Contract Interpretation

JURY FINDS AIG SUBSIDIARIES LIABLE FOR $28 MILLION PLUS PUNITIVE DAMAGES FOR FRAUDULENT INDUCEMENT

March 5, 2008 by Carlton Fields

In an August 16, 2007 post, we commented on a New York district court’s denial of cross motions for summary judgment in a case seeking rescission of two reinsurance facilities. The court rejected the defendants’ statute of limitations defense on summary judgment, however, following a jury trial, the court agreed that plaintiff’s negligent misrepresentation and breach of the duty of utmost good faith claims were barred by the statute of limitations. The court also merged plaintiff’s claims for material nondisclosure and intentional misrepresentation into a single claim of fraudulent inducement. The bases for the claims are set out in the Second Amended Complaint and in our prior post. Shortly before trial, the court denied a motion by Axa to collaterally estop AIG from “relitigating” certain issues that had been determined in a prior arbitration between AIG and a Lloyd’s syndicate.

At trial, a jury found the defendants liable for fraudulent inducement and concluded that plaintiffs were entitled to rescission of both facilities. The defendants were ordered to remit to plaintiff $20,087,166 plus interest of $8,536,004. The jury also found defendants liable for punitive damages in the amount of $5,750,000. Defendants have posted a supersedeas bond in the amount of $36,000,000 in preparation for an appeal. Axa Versicherung Ag v. New Hampshire Ins. Co., No. 05-cv-10180 (USDC S.D.N.Y. Feb. 6, 2008).

This post written by Lynn Hawkins.

‘FOLLOW THE SETTLEMENTS’ LIMITED TO COVER PROVIDED BY SLIP’S TERMS

February 25, 2008 by Carlton Fields

According to a recent decision from the UK Commercial Court, a reinsurer’s obligation to “follow the settlements” of its cedent does not apply when the reinsurance contract contains terms making its scope narrower than the original policy. In this case, the cedent, Aegis, sought to recover from its reinsurer, Continental Casualty Company (“CCC”), for claims arising from incidents at an oil refinery. Aegis had settled the claims made by the refinery owner. CCC denied the claim relying on the fact that additional conditions and definitions relating to boiler and machinery cover were attached to the slip which, if found to apply to the entire contract, would exclude recovery. The same definitions did not appear in the underlying policy. The Court found against Aegis on the issue of contract interpretation, and held that since the original policy and the reinsurance policy were not entirely “back to back,” Aegis could not rely on the follow the settlements provision. Aegis Electrical and Gas International Services Co. Ltd. v. Continental Casualty Company, [2007] EWHC 1762 (Comm. July 25, 2007). This opinion is not available on the UK Court site, but is available on WESTLAW at 2007 WL 2041964.

This post written by Lynn Hawkins.

NINTH CIRCUIT RULES INSURER ALLOWED TO CANCEL POLICY DUE TO UNAVAILABLITY OF REINSURANCE

February 14, 2008 by Carlton Fields

The Ninth Circuit affirmed a magistrate’s ruling that Coregis Insurance Company complied with the plain language of an insurance policy issued to Independent School District of Boise City when Coregis cancelled coverage. The policy permitted Coregis to cancel the policy after it had been in effect for more than 60 days if it was unable to secure adequate reinsurance. The policy also contained a rate guarantee endorsement in which Coregis agreed “to keep this policy in effect and that rates will not increase more than 3% per year for the 2002-2003 and 2003-2004 policy years.” After one of the school shootings, reinsurance for terrorism risks was not available. The court determined that the two policy provisions could be read in harmony. Independent School District of Boise City v. Coregis Ins. Co., No. 06-35627 (9th Cir. Jan. 23, 2008).

This post written by Lynn Hawkins.

SEVENTH CIRCUIT AFFIRMS GRANT OF SUMMARY JUDGMENT AGAINST REINSURANCE SERVICE COMPANY

January 28, 2008 by Carlton Fields

Reinsurance Results is a service company that reviews an insurance company’s claims against its reinsurers to make sure the insurance company receives the benefits to which its reinsurance contracts entitle it. Reinsurance Results entered into a service contract with Indiana Lumbermens Mutual Insurance Company. The fee for the service was 33% of the funds collected from the insurance company’s reinsurers as a result of the review. Reinsurance Results claimed that it obtained $2.2 million and thus was owed 33% of that amount. Indiana Lumbermens disagreed, contending that the $2.2 million was a disputed benefit arising out of a change in its accounting treatment for certain transactions, which affected the amount that Indiana Lumbermens could bill its reinsurers, and that a change in accounting practices did not allow Reinsurance Results to compensation under its contract. An Indiana district court granted summary judgment against Reinsurance Results and Reinsurance Results appealed.

The Seventh Circuit, in an opinion by Judge Posner, affirmed the lower court’s decision. The Seventh Circuit noted that the contract stated that Reinsurance Results was entitled to compensation based upon its reporting of any loss or premium overpayment claims “that have not been processed in accordance with the reinsurance contract terms and conditions” (emphasis in court's opinion). The claims that the insurance company submitted were correctly processed. Even if Reinsurance Results did confer a benefit on Indiana Lumbermens by encouraging them to alter their accounting methodology, “it was not a benefit for which the insurance company was contractually obligated to compensate the service company.” Indiana Lumbermens Mutual Ins. Co. v. Reinsurance Results, Inc., No. 07-1823 (7th Cir. Jan. 16, 2008).

This post written by Lynn Hawkins.

ENGLISH COURT APPLIES PRINCIPLES OF CONTRACT CONSTRUCTION IN REINSURANCE DISPUTE

January 8, 2008 by Carlton Fields

Coromin, a Bermuda based captive insurer, sought indemnification from its reinsurers for physical damage and business interruption losses suffered by its insured as a result of a defective mill motor at a copper mining and processing facility in Chile. The reinsurance policy was an ‘all risks’ property cover with an exclusion for damage or business interruption caused by a defective condition due to design defect, but with an additional extension which reintroduced that element of cover with a form of wording on which the dispute centered. The reinsurers argued that the extension did not apply because Coromon failed to comply with one of four conditions of the extension clause.

The Court, relying on principles of policy construction set out in Absalom v TCRU [2006] 2LLR 129, found that each of the four requirements of the extension were met in respect of the defective mill motor. The English Court applied the following principles of construction: (1) examine and interpret terms in their contractual context; (2) take into account surrounding background matters, but exclude evidence of negotiations and subjective intent; and (3) reject a conclusion that “flouts business common sense.” These principles are generally consistent with contract construction in the United States. Coromin Ltd v AXA Re & Ors [2007] EWHC 2818 (Comm).

This post written by Lynn Hawkins.