass Mutual’s (the cedent) motion for summary judgment against its reinsurer, Employers Reinsurance Corporation. “Nowhere in the Treaty does it state that ERC may question claims once those losses are incurred and paid.” The fact that ERC had a right of joint participation in adjusting the claims did not undermine this conclusion. Mass Mutual retained the right to be the final decision maker in all determinations. The court found additional support in the parties’ thirteen-year course of conduct, inasmuch as during most of that period ERC “consistently and continually” paid out claims without questioning Mass Mutual’s handling of those claims. The court found for Mass Mutual again on the question of whether ERC breached the treaty’s offset provision by withholding disputed reimbursements to Mass Mutual. The provision stated that the parties could offset loss or claim expenses due from one to the other; disputed sums did not count.

As a consolation prize, the court dismissed Mass Mutual’s counterclaim against ERC for violations of the Connecticut Unfair Trade Practices Act: “A simple breach of contract claim is not in and of itself a violation of CUTPA.” The court previously had dismissed other claims that Mass Mutual had asserted, including a claim for breach of fiduciary duty. (See April 24, 2007 post to this blog.) The court essentially brought the dispute down to a simple breach of contract dispute, which was determined based upon the follow the fortunes doctrine. Employers Reinsurance Corporation v. Massachusetts Mutual Life Insurance Company , Case No. 06-0188 (USDC W.D. Mo. Aug. 19, 2008).

This post written by Brian Perryman.

UK COURT ADDRESSES INTERPRETATION OF REINSURANCE SLIP

August 27, 2008 by Carlton Fields

In Mopani Copper Mines PLC v. Millenium Underwriting Limited [2008] EWHC 1331 (Comm. June 16, 2008), the UK Commercial Court determined that under appropriate circumstances it could consider words deleted from a reinsurance slip during the negotiation of its terms in interpreting the scope of coverage ultimately agreed to. The court held that it also could consider the circumstances surrounding the making of the contract, the intention of the parties to the contract, and the terms of a prior agreement, but that it would not consider the content of prior negotiations, communications between the insured and its broker which were not communicated to the reinsurers, and the subjective views of the parties as to what they thought they had achieved. This opinion contains an interesting discussion of the factors considered by English courts in the interpretation of reinsurance slips, and should be read by any of our readers who face such issues, or who enter into slips which may be subject to interpretation under English legal principles.

This post written by Rollie Goss.

IS A SERVICE OF SUIT CLAUSE SUFFICIENT TO TRUMP AN ARBITRATION CLAUSE?

August 21, 2008 by Carlton Fields

Reinsurance treaties often contain so-called “service of suit” clauses. The clause typically states something to the effect that “in the event of the failure of Reinsurer hereon to pay any amount claimed to be due, Reinsurer hereon, at the request of the Reinsured, will submit to the jurisdiction of any court of competent jurisdiction within the United States and will comply with all requirements necessary to give such Court jurisdiction and all matters arising hereunder shall be determined in accordance with the law and practice of such Court.” Practitioners may wish to consider the interaction of this clause with an arbitration clause co-existing in the same treaty. Specifically, does the reinsurer’s submission to the jurisdiction of the courts take precedence over the right to arbitrate disputes between the parties? Different courts have reached different results, with the different decisions generally being reconcilable based upon varying language in the service of suit and arbitration provisions of different agreements. In Ace Capital Ltd. v. CMS Energy Corporation [2008] EWHC 1843 (Comm. July 30, 2008), the UK Commercial Court held that it does not. The court acknowledged what it characterized as the minority view that the more specific service of suit clause should prevail over a general arbitration clause, where the single issue of the service of suit clause is a “failure . . . to pay” an amount “claimed to be due” under the treaty, and the arbitration clause broadly refers to “any dispute” arising out of the entire contract. However, the court favored an apparent majority view that a service of suit clause is merely an aid to enforcing awards granted to reinsureds through arbitration.

This post written by Brian Perryman.

