Opinion
No. X04 CV 04 4000148 S
May 31, 2007
MEMORANDUM OF DECISION [T]he reinsurance industry appears to be a world unto itself. I. INTRODUCTION AND BACKGROUND
Allianz Life Insurance Co. of North America v. American Phoenix Life and Reassurance Company, 2000 WL 34333013 *3 (D.Minn. 2000).
This is a case about the breakdown of a contractual relationship between an insurance company and its reinsurance intermediary, and the resulting consequences. The defendant intermediary, or broker, insists that the relationship is defined by a set of contractual agreements, of venerable vintage and tested by time, which clearly set forth the respective rights and obligations. The plaintiff insurer urges that the relationship, though grounded in the contractual relationships, is further informed and governed by the application of statutory rights and obligations, fiduciary duties and judicial determinations of reasonableness.
It may be well briefly to describe the reinsurance structure, as distilled from the testimony of a number of witnesses, before discussing the specific factual circumstances and legal consequences in this case. An insurer accepts premiums from insureds and in return agrees to indemnify the insureds should various sorts of losses occur. If few or no losses occur, the insurer retains much of the premiums and makes a profit. As the amount of indemnified losses approaches the amount of the premium, the insurer makes less profit, though of course the insurer may make some money on the use of the premium for the period of time it is within the insurer's control. If the losses exceed the premium and the income from the use of premium, the insurer loses money, and if losses exceed premium by too great a margin, both the insurer and the insured are in trouble. The insured buys insurance in order to manage risk and the insurer in turn assumes risk. The insurer is able to protect itself, and indirectly its insureds, by entering into reinsurance arrangements, whereby the insurer transfers a portion of the premiums it receives to reinsurance companies, who agree to reimburse the insurer at certain levels of losses. Typically a number of different reinsurers will participate in the spreading of an insurer's risk. The risk may be further spread through a variety of means, not relevant here. The concept is simple: when business is profitable, the profit is spread; when business sustains losses, the risk is spread. The details are, as might be expected, frequently complex and the concept can be realized in myriad permutations.
Reinsurance is procured in one of two ways. Direct writing occurs when an insurer contracts directly with one or more reinsurance companies in a risk-spreading arrangement without the participation of an intermediary. A brokered arrangement occurs when an insurer enters into an agreement with a reinsurance intermediary, who incurs the duty to place the reinsurance. By contract and tradition, the original insurer agrees to cede to the reinsurer(s) a portion of the premium income received from the insureds in return for the reinsurer(s)' paying a defined portion of the losses within defined levels; the original insurer and reinsurance insured agrees to allow the intermediary to act as its fiduciary in arranging the reinsurance and the intermediary agrees to act in the interest of the reinsurance insured; and the reinsurer(s) agree to pay the intermediary a fee from the portion of the premium it receives from the ceding insurers. It is a high stakes game, informed by sophisticated statistical analyses as well as hunches provided by experience.
In 1999 several young entrepreneurs in the Hartford area, refugees from the recently defunct Executive Risk company, entered into an arrangement with the XL Capital group of companies to form a startup "onshore" insurance company offering directors' and officers' liability coverage. XL Capital approved the venture, apparently because the XL group did not have an onshore facility offering the same product. Though not entirely clear from the evidence, XL apparently financed the fledgling subsidiary and exercised at least some degree of control. The company was operationally a true startup: the witnesses described bringing lawn chairs into the first rented room in order to have a place to sit. But they were not without resources or ambition, and the company which became XL Specialty Insurance Company grew. The company was led by several members of an "operating group."
Sean Hearn and Steve McGill were the members of "the operating group" in charge of obtaining reinsurance for the company. Reinsurance was important, to provide a degree of security for the company and also to facilitate marketing. Realistically the company would not be able to offer high levels of coverage to proposed insureds without the backing of reinsurance. They turned to Carvill, the defendant broker, for assistance in procuring reinsurance. Carvill was a natural choice, at least partly because Carvill had acted as the intermediary for Executive Risk and the XL group were familiar with Carvill and its work.
Carvill America is the North American Carvill company. R.K. Carvill, also a defendant, is the British counterpart. Unless the context dictates otherwise, "Carvill" will mean Carvill America. R.K. Carvill was used to place the European portion of the reinsurance arrangement which was reached. Carvill America was the entity which contracted with XL.
XL and Carvill entered into a Broker of Record agreement ("BOR") in 1999 and signed another in 2001. The details of this and many other items will be discussed at greater length later. Carvill employees placed the reinsurance. XL's business grew enormously; by 2003 XL projected $850,000,000 in premium income. At a meeting of XL and Carvill executives in Bermuda in the spring of 2003, tensions surfaced. XL reported frustration at not being able to find out the precise amount of brokerage fee it was, at least indirectly, paying, and XL executives wanted to adjust the amount downward. Carvill executives believed they were being asked to give back fees which had been rightfully earned. In the summer of 2003 XL terminated the BOR and hired Benfield, another reinsurance intermediary, to take Carvill's place. XL arranged its subsequent premium payments to Benfield such that the reinsurers did not pay any subsequent brokerage fee to Carvill, despite contractual language to the contrary.
XL in its complaint claims that Carvill breached its fiduciary and contractual obligations in a number of ways and seeks damages as a result. In a counterclaim Carvill claims repayment of the amount of brokerage fees that have effectively been cut off by XL's actions. The parties tried the case to the court for five weeks in July, August and December 2006. After extensive briefing, a day of oral argument was held on February 28, 2007. More facts will be presented in the discussion of the issues.
