Baylor Health Care System (“Baylor”) was insured by Church University Insurance Company, a captive insurer, which was reinsured by Employers Reinsurance Corporation (“ERC”). Following the mediation of a malpractice claim involving serious brain damage, Baylor and ERC agreed to jointly fund a settlement of the claim. A dispute arose as to whether this agreement was merely an interim funding of the settlement, subject to later apportionment between Baylor and ERC, or a final settlement of insurance obligations. Baylor filed an action for breach of contract, and seeking a declaratory judgment against ERC, and the district court entered summary judgment in favor of ERC, finding that a series of post mediation e-mails between counsel for Baylor and counsel for ERC amounted to a full settlement of all disputes between them. The Fifth Circuit reversed, finding that there were disputed issues of material fact as to whether the argreement was a complete settlement or merely an agreement to fund a settlement with the claimant, envisioning a later allocation of the settlement amount through arbitration or a mock trial. Baylor Health Care System v. Employers Reinsurance Corporation, Case No. 06-10582 (5th Cir. July 5, 2007).
REINSURER’S CLAIMS DISMISSED FOR FAILURE TO COMPLY WITH LIQUIDATION ORDER
This action was brought by the Statutory Liquidator of two insolvent Pennsylvania insurers (Legion and Villanova) against their reinsurer, Stateco Insurance Company. Plaintiff sought relief for an alleged breach of contract arising out of a Management Agreement between the insurers and Stateco. Stateco asserted several counterclaims.
Plaintiff moved to dismiss Stateco’s counterclaims on the basis that Stateco did not comply with an Order of Liquidation, pursuant to which anyone asserting claims against Legion was required to file a proof of claim on or before June 30, 2005. Defendants argued that their claims could not be barred by the Liquidation Order in light of Ninth Circuit precedent (Hawthorne Savings Bank v. Reliance Insurance Co.), as well as lack of personal jurisdiction, among other reasons.
In July, a California District Court granted plaintiff’s motion to dismiss defendant’s counterclaims. The court distinguished Hawthorne on the basis that the claim in Hawthorne was asserted by a policyholder against its insurer which had no connection to the insolvency proceedings. In contrast, the Court held the instant case was “inextricably intertwined with the liquidation proceedings, and Stateco’s counterclaims seek to interfere with those proceedings.” Additionally, the Court held that it did have personal jurisdiction over the defendant as a result of its long-term agency relationship with a Pennsylvania insurer in addition to the choice of law clause contained in the Management Agreement. The court summarily dismissed Defendant’s remaining arguments relating to mutuality and recoupment. Koken v. Stateco Inc., Case No. 05-03007 (N.D. Cal. July 25, 2007).
STATE SUPREME COURT REJECTS PLEA TO ADD PREJUDGMENT INTEREST TO ARBITRATION AWARD
The Washington Supreme Court recently held that an arbitration award does not transform an unliquidated claim into a fully liquidated sum entitling the prevailing party to prejudgment interest. The underlying dispute arose out of a building contract between the Department of Corrections and Fluor Daniels (“Fluor”). The parties agreed to resolve the dispute in binding arbitration. The dispute proceeded to arbitration and the arbitrator found in favor of Flour Daniels for $5,997,645. Three weeks later, Fluor reduced the award to judgment and sought prejudgment interest from the date of the arbitration until judgment.
The court held that an arbitration decision generally does not convert unliquidated damages into liquidated damages and does not entitle the winner to prejudgment interest between the date of the arbitration decision and entry of judgment. Rather, unliquidated damages accrue interest from the date of judgment, not the date of an arbitration award. State of Washington Department of Corrections v. Fluor Daniel and Fireman’s Fund Ins. Co., Case No. 78290-3 (Wash. July 6, 2007).
ENGLISH HIGH COURT ISSUES RULING ON REINSURANCE CLAIMS DISPUTE
Reinsurers, Dornoch and others, sought a declaration that they were not liable under an Excess Physical Loss or Damage cover for losses sustained by the defendants, Mauritius Union Assurance (“MUA”), a Mauritian company which conducts both life and general insurance business. The Excess Reinsurance policy was written on a slip policy; the cover was excess 50 million Mauritian Rupees any one loss. It provided for “Premises” and “Transit” cover, but did not carry any general infidelity cover. It also provided for a 72 hour discovery period and contained a clause to follow all terms and conditions of the primary reinsurance policy.
The reinsurers argued they were not liable on the ground that the underlying losses were not of their nature within the physical loss or damage cover provided by the policy and that they were not discovered within the 72 hour discovery period. Additionally, they argued that the losses did not exceed the deductible (of MRS 50m x/s MRS 500,000) applicable to each loss under the policy.
The English High Court agreed with the reinsurers on all grounds. Specifically, it found that the reinsurers did not have any liability to MUA pursuant to the Excess Reinsurance because the described losses fell outside the scope of cover due to the fact that the losses sustained by the underlying insured were a direct result of employee infidelity. The court also concluded that none of the many losses alleged were discovered within 72 hours of their occurrence. Lastly, the court agreed that the underlying losses were not capable of meeting their applicable deductible of Maur Rup 50,000,000 any one loss. Dornoch Limited v. The Mauritius Union Assurance Company and Mauritius Commercial Bank, [2007] EWHC 155 (Comm. Feb. 6, 2007).
DISTRICT JUDGE CONFIRMS ORDER FOR PRODUCTION OF REINSURANCE INFORMATION IN COVERAGE ACTION
On June 15, 2007, we reported on a ruling by a United States Magistrate Judge compelling the production of a reinsurance agreement and communications with reinsurers in a coverage action. The district court has entered a fairly detailed Order denying motions seeking to vacate the Magistrate Judge's decision. The Court rejected a strict rule against the production of such information, holding that discoverability and relevance should be evaluated based upon the facts of each case. United States Fire Insurance Co. v. Bunge North America, Inc., Case No., 05-2192 (USDC D. Kansas July 23, 2007).