Opinion
CIVIL ACTION NO. 01-3027, SECTION "C" (2)
December 9, 2003
ORDER AND REASONS
This matter was tried before the Court, without a jury, on November 17-18, 2003, and taken under advisement. Having considered the evidence and testimony adduced at trial, the record, the memoranda of counsel and the law, the Court now issues its opinion.
FINDINGS OF FACT and CONCLUSIONS OF LAW
Findings of Fact
1. McDermott International, Inc. ("Plaintiff or "McDermott"), is a Panamanian corporation with its principle place of business in New Orleans, Louisiana. McDermott owns property located throughout the world and valued at approximately two billion dollars. (Testimony, Louis Burkart)
2. Plaintiff is a publicly traded company on the New York Stock Exchange and is bound by the regulations of that exchange, as well as the securities laws and regulations States. (Testimony, Louis Burkart)
3. In connection with its regulatory, financial and corporate obligations, it is necessary for McDennott to maintain, among other lines, property insurance to protect its global property holdings. (Testimony, Louis Burkart).
4. Industrial Risk Insurers ("Defendant" or "IRI"), maintains its principal place of business in Connecticut, is licensed to conduct business in all fifty states, but is not an insurance company and is not registered in any state to underwrite policies of insurance. (Testimony, Frank Teterus).
5. Rather, Defendant is an association of insurers, through which its members enhance their individual capacity to underwrite significant insurance risks by acting collectively. During the time in question, its primary members were Employers Reinsurance Corporation ("ERC") and Westport Insurance Corporation. Defendant is a subsidiary of ERC which is in turn a subsidiary of the General Electric Corporation. (Testimony, Frank Teterus).
ERC, Westport and General Electric Corporation are not parties to this litigation. Nor have there been any allegations that these companies have ignored the corporate form requiring the Court to address corporate veil piercing.
6. From approximately 1983 through 1998, Plaintiff contracted the property insurance covering its worldwide assets with the Factory Mutual Insurance Company. (Testimony, Robert Hill; Testimony, Louis Burkart).
7. In 1998, working through its insurance broker, Marsh USA, Inc. ("Marsh"), McDennott determined to "shop" its property insurance line for the first time in over a decade. IRI expressed an interest in providing the property coverage Plaintiff sought. During preliminary meetings, and appearing on certain documents produced by Defendant, a corporate relationship between IRI and the General Electric Corporation was expressed. That relationship was one of parent and subsidiary. (Deposition, Dan Ackerman; Testimony, Louis Burkart; Testimony, Christopher Ryan).
8. Commencing October 1, 1998, Plaintiff ceased contracting with Factory Mutual Insurance Company for its property insurance and commenced coverage with Defendant in the amount of live hundred million dollars, fifty percent of which was supplied through Westport and ERC. The Defendant "fronted" the balance of the insurance, which was actually provided by two independent insurers, Allianz and Winterthur. That contract was negotiated in New Orleans, Louisiana during 1998. (Testimony Robert Hill; Testimony, Louis Burkart).
The initial insurance policy between McDermott and IRI covering the period October 1, 1998 through October 1, 1999 had annual premiums of $1,116,567.
9. This coverage was renewed on substantially similar terms on October 1, 1999 and again on October 1, 2000. (Exhibit 1)
The first renewal policy covering the period October 1, 1999 through October 1, 2000 had annual premiums of $1,107,907. The second renewal policy covering the period October 1, 2000 through October 1, 2001 was policy number 31-3-68136 and had annual premiums of $1,160,000. (Exhibit 1). The second renewal policy was not renewed for a third renewal period (i.e. a fourth term), and it is its nonrenewal that forms the basis of the instant claims.
10. During the three years of contracting its property insurance coverage with IRI, McDermott had less than $200,000 of claims. During that time, McDermott never experienced poor performance of claims handling, nor did IRI violate any of its contractual obligations to McDermott. In fact, over that three year period a "great" contractual relationship developed among the parties. (Testimony, Robert Hill; Testimony Louis Burkart).