I do not address in this memorandum every argument raised by each party on every point. Hundreds and hundreds of pages of briefs, suggested findings of facts and conclusions of law were submitted and oral argument took a full day. The court did read and consider every argument, and read the authority presented. For not fully discussing every point raised, I apologize to the attorneys, who performed magnificently, but not necessarily to the small but stalwart reading public.
II. CARVILL'S COUNTERCLAIM
Carvill's counterclaim is the simpler of the actions and is considered first. Carvill alleges that in July 1999, the business relationship between XL Specialty, referred to at times as Executive Liability Underwriters ("ELU"), and Carvill began. Carvill alleges that from the outset it told ELU that it worked only for its "standard rates of commission." After a period of discussions, the parties entered into a Broker of Record Appointment Letter, signed by both parties. Pursuant to the BOR, ELU appointed Carvill to act as its exclusive reinsurance broker for the purpose of procuring and servicing reinsurance programs. Paragraph 10 of the BOR stated that no fees or other remuneration were to be paid by ELU to Carvill. Rather, "remuneration earned by Carvill is to be received from the reinsurer(s) to which ELU's premium is ceded as is customary in the industry." A second BOR was issued in 2002 and confirmed the arrangement, which was in effect until XL terminated the appointment effective August 13, 2003.
Carvill further alleged that it discussed with ELU its reinsurance needs and then negotiated with a number of reinsurers to try to put a program in place. Its efforts were successful. Shortly after the essentials of the program were negotiated, Carvill and the reinsurers executed "draft slips" which described the terms and conditions of reinsurance. After submission to XL, final slips were executed. The final slips established the terms and conditions of the reinsurance coverage. Later, the formal treaty language was drafted, and the treaties were signed by XL and the reinsurers.
Carvill claims to have placed six treaties for XL using this process. One of them was an "excess of loss" ("XOL") treaty placed in 1999 which expired on January 1, 2002. In 2000, XL and Carvill decided that longer term coverage would be more advantageous and thus replaced that with another XOL treaty which was effective from January 1, 2001, through January 1, 2004. This treaty, in turn, was supplemented in 2002 and a new XOL treaty negotiated, to run from January 1, 2003 through January 1, 2004.
Carvill also negotiated several excess cessions ("XC") treaties on behalf of XL. The initial excess cession treaty provided reinsurance for the period of time from July 12, 1999, through January 1, 2001. A 2001 renewal provided coverage from January 2001, through January 1, 2003. A 2003 treaty provided coverage from January 1, 2003, through January 1, 2004. Carvill further alleged that each of the treaties included language to the effect that Carvill America was recognized as the intermediary of record and that communications were to be processed through Carvill, and that payment by XL to Carvill was deemed to be payment to the reinsurers, but that payments from the reinsurers to Carvill were deemed to be payments to XL only to the extent they were received by XL.
The difference between excess cessions treaties and excess of loss treaties will be discussed below. At this point, suffice it to say that the excess of loss treaties transferred risk for the aggregate of individual losses for claims paid between $2.5 million and $10 million and the excess cessions transferred risk between $10,000,000 and $25,000,000 per claim. The premium paid for the excess of loss coverage potentially varied with claim experience; the premium for the excess cessions coverage was fixed. If payment on a claim was less than $2.5 million, then XL bore all the risk. On the next $7.5 million of a claim payment, the risk was transferred but a portion of additional premium was also potentially transferred. On the portion of a claim between $10,000,000 and $25,000,000, the reinsurer bore the risk.
The slips, it is alleged, required that the brokerage commission to be paid to Carvill was to be 10% of the deemed mean rate, which term will be explained below, with respect to the XOL treaties and 10% of the net premium as to the excess cession treaties. The treaty language did not include reference to the commission, but did require that the premiums be paid to the reinsurers through the broker. Premiums are typically paid in installments. When Carvill received reinsurance premiums from XL, it deducted its commission and forwarded net premiums to the reinsurers.
The counterclaims alleges that there were no complaints about the arrangements or the services provided by Carvill until the spring of 2003. At that point, it is alleged, "representatives" of XL demanded that Carvill "retroactively rebate" a portion of the commissions that Carvill had already earned. After Carvill asked for a clarification, XL terminated Carvill's appointment as Broker of Record effective August 13, 2003. Suggesting that in the reinsurance industry all commissions are considered to be earned when the reinsurance program is placed, Carvill alleges that it had earned, according to the contracts, the commissions on the premiums for the reinsurance which it had placed, whether or not the commissions had physically yet been paid.
Having pled the above allegations as background, Carvill moved on to specific causes of action. The first count alleges interference with business expectancy. It alleges that the contractual arrangements created a business relationship between Carvill and the reinsurers, and that XL's termination of the BOR agreements had no effect on Carvill's contractual right to commissions for the reinsurance which was placed. XL knew of the relationship between Carvill and the reinsurers, but it nonetheless instructed Benfield, its new broker, to withhold an amount from its payments to reinsurers that would have ordinarily been paid for brokerage commission. Instead, the amount of Carvill's brokerage commission was to be placed in a segregated account for the benefit of XL and was not to be distributed to Carvill. Because reinsurers did not receive the full amount of premiums from which they could satisfy Carvill's commission and Benfield was instructed not to pay Carvill, XL tortiously interfered with the business relationship between the reinsurers and Carvill.
