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Arbitration / Court Decisions

COURT ENFORCES PERSONAL GUARANTEE OF REINSURANCE CONTRACT AGAINST INSURED’S CHAIRMAN AND CEO

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Defendant, Centrix Financial, LLC (“Centrix”), sought default protection insurance (“DPI”) covering its “Portfolio Management Program” – a program it created to protect lenders of sub-prime auto loans which Centrix bundled – against the risk of deficiency loan balances and property damage connected with default repossessions. Having been informed by its prior DPI carrier of non-renewal, Centrix approached the plaintiffs, Everest National Insurance Company and Everest Reinsurance Company (“Everest”) to underwrite the risk. When Everest expressed reservation about reinsurance, Centrix’s Chairman and CEO, co-defendant Robert Sutton, offered, as part of a letter of intent memorialized between the parties in an integrated contract, to personally guarantee a reinsurance contract issued by Founders Insurance Company, Ltd. (“Founders”), a Bermuda-based company owned by Sutton.

Everest and Founders ultimately proceeded to arbitration as a result of losses, and the arbitration panel ordered Founders to post security in the amount of $70,000,000. Founders failed to comply with the order, and Everest thereafter looked to Sutton to satisfy his obligation to post the security. Sutton resisted, claiming the guarantee obligation was unenforceable as it was fraudulently induced and made under economic duress. Everest sued in federal court and moved for summary judgment. The court rejected Sutton’s defenses, finding that the economic duress he faced in the course of negotiating the various agreements with Everest was not of Everest’s making, and that Sutton’s fraudulent inducement claims, even if true, were barred under the parol evidence rule as the claims were contradicted by the terms of the integrated contract entered into by the parties. The court granted summary judgment in favor of Everest. Everest National Ins. Co. v. Sutton, Case No. 07-722 (USDC D.N.J., Aug. 13, 2008).

This post written by John Pitblado.

SIXTH CIRCUIT DISCUSSES WHETHER COURTS OR ARBITRATORS SHOULD DETERMINE CERTAIN ISSUES

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In 2005, Chronimed purchased DiCello’s retail pharmacy business. The purchase agreement contained an additional purchase price payment based on the business’ 2006 earnings before interest, taxes, depreciation and amortization. The agreement provided that if the parties disagreed as to the calculation, accounting firm KPMG would arbitrate the dispute. A dispute arose as to the calculation, and DiCello invoked the arbitration clause, alleging that the business underperformed due to Chronimed’s management practices. Chronimed disputed DiCello’s position, contending that DiCello had failed to contest the calculation in sufficient detail to invoke the arbitration clause. DiCello sued, and Chronimed moved to compel arbitration. The district court held that Chronimed had waived the right to arbitrate by its pre-litigation conduct.

On appeal, the issues revolved around whether the court or the arbitrator should determine certain issues, with guidance drawn from the Supreme Court's decision of Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002). Not all courts have agreed as to the implementation of Howsam. The Sixth Circuit affirmed the holding that the court, rather than the arbitrator, should determine whether the dispute was within the arbitration clause, and agreed that the language of the broad arbitration clause encompassed the dispute. The Court further held that whether Chronimed failed to satisfy a contractual precondition to arbitration relating to the required documentation of the tax calculation was an issue for the arbitrator to decide. Finally, the Court held that the issue of whether Chronimed’s pre-litigation conduct waived the right to arbitrate was an issue for the court, not the arbitrator, and that the conduct here was not so “completely inconsistent” with the later arbitration demand as to constitute a waiver. The Court found that Chronimed’s conduct could be interpreted as a disagreement with DiCello’s position rather than a repudiation of arbitration as a process for resolving the dispute. JPD, Inc., et al. v. Chronimed Holdings, Inc., No. 07-4427 (6th Cir. Aug. 22 2008).

This post written by Dan Crisp.

MARSH REACHES SETTLEMENT AGREEMENT FOR CIVIL CLASS ACTION REGARIDNG CONTINGENT COMMISSIONS

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The Marsh & McLennan companies have reached a settlement agreement in a class action relating to allegations of improper “contingent commissions.” The proposed settlement is described in a Memorandum of Law in support of the preliminary approval of the proposed settlement. The court has entered an Order of preliminary approval, setting a a hearing on the final approval of the proposed settlement on December 15, 2008. The proposed settlement provides for a fund in the amount of $69 million, which will be distributed to class members. Marsh may use up to $5 million of the fund to resolve and settle claims of state officials representing policyholders who are potential members of the settlement class. In addition, Marsh may use up to $7 million of the fund to resolve and settle claims of individual plaintiffs in pending actions relating to the same matters that are at issue in the class action. Class counsel will apply to the court for fees and expenses of $14.5 million. In re Insurance Brokerage Antitrust Litigation, Case No. MDL 1663 (USDC D.N.J. Aug. 21, 2008).

This post written by Rollie Goss.

COURT TO REINSURER: “FOLLOW THE FORTUNES”

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“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

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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.