11. The insurance industry is defined by a complex series of contracts designed to spread the risk associated with underwriting policies. This dispersion of risk from a direct insurer to other insurers is known as reinsurance. Reinsurance exists in two forms: where the direct insurer enters into an agreement whereby it reinsures a specific risk, and, in the case of treaty reinsurance, where the primary insurer contracts to reinsure an entire portion of its portfolio for a specific period. Reinsurance is a necessary component of the insurance industry as a whole, as the spreading of risk has a "smoothing effect" on insurers' profits and losses, thereby facilitating and expanding insurers' capacity to underwrite insurance. (Testimony, Frank Teterus; Testimony, Robert Lembke).
12. By the beginning of 2001, and as a result of significant insurable occurrences, including risk exposure resulting from severe flooding damage in the Gulf Coast Region as a result of Tropical Storm Alison, the insurance industry began to "harden," that is, insurers became less willing to underwrite significant insurable risks, and the price, as well as the terms and conditions for coverage became less attractive. This result was due in significant part to the limited capacity reinsurers had remaining to underwrite their facultative and treaty policies. (Testimony, Robert Hill; Testimony, Frank Teterus).
13. Beginning in Spring 2001, Marsh and McDermott commenced preparations for McDermott's 2001-2002 renewal process. As a part of this process, Marsh and McDermott officials engaged in preliminary discussions in which the dynamics of the hardening market and the potential difficulty McDermott would face obtaining such a large policy was addressed. This preparatory process included marketing McDermott's needs to gauge industry interest. The parties obtained little interest from insurers, and received a negative expression of interest from McDermott's prior insurer, Factory Mutual Company. (Testimony, Robert Hill; Testimony, Louis Burkart).
14. On August 31. 2001, Defendant submitted a renewal proposal to Plaintiff setting forth the renewal terms and conditions for the fourth contract year commencing October 1, 2001. (Exhibit 2). The offer, which was received by Plaintiff on September 4, 2001 and by Marsh on September 6, 2001, substantially changed the terms of the prior years' coverage, most fundamentally by not "fronting" the two hundred fifty million dollar balance that completed Plaintiffs five hundred million dollar coverage needs, and by significantly increasing the annual premiums. In addition, the premium for the first half of the five hundred million dollar policy was significantly higher than previous years. Because of the hardening market, the premium proposal made by Defendant on August 31, 2001 was not unexpected. (Testimony, Robert Hill).
The annual premium proposed in the August 31, 2001 renewal offer was $1,965,200. This is was an increase of between seventy percent and seventy-seven percent over the prior policy premiums which ranged from $1,107,907 to $1,160,000.
In fact, Mr. Hill testified that Marsh and McDermott learned as early as August 6, 2001 that the most significant change, the lack of fronting of half the policy, would be made by IRI.
15. It is customary in the insurance industry for renewal offers to remain open until the coverage under the expiring policy concludes. However, it is also reasonable for proposals for renewal to be accepted within two weeks of being made. Moreover, it is not uncustomary that industry participants withdraw renewal offers where significant circumstances dictate that the offer is no longer practicable. (Testimony Jim Schratz; Testimony, Robert Lembke; Testimony, Mike Smith).
16. While Plaintiff adduced evidence that it intended to accept this offer after "filling the slip," that is obtaining the balance of its insurance needs to bring its total coverage to five hundred million dollars, it made no expression of this intention to Defendant prior to September 11, 2001. or anytime thereafter, despite McDermott's awareness of the dramatic and immediate impact these events had on the insurance industry. (Testimony, Robert Hill; Testimony, Louis Burkart).
17. While parties customarily try to "fill the slip" before accepting individual subscriptions to an entire underwriting, that is not a necessary prerequisite to accepting any individual component of a proposal. (Testimony, Louis Burkart; Testimony, Robert Lembke).