The second count alleges breach of contract. Carvill alleges that both of the Broker of Record agreements between XL and Carvill state that Carvill's remuneration is to be received from the reinsurers "to which ELU's premium is ceded as is customary in the industry." The count goes on to allege that an implied term of the contract was that XL would pay the entire premium to the reinsurers so that Carvill's commission logically could be paid by the reinsurers from the amount of the gross premium, and that it was a further implied term that XL would be ultimately liable to pay the commission if the reinsurers did not. Carvill alleged that the contract further implied that the commission was earned when the reinsurance was placed. XL breached the contract by refusing to pay the entire premium to the reinsurers so that Carvill would receive its commission and by instructing Benfield, the successor intermediary, to withhold the amount of commission from the amount of the premium forwarded to it and to place the amount of the commission in a segregated account. The count maintains that XL has continued to control the account and refuses to allow Carvill to be paid. The count concludes that XL has breached the terms of the contract and has breached the implied covenant of good faith and fair dealing.
The "Third Amended Answer, Special Defenses and Counterclaims" dated May 9, 2006, refers to the count as "Count Eight," despite there being but two counts.
The validity of both counts depends upon the nature of the contractual relationship between the parties. The relationship, though somewhat intricate, is easily comprehensible. The contractual relationship between Carvill and XL is governed by the two Broker of Record agreements. The agreements provide that Carvill is to be the exclusive agent for XL in the placement and servicing of reinsurance. Each BOR provides, in ¶ 10, that "[t]here are no fees or other remuneration to be paid to Carvill by ELU under this appointment letter. Remuneration earned by Carvill is to be received from the reinsurer(s) to which ELU's premium is ceded as is customary in the industry."
The Broker of Record agreements are not self-executing in the sense that no consideration is due to Carvill until other contracts are in place. Contractual agreements between each of the three groups of participants — the reinsured, the reinsurer(s) and the intermediary — are required to complete the set of obligations. The second contractual relationship is between the intermediary and the reinsurers. After having been engaged by the reinsured (XL), Carvill discussed reinsurance structures with XL and explored reinsurance possibilities with a number of reinsurers. As the program coalesced, Carvill prepared "slips" which reflected the percentages of risk the reinsurer would bear in return for percentage of the total premium. The slips also prescribed the commission to be paid to Carvill by the reinsurers: the amount of the brokerage commission was 10% of the deemed mean rate of 26% of the subject premium on the XOL treaties and 10% of the original net premium with respect to the excess cession ("XC") treaties. Though there was considerable discussion at trial and some disagreement among experts as to what effect the termination of the BOR agreement had on the obligation of the reinsurers to pay Carvill's commission, there can be no question but that the slips themselves contained no limitation or qualification: the reinsurers were obligated to pay Carvill a specific portion of the premium ceded to them pursuant to their treaties with XL.
The third leg of the contractual stool is the relationship between the reinsured and the reinsurers. The "first draft," in effect, of the reinsurance contract consists of the draft slips which are typically prepared by the intermediary after a series of negotiations. These slips are called "cover notes" and all information concerning remuneration paid by the reinsurer to the intermediary is deleted. The information contained in the cover notes is then formally incorporated into treaty language, again generally drafted, with input from all sides, by the intermediary. The fundamental contractual provisions provide that for a specified percentage of the premium, the reinsurers obligate themselves to pay a specified portion of the loss. The intermediary is not directly a party to this arrangement: though payments of premium from the reinsured to the reinsurer are customarily physically paid to the intermediary with the understanding that the intermediary will deduct its premium and perhaps other fees before passing the remainder along to the reinsurer(s), payment to the intermediary is expressly deemed to be payment to the reinsurer.
It is not disputed that this conceptual arrangement was implemented in this case. The relationship and set of mutual obligations between XL and Carvill are set forth primarily in the two BOR agreements. Both were drafted by Carvill. The first was dated August 26, 1999, and it was one of the earlier projects of XL Specialty's "operating committee." Although XL personnel testified that they didn't pay a lot of attention to the details of the contractual arrangement with Carvill because they trusted Carvill and they were busy with other matters, they were nonetheless reasonably experienced and generally knowledgeable in insurance. Carvill drafted a letter for Hearn and McGill to present to the people they reported to in the XL hierarchy; the BOR was not signed by XL Specialty without clearance from above. The letter appointed Carvill as the exclusive reinsurance broker and included the language in ¶ 10 quoted above.
At least one of the reinsurers did not physically sign the 2003 excess cessions treaty until after XL terminated Carvill, even though the treaty was effective January 1, 2003. One of the oddities of the reinsurance business is that the precise treaty language is frequently negotiated at the parties' relative leisure after the relative frenzy of committing reinsurers to the program. This issue will be briefly discussed in the context of XL's claims against Carvill, but the loose end has no effect on the contractual arrangements of the parties.
The initial operating committee consisted of Stephen McGill, Tony Giacco, James Koval, John Burrows and Sean Hearn. Among them, the leadership appears to have been shared and decisions were made by consensus. As noted previously, McGill and Hearn were primarily responsible for reinsurance and most of the communications between Carvill and XL included Hearn or McGill. Later, Gladstone, an attorney, joined XL and performed claims and legal functions. Bernard Horowitz joined and performed actuarial services, among other duties.
