A Cautionary Tale: Reinsurer's Bad Faith Disavowal of Agreement Leads to Multiple Damages, Attorneys' Fees

On May 23, 2011, Judge Nancy Gertner of the U.S. District Court for the District of Massachusetts entered a judgment against a reinsurer, its controlling officer and the reinsurer's intermediary in the amount of $4.1 million for breach of contract, $4.1 million for double damages, $2.6 million for attorneys' fees and $1.6 million for prejudgment interest. The punitive elements of the judgment were awarded pursuant to the Massachusetts Unfair and Deceptive Trade Practices Act (“Chapter 93A”) due to the defendants' 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 Gertner's prior holding in Commercial Union Ins. Co. v. Seven Provinces Ins. Co., Ltd., 9 F.Supp.2d 49 (D.Mass. 1998), aff'd 217 F.3d 33 (1st Cir. 2000) that, where a “moving target” strategy is employed to coerce a favorable compromise of reinsurance obligations, the reinsurer's conduct may constitute a violation of Chapter 93A. Trenwick warns reinsurers and their officers not to turn what should be “a routine claim ' into a tortuous marathon.” Trenwick, 2011 WL 570016, at *3.

The 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. Through these companies, Swasey administered and underwrote a workers' compensation and employers' liability insurance program. Swasey procured insurance for this program in 1996 from Reliance National Insurance Company (“Reliance”). Plaintiff Trenwick America Reinsurance Corporation (“Trenwick”) reinsured 54% of Reliance's risk of which 19% was, according to Trenwick, retroceded to IRC Re. A dispute arose between the parties in 2006 when Swasey contested the existence of the retrocessional agreement. Id. at *1.

The Reinsurance Claim

In the years following the inception of the program, IRC Re enjoyed the benefits of the retrocessional agreement, receiving in excess of $1 million in net premiums from Trenwick. Id. at *4. The dispute did not arise until the reinsurance program's losses exceeded premiums and Trenwick's reinsurance intermediary attempted to collect IRC Re's outstanding balance. After making no progress with IRC Re, the intermediary reached out to Swasey directly. Swasey requested various information, which was provided, and, after two months of negotiations, the parties were approximately $300,000 apart. See Id.

Contrary to his subsequent position, Swasey's calculations acknowledged that at least $2.4 million was owed by IRC Re to Trenwick. Trenwick's intermediary continued to press for payment until Swasey abruptly refused to speak with her, and instead, sent a letter contesting ' for the first time in their negotiations ' the very existence of the reinsurance agreement between Trenwick and IRC Re and “conditioned further discussions with [Trenwick's intermediary] on her producing a written contract between IRC Re and Trenwick relative to [the program].” Id. at *5.

Evidence of the Contract and the Statute of Frauds

Despite the defendants' contention that “there was, at most, only an 'agreement to agree,'” the court found “overwhelming” evidence of a contract. Id. at *6-9. 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.

The court further rejected the defendants' Statute of Frauds arguments, finding that, even though there was no formal written contract, the correspondence between the parties during negotiations contained the contract's essential terms and satisfied the statute's writing requirement. The court's decision in this regard may have been influenced by its finding that: “It is not uncommon to form reinsurance contracts via 'gentlemen's 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. at 18. (citation omitted). Indeed, the evidence cited by the court in support of its finding that the Statute of Frauds writing requirement was satisfied consisted of post-contracting confirmation and claims correspondence. See Id. at *19.

Chapter 93A Liability

Judge Gertner previously held in Seven Provinces that a “moving target” strategy employed to “evade payment of reinsurance obligations” may constitute a violation of Chapter 93A. The First Circuit affirmed that decision, noting that the Seven Provinces “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' conduct ' raising 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 claim ' had the extortionate quality that marks a 93A violation.” Id.

Applying similar reasoning in Trenwick, Judge Gertner held that IRC Re, Swasey, and the program manager and intermediary controlled by Swasey, IRC, Inc., all 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.” Trenwick, 2011 WL 570016, at *24.

With respect to Swasey and IRC, Inc., the court found that Trenwick had not satisfied the evidentiary burden necessary to pierce IRC Re's corporate veil and hold Swasey and IRC, Inc. liable for IRC Re's obligations. For instance, the court held that the evidence was insufficient to find “confused intermingling of business assets or management” and “siphoning away of corporate assets by [Swasey].” Id. at *22. Nevertheless, the court held Swasey and IRC, Inc. liable under Chapter 93A.