18. On September 11, 2001, the insurance industry suffered a catastrophic event in the form of terrorist attacks occurring in New York City, Pennsylvania and Washington, D.C. These events had a further, and extreme, hardening effect on both the insurance and the reinsurance markets, and the ability of industry participants to underwrite policies. In effect, the capacity of the insurance industry as a whole was frozen for upwards of six months pending the determination of the risk exposure posed as a result of those events. Defendant, working with its reinsurers, determined not to offer coverage in excess often million dollars as a result. (Testimony, Frank Teterus).
19. On September 18, 2001, Defendant withdrew its renewal offer by telephonic communication with Mr. Robert Hill, Plaintiffs representative at Marsh. (Testimony, Robert Hill). Defendant confirmed its oral recision by e-mail and facsimile addressed to Mr. Hill on September 18, 2001, informing Plaintiff that Defendant was required to withdraw its August 31, 2001 offer, and that the insurance coverage provided by Defendant would therefore expire by its terms on October 1, 2001. (Exhibit 3). Defendant sent a substantially similar letter of non-renewal to McDermott on September 21, 2001. (Exhibit 6).
20. On September 19, 2001, Marsh representatives notified Defendant that IRI was required to send a notice of nonrenewal directly to its insured sixty days before the expiration date of the current policy. That notice required a specification of the reasons for the insurer's decision to not renew. (Exhibit 4). This demand for a sixty-day extension and detailed notice was made again by letter from Marsh to Defendant's president dated September 25, 2001 (Exhibit 9), and from Plaintiff to defendant dated September 27, 2001 (Exhibit 10), with each explaining that provisions in the expiring contract required such notice and extension in accordance with Louisiana Law.
21. By letter dated September 21, 2001, Defendant's president informed Plaintiff that due to "the significance of recent events, and the resulting impact on the insurance and reinsurance industries," it was necessary to withdraw its offer of renewal. (Exhibit 7).
22. Defendant amended its September 21, 2001 notice of non-renewal on September 27, 2001. With that amendment, Defendant continued the expiring policy at the same premium, terms and conditions for sixty days, which period expired November 20, 2001, or sixty days from September 21, 2001. (Exhibit 11). In a subsequent letter dated September 28, 2001, IRI specified that that extension was in compliance with the laws of the State of Louisiana governing insurance contracts. (Exhibit 13).
23. Defendant subsequently proposed to underwrite twenty-five percent of a one hundred million dollar proposal, which offer was rejected by Plaintiffs. (Exhibits 5, 8; Testimony, Louis Burkart).
24. By November 15, 2001, Plaintiff obtained $100 million of property coverage at a cost of $3,297,580. This coverage was made by six insurers, including Allianz and Winterthur, who insured twenty-five percent and thirty percent of the total policy, respectively. (Testimony, Louis Burkart).
25. In March 2002, Plaintiff obtained a second tranche of $100 million in insurance coverage for its properties, at a cost of S654.190. (Testimony, Louis Burkart).
26. Plaintiff was unable to obtain coverage at the levels or premiums available to it preceding September 11, 2001. (Testimony, Louis Burkart).
27. Plaintiff filed this action alleging a breach of its contract with the defendant and a breach of the Defendant's duty of good faith and fair dealing in its contractual performance and as an insurer. Plaintiff seeks recovery of the amount of the increased premium amounts paid following the nonrenewal in excess of the proposed premium amount offered on August 31, 2001.
Conclusions of Law
1. The Court has jurisdiction over the subject matter of this case under its diversity jurisdiction pursuant to 28 U.S.C. § 1332.
2. "A federal court considering a diversity case that implicates choice of laws must determine which [jurisdiction]'s law applies by following the choice of law rules of the forum state." Marchesani v. Pellerin-Milnor Corp., 269 F.3d 481, 485 (5th Cir. 2001). Accordingly, Louisiana's choice of law rules control the Court's determination of which jurisdiction's law applies to this case. See id.