The 1999 BOR also referred to and attached an "Addendum A," also prepared by Carvill, which purported to state that the BOR was for a term of five years. The addendum has been a source of controversy in the course of the present litigation. A five-year term is inconsistent with the provisions of Connecticut General Statutes § 38a-760c, which requires that insurance intermediary engagements be terminable at will. The Model Reinsurance Intermediary Act authored by the National Association of Insurance Commissioners, referenced with some regularity during the trial, contains a similar provision. Carvill suggested that the language, appearing in an addendum, expressed a mutual expectation of a long-term relationship; from Carvill's point of view, XL as a start-up venture would not be likely to generate a great deal of premium immediately, and thus not a great deal of commission immediately, and yet a great deal of effort would be required to place a worthwhile reinsurance program. Carvill most likely did not believe it would make much money in the short-term and wanted to encourage longevity. It was also in XL's interest to foster some continuity in its reinsurance program. In any event with the possible exception of a letter written much later by Rory Carvill, Carvill's CEO, none of the players seemed to think that the five-year term was binding.
Section 38a-760c provides in part: "Transactions between a reinsurance intermediary-broker and the insurer it represents in such capacity shall only be entered into pursuant to a written authorization, specifying the responsibilities of each party. The authorization shall, at a minimum, provide (1) the insurer may terminate the reinsurance intermediary-broker's authority at anytime . . ."
In any event, a new BOR was executed in the fall of 2002, to be effective, in a monumental exercise of nunc pro tunc, on January 1, 2001. Tim Walters, a Carvill executive, testified that the purpose of the new BOR was to comply with regulatory requirements. The same provisions of paragraph 10 were included in the new BOR. "Addendum A" was not appended to the 2001 BOR and there was no reference to any term for years. The 2001 BOR included in its terms a number of provisions regarding disclosure of various sorts of information to XL. The disclosure requirements, both statutory and contractual, will be discussed in more detail below. The 2001 BOR agreement was signed by XL and was in effect at the time of XL's termination of the contractual relationship.
Following execution of the BOR agreements, Carvill did consult with XL to determine the structure of the reinsurance program. Carvill then contacted a number of reinsurers and a program coalesced. Two treaties emerged: the excess of loss treaty ("XOL"), briefly described above, and the excess cessions treaty. XL itself paid all losses of up to $2.5 million per claim. If a loss exceeded $2.5 million, each reinsurer participating in the XOL treaty would, in an amount individually proportionate to its percentage participation in the treaty, reimburse XL for the loss over $2.5 million and up to $10 million per claim. The actual premium ceded to the reinsurers was determined by the loss experience. The "swing rate" was 10% to 42%. This means that the reinsurers were paid a minimum premium of 10% of the total premium collected by XL from its insureds simply for covering the potential risks. If total losses exceeded 10% of the premium but were less than 42% of the premium received by XL, the reinsurers covered the losses but received additional premium equal to the amount of losses paid. If losses, for the amounts of individual claims up to $10 million, exceeded 42% of the premiums collected by XL, were incurred, then the reinsurers paid the losses without further compensation. As to the XOL treaty, then, if losses were minimal the amount of 10% of total premiums generated by the particular policies was profit for the reinsurers; if losses were great, the claims paid by the reinsurers were not entirely reimbursed by the ceding reinsureds and the reinsurers were liable to lose money.
Apparently a small surcharge was added as well. The amount does not affect the analysis at this point. Given the complexity of the business, it may be unrealistic to set forth every detail with absolute precision.
A "ceding commission" was paid as well, in theory directly by the reinsurers to XL. In practice, XL deducted the ceding commission from the premium payments it forwarded through Carvill. The ceding commission was another part of the negotiated structure.
For placing the XOL treaty, Carvill was contractually entitled to a commission of 10% of the "deemed mean rate." The deemed mean rate in this instance was 26%, halfway between the 10% and 42% boundaries of the "swing rate," as to the United States placements. The deemed mean rate was 28% on the "European" reinsurance placements, made through R.K. Carvill (London). The actual brokerage commissions for the XOL treaties were, then, effectively 2.6% of premium for the U.S. portion and 2.8% of premium for the U.K. or European portion.
A second set of treaties covered those claims in excess of $10 million and less than $25 million. These were called the excess cession treaties. The premium computation was simpler and did not involve a swing rate. The formula for computation of the brokerage commission was simply 10% of the premium ceded to the reinsurers for coverage of those losses. The reinsurance programs were adjusted periodically and new treaties instituted. At the critical time of August 13, 2003, when XL terminated Carvill's services as broker of record, an XOL treaty and an excess cessions treaty were in place on essentially the same terms as the first set. Several reinsurers were added to and deleted from the program over time, and their percentage participation changed. The contractual language establishing obligations was functionally identical: XL paid the reinsurers a premium, which varied with loss experience as to the XOL treaty, and the reinsurers agreed to indemnify losses per the treaties. Carvill was not a party to those contractual obligations, though payments, both claims for losses and premium payments, were funneled through Carvill. As noted above, physical payment of premiums to Carvill was deemed to be payment to the reinsurer.
A three-year XOL treaty, effective January 1, 2001, was in effect at the time, as was an excess cessions treaty effective January 1, 2003.
The third conceptual contractual arrangement was also executed: by virtue of signing the slips, the reinsurers obligated themselves to pay the brokerage commission to Carvill. There is no limiting language or qualification in the slips themselves. On its face, then, the contractual arrangement as negotiated by the parties — and, as will be seen, standard in the industry — was that XL paid the reinsurers, the reinsurers paid Carvill (and losses, as appropriate), and Carvill owed XL duties involving the placing and servicing of the reinsurance program.
