Opinion
No. X02 CV 03-0178122-S, (X02) CV-03-0179514 S
September 19, 2008
MEMORANDUM OF DECISION RE MOTION TO COMPEL POSTING OF PRE-PLEADING SECURITY
I. BACKGROUND
These actions stem from a series of annual reinsurance contracts — the Blanket Casualty Treaty Program (hereinafter referred to as the "BCT") — between the plaintiffs (hereinafter referred to as "Hartford") and the defendants over a period of more than thirty years. Under the BCT, defendants agreed to accept liability for certain losses incurred by Hartford to its own insureds, if those losses exceeded a certain threshold amount. The BCT program was structured in layers with each reinsurance contract covering losses in excess of a specified amount or "attachment point" and up to a stated limit, and with the attachment point for each reinsurance contract corresponding to the limit of the immediately preceding layer. Over time, Hartford paid claims of its direct policyholders allegedly covered by the terms of the BCT and billed defendants for those losses in excess of the attachment point for each reinsurance contract. Defendants claim that the losses are not covered pursuant to the terms of the contracts and have refused to pay a substantial portion of those bills. Hanford has sued numerous defendants to recover for the claimed breaches of contract.
On May 28, 2004, Hartford moved in the ACE action for the posting of pre-pleading security pursuant to Connecticut General Statute Section 38a-27. On July 19, 2004, this Court (Schuman, J.) denied the motion, ruling that Hartford was not entitled to seek pre-pleading security because the Security Statute did not apply to defendants served through a contractually designated agent for service of process, and the defendants that were the target of that motion were served in that manner. The Appellate Court has since reversed this Court, holding that Hartford's method of service did not disqualify plaintiff's from filing for pre-pleading security and rejecting other arguments made by defendants as to why the Security Statute should not apply to Hartford's reinsurers unauthorized to do insurance business in Connecticut.
Hartford has now filed a new motion for pre-pleading security based upon the Appellate Court's decision. The new motion differs from the original motion because several of the defendants have resolved their issues with the plaintiffs. Further, the case has since been consolidated with the FRANKONA matter and additional unauthorized reinsurers were added that were defendants in that matter. The motion only applies to those defendants who are not authorized in the State of Connecticut.
On September 10, 2008, this Court conducted a hearing on the matter in which Hartford presented witnesses regarding both the existence of the contracts, the amount billed and the balances due. The defendants were afforded the right to cross-examine witnesses and present witnesses on their behalf regarding the existence of the contracts and the amounts presented.
Defendants have objected, inter alia, to the scope of the hearing. Their position is that they should be allowed to present evidence of their defenses to this action. Further, as to two of the defendants, they claim that for approximately ten years of the contracts, the claims are governed by an arbitration clause in the contracts. Finally, they argue that since these cases are going to be tried in stages, and that the last stage may not be tried for several years, if there is to be pre-pleading security it should relate to the various stages of the trials. The Court reserved decision on the matter.
II. DISCUSSION
C.G.S. Section 38a-27(a), provides, in relevant part:
Before any unauthorized person or insurer files or causes to be filed any pleading in any court action or proceeding . . . instituted against the person or insurer by service made in accordance with the provisions of section 38a-25, section 38a-26 or 38a-273, the person or insurer shall either: (1) Deposit with the clerk of the court in which the action or proceeding is pending . . . cash or securities . . . in an amount to be fixed by the court . . . sufficient to secure the payment of any final judgment which may be rendered in the action or proceeding . . .; or (2) procure proper authorization to do an insurance business in this state.
Plaintiffs have offered evidence that the alleged unauthorized insurance companies are, indeed, unauthorized to conduct insurance business in this state. Defendants have not contested this issue.
The Security Statute is intended to ensure that any insurer, domestic or foreign, selling insurance or reinsurance to a person in this state will have sufficient assets in this state to satisfy any judgment. It is a regulatory requirement targeting a specific subset of insurance companies that do not maintain adequate reserves and surplus in this state to satisfy licensure requirements and are alleged by a policyholder to have defaulted on their obligations under the terms of a policy.