3. Article 3515 governs the choice of law, and requires the Court to consider the relationships of the parties to the states involved, the public policies involved, and each of those elements in terms of the facilitation of interstate commerce. La.C.C. Art. 3515 (West 1994).
4. Because this is a contract dispute, Article 3537 directs the Court to also consider the place of the negotiation and the place of the delivery of the contract, as well as the type of contract involved. La.C.C. Art. 3537 (West 1994).
5. Applying these Articles to the instant matter, the Court finds that Louisiana law governs the substantive issues of this case. Plaintiff is a Louisiana corporation, which is also the state of negotiation and delivery of the policy in question. Because Louisiana has a significant public policy interest in regulating its insurance industry, the Court finds that the public policies of Louisiana, rather than those of the jurisdictions in which the Plaintiffs properties are located, would be most seriously impaired if its law were not applied to this contract dispute. See generally Resure, Inc. v. Chem. Distribs., Inc., 927 F. Supp. 190, 192 (M.D. La. 1996), aff'd, 114 F.3d 1184 (5th Cir. 1997), cert. denied, Chem. Distribs., Inc. v. Resure, Inc., 523 U.S. 1072; 1185. Ct. 1511, 140 L.Ed.2d 665 (1998) (applying Louisiana law stating that where a policy implicates the potential for diffuse geographic concerns, the law of the place of execution governs).
6. Louisiana law also applies to the breach of the covenant of good faith and fair dealing claim.
7. Louisiana enjoys the most significant relationship to the parties and the dispute. The insured is a Louisiana corporation, and none of the other states or foreign jurisdictions where the Plaintiffs properties are located enjoy a more significant relationship to the dispute than Louisiana. One purpose of imposing an implied covenant of good faith and fair dealing on an insurer "is to protect the insured from being exposed to financial risk." E.g., Fireman's Fund Ins. Co. v. Nat'l Bank for Coops., 849 F. Supp. 1347, 1363 (N.D. Cal. 1994). Because the financial risk at issue arises directly from the negotiation and delivery of the insurance contracts in. Louisiana, the other states and foreign jurisdictions containing Plaintiffs property can have no more interest in protecting McDermott than Louisiana. Furthermore, applying the law of the jurisdiction of the location of each property would subject IRI to the adverse consequences of complying with myriad and potentially conflicting renewal laws not just of different states, but also of foreign jurisdictions.
8. Accordingly, it is proper to apply Louisiana law to decide McDermott's claim that IRI breached its duty of good faith and fair dealing in the nonrenewal of its insurance.
9. A contract is an agreement between two parties whereby one party makes an offer and the other party accepts that offer, "thereby establishing a concurrence in understanding the terms." Tyler v. Haynes, 760 So.2d 559 (La.App. 3d Cir. 2000); La.C.C. Art. 1906 (West 1987).
10. Plaintiff urges the Court to allow prevailing custom in the insurance industry concerning keeping offers open to guide its decision. While custom may be a source of law, see, e.g., La.C.C. Art. 2053 (West 1987); La.R.S. § 10:1-205 (West 2003), it may not abrogate legislation and must yield to clear statutory law and the Civil Code. Horil v. Scheinborn, 663 So.2d 697, 701 (La. 1995): La.C.C. Art. 3 (West 1999). Though there is a practice in the insurance industry to keep renewal offers open until the completion of the expiring contract term, it is not uncommon that offers to insure are withdrawn under circumstances where the offer is no longer practicable. Because it is not uncustomary to leave an offer open nor to withdraw an offer, and because Louisiana law specifically permits the withdrawal of an offer to contract prior to its acceptance by the offeree, see La.C.C. Art. 1928, 1930 (West 1987), industry' custom will not abrogate an insurers' right to withdraw an offer.
11. The renewal offer at issue in this matter was revocable, that is, the offerer did not specify a period during which the offer would remain open, and could therefore be revoked by the offerer anytime before acceptance. See La.C.C. Arts. 1928, 1930 (West 1987).