Carvill's claim of tortious interference is governed by Connecticut law. The applicable law is easy to state:
[I]n order to recover for a claim of tortious interference with business expectancies, the claimant must plead and prove that: (1) a business relationship existed between the plaintiff and another party; (2) the defendant intentionally interfered with the business relationship while knowing of the relationship; and (3) as a result of the interference, the plaintiff suffered actual loss.
CT Page 7925 Hi-Ho Tower, Inc. v. Com-Tronics, Inc., 255 Conn. 20, 32-33 (2000).
Carvill's claim is very simple. The first element is not contested: XL clearly knew at all relevant times of the relationship between Carvill and the reinsurers. The third element similarly is easily decided: if XL tortiously interfered as alleged, then the actual loss is the amount of brokerage commission which Carvill would have been paid under the terms of the contractual arrangement which amount has effectively been withheld. As to whether there was intentional interference which was tortious, a factual inquiry is necessary.
The facts as to the interference element are only partly in dispute, though the interpretation of the facts is hotly contested. After XL terminated its broker of record agreement with Carvill, as was its statutory right, it did not take Carvill up on its offer to continue servicing the reinsurance program. Instead, it invited reinsurance brokers to submit proposals to become the new broker of record. Four brokers made presentations as part of the process referred to in the business as the "beauty contest." XL chose Benfield to be its new broker of record and XL sent its payments of premium to Benfield. It specifically instructed Benfield not to forward to the reinsurers that portion of the premium which would be paid, under the slips, to Carvill as commission pursuant to the contract reflected in the slips between the reinsurance companies and Carvill. Rather, Benfield was instructed by XL to withhold that sum, with the understanding that 90% of the withheld commission was to be held for the benefit of XL and 10% would go to Benfield, presumably to compensate Benfield for its costs of servicing the program. When some inquiry was made on the part of reinsurers about the withheld premium, XL offered to hold at least one reinsurer harmless against any claim by Carvill against the reinsurer.
Each BOR expressly contemplated Carvill's placing and servicing the reinsurance program, and service was an important segment of Carvill's overall responsibility. Servicing included processing claims made to the reinsurers, allocating premium, figuring adjustments to premium, handling disagreements, and the like, as well as continuing evaluation of the program.
There was some dispute at trial as to whether the brokerage was earned when the insurance was placed or whether it was earned over the course of the broker-client relationship. In some ways this is a chimerical argument, for the contract between the reinsurers and Carvill simply states that the reinsurers will pay Carvill a certain percentage of the premium paid to the reinsurers. There is no qualifying or temporizing language in the written contract. The convention is that the payments are made by deducting amounts from the premium forwarded, but the mechanics of payment do not alter the contractual obligation. In any event, Carvill's experts testified that the commission was paid by the reinsurers as consideration for receiving the business. In the event of a second broker replacing the first it was the first which provided the business, so pursuant to that theory the first broker would earn the entire commission over the length of the treaty.
Legal authority in the context of reinsurance is sparse. In the context of primary insurance, the law is quite clear that the broker earns her full commission when the insurance is placed. See, e.g., Hamond Co. v. Risk Specialists Col of New York, Inc., 619 N.Y.S.2d 744, 745 (App.Div. 1994). The only case directly on point provided by either party to this action in the reinsurance context is Benfield, Inc. v. Moline, Civil File No. 04-3513 (D.Minn. 2006), in which the United States District Court for the District of Minnesota considered a situation in which several employees of Benfield, coincidentally the same reinsurance intermediary which plays a role in this case, left employment with Benfield and joined another broker. Shortly thereafter some of Benfield's insurer-clients terminated their broker of record agreements with Benfield, as was their right under Minnesota law, and signed broker of record agreements with the other broker. One of the many issues presented in motions for summary judgment was who was entitled to the brokerage where there was a "mid-term" switch of brokers. It appears from a reading of the decision that the contractual relationships were analogous to those presented here.
The federal court noted the paucity of authority in the reinsurance arena, and proceeded to discuss the issue in fairly general terms: "Like reinsurance brokers, primary insurance brokers assess their clients' needs, assist them with claims submissions, and facilitate communications between the insurer and the insured. Also, the reinsurance brokerage commission is based on the reinsurance treaty's premium; thus, the client's need for services after the treaty is secured has no effect on the amount of the brokerage commission. The case law from primary insurance is clear: unless the contract states otherwise, a broker earns its commission upon creation of the relationship between the insurer and the insured. [Benfield] further assert[s] that if brokerage payments were dependent on the broker serving as the broker throughout the year, then brokers who are paid up-front flat fees would have to disgorge those revenues whenever an account moves midterm. There is no evidence of this practice.
In the case at hand, there may be some relation between the need for services and the amount of the commission, at least as to the XOL treaties, and there was a claims servicing fee applicable in some circumstances as to the reinsurance placed in the London market. The analogy may, then, not be perfect.
"The Court concludes that the general rule for insurance commissions applies to the reinsurance industry: generally, reinsurance brokerage commissions are earned at placement; if the client switches brokers partway through the insurance contract year, the initial broker is still entitled to those commissions until the treaty renewal period. Because neither party has submitted any evidence regarding the existence and terms of any contracts governing brokerage commissions, the general presumption applies. As the placing broker, Benfield is entitled to the brokerage commissions until the end of a treaty term." Benfield, supra, 33-34 (Emphasis added; footnotes added).
Here, of course, those contracts have been supplied and they state that the commission shall be paid by the reinsurers to Carvill, based on percentages of the premium forwarded to the reinsurers.
