Reinsurance Claims

Following New York High Court’s Answer To Certified Question, Second Circuit Remands Reinsurance Dispute To District Court

June 4, 2018 by Rob DiUbaldo

The Second Circuit vacated and remanded for reconsideration a district court opinion in a dispute concerning the limits available under certain facultative reinsurance certificates after the New York Court of Appeals answered a certified question on that issue. Specifically, the Second Circuit had questioned whether Excess Insurance Co. v. Factory Mutual Insurance Co. imposed a rule of construction or a presumption that the per occurrence liability caps in facultative reinsurance certificates strictly limit the reinsurance coverage regardless of whether the operative language is understood to cover defense costs or other expenses. The N.Y. Court of Appeals answered there is no such rule of construction or presumption, and instead, reinsurance agreements are governed by standard contractual interpretation principles that place utmost importance on the language of the contract. Given that answer, the Second Circuit remanded the case to the district court to interpret, in the first instance, the reinsurance contracts terms as they relate to liability caps.

Global Reinsurance Corp. of Am. v. Century Indemn. Co., No. 15-2164 (2d Cir. May 9, 2018).

This post written by Thaddeus Ewald .

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New York Federal Court Dismissed Action, Finding That Insurer’s Reimbursement Under Insured’s Captive Reinsurance Agreement Did Not Breach Its Contracts With Insureds

May 24, 2018 by Carlton Fields

In this case, plaintiffs Keller Foundations LLC, a limited liability construction company (“Keller”), Hayward Baker Inc., a construction services corporation (“HBI”), and their parent Keller Group PLC (“Keller Group”) brought a suit in New York federal court against Zurich American Insurance Company (“Zurich”) for breach of contract and breach of the contractual and statutory implied covenants of good faith and fair dealing. Zurich had issued a policy to Keller and HBI. Keller Group is also the parent company of Capital Insurance Company, a captive reinsurer that covered a portion of Zurich’s risk under a captive reinsurance agreement that provided that Capital would reimburse $450,000 per loss on the policy in excess of a $50,000 deductible.

The dispute concerns a settlement Zurich entered into with Diaz Fritz Isabel (“Diaz”). In 2009, HBI was hired by Diaz to serve as a subcontractor at an expansion project at a hospital in Florida. Groundwater seeped into the existing portions of the hospital, causing damage to the project. Diaz then sued HBI in Florida state court for breach of contract relating to the flood damage, to which HBI counterclaimed for money that it was owed for its work as subcontractor (the “Diaz/HBI Lawsuit”). Diaz also sought additional insured coverage under the Zurich policy, which was denied by Zurich. Diaz then sued Zurich in Florida federal court, alleging that it was entitled to additional insured coverage with respect to the damages allegedly caused by HBI’s breach (the “Diaz/Zurich Lawsuit”). Zurich counterclaimed, seeking a declaration that it had no duty under the policy to defend or indemnify Diaz. The parties mediated their dispute, which resulted in a settlement under which Zurich agreed to pay Diaz $450,000. Zurich paid Diaz, and then sought reinsurance reimbursement from Capital under the reinsurance agreement, which was paid by Capital. In the New York litigation, plaintiffs claimed that Zurich did not have the authority to enter into the settlement agreement with Diaz and that Zurich unlawfully damaged them by doing so. Zurich initially moved to dismiss the complaint, which the court granted, but without prejudice to the plaintiffs’ ability to bring an amended complaint or a new lawsuit against Zurich. Plaintiffs then filed an amended complaint, which Zurich again sought to dismiss.

The New York federal court again dismissed the amended complaint in its entirety for failure to state a claim. First, the court held that there are no adequate allegations that Zurich breached its duties in the Diaz/HBI Lawsuit as Zurich has paid, and continues to pay, for HBI’s defense in that action. As for the Diaz/Zurich Lawsuit, the court held that since none of the plaintiffs in the New York action were a party to that case, Zurich could not have violated a duty to defend them. The court also noted that plaintiffs did not allege that Zurich failed to repay ‘‘sums’’ for ‘‘damages’’ covered by the Zurich policy to which HBI and Keller are parties. Rather, the court noted that the New York litigation involved Capital’s reimbursement under the captive reinsurance agreement, to which none of the plaintiffs was a party. Thus, the court held “[t]o the extent Keller and HBI are aggrieved by this chain of events, their grievances do not arise under the Policy, but under the Captive Reinsurance Agreement, to which plaintiffs are not parties. And plaintiffs’ grievances are ultimately not with Zurich, but with Capital.” Thus, the court granted the motion to dismiss Keller and HBI’s breach of contract claims, and as for Keller Group, the court ruled that it lacks standing to sue Zurich under the policy. The court also dismissed plaintiffs’ claims for breach of good faith and fair dealing.