12. Moreover, even accepting that the offer made to McDermott was irrevocable, its recision did not violate Louisiana law. While the Court reads the offer made to McDermott by IRI as one revocable in nature because it did not specify a time during which it would remain open, La. CC. Art. 1928 (West 1987), language in the offer can be read to suggest an unspecified allotment of time in which to consider the offer.See Ex. 2 ("This notice is being provided to you so that you may have ample time to consider it and then to advise us of your decision"). In such an instance, a reasonable period of time will be inferred, during which the offer will remain open. See Schulingkamp v. Aicklen, 534 So.2d 1327, 1331 (La.App. 4th Cir. 1988) (determining reasonable time must be made under the particular facts and circumstances of the case); La.C.C. Art. 1928 (West 1987).
13. Testimony adduced at trial indicated that two weeks between offer and acceptance was reasonable. Moreover, evidence at trial demonstrated that the Defendant notified the Plaintiff in early August, approximately one month before delivery of the formal offer, that there were significant changes to the coverage and its terms. The offer remained open in excess of two weeks, and for one week after the catastrophic events of September 11, 2001. Under these facts and circumstances, the period during which the offer was open was reasonable, as required by Article 1928.
14. Unless statutory law demands otherwise, where an insurer has not contractually obligated itself to policy renewals, there is no obligation on the part of the insurer to renew that policy. Gautreau v. Southern Farm Bureau Cas. Ins. Co., 429 So.2d 866, 870 (La. 1983). Nothing in the contract then in existence between McDermott and IRI required the Defendant to renew the policy: in fact, the policy and its amendatory endorsements specifically entitled the insurer to not renew the policy, in accordance with Louisiana law. (Ex. 1.)
15. While Louisiana's legislature has not limited the ability of a commercial lines carrier to not renew a policy, it has prescribed a notice procedure according to which an insurer must follow when not renewing a policy of the type at issue here. An insurer's decision not to renew an insurance contract must be noticed to the insured at least sixty days prior to the expiration of the current policy. La.R.S. § 22:636.4(D) (West 1995). Where an insurer has failed to comply with this notice provision, the statute provides for a cure, whereby the policy must be continued for sixty days from the date of notice under the same terms and conditions as the expiring policy. Id.
16. Plaintiff maintains that the notice of nonrenewal supplied by Defendant failed to give specific reasons for the nonrenewal decision, as required by the policy's statutory endorsements. The September 21, 2001 notice of nonrenewal (Exhibit 7) stated that "[g]iven the significance of recent events, and the resulting impact on the insurance and reinsurance industries" the policy would not be renewed. The Court finds this statement specifically and adequately referenced the terrorist attacks of September 11, 2001, as required by the law of the parties and the law of Louisiana.
17. The duty of good faith running from an insurer to its insured is fiduciary in nature. Theirot v. Midland Risk Ins. Co., 694 So.2d 184, 192-93 (La. 1997); La.R.S. 22:1220 (West 1995). This duty, however, relates to claims based insurance actions, and a breach of this duty is limited to those acts enumerated in that statute. Theriot, 694 So.2d at 188-90. The courts of Louisiana have held that an insurance contract does not give rise to an implied covenant of good faith and fair dealing precluding an insurer from refusing renewal. See Gautreau, 429 So.2d at 870 (reversing appellate court's finding that such a covenant exists in insurance contracts). Neither contract negotiation and formation, nor policy nonrenewal or recision of an offer to renew are enumerated in 22:1220. See Theriot, 694 So.2d at 190. As such, it cannot be said that as a matter of law the Defendant breached its duty of good faith and fair dealing owed to McDermott, as that duty has been defined by the Louisiana Legislature and explained by the Louisiana Supreme Court.