The Connecticut Appellate Court construed both the text and the purpose of the Security Statute and directed this court "to determine the amount of security that the defendants must post as a condition of responding to the merits of the plaintiffs' claims." Hartford Accident Indem. Co. v. ACE Am. Rein. Co., 103 Conn.App. 319, 333, 930 A.2d 701 (2007). Defendants maintain that, since the Security Statute has been compared to the Pre-Judgment Remedy Statute, the Court must conduct a hearing in which the defendants' are allowed to raise their defenses, and the Court must find the plaintiffs have established probable cause that they will prevail. Plaintiffs argue that, under established rules of statutory construction, since the Legislature did not require a probable cause determination in the Security Statute it is not the same type of hearing contemplated by the Pre-Judgment Remedy Statute. Simply stated, the Legislature could have used the same language as the Pre-Judgment Remedy Statute and chose not to do so. M. DeMatteo Constr. Co. v. City of New London, 236 Conn. 710, 717, 674 A.2d 845 (1996). Further, our Supreme Court has instructed that a trial court, under the Security Statute, exercises no "discretion to determine whether to confer a right" of pre-pleading security on Hartford in this case. Hartford Accident Indemn. Co. v. ACE Am. Reins. Co., 279 Conn. 220, 233 n. 11, 901 A.2d 1164 (2006).
A. Scope of Hearing
Defendants suggest that a hearing on the merits is mandated by the U.S. Supreme Court case of Connecticut v. Doehr, 501 U.S. 1 (1991), which held that the portion of the Connecticut pre-judgment attachment statute allowing for ex parte pre-judgment attachments was unconstitutional because it did not allow for prior notice or hearing. However, the Doehr case did not decide the substantive standard for obtaining relief at an adversarial hearing. In this case, the Appellate Court discussed the need for a hearing and due process "[i]n the specific context of insurance law." Hartford Accident Indemn. Co., 103 Conn.App. at 336. In doing so, it cited and relied on case law construing a nearly identical pre-pleading security statute in New York. In New York, due process under its pre-pleading security statute is satisfied by a hearing fixing the amount of pre-pleading security to satisfy a possible judgment, and not a weighing of the merits or probable cause, as the defendants request of this Court. See British Int'l Ins. Co. v. Seguros La Republica. S.A., 212 F.3d 138 (2d Cir. 2000); Curiale v. Ardra Ins. Co., 88 N.Y.2d 268 (1996). The British Int'l. Ins. Co. case was relied on by the Appellate Court as "particularly instructive" and served as "persuasive precedent." Hartford Accident Indemn. Co., 103 Conn.App. at 336-37.
The Curiale decision emphasized the limited scope of a pre-pleading security hearing, which is not to resolve the dispute on the merits or predict the outcome of the case, but to guarantee at the outset of a case, before litigation begins, that the unlicensed insurer has funds that are accessible in the event the plaintiff prevails at trial. Curiale held that an unauthorized reinsurer "must maintain sufficient funds in the State to satisfy any potential judgment" under the reinsurance contracts, not any "likely" or "probable" judgment. Curiale at 275. The court explained the unfairness of letting an unauthorized insurer write business in the State without requiring it to post security for a possible judgment when named in a lawsuit. "Thus, appellant would encourage alien insurers, with little or no assets in New York, to conduct a large volume of insurance business in this State at the expense of licensed insurers who must limit their risk to a percentage of their surplus, and maintain certain reserves and deposits." Id. at 277. That position, the court held, "would eviscerate the Legislature's policy, as embodied in the Insurance Law, of ensuring the availability of funds within the State to pay losses on insurance policies issued here." Id. An unauthorized insurer may therefore not "litigat[e] the merits of the [plaintiff's] claims without posting pre-answer security sufficient to pay any judgment." Id. at 277-78. It is interesting to note that the pre-pleading security statute under consideration in the New York cases is very similar in its wording to the Connecticut Pre-Pleading Security Statute.
The Second Circuit likewise concluded that the pre-pleading security requirement is "readily distinguished from traditional pre-judgment creditors' remedies." British Int'l Ins. Co., 212 F.3d at 142. A pre-pleading security hearing need only establish that the defendant owes a sum of money under a set of contracts, and this showing is "uncomplicated" and lends itself to "documentary proof' from the plaintiff alone. Id. at 144 n. 3. The court in British Int'l Ins. Co. agreed with the court's ruling in Curiale that this level of process and scrutiny under an insurance pre-pleading security statute satisfies the due process test of Doehr. Id. at 142-44.