XL suggests that the general rule, if there is a general rule, regarding entitlement to the commission upon placement ought not be applied to the facts here. Several of the arguments are as follows, and I have considered all of the arguments. The brokerage contract, it will be remembered, obligated Carvill to service the program, in addition to other duties. If XL can terminate the intermediary relationship at will, then, the reasoning goes, it ought not to have to pay for servicing after the termination. When combined with the oft-repeated mantra that servicing is an important part of the reinsurance broker's job, as set forth in texts and in Carvill's own literature, the argument that XL ought no longer have to pay Carvill for the performance of duties that are no longer necessarily being performed by Carvill has a certain superficial allure.
Though Carvill did offer to continue to service the program, its offer does not end the inquiry. If XL saw fit to sever the BOR, which it was statutorily entitled to do at any time without cause, then presumably it may not have had much interest in continuing to work with Carvill in the sometimes delicate matter of servicing the reinsuranee treaties. The primary difficulty with XL's position is that there is nothing in the language of the contracts to compel the conclusion that termination of the contract between XL and Carvill perforce terminates the contracts between Carvill and the reinsurers. I credit the evidence suggesting that the reinsurers paid the commission for providing the business; so long as the reinsurers received premium payments, a percentage of that premium was owed to Carvill by the clear and unequivocal language of the slips.
In fact the relationship deteriorated to a level of some bitterness. The history of the relationship will be discussed in more detail below.
The evidence as to practice and custom in the industry, though of little if any relevance in light of the clear contractual language, was as favorable to Carvill's position as to XL's on this issue. Each side offered anecdotal evidence of past examples of how commissions on future premium payments were allocated in cases of midterm terminations. In a case involving Vesta, for example, Carvill, in this case the new broker, split future commissions with the original broker by agreement. Even in this transaction, however, Carvill suggested that commissions were earned when placed and that the replacing broker's taking a portion of future commissions would not be consistent with industry practice. In several instances efforts were made to ascertain the desires of the client — the insured — and to work things out accordingly. Mr. Rivers, an expert for XL, suggested that the industry standard was to negotiate the brokerage between the original broker and the replacing broker. There also was evidence, however, from Mr. Dwyer, an expert for Carvill, as well as Tony Key and Robert Marsden, Carvill employees, that both Carvill and Guy Carpenter, one of the largest brokers, consistently recognized the right of the placing broker to the fall brokerage, even when they were the replacing broker. The conclusion I draw from the expert testimony, and the documentary evidence of other midterm cancellations, is that there probably is a custom of trying to work things out, with an eye toward satisfying the client if possible. This is good business. This does not mean that the industry custom contradicts or defines contractual entitlement, however. It only means that despite the clear contractual entitlement, efforts frequently will be made to smooth ruffled feathers.
Another difficulty with XL's position is the problem in providing relief. If the brokerage does not "belong" to the placing broker but rather is to be negotiated, the court is left with an amorphous standard to apply in fashioning damages. This is not a situation, for example, in which arbitration is a contractually provided remedy. The conclusion that terminating the reinsured-broker agreement does not terminate the reinsurer-broker agreement likewise does not necessarily create an injustice, in the broad sense that either the reinsured will have to pay twice for the servicing and a financial penalty would thereby be placed on the statutory ability to terminate or the broker will receive a windfall for being paid for servicing it does not perform. Damages can be adjusted; see, e.g., Benfield, Inc. v. Moline, 2006 WL 1662759 (D.Minn. 2006); and in the case at hand will be adjusted.
It is, however, a situation in which arbitration might have provided a reasonably fast and relatively inexpensive means to resolve the entire dispute.
"The Court concludes that evidence of the servicing costs will be admissible in trial to address the issue of damages for the conversion claim. Although Collins committed a tort by converting commissions that rightfully belonged to Benfield, its tortious actions may have also benefitted Benfield by relieving it of the costs associated with servicing those clients. Allowing Benfield to recover the entire commissions while at the same time allowing it to reap the benefit of saving substantial servicing costs would grant Benfield a windfall." Id., at *2.
I have concluded, then, that the termination of the reinsured-broker contract did not have the effect of terminating the contract between the reinsurers and Carvill, and that the contractual relationship remained in place. There was, then, a cognizable business relationship between Carvill and the reinsurers that survived the appointment of Benfield as the new intermediary. The evidence is clear, and not contradicted in any way, that XL instructed Benfield to withhold from the reinsurers the portion of the premium that ordinarily would be retained in payment of the brokerage commission and to maintain a segregated account. The clear intent was to prevent the reinsurers from paying Carvill its commission, and the intent was realized.