18. A contract must be performed in good faith. La.C.C. Art. 1983 (West 1987). Because McDermott has not alleged a violation by IRI of any of the existing contract terms, the Court finds no violation of Article 1983. As discussed previously, there was no contractual requirement to renew the policy as a matter of Louisiana law or as a matter of the law between the parties. IRI's decision to rescind its offer of contract renewal was therefore not a violation of the good faith performance of the contract terms required by Article 1983.
19. Finally, McDermott contends that it detrimentally relied upon assertions made that IRI was owned and backed by the General Electric Corporation, which representations induced McDermott to contract with IRI in 1998 and to renew that policy on two subsequent occasions. In order to prove detrimental reliance, McDermott must demonstrate three elements: a representation by the defendant; justifiable reliance on that representation; and a change in McDermott's position to its detriment.Orr v. Bancroft Bag, Inc., 687 So.2d 1068, 1070 (La.App. 2d Cir. 1997); La. Art. 1967 (West 1987).
20. McDennott adduced evidence at trial that representations concerning the existence of a corporate relationship among the General Electric Corporation, ERC and IRI were made. Defendant does not deny the existence of that relationship. As such, Plaintiff has satisfied the first element for a detrimental reliance claim.
21. McDennott, however, fails to satisfy both the second and third prongs required under Article 1967.
22. Reasonableness of a party's reliance is to be measured against its business acumen. Academy Mortgage Co., LLP v. Baker, Boudreaux, Lamy Foley, 673 So.2d 1209, 1212 (La.App. 4th Cir. 1996). Moreover, "[a]n insured is presumed to know the provisions of his contract." Stephens v. Audobon Ins. Co., 665 So.2d 683, 686 (La.App. 2d Cir. 1995). The contract is the law of the parties, and where none of the contracts (not the original nor the renewal contracts) for insurance makes reference to a relationship and financial backing of the General Electric Corporation, no reasonable reliance can be demonstrated. See Carter v. Huber Heard, 657 So.2d 409, 412-13 (La.App. 3d Cir. 1995) (holding that where a written contract was contemplated, the parties to that contract were not bound by expressions made during the negotiating promise where those terms were excluded from the final writing). While references were made verbally and by the appearance of the General Electric Corporation logo on certain communications, thus suggesting the existence of a corporate relationship, the absence of any reference to that relationship in the insurance contract itself, whether as an insurer or in any other capacity, precludes the Plaintiff from asserting that its reliance on the relationship was commercially reasonable.
23. Furthermore, because McDermott, a multi-billion dollar corporation, accepted two renewal contracts between it and IRI during the years interceding initial contracting and nonrenewal, later reliance on such representations is similarly unreasonable. Any representations made in 1998 concerning a relationship between IRI and General Electric Corporation, cannot reasonably form the basis for the subsequent renewals of the policy by McDermott, and cannot form the basis of recovery for the nonrenewal three years after the making of those representations.See Bethea v. St. Paul Guardian Insurance Co., 20002 U.S. Dist. LEXIS 23 141, *15-*18 (E.D. La. Dec. 2, 2002) (applying Article 1967 to find absence of unambiguous promise to continue insuring a line of business, precludes requirement to renew policy).
24. McDermott also fails to satisfy the third element, or the necessary demonstration of detriment, required under Article 1967. Even accepting that these representations formed a reasonable basis of McDermott's inducement to contract its properly insurance business with IRI, the Defendant performed its obligations under the three contracts to the satisfaction of McDermott. Therefore, no detriment resulted from McDermott's reliance on those earlier statements concerning the corporate structure of IRI and the General Electric Company. Even accepting the impact those representations may have had on the initial contracting decision, it is the satisfaction of the services provided by IRI which induced McDermott into later renewal contracts.
Accordingly,
IT IS ORDERED that judgment be entered against the Plaintiff, McDermott International, Inc., and in favor of the Defendant, Industrial Risk Insurers.
IT IS FURTHER ORDERED that Plaintiffs claims are hereby DISMISSED with prejudice.