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LUMBERMENS MUT. CAS. CO. v. FRANEY MUHA ALLIANT INS. SERV.

September 19, 2005.

LUMBERMENS MUTUAL CASUALTY COMPANY, Plaintiff,
v.
FRANEY MUHA ALLIANT INSURANCE SERVICES f/k/a FRANEY, PARR & MUHA, INC., FRANEY, PARR & MUHA, INC. and FRANEY, PARR & ASSOCIATES, INC., Defendants.



The opinion of the court was delivered by: WILLIAM CONNER, Senior District Judge

OPINION AND ORDER

Plaintiff Lumbermens Mutual Casualty Company ("Lumbermens") commenced the present action against defendants Franey Muha Alliant Insurance Services f/k/a Franey, Parr & Muha, Inc., Franey Parr & Muha, Inc. and Franey, Parr & Associates, Inc.*fn1 (collectively, "Franey" or "defendants") seeking indemnity for losses incurred under a reinsurance contract which plaintiff entered into with a non-party insurance company.*fn2 Plaintiff also alleges negligence, breach of contract, breach of fiduciary duty and breach of duty of good faith and fair dealing. In the present motions, pursuant to FED. R. CIV. P. 56, plaintiff moves for partial summary judgment and defendants move for summary judgment. For the reasons stated hereinafter, plaintiff's motion for partial summary judgment is denied, and defendants' motion for summary judgment is granted in part and denied in part.

  BACKGROUND

  The following facts are undisputed unless otherwise noted. Plaintiff, a mutual insurance company and the lead company of Kemper Insurance Company ("Kemper"),*fn3 is engaged in the business of, inter alia, underwriting and providing commercial property and casualty insurance products, including surety bonds. (Complt. ¶ 15; Pl. Rule 56.1 Stmt. ¶ 2; Defs. Rule 56.1 Stmt. ¶ 7.) Plaintiff is also engaged in the business of approving and issuing bonds based on bond applications it received from agents or brokers such as defendants. (Pl. Rule 56.1 Stmt. ¶ 2.) On March 1, 1997, plaintiff and defendants entered into a security agency agreement (the "Lumbermens Agency Agreement") that, among other things, authorized defendants to solicit and/or bind certain kinds of insurance, including bonds, on behalf of plaintiff as specified in the Lumbermens Agency Agreement. (Id. ¶ 5.) Plaintiff maintains that defendants were "authorized to solicit and bind plaintiff respecting contracts of insurance only to the extent that the authority was specifically granted in the Lumbermens Agency Agreement." (Complt. ¶ 17, Ex. A at ¶¶ 2-3.) The Schedule of Binding Authority Commercial Lines (the "Schedule") included in the Lumbermens Agency Agreement lists "specific classifications of commercial lines and corresponding limits" over which defendants could not write or bind plaintiff without plaintiff's express permission. (Id. ¶ 18, Ex. A at Schedule.) The Schedule also includes an independent classification entitled "Bonds," and provides that defendants must "refer" to plaintiff prior to writing or issuing a bond on plaintiff's behalf. (Id. ¶ 20, Ex. A at Schedule.) Specifically, defendants were required to "refer to the company" for express approval (or rejection) by plaintiff for any and all types of bonds (surety, fidelity or otherwise) prior to writing or issuing a bond on plaintiff's behalf because the Lumbermens Agency Agreement did not authorize defendants to bind plaintiff on such a transaction without plaintiff's express acceptance and consent. (Id. ¶ 21, Ex. A at Schedule; Pl. Rule 56.1 Stmt. ¶ 6.) Plaintiff contends that defendants, as its agents, "were required to act in strict compliance with industry practice and to insure that their duties and obligations to Lumbermens were carried out with skill, diligence and care" and that defendants owed Lumbermens "a fiduciary duty and a duty of good faith and fair dealing." (Complt. ¶¶ 22, 23.) Additionally, plaintiff points out that at no time prior to July 10, 2001 did Franey or Lumbermens terminate the Lumbermens Agency Agreement. (Pl. Rule 56.1 Stmt. ¶ 7.)