Keller Foundations LLC, et al. v. Zurich American Insurance Co., No. 16-6751 (USDC S.D.N.Y. Mar. 29, 2018).

This post written by Jeanne Kohler.
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New York Federal Court Largely Denies Motions for Summary Judgment on Issues in Breach of Facultative Reinsurance Certificate Dispute But Grants Dismissal of Quasi-Contract Claims

April 30, 2018 by John Pitblado

Defendant, Munich Re, moved for summary judgment relating to defense costs and allocation and Plaintiff, Utica, moved for summary judgment as to Munich Re’s claim for reimbursement. The Court denied the motions with the exception of Utica’s motion for summary judgment with respect to Munich Re’s quasi contract claims.

Munich Re argued Utica’s breach of contract claim should be dismissed because Utica allegedly never notified Munich Re it had added a defense endorsement to an umbrella policy issued to Goulds Pumps Inc. Utica asserted that the follow-the-fortunes doctrine prohibited Munich Re’s argument, and that even if it didn’t, notice would not have been required because issuance of the defense endorsement was an immaterial change that did not prejudice Munich Re. Finding no follow-the-fortunes clause in the reinsurance certificate, the Court looked at the parties’ contract modification argument, finding there to be a question of fact as to whether Munich Re reinsured the defense endorsement.

Munich Re moved for summary judgment regarding defense costs, arguing it had no duty to indemnify Utica for defense costs Utica paid in addition to the umbrella’s limits. Utica opposed the motion and moved for summary judgment on the allocation of defense expenses, arguing that Munich Re had “no valid defense to payment as a matter of law.” The Court found that questions of material fact precluded summary judgment, ruling that the insurance certificates language concerning the payment of expenses and their connection to the umbrella policies was “sufficient to render the Certificate ambiguous.”

Utica argued that, even assuming that reinsurance is unavailable unless the umbrellas themselves provide for defense costs in addition to the limits, Utica was still entitled to summary judgment on the defense costs because the umbrellas provide such coverage and follow-the-fortunes would require Munich Re to pay its share. Munich Re opposed, stating the certificates did not contain a follow-the-fortunes provision and even if they did, “Utica would not be entitled to defense under follow the fortunes because its payment of defense costs in addition to the limits was clearly beyond the scope of the Umbrellas and not in good faith.” After much discussion on the law on follow the fortunes/follow the settlements, the Court declined to imply such a clause into the reinsurance certificates at issue and denied the requests for summary judgment.

Utica also moved for summary judgment dismissing Munich Re’s quasi-contract claims. Munich Re argued there was a basis for finding that the reinsurance certificate did not encompass the events at issue because they did not have any provision providing for reimbursement. The Court disagreed, finding that the claims at issue, including Munich Re’s obligation to pay defense expenses, are governed by the terms of the reinsurance certificate, dismissing Munich Re’ quasi-contract claims.

Additional arguments on various issues raised in the summary judgment motions can be read in the Court’s order.

Utica Mut. Ins. Co. v. Munich Reinsurance Am., Inc., 6:13-cv-00743 (NDNY Mar. 20, 2018)

This post written by Nora A. Valenza-Frost.

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California Federal Court Remands Fraud Claims in Workers’ Compensation Reinsurance Action To State Court

April 12, 2018 by John Pitblado

In a March 15, 2018 order, noting that only state law claims remained in the case, a California federal court remanded to state court a lawsuit against an insurance company and its affiliates, which alleged that they fraudulently marketed and sold a workers’ compensation program.

This case involves a matter that plaintiff BSA Framing Inc. (“BSA”) filed against defendants Applied Underwriters, Inc. (“AUW”), Applied Underwriters Captive Risk Assurance Company, Inc. (“AUCRA”), California Insurance Company (“CIC”), and Applied Risk Services, Inc. (“ARS”) (collectively, the “Applied Defendants”). BSA entered into the Applied Defendants’ EquityComp workers’ compensation package, which consists of three consecutive one-year workers’ compensation policies issued by defendant CIC, an affiliate of AUW, and a “Reinsurance Participation Agreement” with defendant AUCRA (the “RPA”). According to the complaint, over the course of its three-year participation in the EquityComp program, BSA paid the Applied Defendants a total of $2,133,345 in premiums and defendants paid $352,623 in BSA-related workers’ compensation claims pursuant to the terms of the workers compensation policies and the RPA. BSA also alleges that defendants made misrepresentations or omissions that led it to believe that its participation in the EquityComp program would be more financially favorable to BSA than it was. Specifically, BSA alleges that it expected to pay “at least $868,583” less than it actually paid in premiums over the course of its participation in the EquityComp program. BSA also alleges that the RPA was “purposefully written to be as vague as possible and to obfuscate and hide the manner in which an insured’s payment obligations are to be determined.”