With respect to Trenwick's Chapter 93A claim, the court found that “Swasey's fingerprints are all over this case ' the formation of the Reliance program, the company that administered it, the company that reinsured it. His acts cannot be disentangled from IRC Re.” Id. at 24-25.

In addition, the court found Swasey's prelitigation conduct was “compounded by his post-litigation antics,” which included misrepresentations during his deposition and even at trial.

For example, the court found that Swasey lied about the status of the more than $1 million in premium payments that IRC Re received from Trenwick. When deposed, Swasey insisted that the premium was held in a “suspense account” because the parties did not have a contract. The individuals responsible for handling IRC Re's finances, however, knew nothing about a “suspense account” and Swasey eventually admitted that there was no such account and that the bank account where the money had been deposited was used for purposes other than holding the premium. See Id. at *12.

Because the court found that: 1) Swasey assured Reliance that IRC Re would take on 19% of the risk; 2) Swasey set up and renewed the program each year; and 3) Swasey negotiated with Trenwick's intermediary about the amount due until he abruptly halted further communication, it held Swasey personally liable for the bad faith acts committed by IRC Re in violation of Chapter 93A.

The court also held IRC, Inc. liable under Chapter 93A for supporting IRC Re's 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 the plaintiffs' contractual rights. Id. at *25-27.

As noted at the outset of this article, the court awarded the plaintiffs the balance due under the IRC Re agreement, $4.2 million, plus $1.6 million of prejudgment interest, and, because Judge Gertner found that the Chapter 93A violations were willful and knowing, she also awarded double damages, plus attorneys' fees and cost of suit for a total award in excess of $12 million. Id. at 29.

Conclusion

Trenwick tells a cautionary tale. Where the evidence shows that a reinsurer withheld payments owed under a reinsurance agreement, coupled with a moving target strategy employed to extort a more favorable settlement of a claim, a court may find a Chapter 93A violation and award punitive damages against the reinsurer and its key decision maker, where it is clear that he or she committed unfair or deceptive acts or practices. Judge Gertner's decision was, however, based on egregious facts and conduct. Where there is a bona fide dispute regarding a reinsurance cession, a court should not find a Chapter 93A violation.

Nicholas C. Cramb and Alec J. Zadek are attorneys in the litigation section of Mintz Levin Cohn Ferris Glovsky and Popeo PC's Boston office, practicing in the firm's insurance/reinsurance group. The views expressed in the article are those of the authors and not necessarily those of Mintz Levin or its clients.

On May 23, 2011, Judge Nancy Gertner of the U.S. District Court for the District of Massachusetts entered a judgment against a reinsurer, its controlling officer and the reinsurer's intermediary in the amount of $4.1 million for breach of contract, $4.1 million for double damages, $2.6 million for attorneys' fees and $1.6 million for prejudgment interest. The punitive elements of the judgment were awarded pursuant to the Massachusetts Unfair and Deceptive Trade Practices Act (“Chapter 93A”) due to the defendants' 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 Gertner's prior holding in Commercial Union Ins. Co. v. Seven Provinces Ins. Co., Ltd. , 9 F.Supp.2d 49 (D.Mass. 1998), aff'd 217 F.3d 33 (1st Cir. 2000) that, where a “moving target” strategy is employed to coerce a favorable compromise of reinsurance obligations, the reinsurer's conduct may constitute a violation of Chapter 93A. Trenwick warns reinsurers and their officers not to turn what should be “a routine claim ' into a tortuous marathon.” Trenwick, 2011 WL 570016, at *3.

The 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. Through these companies, Swasey administered and underwrote a workers' compensation and employers' liability insurance program. Swasey procured insurance for this program in 1996 from Reliance National Insurance Company (“Reliance”). Plaintiff Trenwick America Reinsurance Corporation (“Trenwick”) reinsured 54% of Reliance's risk of which 19% was, according to Trenwick, retroceded to IRC Re. A dispute arose between the parties in 2006 when Swasey contested the existence of the retrocessional agreement. Id. at *1.

The Reinsurance Claim

In the years following the inception of the program, IRC Re enjoyed the benefits of the retrocessional agreement, receiving in excess of $1 million in net premiums from Trenwick. Id. at *4. The dispute did not arise until the reinsurance program's losses exceeded premiums and Trenwick's reinsurance intermediary attempted to collect IRC Re's outstanding balance. After making no progress with IRC Re, the intermediary reached out to Swasey directly. Swasey requested various information, which was provided, and, after two months of negotiations, the parties were approximately $300,000 apart. See Id.