  A. Franey's Agency Relationship with Hanover*fn4

  Hanover, a non-party to the present litigation, is, similar to Lumbermens, engaged in the business of underwriting and providing insurance products and services, including surety bonds. (Id. ¶ 8.) Hanover also entered into an Agency Agreement (the "Hanover Agency Agreement") with defendants on January 1, 1977 which, inter alia, authorized defendants to solicit and bind certain kinds of insurance and bond applications on behalf of Hanover. (Id. ¶ 9.) The Hanover Agency Agreement "included a schedule entitled `Limits of Authority,' which stated in paragraph one that Franey is `authorized to solicit, receive, and transmit to the Company proposals for . . . fidelity and surety bonds . . .,' and [further stated] that Hanover had to specifically authorize underwriting any such bond." (Id.)

  Plaintiff maintains that "[b]y entering into respective agency agreements with both Lumbermens and Hanover, [d]efendants were, in actuality, an agent for Lumbermens and were authorized to solicit and bind certain kinds of insurance on behalf of Lumbermens" while at the same time "an agent for Hanover and were likewise authorized to solicit and bind certain kinds of insurance on behalf of Hanover." (Complt. ¶ 26.) However, defendants point out that "Franey was not bound by an exclusive agreement running to either Hanover or Lumbermens and was an independent agent." (Defs. Rule 56.1 Stmt. ¶ 21 (citing Van Steenburgh Dep. at 22-23; Franey Aff. ¶ 7; Exs. H, I).)

  Beginning in 1978, Hanover wrote cable bonds for Adelphia Communications Corporation and related entities (collectively "Adelphia") on various obligations, including pole attachment bonds, franchise fee bonds, miscellaneous license bonds and performance/completion bonds. (Pl. Rule 56.1 Stmt. ¶ 10.) Franey was the exclusive agent for Hanover through which all Adelphia bonds were written. (Id.) In or about the early part of 2001, Hanover sought to decrease its overall cable bond exposure, which at that time exceeded $100 million. (Id. ¶ 11.)

  Richard Van Steenburgh, Vice President of Surety for Hanover, notified Franey of its decision to reduce the risk on the Adelphia account and informed Franey that "one of Hanover's risk reduction options was to not write any new bonds for Adelphia." (Pl. Rule 56.1 Stmt. ¶¶ 12, 13 (citing Van Steenburgh Dep. at 64).) Van Steenburgh testified that "[t]he option of reducing Hanover's risk by discontinuing to write new bonds for Adelphia and its affiliates was not an acceptable option to William Franey," who said he would personally find the market, or other sureties, to share the Adelphia cable bond. (Id. ¶¶ 14, 15 (citing Van Steenburgh Dep. at 64-65).) However, according to defendants, it was Hanover that decided that the only acceptable option to decrease its liability was to enter into a quota-share reinsurance treaty, so as to avoid "the disruptive cancellation of outstanding bonds" and "the need to negotiate any indemnification agreements." (Defs. Mem. Supp. Summ. J. at 2.)

  Moreover, Van Steenburgh testified that Franey identified and proposed Lumbermens to Hanover as the market for the Adelphia cable bond account and that, at that time, neither Hanover nor Van Steenburgh had any type of business relationship with Lumbermens. (Pl. Rule 56.1 Stmt. ¶¶ 16, 17, 18 (citing Van Steenburgh Dep. at 64-66).) Defendants, however, contend that Franey contacted Lumbermens regarding Hanover's need for reinsurance at the request of Hanover. (Defs. Mem. Supp. Summ. J. at 2.)

  B. Quota-share Reinsurance Treaty

  Plaintiff entered into a Quota-share Reinsurance Treaty (the "Reinsurance Treaty") with Hanover effective June 1, 2001.*fn5 (Defs. Rule 56.1 Stmt. ¶¶ 7, 8; Pl. Rule 56.1 Stmt. ¶ 19.) Plaintiff contends that defendants acted as an intermediary between Lumbermens and Hanover and that "[a]ll dealings between Lumbermens and Hanover, including the negotiation of the Reinsurance Treaty, were exclusively handled through the [d]efendants, i.e., Lumbermens and Hanover only had contact with the [d]efendants regarding the Reinsurance Treaty and there was no direct communication on any issue related to the Reinsurance Treaty including the underwriting of cable bonds between Lumbermens and Hanover." (Complt. ¶¶ 32, 33; Pl. Rule 56.1 Stmt. ¶¶ 21-23.) Plaintiff further asserts that "[a]ll of the contact with Charles Schmalz*fn6 of Lumbermens during the formation of the surety relationship between Hanover and Lumbermens prior to the execution of the Reinsurance Treaty was with William Franey." (Pl. Rule 56.1 Stmt. ¶ 23.) Defendants admit that Franey acted "as a conduit between Hanover and Lumbermens, passing papers between two markets," but note that Franey did not write the language of the Reinsurance Treaty*fn7 or tell Schmalz*fn8 to sign the Reinsurance Treaty without reading it or otherwise trick him into signing it. (Defs. Rule 56.1 Stmt. ¶¶ 8, 10, 12, 15, 16.)

