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Greenlight Reinsurance, Ltd. v. Appalachian Underwriters, Inc.

United States District Court, S.D. New York

July 25, 2013

GREENLIGHT REINSURANCE, LTD., et al., Plaintiffs,
v.
APPALACHIAN UNDERWRITERS, INC., et al., Defendants

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[Copyrighted Material Omitted]

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[Copyrighted Material Omitted]

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For Greenlight Reinsurance, Ltd., Verdant Holding Company, LTD, Plaintiffs: Daniel Mumford Perry, Jed Mastren Schwartz, Linda Dakin-Grimm, Milbank, Tweed, Hadley & McCloy LLP, Los Angeles, CA.

For Appalachian Underwriters, Inc., Insurance Services Group, Inc., Defendants: Ronald Lee Daugherty, LEAD ATTORNEY, Salmanson Goldshaw, P.C., Philadelphia, PA.

OPINION

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OPINION AND ORDER

J. PAUL OETKEN, United States District Judge.

Plaintiffs Greenlight Reinsurance, Ltd. (" Greenlight" ) and Verdant Holdings Company, Ltd. (" Verdant" ), bring this action for breach of contract and declaratory judgment against Defendants Appalachian Underwriters, Inc. (" AUI" ) and Insurance Services Group, Inc. (" ISG" ). Before the Court is Defendants' motion to dismiss the Complaint pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). For the reasons that follow, Defendants' motion is granted in part and denied in part.

I. Background

A. Factual Background[1]

The claims in this case arise from several contracts, which overlap in various ways and involve several iterations of the same, or related, parties. These contracts can be grouped into three primary sets: the Reinsurance Agreements; the Retrocession Agreements; and the Guarantees. Each of these categories is described in turn.

1. The Reinsurance Contracts

Defendant AUI is a managing general agent (" MGA" ) within the insurance sector, meaning that AUI manages all aspects of insurance underwriting for designated policies. AUI acts as a MGA for State National Insurance Co., Inc. and United Specialty Insurance Co. (together, " the Insurance Companies" or " the Companies" ). As a general rule, once AUI, as the MGA, binds policies for the Insurance Companies, they have assumed risk for the insured's loss. In order to reduce their exposure to risk, the Insurance Companies entered into three reinsurance contracts

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with Plaintiff Greenlight, by which the reinsurer--Greenlight--assumed some of the Companies' risk, in exchange for the transfer of a share of the Companies' premium payments received from policyholders, less the commission paid to the MGA.

At issue here are three reinsurance contracts that the Insurance Companies entered into with Greenlight: (1) the Quota Share Reinsurance Agreement, among the Insurance Companies, Greenlight, and AUI, effective July 1, 2008 (Compl., Ex. A); (2) the Quota Share Reinsurance Agreement among the Insurance Companies, Greenlight, and AUI, effective July 1, 2010 ( id., Ex. B); and (3) the California Quota Share Reinsurance Agreement among United Specialty Insurance Co., Greenlight, and AUI, effective July 1, 2010 ( id., Ex. C) (collectively, " the Reinsurance Agreements" ). AUI acted as the MGA for each of these agreements.

Pursuant to § 2.03 of the Reinsurance Agreements, the Companies were required to cede part of their premiums from policyholders to Greenlight as reinsurer.[2] In turn, § 6.03 of the Reinsurance Agreements requires AUI to remit to Greenlight these ceded premiums, less any commissions to which AUI itself is entitled, providing as follows:

Within thirty (30) days after the end of each month, the General Agent [referring to AUI][3] shall remit to the Reinsurer [referring to Greenlight] the following:

(a) Ceded Collected Premiums, less;

(b) General Agent's commission thereon, less;
(c) Paid losses less;
(d) Paid Loss Adjustment Expenses.
The positive balance of (a) less (b) less (c) less (d) shall be remitted by the General Agent with its report. Any balance shown to be due the Company [referring to the Insurance Companies] shall be remitted by the Reinsurer as promptly as possible after receipt and verification of the General Agent's report.

(Compl., Exs. A-C, § § 6.03.) Article 8 of these agreements addresses the calculation of AUI's commission, which it subtracted from the premiums it remitted to Greenlight pursuant to the contractual language. Because the extent of losses under insurance policies changes over time, § 8.05 provides for so-called provisional commissions, which AUI was permitted to take up front--" before the extent of losses on the underlying insurance program [was] actually known." (Plaintiff's Memorandum of Law in Opposition, Dkt. No. 14 (" Pl.'s Opp." ), at 4 (discussing Compl., Exs. A-C, § 8.05).) Section 8.06(a) of the Reinsurance Agreements mandates that the provisional commissions " be adjusted for each agreement year," based upon explicit criteria associated with the actual performance of the insurance business, such as the loss ratio incurred on the insurance program. (Compl., Exs. A-C, § 8.06(a).) Put simply, each of the Reinsurance Agreements defines

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a minimum commission rate for AUI, which is accordingly less than AUI's provisional commission rate. For example, if the performance of the underlying insurance at issue was poor, then AUI would be entitled to only the minimum commission, and would have to remit to Greenlight the provisional commission less the minimum commission. If the opposite were true, meaning " the ratio of losses incurred to premiums earned [was] less than what Greenlight and [AUI] anticipated in the reinsurance Agreements," Greenlight was required to " return additional premium amounts to [AUI], increasing [AUI's] commission." (Memorandum of Law of Defendants Appalachian Underwriters, Inc. and Insurance Services Group, Inc., Dkt. No. 13 (" Def.'s Mem." ), at 3.)

Section 8.06 of the Reinsurance Contracts requires AUI to " calculate and report the adjusted commission on ceded premiums earned within 60 days after 12 months after the end of each Agreement Year, and within 60 days after the end of each 12-month period thereafter until all losses [under the contract] are fully settled." (Compl., Exs. A, § 8.06(c); B-C, § § 8.06(d).) If this calculation reveals that the " adjusted commission on ceded premiums earned for the agreement year, [AUI] shall remit the difference to [Greenlight] with its report." ( Id .) In short, " AUI was required to remit its adjusted commission amounts on the Report and Remittance Dates." (Pl.'s Opp. at 5.) According to Plaintiffs, to date, AUI has failed to remit $13 million in contractually required funds to Greenlight. The $13 million figure was calculated by examining the difference between the amount of commission to which AUI was entitled given the premiums and losses, and the amount of commission AUI had already taken.

There is no " reconciliation" procedure in Article 8, by which disputes concerning the amount owing or the commission calculations can be resolved between AUI and Greenlight, save one subsection of Article 8 of the 2010 and California Reinsurance Agreements, which provides that if there is a dispute as to the Ultimate Loss Ratio, such dispute will be determined by a third party actuary.[4] (Compl., Exs. B, C, § 8.06(i).) According to Greenlight, however, all parties agree that the Ultimate Loss Ratios are high enough that AUI is entitled only to its minimum commission, which is lower than the aforementioned provisional commission.

The three Reinsurance Agreements also contain an identical Arbitration Clause, which states as follows:

As a condition precedent to any right of action hereunder, in the event of any dispute or difference of opinion hereafter arising between the Company [referring to the Insurance Companies] and the Reinsurer [referring to Greenlight] with respect to this Agreement, or with respect to these Parties' [referring to the Insurance Companies, Greenlight, and AUI] obligations hereunder, it is hereby mutually agreed that such dispute or difference of opinion shall be submitted to arbitration.

( Id., Exs. A-C, ยง 10.01.) Article 10 also provides details for the arbitration procedure, discussing the process by which the ...


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