Mutual Holdings (Bermuda) Ltd v Matsen Insurance Brokers Inc. [SC Comm (Bda)]
| Jurisdiction | Bermuda |
| Judgment Date | 25 June 2014 |
| Neutral Citation | [2014] SC Bda 54 Com |
| Date | 25 June 2014 |
| Docket Number | CIVIL JURISDICTION Commercial List 2008: No. 282 |
| Court | Supreme Court (Bermuda) |
[2014] SC (Bda) 54 Com
In the Supreme Court of Bermuda
CIVIL JURISDICTION Commercial List 2008: No. 282
Mr. Ben Adamson, Conyers Dill & Pearman Ltd., for the Plaintiff
Mr. Mark Diel and Ms. Katie Tornari, Marshall Diel & Myers Limited, for the Defendant
(in Court)
By a Specially Indorsed Writ issued on November 13, 2008, the Plaintiff sought damages in the amount of $165, 703 plus interest as monies due from the Defendant under a contract. The relevant contract was a shareholder agreement initially entered into as of March 1, 1998, and amended thereafter from time to time (‘the Shareholder Agreement’).
The Plaintiff's case was that the Shareholder Agreement was concluded as one aspect of the Defendant's participation in an Insurance Profit Centre (‘IPC’) ‘rent-a-captive’ programme (‘the Programme’), offered by the Plaintiff and its affiliate Mutual Indemnity (Bermuda) Limited (‘Mutual Indemnity’). The main elements of the Programme included the following:
-
(1) Legion Insurance Company and/or Villanova Insurance Company (‘Legion’), affiliates of the Plaintiff issued insurance policies to the Defendant's clients;
-
(2) Mutual Indemnity reinsured certain of Legion's risks;
-
(3) the Defendant, an insurance agent which received commissions for insurance business it introduced to Legion, purchased a non-voting preference share in the Plaintiff for series Z31 on terms set out in the Shareholder Agreement;
-
(4) the Shareholder Agreement entitled the Defendant to a dividend if the Programme was profitable, but obliged the Defendant to indemnify the Plaintiff in respect of any losses suffered by Mutual Indemnity in respect of the insurance risks relating to the Defendant's clients.
It was further alleged that in 2003, Legion was placed into liquidation by the Commonwealth Court of Pennsylvania, having been placed into rehabilitation the previous year. Mutual Indemnity commuted its liabilities to Legion on April 23, 2003 (with effect from December 31, 2001-‘the Commutation’) by paying US$ 165, 703 1 in respect of losses on the Programme. The Defendant was obliged to indemnify the Plaintiff in this amount under clause 3A of the Shareholder Agreement.
The Defendant's Defence and Counterclaim asserted that:
-
(a) under clause 3A, the obligation to indemnify did not apply to unpaid reported losses or incurred but not reported losses (‘IBNR’); and
-
(b) a dividend payment was due to the Defendant in the total amount of US$121,422.11.
The issues in controversy substantially turned on the interpretation of the dividend and indemnity provisions of the Shareholder Agreement without, in the final analysis, any serious dispute about the underlying facts and/or figures.
The Plaintiff filed a Witness Statement and called Mr. Leslie Dziwenka, a chartered accountant who is now a senior vice-president of Marsh IAS Management Services (Bermuda) Limited. Mr. Dziwenka, who has worked for the Plaintiff's group of companies for over 10 years, was responsible for calculating the Plaintiff's claim. He gave his evidence in a very straightforward manner and I readily accepted him as a credible witness.
The Plaintiff's witness explained how the programme worked. He described three risk layers:
-
(1) ‘the Loss Fund’, made up of net premiums ceded by Legion to Mutual Indemnity;
-
(2) ‘the Gap’, a layer of risk between the Loss Fund and the Aggregate Attachment Point (‘AAP’), which was usually collateralised by the IPC client through a ‘Security Deposit’;
-
(3) ‘the Third Layer’ which, if pierced by paid losses, would be funded through third party reinsurance.
A pivotal paragraph in his Witness Statement encapsulated both the Plaintiff's subjective view of the Programme of which the Shareholder Agreement formed part, which of course was irrelevant to the contract's interpretation, and the construction contended for by the Plaintiff:
‘ 20. The purpose behind the IPC model was for the IPC Client to take on the risks which were not ceded to third party reinsurers. From the perspective of the IPC companies, the IPC business was fee based, not risk based. The risk for Mutual Indemnity and Mutual Holdings was credit risk: that the IPC Client would fail to abide by the Indemnity. A large part of my job was calculating and obtaining the necessary security or collateral to minimise credit risk.’
