Mutual Holdings (Bermuda) Ltd v Matsen Insurance Brokers Inc.

• Jurisdiction: Bermuda
• Judgment Date: 25 June 2014
• Date: 25 June 2014
• Docket Number: Commercial Jurisdiction 2008 No282
• Court: Supreme Court (Bermuda)

[2014] Bda LR 67

In The Supreme Court of Bermuda

Commercial Jurisdiction 2008 No282

Between:

Mutual Holdings (Bermuda) Limited

Plaintiff

and

Matsen Insurance Brokers, Inc

Defendant

Mr B Adamson for the Plaintiff

Mr M Diel and Ms K Tornari for the Defendant

The following cases were referred to in the judgment:

Mutual Holdings (Bermuda) Ltd v Stateco Inc [unreported, 2005: Civil Jur No 380, 26 September 2014]

Mutual Holdings (Bda Ltd) v American Patriot et alBDLR [2010] Bda LR 46

American Patriot Insurance Agency v Mutual Holdings (Bda) LtdBDLR [2011] Bda LR 47

Mutual Holdings (Bda) Ltd v American Patriot Insurance AgencyUNK [2013] UKPC 13

Damages for monies due under contract — Indemnification under rent-a captive programme — Dividend — Construction of Shareholder Agreement

JUDGMENT of Kawaley CJ

Introductory

1. 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’).

2. 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:

• i. Legion Insurance Company and/or Villanova Insurance Company (‘Legion’), affiliates of the Plaintiff issued insurance policies to the Defendant's clients;

• ii. Mutual Indemnity reinsured certain of Legion's risks;

• iii. 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;

• iv. 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.

3. 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, 7031 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.

4. The Defendant's Defence and Counterclaim asserted that:

• i. under clause 3A, the obligation to indemnify did not apply to unpaid reported losses or incurred but not reported losses (‘IBNR’); and

• ii. a dividend payment was due to the Defendant in the total amount of US$121,422.11.

5. 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 Witnesses

6. 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.

7. The Plaintiff's witness explained how the programme worked. He described three risk layers:

• i. ‘the Loss Fund’, made up of net premiums ceded by Legion to Mutual Indemnity;

• ii. ‘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’;

• iii. ‘the Third Layer’ which, if pierced by paid losses, would be funded through third party reinsurance.

8. 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.’

9. 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.

10. 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.

11. 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.

12. However, Mr Dziwenka did not concede and the Defendant did not establish that this would also result in the Defendant being entitled to receive...