UK COURT FINDS THAT REINSURED VIOLATES COOPERATION CLAUSE BY WAIVING POTENTIAL LIMITATION DEFENSE

July 30, 2008 by Carlton Fields

In a 40 page opinion, the UK Commercial Court considered a situation in which a Venezuelan insurer, Multinacional de Seguros, provided insurance for a producer of liquid aluminum, aluminum ingots and aluminum cylinders. Multinacional obtained reinsurance from three reinsurers. An adjuster was retained to assist in processing claims, and during negotiations with the insured the Venezuelan three year limitation period expired. The Venezuelan Superintendent of Insurance provided an opinion that the limitation period had not expired, but the reinsurers decided to commence a declaratory action in London seeking a declaration that they were not responsible for the losses, and instructed the insurer to take the same position with the insured. Multinacional sent the insured a letter, however, which the Court found waived any potential limitation defense. The Court found that this action breached the cooperation clause of the reinsurance agreements. Lexington Insurance Company v. Multinacional de Seguros, S.A. [2008] EWHC 1170 (Comm. May 23, 2008).

This post written by Rollie Goss.

COURT ADDRESSES PROCESS FOR REPLACING PARTY-APPOINTED ARBITRATOR WHO HAS WITHDRAWN

May 12, 2008 by Carlton Fields

WellPoint Health Networks and John Hancock Life Insurance Company became involved in a dispute over the interpretation of three documents relating to WellPoint’s purchase from John Hancock of what were termed Hancock’s Group Business Operations. The Purchase and Sale Agreement, Coinsurance Agreement and Administration Agreement all contained arbitration provisions. The issue was whether three loss-producing books of insurance business, the most important of which were heavily loss producing personal accident risks originated by JEH Re Underwriting Management in Bermuda, were included in the transaction. WellPoint demanded arbitration, seeking additional information about these businesses and a declaration of its responsibilities. Hancock counter-demanded for arbitration seeking $42.4 million from WellPoint, which it later “revised” to $464.4 million. Both parties appointed an arbitrator, and when the party-appointed arbitrators could not agree on an umpire, under the terms of the contract the Denver office of the American Arbitration Association appointed the umpire. Shortly after Hancock increased its claim by ten-fold, Hancock replaced its counsel and sought to replace its party-appointed arbitrator. Conceding that it could not “fire” its appointed arbitrator, WellPoint apparently convinced the arbitrator to withdraw, and a dispute arose as to how to appoint a replacement.

Neither the agreements nor applicable law expressly covered the issue. WellPoint contended that it could appoint a replacement, while Hancock contended that it could appoint the replacement under a provision allowing it to do so if WellPoint defaulted in timely appointing an arbitrator. The remaining arbitrator and umpire allowed WellPoint to appoint a successor, who Hancock conceded was qualified under the arbitrator qualification provisions of the agreements. The arbitration proceeded in two phases, with an interim award entered after the initial phase, and a final award entered after the second phase. The panel's conclusion was that the JEH Re business was not included in the purchase transaction, and that WellPoint owed Hancock $26.4 million instead of the $464 million it had requested.

Hancock moved to vacate the awards, while WellPoint moved to confirm. The first issue was whether the award after the initial phase was subject to immediate confirmation. If it were, Hancock’s motion to vacate was untimely. The court determined that the “initial award” was not a final award, and that Hancock had acted timely in seeking to vacate the final award.

With respect to the replacement of the arbitrator, the court held that Hancock had not waived its right to challenge the appointment by failing to seek relief immediately under section 5 of the FAA. The court upheld the appointment of the replacement arbitrator by WellPoint based upon its interpretation of the agreements and the evident intention of the parties that each would appoint one of the arbitrators. The fact that neither the agreements nor the FAA clearly addressed the situation provided the court with discretion, which it interpreted to require it to attempt to implement the intention of the parties.

This is a very interesting, 33 page opinion, which addresses a number of issues of great importance in many reinsurance arbitrations. The Seventh Circuit has addressed some interesting arbitration process issues, and we will watch to see if this decision is appealed. WellPoint Health Networks, Inc. v. John Hancock Life Ins. Co., Case No. 07-943 (USDC N.D. Ill. Apr. 24, 2008).

This post written by Rollie Goss.