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Contract Interpretation

ENGLISH COURT APPLIES PRINCIPLES OF CONTRACT CONSTRUCTION IN REINSURANCE DISPUTE

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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.

COURT INTERPRETS REINSURANCE AGREEMENT BUT FINDS DISPUTE AS TO RESCISSION CLAIM

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A New York state court, in an action involving claims under a quota share reinsurance of insurance issued to automobile financing institutions covering the residual value of motor vehicle leases, has resolved some issues as to the interpretation of the reinsurance as a matter of law, finding no ambiguity in the quota share agreements. At the same time, the court denied summary judgment on a claim to rescind the reinsurance on the basis that the cedent had not disclosed to the reinsurer, at the time the reinsurance was placed, that its own actuary had projected a loss ratio of over 100% on the underlying risks. The court found that there was a disputed issue of fact as to when the cedent had knowledge of high losses, but that if it was established that the cedent had such knowledge at the time of placement, rescission would be appropriate. The interpretation issues included such important issues as determining that an entire block of risks could not be ceded to the quota share agreement and the percentage of the pool reinsured by a particular quota share reinsurer. Gulf Insurance Co. v. Transatlantic Reinsurance Co.,. No. 601602/03 (N.Y. Sup. Ct. Nov. 21, 2007).

This post written by Rollie Goss.

SUPREME COURT HEARS ORAL ARGUMENT ON WHETHER PARTIES MAY SUPPLEMENT ARBITRATION AGREEMENTS BEYOND FAA’S VACATUR STANDARDS

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The Supreme Court recently heard oral arguments on whether an arbitration agreement may provide for more expansive judicial review of an arbitration award than the narrow standard of review provided for in the Federal Arbitration Act. This case arose out of a property lease dispute between Mattel, the well-known toy manufacturer, and its landlord, Hall Street Associates. The parties agreed to arbitrate the dispute pursuant to the FAA procedures, but also agreed that a district court could overrule the arbitrator’s decision if the arbitrator’s “conclusions of law [we]re erroneous.”

The Ninth Circuit barred this type of court review, reasoning that private parties cannot expand the Congressionally-determined role of courts in reviewing arbitration awards. In contrast, the First, Third, Fourth, Fifth, and Sixth Circuits appear to have interpreted the FAA’s vacatur standards as non-exclusive standards which parties may supplement by agreement. While the Seventh Circuit has not squarely addressed the issue, it stated in dicta that the parties “cannot contract for a judicial review” of a labor arbitration award “because federal jurisdiction cannot be created by contract.”

After hearing oral arguments on the issue, the Supreme Court asked for additional briefing on three issues: (1) whether authority exists outside the FAA under which a party to litigation begun without reliance on the FAA may enforce a provision for judicial review of an arbitration award; (2) if such authority does exist, did the parties, in agreeing to arbitrate, rely in whole or part on that authority; and (3) whether the petitioner waived any reliance on authority outside the FAA for enforcing the judicial review provision of the parties’ arbitration agreement.

Hall Street Associates, LLC v. Mattel, Inc., No. 06-989.

This post written by Lynn Hawkins.

CONNECTICUT SUPREME COURT VACATES SUMMARY JUDGMENT INTERPRETING REINSURANCE AGREEMENT

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On September 24, 2007, we reported on a Connecticut Supreme Court decision addressing issues relating to a request for the posting of pre-pleading security in a case involving the interpretation of a reinsurance agreement covering losses on general liability insurance policies arising from claims for insuries resulting from the underlying insured's production and use of products containing asbestos. On remand, the principal issue on the merits of the dispute revolved around language in the reinsurance agreement relating to aggregation of losses and the definition of occurrence. The trial court granted summary judgment on that issue to the reinsurers. The Supreme Court has reversed, finding that there are disputed issues of material fact which preclude the determination of the interpretation issues in a summary judgment posture. Hartford Accident and Indemnity Co. v. Ace American Reinsurance Co., SC 17625 (officially released Dec. 25, 2007).

This post written by Rollie Goss.

ILLINOIS COURT GRANTS SUMMARY JUDGMENT TO INSURANCE COMMISSIONER, AS STATUTORY LIQUIDATOR, ON RESCISSION AND SETOFF AFFIRMATIVE DEFENSES

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We have reported previously on developments in Legion Insurance’s liquidation proceeding (see January 16, 2007 and April 26, 2007 posts), including an attempt to recover premiums allegedly owed by American Patriot Insurance Agency, Inc. (“American Patriot”) relating to a workers’ compensation program under a limited agency agreement.

On September 7, an Illinois federal court granted the Commissioner’s motion for summary judgment on American Patriot’s affirmative defenses for setoff and rescission. The court concluded that American Patriot had waived their right to rescind the limited agency agreement where they failed to take any steps towards rescinding the agreement until three years after they acquired knowledge of the fraud, coupled with Defendants’ continued retention of the benefits of the contract. With respect to American Patriot’s setoff defense, the liquidator contended that the alleged debts could not be mutual because they were not due and owing between the same parties or based upon the same contracts, and that mutuality of capacity was lacking because the premium owed by American Patriot were held in a fiduciary capacity. The judge agreed, stating that “the debts asserted by Defendants lack a mutuality of time with the debts asserted against them by the Liquidator, and Defendants’ claim for setoff must be dismissed on these grounds.”

The court denied summary judgment to the liquidator on American Patriot’s remaining affirmative defenses of unclean hands, fraud, negligent misrepresentation, estoppel of a 2000 program year and breach of contract. Ario v. American Patriot Ins. Agency, Case No. 05 C 1049 (N.D.Ill. September 7, 2007).