Contrary to his subsequent position, Swasey's calculations acknowledged that at least $2.4 million was owed by IRC Re to Trenwick. Trenwick's intermediary continued to press for payment until Swasey abruptly refused to speak with her, and instead, sent a letter contesting ' for the first time in their negotiations ' the very existence of the reinsurance agreement between Trenwick and IRC Re and “conditioned further discussions with [Trenwick's intermediary] on her producing a written contract between IRC Re and Trenwick relative to [the program].” Id. at *5.

Evidence of the Contract and the Statute of Frauds

Despite the defendants' contention that “there was, at most, only an 'agreement to agree,'” the court found “overwhelming” evidence of a contract. Id. at *6-9. 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.

The court further rejected the defendants' Statute of Frauds arguments, finding that, even though there was no formal written contract, the correspondence between the parties during negotiations contained the contract's essential terms and satisfied the statute's writing requirement. The court's decision in this regard may have been influenced by its finding that: “It is not uncommon to form reinsurance contracts via 'gentlemen's 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. at 18. (citation omitted). Indeed, the evidence cited by the court in support of its finding that the Statute of Frauds writing requirement was satisfied consisted of post-contracting confirmation and claims correspondence. See Id. at *19.

Chapter 93A Liability

Judge Gertner previously held in Seven Provinces that a “moving target” strategy employed to “evade payment of reinsurance obligations” may constitute a violation of Chapter 93A. The First Circuit affirmed that decision, noting that the Seven Provinces “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' conduct ' raising 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 claim ' had the extortionate quality that marks a 93A violation.” Id.

Applying similar reasoning in Trenwick, Judge Gertner held that IRC Re, Swasey, and the program manager and intermediary controlled by Swasey, IRC, Inc., all 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.” Trenwick, 2011 WL 570016, at *24.

With respect to Swasey and IRC, Inc., the court found that Trenwick had not satisfied the evidentiary burden necessary to pierce IRC Re's corporate veil and hold Swasey and IRC, Inc. liable for IRC Re's obligations. For instance, the court held that the evidence was insufficient to find “confused intermingling of business assets or management” and “siphoning away of corporate assets by [Swasey].” Id. at *22. Nevertheless, the court held Swasey and IRC, Inc. liable under Chapter 93A.

With respect to Trenwick's Chapter 93A claim, the court found that “Swasey's fingerprints are all over this case ' the formation of the Reliance program, the company that administered it, the company that reinsured it. His acts cannot be disentangled from IRC Re.” Id. at 24-25.

In addition, the court found Swasey's prelitigation conduct was “compounded by his post-litigation antics,” which included misrepresentations during his deposition and even at trial.

For example, the court found that Swasey lied about the status of the more than $1 million in premium payments that IRC Re received from Trenwick. When deposed, Swasey insisted that the premium was held in a “suspense account” because the parties did not have a contract. The individuals responsible for handling IRC Re's finances, however, knew nothing about a “suspense account” and Swasey eventually admitted that there was no such account and that the bank account where the money had been deposited was used for purposes other than holding the premium. See Id. at *12.

Because the court found that: 1) Swasey assured Reliance that IRC Re would take on 19% of the risk; 2) Swasey set up and renewed the program each year; and 3) Swasey negotiated with Trenwick's intermediary about the amount due until he abruptly halted further communication, it held Swasey personally liable for the bad faith acts committed by IRC Re in violation of Chapter 93A.

The court also held IRC, Inc. liable under Chapter 93A for supporting IRC Re's 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 the plaintiffs' contractual rights. Id. at *25-27.

As noted at the outset of this article, the court awarded the plaintiffs the balance due under the IRC Re agreement, $4.2 million, plus $1.6 million of prejudgment interest, and, because Judge Gertner found that the Chapter 93A violations were willful and knowing, she also awarded double damages, plus attorneys' fees and cost of suit for a total award in excess of $12 million. Id. at 29.

Conclusion

Trenwick tells a cautionary tale. Where the evidence shows that a reinsurer withheld payments owed under a reinsurance agreement, coupled with a moving target strategy employed to extort a more favorable settlement of a claim, a court may find a Chapter 93A violation and award punitive damages against the reinsurer and its key decision maker, where it is clear that he or she committed unfair or deceptive acts or practices. Judge Gertner's decision was, however, based on egregious facts and conduct. Where there is a bona fide dispute regarding a reinsurance cession, a court should not find a Chapter 93A violation.

Nicholas C. Cramb and Alec J. Zadek are attorneys in the litigation section of Mintz Levin Cohn Ferris Glovsky and Popeo PC's Boston office, practicing in the firm's insurance/reinsurance group. The views expressed in the article are those of the authors and not necessarily those of Mintz Levin or its clients.