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Employers Reinsurance Company v. Massachusetts Mutual Life Insurance Company

Issue Discussed: Follow the Fortunes/Settlements

Submitted by Rick H. Rosenblum

Date Promulgated: September 7, 2011

Issues Decided: Follow-the-Settlements; Statute of Limitations; Breach of Implied Covenant of Good Faith and Fair Dealing; Offset

On September 7, 2011, the U.S. Court of Appeals for the Eight Circuit, affirming the judgment of a Missouri federal district court, held, in relevant part that: a) the reinsurance treaty expressly mandated a “follow-the-settlements” requirement, even without the term appearing anywhere in the Treaty, as the concept need not take any particular form; b) Connecticut’s statute of limitations barred the reinsurer’s challenge to specific claim settlements made by the cedent; c) the Treaty’s Offset clause did not afford the reinsurer a right to refuse to honor claim cessions; and d) the reinsurer breached its implied covenant of good faith by improperly withholding reinsurance benefits for over two years.

Factual Background

Employers Reinsurance Company (“ERC”) reinsured Massachusetts Mutual Life Insurance Company (“Mass Mutual”) for loss incurred under a 1993 Excess Disability Income Reinsurance Agreement. The Treaty reinsured “loss sustained by [Mass Mutual] under the [reinsured policies] as a result of disabilities commencing on or after the effective date and prior to the termination date [of the Treaty];” defined “loss” as “such amounts as are actually paid by the Reinsured for disability benefits afforded under the policies, in settlement of claims for disability benefits…or in satisfaction of judgments…;” authorized the cedent to determine the date of disability for each claim arising under the Treaty; and required ERC to “reimburse [Mass Mutual] promptly for loss against which indemnity is herein provided.” The Treaty did not expressly include the phrase “follow-the-settlements.”

In addition, ERC and Mass Mutual also entered into a series of Claim Review Agreements pursuant to which a third-party claims administrator chosen by ERC reviewed Mass Mutual’s claim decisions and made non-binding claim recommendations. These Claim Review Agreements, however, did not affect, amend or waive any Treaty terms.

In 2004, Mass Mutual discovered that it had inaccurately coded over $5 million of claims subject to the Treaty, which amount had been billed to and reimbursed by ERC. ERC subsequently presented its own reimbursement request to Mass Mutual, arguing that Mass Mutual breached the Treaty by mishandling claims and demanding reimbursement for twelve specific disability claims it claimed were not properly reinsured. Mass Mutual rejected ERC’s demands, responding that “follow-the-settlements” precluded ERC from second-guessing underlying claim decisions. In 2006, ERC sued in federal court in Missouri and refused to honor any further reinsurance cessions pursuant to the Treaty’s Offset provision. Mass Mutual counter-claimed for breach of contract and breach of the implied duty of good faith and fair dealing in regard to ERC’s refusal to honor reinsurance claims.

Court Analysis

The parties cross-moved for summary judgment. The cross-motions turned on whether “follow-the-settlements” existed under the Treaty, and, if so, whether it precluded ERC’s challenge to the twelve specific disability claims; whether the statute of limitations barred ERC’s breach of contract theory as to the twelve individual disability claims; and, whether ERC’s unilateral setoff constituted a breach of contract or violated its implied duty of good faith and fair dealing. The district court first concluded that the Treaty contained an express “follow-the-settlements” provision, thus limiting any challenge to Mass Mutual’s claim settlements to those claims either not covered under the Treaty or paid in bad faith. After finding issues of fact existed as to whether Mass Mutual “exercised its discretion outside of the Treaty” as to eight of the twelve challenged individual claims, the trial court next concluded that limitations barred ERC’s right to proceed as to six of those claims (ERC abandoned its right to pursue the remaining two). Finally, the district court granted Mass Mutual’s summary judgment motion as to its claims for breach of contract and breach of the implied covenant of good faith.

Follow-The-Settlements

On appeal, the Eighth Circuit, applying Connecticut law, affirmed. The appellate court first concluded that the Treaty unambiguously contained a “follow-the-settlements” obligation. Finding that “[t]he wording of follow-the-settlement clauses may vary,” the court held that the Treaty’s various reimbursement provisions together imposed on ERC the duty to “promptly reimburse Mass Mutual for a part of amounts actually paid by Mass Mutual for disability benefits afforded under the policies, in settlement of claims for disability benefits under the policies, or in satisfaction of judgments for disability benefits under the policies.” Accordingly, ERC was obligated to accept “the cedent’s good faith decisions on all things concerning the underlying insurance terms and claims against the underlying insured,” and “indemnify [Mass Mutual] for a settlement as long as that settlement is reasonable and made in good faith.” In reaching this conclusion, the Eight Circuit relied on the Treaty language, noting that ERC agreed to indemnify Mass Mutual for “Loss,” which included amounts Mass Mutual paid “in settlement” of individual disability claims. The Eight Circuit further explained that a claim made under a disability policy might or might not be covered, but either way, ERC was bound to indemnify Mass Mutual for such claims “subject to ERC’s well established, limited ability to challenge Mass Mutual’s coverage decisions.” The court expressed no view as to whether “follow-the-settlements” is an implied term of a reinsurance agreement under Connecticut law.

Statute of Limitations

After rejecting ERC’s contention that the Treaty’s Reinsurance Premium Adjustment clause constituted a limitations tolling agreement between the parties, the court turned to the question of whether Mass Mutual’s alleged continuing course of conduct tolled the statute of limitations under Connecticut law. The Eight Circuit noted the Connecticut rule recognizing “that where there is a continuing course of conduct constituting a breach of duty, the limitations period does not begin to run, or is tolled, until that conduct terminates.” The continuing course of conduct rule requires a showing of a “continuing breach of a duty that remained in existence after commission of the original [related] wrong,” which most often arises where a special relationship exists between the parties or some later wrongful conduct occurs relating back to the prior act. Ultimately, the Eight Circuit affirmed the district court’s judgment that limitations barred ERC’s specific claim challenges, finding that no special relationship existed between Mass Mutual and ERC and no fact issue existed with respect to whether Mass Mutual engaged in subsequent wrongful conduct sufficient to toll limitations. Finally, the court of appeals also affirmed the district court’s holding that a reinsurer’s cause of action for breach of contract accrues at the time a disputed claim is ceded to it.

The Offset Provision and ERC’s Breach of The Implied Covenant of Good Faith and Fair Dealing

The court also affirmed the district court’s grant of summary judgment for Mass Mutual on its claims that ERC breached the Treaty and the implied covenant of good faith and fair dealing. In reaching its decision on the breach of contract count, the appellate court rejected ERC’s contention that the Treaty’s offset provision authorized its refusal to honor Mass Mutual’s cessions, finding that the balances ERC offset were not “due” as contemplated by the Treaty offset clause. The court found that “no fair reading of the offset clause would permit ERC to cease all reimbursements on the basis of its own unilateral conclusion that Mass Mutual had improperly submitted claims in the past.” Finally, the court ruled that the district court correctly found that ERC’s unilateral withholding of all reimbursements for more than two years constituted bad faith, as ERC’s performance and/or interpretation of the Treaty evaded its spirit and was unfaithful to its purpose, resulting in a denial of Mass Mutual’s justified contractual expectations.

* Rick H. Rosenblum is a partner at Akin Gump Strauss Hauer & Feld LLP who specializes in insurance/reinsurance litigation throughout the United States.