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You are here: Home / Archives for Arbitration / Court Decisions / Contract Interpretation

Contract Interpretation

SEVENTH CIRCUIT HOLDS STOP-LOSS POLICY NOT REINSURANCE UNDER WISCONSIN LAW

March 6, 2008 by Carlton Fields

The Seventh Circuit has reversed a federal magistrate’s ruling that defined a stop-loss policy as reinsurance under Wisconsin law.

Edstrom, a manufacturing company, had a stop loss policy in place for its group health plan with Companion Life. Prior to issuing the policy, Companion asked Edstrom to identify any participant who could reasonably be expected to incur more than $32,500 in medical expenses in 2004. Edstrom informed Companion that there was no such participant. In 2004, one of the plan participants had a child that developed a serious medical condition, which was based upon an undisclosed condition that existed prior to the issuance of the policy, and which resulted in claims of at least $890,000. When Companion discovered the child’s condition, it raised the child’s deductible to $450,000, pursuant to a policy provision that allowed the insurer to revise the deductible based on subsequent information that if known before issuing the policy would affect the rates, deductibles, and terms of the policy.

Edstrom initiated arbitration proceedings against Companion. The arbitrator found in favor of Companion finding that the terms of the policy provided the insurer with unfettered rights to raise the deductible. Edstrom unsuccessfully moved to have the award vacated by the District Court claiming that the decision violated Wisconsin Statute Section 631.11(1)(b), which provides that a misrepresentation cannot affect an insurer’s obligations unless the insured “knew or should have known that the representation was false.” Edstrom contended that since it neither knew, nor had reason to know, that the representation regarding potential claims was false, Companion could not raise the deductible. While the arbitrator did not mention this statute, the magistrate judge held that the policy was a contract of reinsurance, and that the statute did not apply to contracts of reinsurance.

The Seventh Circuit held that the federal magistrate’s definition of stop loss policy as reinsurance under Wisconsin law was incorrect. The court stated that “it is a mistake to think that anything someone does to insure someone else against a risk is ‘insurance’ within the meaning of statutes that regulate insurance.” “Stop-loss insurance is an insurance policy for losses that the insured self-insures up to the limit of the deductible,” according to the court.

The contract contained a provision which required that the arbitrator “strictly abide by the terms of this [policy] and shall strictly apply rules of law applicable thereto,” namely the rules of Wisconsin law. The Court of Appeals found this provision to be enforceable. Since there was no evidence in the record that the arbitrator had considered the applicability of the statute to this situation, the appellate court remanded the case to the district court with instructions to vacate the award and to return the case to the arbitrator for consideration of the statute and to determine whether the policyholder knew or should have known that its representation to the insurer was false. Edstrom v. Companion Life Ins. Co., No. 06 C 964 (USCA 7th Cir. Feb. 11, 2008).

This post written by Lynn Hawkins.

Filed Under: Contract Interpretation, Reinsurance Avoidance

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.

Filed Under: Contract Interpretation, Reinsurance Avoidance

‘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.

Filed Under: Contract Interpretation, Follow the Fortunes Doctrine, Reinsurance Claims, UK Court Opinions, Week's Best Posts

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.

Filed Under: Contract Interpretation, Reinsurance Avoidance

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.

Filed Under: Brokers / Underwriters, Contract Interpretation, Week's Best Posts

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