Reinsurance Focus

In a dispute between providers of automobile warranty services (“Plaintiffs” or “American Guardian”) and a Florida car dealership (“Defendants” or “JCR”), an Illinois federal district court recently dealt two blows to the Plaintiffs by refusing to dismiss the Defendants’ counterclaims and refusing to grant a requested preliminary injunction. The parties entered into an agreement in which American Guardian would provide warranties to JCR’s customers, as well as administer and approve payments for all claims under the American Guardian contracts sold by JCR, secure insurance policies indemnifying the parties against obligations, and administer reimbursement to JCR for the cost of repairs. The agreement contained a modification clause requiring amendments be supplemented by writing, which the parties utilized to make subsequent changes, including adding a production agreement requiring JCR to sell a minimum number of warranty and service contracts monthly for five-years and inserting an exclusivity provision.

The parties’ relationship eventually broke down and JCR stopped selling American Guardian contracts, leading American Guardian to file suit. Defendants counterclaimed for fraud in the inducement as well as breach of contract and the duty of good faith and fair dealing. The fraudulent inducement counterclaim was based on an American Guardian agent’s alleged representation before the master agreement was signed to JCR’s owner that Plaintiffs would establish an “offshore reinsurance company” to allow JCR to retain the warrant payments paid by customers as well as earn investment income. The good faith and fair dealing claim was based on American Guardian’s alleged failure to monitor JCR’s loss ratio on claims made by its customers on American Guardian contracts. The district court denied Plaintiffs’ motion to dismiss on each of these claims.

First, Plaintiffs challenged the fraud counterclaim’s sufficiency of pleadings regarding the elements of fraud and the specificity of pleadings in light of Rule 9(b)’s heightened pleading standard. The court rejected Plaintiffs’ argument that JCR’s allegations regarding false statements were non-actionable as representations of intent regarding future conduct. The court read the claim as one for promissory fraud rather than fraudulent inducement, finding that JCR had sufficiently alleged that American Guardian’s agent made a fraudulent promise regarding the formation of a reinsurance company with no intent to fulfill it. Furthermore, the court rejected Plaintiffs’ argument that the agreement’s integration clause was a no-reliance clause which precluded a fraud suit. Finally, the court found that JCR had alleged its fraud claim with sufficient particularity as to “when” the fraudulent promise occurred.

Second, Plaintiffs challenged the good faith and fair dealing counterclaim only on damage grounds—that any excess payments on claims would harm Plaintiffs, and not Defendants, because only American Guardian was responsible for payment on claims. The court concluded this misread the agreement, which provided for both parties making payments for repairs and expenses incurred by JCR customers, and thus declined to dismiss the claim. Interestingly, the court did go on to note “a few of the intricacies at play” with the claim that Plaintiffs did not mention in their motion but which might affect the claim later in the litigation—a bone thrown by the court to counter Plaintiffs’ “misapprehension of many of the salient issues” in the case.

The district court also denied Plaintiffs’ request for a preliminary injunction blocking Defendants from selling vehicle service contracts and related warranty products on behalf of Plaintiffs’ competitors. The court held that Plaintiffs had failed to show a likelihood of success on the merits because they failed to adequately address the host of Defendants’ affirmative defenses that would preclude recovery. The court noted that for the defenses of estoppel and accord and satisfaction in particular, the Plaintiffs introduced inapposite evidence or no evidence at all, thus failing to show a likelihood of overcoming those defenses. Furthermore, the court noted, Plaintiffs’ requested injunction of preventing JCR’s sales of competitor warranties would do nothing to redress the alleged injury (denied profits on JCR’s warranty sales). Nor had Plaintiffs shown that loses could not be compensated for purely by monetary damages later at trial, that waiting for a final judgment would fail to redress their injury, or that their goodwill had been harmed in any way. Thus, the court refused to impose a preliminary injunction.

Am. Guardian Warranty Servs., Inc. v. JCR-Wesley Chapel, LLC, Case No. 16 C 11407 (USDC N.D. Ill. May 22, 2017)

This post written by Thaddeus Ewald .

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