by ~ Nicholas C. Cramb (Email) (Web Site)
Earlier this year, in an important decision with implications for both cedents and reinsurers, Judge Gertner of the United States District Court for the District of Massachusetts held a reinsurer and its controlling officer liable for double damages plus attorneys fees under the Massachusetts Unfair and Deceptive Trade Practices Act (Chapter 93A) for their bad-faith disavowal of a reinsurance agreement. See Trenwick Am. Reins. Corp. v. IRC, Inc., ___ F. Supp. 2d ___, 2011 WL 570016, *24-28 (D. Mass. Feb. 16, 2011). Trenwick reaffirms Judge Gertners prior holding in her oft-cited Seven Provinces decision that, where a moving target strategy is employed to coerce a favorable compromise of reinsurance obligations, the reinsurers conduct may constitute a violation of Chapter 93A. Trenwick warns reinsurers not to turn what should be a routine claim. . . into a tortuous marathon, and also includes noteworthy discussion of the status of the Follow the Fortunes doctrine in Massachusetts.
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The Insurance Program and Disputed Reinsurance Contract
The facts involve a set of insurance and reinsurance agreements put in place by Defendant Malcolm Swasey and corporations controlled by him, including IRC, Inc. and IRC Re, Limited. In 1994, through these companies, Swasey administered and underwrote a workers compensation and employers liability insurance program known as Compcare. Swasey procured insurance for this program in 1996 from Reliance National Insurance Company (Reliance). Plaintiff Trenwick America Reinsurance Corporation reinsured 54% of Reliances risk. The parties disagreed as to whether a portion of the risk was then retroceded by Trenwick to IRC Re.
The Reinsurance Claim
In the years following inception of the program, IRC Re received in excess of $1 million in net premiums from Trenwick on the retroceded business. A dispute arose when Trenwicks reinsurance intermediary attempted to collect IRC Res outstanding balances on billings ceded to it. After making no progress with IRC Re for more than a year, the intermediary reached out to Swasey directly. After two months of negotiations, the parties were approximately $300,000 apart.
Swaseys own calculations acknowledged that at least $2.4 million was owed by IRC Re to Trenwick. The intermediary continued to press for payment until Swasey abruptly refused to speak with her, indicating that he would be sending her a fax shortly. The fax contestedfor the first time in their negotiationsthe very existence of the reinsurance agreement and conditioned further discussions with [Trenwicks intermediary] on her producing a written contract between IRC Re and Trenwick relative to [the program].
Overwhelming Evidence of an Agreement
Despite the Defendants contention that there was, at most, only an agreement to agree, the court found overwhelming evidence of a contract. The court found that IRC Re repeatedly acknowledged the existence of the agreement through its own documents, its dealings with all of the participants in the program, outside auditors, and government agencies, and by accepting millions of dollars in premiums. Indeed, the court noted that the witnesses who testified on the behalf of the plaintiffseven those without an interest in the outcomewere positively indignant that IRC Re and Swasey had the temerity to claim no contract.
The court also dispatched the Defendants Statute of Frauds arguments, finding that, even though there was no formal written contract, the correspondence between the parties contained the contracts essential terms and satisfied the statutes writing requirement. The courts decision seems to have been influenced by its finding that there is no rule requiring that reinsurance agreements be expressed in writing. As the court noted: It is not uncommon to form reinsurance contracts via gentlemens agreements concluded with handshakes or written on cocktail napkins, but ultimately a written confirmation is a common sense requirement and a prudent and generally prevailing practice in facultative reinsurance. Id. (citation omitted). Indeed, the evidence cited by the court in support of its finding that the Statue of Frauds writing requirement was satisfied consisted of post-contracting confirmation and claims correspondence.
Implication of the Follow the Fortunes Doctrine
In an attempt to relitigate defenses that Trenwick had raised in an underlying arbitration with Reliance, the Defendants argued that, even if there were a reinsurance agreement, the Follow the Fortunes Doctrine did not apply in the absence of an express provision. The court defined the doctrine to include Follow the Settlements and to require a reinsurer to cover the reinsured, unless the reinsurer demonstrates that the original insurers liability resulted from fraud or collusion, or unless the claim was not reasonably within the scope of the original policy. Id. Finding no Massachusetts case directly on point, and out of an abundance of caution, the court heard expert testimony to determine, as a matter of fact, whether a duty of IRC Re to follow Trenwicks fortunes was implied in the reinsurance agreement.
The court was persuaded by Trenwicks expert who testified that the doctrine is a customary component of almost every reinsurance agreement, that all of the written contracts relative to the Compcare program had Follow the Settlements language, and that it would be extraordinary not to see a Follow the Settlements provision in the retrocessional agreement, had it been put to writing. Indeed, even the Defendants expert agreed that the follow the fortunes doctrine is a core tenet of the reinsurance business.
Chapter 93A Liability
Previously, in Seven Provinces, Judge Gertner held that a moving target strategy employed to evade payment of reinsurance obligations may be an unfair and deceptive trade practice and a violation of Chapter 93A. The First Circuit affirmed that decision, noting that the case did not involve a party whose only miscue was to decide (incorrectly, as matters turned out) to let the courts resolve a good-faith disagreement or to rely mistakenly on faulty legal argumentation. Commercial Union Ins. Co. v. Seven Provinces Ins. Co., Ltd., 217 F.3d 33, 43 (1st Cir. 2000). Instead, Seven Provinces conductraising multiple, shifting defenses (many of them insubstantial) in a lengthy pattern of foot-dragging and stringing Commercial Union along, with the intent (as its own witnesses admitted) of pressuring Commercial Union to compromise its claimhad the extortionate quality that marks a 93A violation.
Applying the same reasoning here, Judge Gertner held that IRC Re, Swasey, and IRC, Inc. each violated and were independently liable under Chapter 93A. The court concluded that IRC Re plainly lacked a good-faith basis to dispute the existence of the contact and raised that defense, contrived at the eleventh hour, to avoid paying.
With respect to Swasey, the court noted, Swaseys fingerprints are all over this casethe formation of the Reliance program, the company that administered it, the company that reinsured it. His acts cannot be disentangled from IRC Re. In addition, the court found Swaseys prelitigation conduct was compounded by his post-litigation antics, which included misrepresentations during his deposition and even at trial.
The court also held IRC, Inc., a program manager and intermediary controlled by Swasey, liable under Chapter 93A for supporting IRC Res untenable position that there was no agreement. It held that IRC, Inc. was fully aware that it was not participating in a good-faith contract dispute, but rather was using its status as program manager and intermediary to frustrate Trenwicks contractual rights.
The court awarded the Plaintiffs the balance due under the IRC Re agreement, $4.2 million, plus the statutory rate of 12% interest from the commencement of the suit an additional $1.9 million. Because Judge Gertner found that the Chapter 93A violations were willful and knowing, she also awarded double damages (including interest), plus attorneys fees and cost of suit pursuant to the statute.
In light of this decision, albeit one involving several egregious facts, cedents, reinsurers, and their corporate officers must be mindful that where there is a bona fide dispute regarding a reinsurance cession, a court is unlikely to find a Chapter 93A violation. Where, however, the evidence shows that a reinsurer withheld payments indisputably owed under a reinsurance agreement and put forward multiple shifting defenses in order to extort a more favorable settlement of the claim, that conduct may constitute a Chapter 93A violation and result in an award of punitive damages. Buying replica handbags,replica watches,replica omega and cartier replica online can save you big.
Nicholas Cramb, is an associate in Mintz Levins Boston office. He can be reached at firstname.lastname@example.org.
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