BSA first filed its suit against the Applied Defendants in California state court, asserting several California state law claims and federal RICO claims. The Applied Defendants removed the case, invoking the district court’s federal-question jurisdiction on the basis of BSA’s RICO claims. In a November 28, 2017 order, the California district court granted the Applied Defendants’ motion to dismiss the RICO claims, but allowed BSA to file an amended complaint. BSA then filed an amended complaint, in which it again asserted RICO claims against the Applied Defendants, which again moved to dismiss the RICO claims. On February 27, 2018, the California district court granted the Applied Defendants’ motion without leave to amend and also ordered the Applied Defendants to show cause why the action, which now involves only state claims, should not be remanded to state court. The Applied Defendants did not file a response, and thus, the California district court remanded the case to state court.

BSA Framing, Inc. v. Applied Underwriters, Inc. et al., No. CV-17-1836 (USDC C.D. Cal. Feb. 27 and Mar. 15, 2018)

This post written by Jeanne Kohler.
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FEDERAL COURT DENIES REINSURER’S POST-TRIAL MOTIONS IN LONG-RUNNING DISPUTE WHICH RESULTED IN A VERDICT IN ITS CEDENT’S FAVOR

March 13, 2018 by Carlton Fields

A federal district court has denied both a motion for judgment as a matter of law or for a new trial and a motion to correct the interest calculation filed by Fireman’s Fund Insurance Company after a jury award of $35 million in damages and $29 million in prejudgment interest against Fireman’s Fund based on its reinsurance obligations to Utica Mutual Insurance Company.

Fireman’s Fund motion argued that there was insufficient evidence that it had breached the relevant reinsurance contracts with Utica because: (1) the facultative certificates at issue did not cover the underlying loss; (2) the follow the settlements doctrine did not apply; and (3) Utica’s late notice either economically prejudiced Fireman’s Fund or was the result of gross negligence or recklessness by Utica. The court began by finding that the follow the settlements doctrine applied to the facts of the dispute unless Fireman’s Fund could show that Utica’s settlement decisions, by which it allocated portions of a settlement to certain reinsured policies, were objectively unreasonable. The court found that, based on the evidence presented at trial, a reasonable jury could have concluded that Utica’ settlement decisions were objectively reasonable, and therefore that the follow the settlements doctrine obligated Fireman’s Fund to indemnify Utica for the amounts sought under the certificates.

Regarding Fireman’s Fund’s late notice defense, the court found that a reasonable jury could have concluded that Fireman’s Fund failed to prove that it suffered tangible economic injury from any late notice on Utica’s part with respect to the claims for which it sought reinsurance coverage. The court also found that evidence Utica presented of its routine procedures related to its search for applicable reinsurance and reporting claims to reinsurers was sufficient for the jury to conclude that Utica’s late notice to Fireman’s fund in this instance was not the result of gross negligence or recklessness. Because the court found the jury’s decisions on these issues to be reasonable and not against the weight of the evidence, the court refused to grant Fireman’s Fund’s motion for either judgment as a matter of law or a new trial.

As regards Fireman’s Fund’s motion to correct the interest calculation, it argued that this interest was based on the faulty assumption that the entire $35 million that the jury found Fireman’s Fund owed Utica came due on September 22, 2008, when Utica first provided Fireman’s Fund with a claims narrative and billings. The court found the motion to be procedurally improper, as the revision requested “would be substantive rather than clerical,” as it required findings regarding each of the multiple days on which Fireman’s Fund’s argued its obligation to pay Utica accrued, findings that would contradict the jury’s finding that Utica provided Fireman’s Fund’s with sufficient proof of loss as of September 22, 2008. The court found that such a reconsideration of the jury’s factual findings was beyond its authority under Rule 60, and it denied the motion.

Utica Mutual Insurance Company v. Fireman’s Fund Insurance Company, Case No. 6:09-CV-853 (N.D.N.Y. Feb. 28, 2018).

This post written by Jason Brost.
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