In this case, plaintiffs offered proof of the existence of the contracts between the parties. Further, they introduced evidence of the billings which have been submitted pursuant to their interpretation of those contracts, and the fact that said billings remain outstanding. Defendants were allowed to cross-examine the witnesses presented and present any witnesses they wished on the issue of the billings. Defendants were also allowed to present, in the form of a brief and oral argument, the nature of their defenses in this matter. However, in view of the New York cases which our Appellate Court has already cited with approval, this Court is of the opinion that the scope of the hearing was sufficient to meet due process standards, and followed both the letter and intent of the statute. The wording of the pre-pleading statute is clear. If the Legislature had wished to change the pre-pleading statute into a pre-judgment remedy statute with similar wording they would have changed the wording. Instead, the pre-pleading statute remains as a security statute wherein the security must be posted prior to the filing of any pleading. The due process requirements are met by the submission of some proof that contracts existed, billings were made under the auspices of those contracts, and the bills remain unpaid. Further, defendants had the ability to cross-examine the presented witnesses and offer proof, either that the bills were paid or that the amounts were incorrect. Therefore, defendants objection to the scope of the hearing is overruled and their request for a full hearing on the merits is denied.
B. Arbitration
Defendants claim that an arbitration clause prevents the plaintiffs from recovering some of the bills regarding two defendants from approximately 1976 to 1986. Plaintiffs admit that an arbitration clause existed in those contracts. Plaintiffs suggest, however, that since this is the first time the issue has been raised in four years, the defendants have waived their right to enforce the clause. Defendants counter that the plaintiffs cannot show prejudice as the result of their failure to enforce the clause.
The issue of arbitration would ordinarily be presented as part of the defendants' special defenses. Further, a Motion to Compel Arbitration could always be submitted to the Court. The questions presented by this one issue alone, in a case in which a myriad of issues are presented, lend further credence to the interpretation which the Court has offered for the scope of hearing contemplated by the statute. Indeed, if a hearing on the merits were to take place regarding all of the issues, the court could be involved in the matter for several weeks on a hearing that was intended to answer the question of pre-pleading security. This type of hearing was never intended to be a hearing on the merits, or offer the parties several opportunities to question potential witnesses in the case. The issue of arbitration will have to remain for another day.
C. Several Trials — Non-MacArthur Claims
Defendants argue that this case will be tried in several stages in view of the nature of the claims and the number of defendants. It is likely that the cases will take several years before the final cases are tried. They suggest that, if the Court is inclined to award pre-pleading security, that the issue should be raised in stages before the commencement of trial for the various cases.
The purpose of the pre-pleading Security Statute, as already discussed, is to ensure that defendants who sell insurance to Connecticut insureds without complying with the regulatory licensing requirements post sufficient security at the beginning of a case. The defendants do not get to choose the time for posting pre-pleading security just because the case may be long and complex. The statute reads that the security must be filed before any pleading. Therefore, all of the security will be required as part of the court order.
D. Evidence
The plaintiffs have presented evidence of the amounts which they claim are due from each defendant. The Court finds that the evidence is sufficient for the posting of pre-pleading security under the terms of the statute. Therefore, the Court orders the defendants to post pre-pleading security as follows:
TBTABLE 1. Anglo French Insurance Company Limited $ 419,829 2. CGU International Insurance PLC, successor in interest to British and European Reinsurance Co. $ 123,572 3. Eagle Star Insurance Company Ltd. $ 308,007 4. Fortis Insurance Ltd, f/k/a Bishopsgate Insurance Co., Ltd $ 145,241 5. IRB Brasil Resseguros $ 229,636 6. National Casualty Company of America $ 2,678,967 7. Winterthur Swiss Insurance Company $ 1,749,966 Total Security $ 5,655,218 TB/TABLE
The security posted must be in the form of cash, bond, letter of credit or some other form acceptable to the Court.
In addition, the plaintiffs would be entitled to a calculation of pre-judgment interest as part of the security. There is a dispute as to the correct calculation in this regard. The Court will allow the parties two weeks in an effort to resolve the correct amount of interest to add to the security. If the parties cannot agree they should submit their own calculations to the Court by October 3, 2008.
III. CONCLUSION
Based upon the foregoing reasons, the plaintiffs' motion is granted. The defendants are to post pre-pleading security in the total amount of $5,655,218.00 together with pre-judgment interest as agreed upon by the parties, or in the alternative by the Court after October 3, 2008.