Mr. Dziwenka admitted under cross-examination that the commutation amount paid to Legion was in respect of both paid losses and IBNR. The Commonwealth of Pennsylvania court (which was supervising the Legion liquidation) insisted on a $5 million increase on the total payment amount by Mutual Indemnity to Legion, which was applied pro rata throughout the various programmes. The parties to the commutation negotiated on the basis that paid losses of $817, 486 were due, and an estimated $561,984 in respect of IBNR. A discount of $217, 478 was given to Mutual Indemnity for early payment of the IBNR element of the Legion claim on the Z31 Programme, which was also credited with all earned premium (whether or not it was collected) and 100% of funds withheld (an item subject to some doubt). $715,050 was the agreed Commutation amount but it was increased by Court order to $742,617. The witness also demonstrated a clear worsening trend in terms of loss development, providing retrospective validation for the Commutation in commercial terms.
I accept Mr. Dziwenka's evidence that $742,617 was paid by Mutual Indemnity to Legion under the Commutation in respect of the Programme, less offsets of $492,914+$84,000 ($576,914) resulting in a net payment of $165, 703, the amount claimed by the Plaintiff.
He also conceded under cross-examination, that if the elements of these payments representing loss reserves and IBNR were taken into account for dividend calculation purposes but not taken into account for indemnity purposes, the Plaintiff's claim would be more or less extinguished. This question of construction of the Shareholder Agreement was the central controversy this Court is required to resolve.
However, Mr. Dziwenka did not concede and the Defendant did not establish that this would also result in the Defendant being entitled to receive by way of dividend the sum claimed in its Counterclaim.
Lynne Wallace was the Defendant's President from 2001 to 2007 and Senior Vice-President prior to that. She is a California Licensed Insurance Broker and also a Certified Property Casualty Underwriter. Her First Witness Statement primarily made the case that the Defendant was not liable as a matter of construction of the Shareholder Agreement (Clause 3A) and that without sufficient back-up for the demand, payment ought not to be made. It also asserted that the demand came as a shock as no financial data had previously been supplied (paragraph 16). In her Second Witness Statement, this point was further elaborated, with the assertion that before the August 15, 2003 payment demand, communications ‘ had been positive’ (paragraph 7). The arguments that the Commutation payment did not fall within the Shareholder Agreement, and ought not to be binding on the Defendant as it was consummated without consultation are then set out.
Ms. Wallace gave her oral evidence in a very frank manner and I found her to be an entirely credible witness. She admitted that her commercial experience was in the domestic insurance sphere and that, in effect, she was not confident or comfortable with the complex Programme and its reinsurance and financial dimensions. Her main practical concern was a lack of access to information once Legion went into rehabilitation/liquidation. The claims' handling process was transferred away from the private entity her company had previously dealt with, and it was impossible to penetrate the State liquidation system in communication terms. In addition, the information emanating from the Mutual Group was unhelpful at best and misleading at worst.
I accept that Ms. Wallace's concerns are entirely genuine, but they appeared to me in part to flow from the implicitly admitted fact that, despite her company entering into a complex commercial structure with onshore insurance and offshore reinsurance strands to it, she did not fully appreciate that, like all commercial bargains, it had both upside and downside to it. The fact that commissions were “guaranteed” in respect of business the Defendant fed to Legion at the ‘front end’ did not mean that the Defendant was guaranteed profits at the ‘back end’, because those profits depended on the profitability of the Programme (First Dziwenka, paragraph 26). Nevertheless, Mr. Diel still made the point that while adequate financial information about the negative status of the Defendant's shareholding in the Plaintiff was duly supplied, it was delivered, in effect, in a package displaying “smiley faces” rather than “sad faces”.
David Alexander (as President of Mutual Indemnity) sent Lynne Wallace quarterly financial statements for ‘ Preferred Share Series “Z31”’ in 2000 and 2001 under cover of letters which made no comments on the attached statements, but instead made generally positive and upbeat noises about the Mutual investments. A quick glance at the attached statements would have shown a consistent pattern in terms of negative shareholder equity; ($73,374.06) as at June 30, 2000, and after 2001 fairly consistently worse than ($300,000). I find that the covering letters to Ms. Wallace were far from misleading; but, at first blush, they seemed hardly helpful in that they failed to even hint at the bad news the statements contained.
However, I further find that the covering letters were, more likely than not, simply standard form letters with unique addressee information...
To continue reading
Request your trial