In order for interference to be actionable, the interference must be intentional and without justification:
"This court has long recognized a cause of action for tortious interference with contract rights or other business relations . . . Blake v. Levy, 191 Conn. 257, 260, 464 A.2d 52 (1983) . . . [We have held, however, that] not every act that disturbs a contract or business expectancy is actionable. Jones v. O'Connell, [ 189 Conn. 648, 660-61, 458 A.2d 355 (1983)]. Blake v. Levy, supra, 260-61. [F]or a plaintiff successfully to prosecute such an action it must prove that the defendant's conduct was in fact tortious. This element may be satisfied by proof that the defendant was guilty of fraud, misrepresentation, intimidation or molestation . . . or that the defendant acted maliciously . . . [ Blake v. Levy, supra], 261, quoting Kecko Pining Co. v. Monroe, 172 Conn. 197, 201-02, 374 A.2d 179 (1977). [A]n action for intentional interference with business relations . . . requires the plaintiff to plead and prove at least some improper motive or improper means . . . Blake v. Levy, supra, 262; Kakadelis v. DeFabritis, 191 Conn. 276, 279-80, 464 A.2d 57 (1983); see also Sportsmen's Boating Corporation v. Hensley, 192 Conn. 747, 753, 755, 474 A.2d 780 (1984) (liability in tort imposed only if defendant acted maliciously)." (Citation omitted; internal quotation marks omitted.) Robert S. Weiss Associates, Inc. V. Wiederlight, 208 Conn. 525, 535-36, 546 A.2d 216 (1988). The plaintiff in a tortious interference claim must demonstrate malice on the part of the defendant, not in the sense of ill will, but "intentional interference without justification." 4 Restatement (Second), Torts § 766, comment (s) (1979). In other words, the employee bears the burden of alleging and proving "lack of justification" on the part of the actor. Id.
Daley v. Aetna Life Casualty, 249 Conn. 766, 805-06 (1999).
Although the tenor of some of the correspondence and memos written by XL personnel reflects some malice on the part of XL toward Carvill during the period of time surrounding XL's termination of the intermediary agreement, malice in the legal sense is more clearly shown by the absence of legal justification. After terminating Carvill, XL did not forward the full amount of the premium to the reinsurers through its new broker Benfield, but rather specifically instructed Benfield to withhold the amount of Carvill's brokerage. There is no discernable justification: even if Carvill had breached the contract between it and XL, such breach would not justify interference with the contracts between Carvill and the reinsurers.
I hold, then, that XL tortiously interfered with Carvill's business relationships with the reinsurers. I need not reach the second count of the counterclaim, which alleges a breach of contract on the part of XL, because damages are the same either way. Defenses are discussed in section IV below. I will discuss damages at the conclusion of this memorandum.
III. XL'S COMPLAINT
XL's complaint against Carvill is more complex. As intimated above, XL's liability to Carvill on the counterclaim does not mean that Carvill is not liable to XL as a result of one or more of the counts of the complaint. We first examine the allegations of the complaint.
XL first alleges the nature of the business organizations. XL Specialty Insurance Company, the actual plaintiff, is licensed to operate in Connecticut and writes professional liability insurance. Divisions of the plaintiff include the XL Professional business unit, which was formerly known as Executive Liability Underwriters ("ELU") division. The complaint alleges that Carvill America ("Carvill") is incorporated in Delaware and has a principal place of business in Norwark. Carvill is licensed to do business in Connecticut as a reinsurance intermediary. The second defendant R.K. Carvill Co. Ltd ("Carvill UK") is incorporated in the United Kingdom. It apparently is not licensed to do reinsurance intermediary business in Connecticut but rather handled some of the placement of XL's reinsurance business on behalf of Carvill America.
Much of the underlying contractual framework was also alleged by XL. It alleged that the first BOR agreement between XL and Carvill was signed in 1999 and that the agreement "purported to include a five-year term," in contravention of Connecticut General Statutes § 38a-760c. Two reinsurance agreements, the excess cessions treaty and the XOL treaty, were placed, effective July 12, 1999. In the fall of 2002 a new BOR was executed; this BOR specifically stated that the agreement could be terminated by XL at any time and without advance notice. XL alleged several of the contractual duties owed to it by Carvill: these duties included Carvill's obligations to supply quarterly accounts "detailing all material transactions, including information necessary to support all commissions, charges and other fees received by, or owing to, Carvill," and to maintain other detailed information. XL had the right to copy and to audit all accounts and records maintained by Carvill in relation to its business with XL. The complaint alleges that XL's abilities to terminate the BOR agreement and to receive pertinent information were also statutorily mandated.
The complaint alleges that Carvill engaged in considerable misconduct prior to its termination by XL. Carvill repeatedly refused to provide XL details regarding the "amount or structure of its commissions," for example, and its charging excessive commissions discouraged several reinsurers from participating in the 2003 reinsurance programs and caused some to place conditions on coverage that they would not otherwise have insisted upon. Carvill did not inform XL of reinsurers' concerns about the magnitude of brokerage commissions. XL relied on Carvill to perform its duties to exercise reasonable care in performing service, disclosing information and procuring adequate coverage with reasonable terms, yet Carvill did not disclose unwillingness on the part of some reinsurers to accept "material terms on which XL's reinsurance was based" and as a result XL was exposed to a gap in coverage and a risk of unreinsured loss. Carvill further failed to ensure that each reinsurer had signed a 2003 treaty agreement.
The complaint more specifically alleges various refusals on the part of Carvill to provide information about the reinsurance coverage to XL. It alleges that Carvill failed to respond in a reasonable way to requests for specific information regarding the reinsurance brokerage, the "retrocessional brokerage," and correspondence with reinsurers.
XL alleges that it terminated Carvill's authority to act on behalf of XL by letter dated July 14, 2003, effective August 13, 2003. It claims that Carvill contested the termination and suggested that the reinsurers had first to accept the termination in order for it to become effective. XL appointed Benfield, Inc., to act as its successor reinsurance intermediary.