  The Reinsurance Treaty provided in relevant part that "[t]he Reinsurer [Lumbermens] shall indemnify the Company [Hanover] for fifty percent of Ultimate Net Losses arising under all Surety bonds and Fidelity policies written on behalf of Adelphia Communications Corporation, its affiliates and subsidiaries as Principal." (Pl. Rule 56.1 Stmt. ¶ 20 (citing Ex. D at Art. 1).) Thus, once bound to the Reinsurance Treaty, plaintiff became responsible for fifty percent of the risk for all surety bonds written by Hanover on behalf of Adelphia, its affiliates and subsidiaries.

  C. Allegheny Bond

  On July 3, 2001, William Franey, on behalf of defendants, presented a bond submission to Hanover for a $15.5 million "guarantee bond" to be written on behalf of Adelphia and its subsidiary, Adelphia Business Solutions Long Haul, L.P., guaranteeing payment to Allegheny Communications Connect, Inc. ("Allegheny") with respect to a Fiber Optic Agreement entered into between Allegheny and Adelphia dated August 13, 1999, as amended by Addendum #1 through and including Addendum #8 (the "Allegheny Bond"). (Complt. ¶¶ 36, 37; Pl. Rule 56.1 Stmt. ¶¶ 24, 25; Defs. Rule 56.1 Stmt. ¶ 22.) On July 7, 2001, Hanover advised David Summerall of Franey that "Hanover was unable to write the Allegheny Bond because of Hanover's concerns of the type and size of the Allegheny Bond, among other concerns."*fn9 (Pl. Rule 56.1 Stmt. ¶ 28.) Consequently, after Hanover expressed these initial concerns about issuing the bond, Franey presented the Allegheny Bond submission to Lumbermens to place directly, but Lumbermens rejected it by a specific refusal on July 10, 2001. (Pl. Rule 56.1 Stmt. ¶¶ 31, 35; Defs. Rule 56.1 Stmt. ¶ 23.) Plaintiff maintains that when Franey presented the Allegheny Bond to Lumbermens for consideration, it was as a stand-alone submission, and not for consideration under the Reinsurance Treaty. (Pl. Rule 56.1 Stmt. ¶¶ 32, 33.) In fact, when defendants presented the Allegheny Bond to Lumbermens, they indicated that Franey had already presented it to Hanover, which was unable to write it due to its size. (Id. ¶ 34 (citing Franey Dep. at 90).) Additionally, "[i]n his telephone call declining the Allegheny Bond, Charles Schmalz informed William Franey of Lumbermens' position that this Allegheny Bond was a financial guaranty bond, was not a cable pole attachment bond and was not the type or size of bond that Lumbermens intended to be covered by the Reinsurance Treaty." (Id. ¶ 36 (citing Schmalz Dep. at 114-15).)

  Hanover, as mentioned above, originally refused to write or issue the Allegheny Bond; however, Hanover later authorized it to be executed. (Defs. Rule 56.1 Stmt. ¶ 24; Pl. Rule 56.1 Stmt. ¶ 37.) According to defendants, Hanover's initial concerns about issuing the Allegheny Bond were mitigated after Franey had provided additional information, partly through a conference call between Hanover and Adelphia, the principal on the bond. (Defs. Rule 56.1 Stmt. ¶ 24.) Hanover, through Van Steenburgh, testified that they conducted due diligence in underwriting the Allegheny Bond and do not attribute any misstatements of fact regarding the Allegheny Bond to Franey. (Id. ¶ 25 (citing Van Steenburgh Dep. at 205).) After final approval on July 16, 2001, Hanover issued the Allegheny Bond. (Pl. Rule 56.1 ...


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