After having been terminated, Carvill allegedly contacted the reinsurers, challenged the validity of the termination and indicated that it continued to have the right to receive its commission on premium payments made after the termination. Carvill, without justification, tried to get XL to execute an "account transfer agreement" as a condition necessary for providing information to Benfield. As a result of Carvill's action, several of the reinsurers requested that XL indemnify them from any losses incurred as a result of their not forwarding commission payments to Carvill, that full premium payments be made to the reinsurers and that XL "otherwise assume obligations not required by governing industry practice or legal requirements." Carvill continued to act in some ways as if it were still authorized by XL to act in its behalf: it continued to elicit signature pages. The complaint alleges that Carvill filed an action in the United Kingdom against XL and the reinsurers to recover its claims for brokerage. XL alleges that allegations made by Carvill in the UK litigation were erroneous. XL alleges that Carvill's repeated assertions that it is still entitled to post-termination brokerage commissions are improper and that Carvill no longer performs any servicing obligations.
Reportedly the UK action was settled with the result that the disputed commissions were in fact paid to Carvill.
Count One
The complaint proceeds to allege in eleven counts its causes of action. The first count is a request for a declaratory judgment. It alleges that Carvill owed XL fiduciary duties as a result of the relationship as well as the duty to act in good faith and "with reasonable care and skill." It owed duties of disclosing on a quarterly basis all accounts including "all commissions, charges and fees." It failed prior to its termination to secure the signature of Converium Ltd., a reinsurer, on one of the reinsurance treaties. It breached duties by 1) misstating to third parties the reasons for its termination and the contractual term of the brokerage agreement; 2) not providing contractually and statutorily required disclosures; 3) not providing details of commissions; 4) placing its interests ahead of XL's by insisting on a commission structure that resulted in reinsurers' not agreeing on terms advantageous to XL; 5) failing to make "certain reinsurance placements" on behalf of XL and not informing XL of this; 6) failing to obtain the signatures of all the reinsurers; and 7) failing to ensure that all of the material terms and conditions required by XL were included in the reinsurance program.
After termination, Carvill allegedly continued to owe XL duties including a duty not to act as XL's agent, not to injure XL's interests and not to use any information acquired in the course of the agency relationship in a manner harmful to XL. The post-termination duties were breached by 1) misstating the basis of the termination, by, for example, telling reinsurers that the reason for the termination was XL's attempt to avoid the obligation to pay commission and asserting that a binding five-year agency agreement was in effect; 2) telling Benfield that certain actions would constitute contractual interference; 3) asserting that it had a right to commission payments after its termination; 4) improperly relying publicly on the 1999 BOR agreement; 5) refusing to provide contract and brokerage information to Benfield or to XL after request.
As a result of the above allegations, and further alleging that Carvill was not entitled to post-termination brokerage, XL seeks a declaratory judgment that it properly terminated the 2001 BOR agreement and that Carvill is not entitled to post-termination brokerage.
Count Two
The second count alleges that Carvill breached contractual obligations. It claims, in addition to the preceding allegations, that Carvill did not supply accounting materials which were required by the 2001 BOR and that it did not supply "basic contract and brokerage information" as requested. "Substantial damages" are claimed.
Count Three
The third count alleges breach of fiduciary and agency duties. In addition to the previous allegations, it alleges that Carvill owed the duties of full disclosure, loyalty, prudence and "selflessness." It claims breach of those duties generally by failing to provide information, by its "failures and misconduct" in discharging duties, and in its communications with third parties. Specifically, XL claims that Carvill mischaracterized the basis for and validity of XL's termination of Carvill to the reinsurers; wrongfully asserted its right to brokerage commission on premium payments made after XL terminated the brokerage agreement; told Benfield that any action Benfield took to act as reinsurance intermediary would constitute interference with contract; publicly relied on terms of the 1999 BOR after it had been superseded and even though it contained terms which violated statutory provisions and industry custom; and refused to provide information regarding the contracts and brokerage to Benfield or to XL after the termination. XL further alleges breaches of fiduciary duty by failure to disclose details of the commission; putting its interests ahead of those of XL by insisting on a commission structure that adversely affected the terms on which reinsurers would participate in the reinsurance program; by failing to make certain reinsurance placements and failing to disclose those facts to XL; by failing to be sure that every reinsurer signed the 2003 program; and by failing to ensure that certain placements included all of the material terms and conditions and by failing to disclose these shortcomings to XL. As a result of the breaches of fiduciary duty, XL claims money damages.
Count Four
The fourth count alleges breach of the duties of good faith and fair dealing. This count, quite understandably, essentially repeats the factual allegations of the third count and claims that the same omissions and commissions which constitute breaches of fiduciary duty also constitute breaches of the duties of good faith and fair dealing.
Count Five
The fifth count sounds in tortious interference with business and contractual relationships. XL claims that Carvill intentionally interfered with XL's contractual relationships with its reinsurers and with Benfield, the successor intermediary. Many of the same factual allegations are recited in this fifth count. In order to advance its own interests, it is alleged, Carvill: 1) misstated the reason for and the validity of XL's termination of Carvill, by saying that the termination was for the sole purpose of avoiding the obligation to pay commissions and the belief that a five-year term governed the XL-Carvill relationship; 2) told Benfield that any action taken on its part would constitute interference; 3) asserted that it had a right to commissions on premium payments made after its termination; 4) unjustifiably relied on the 1999 BOR; and 5) refused to provide basic contract and brokerage information on request, either to XL or to Benfield. XL further alleges that Carvill held itself out as XL's intermediary after the termination. XL claims substantial losses as a result of Carvill's interference with XL's relationships with Benfield and the reinsurers.
Count Six
The sixth count sounds in negligence. In addition to the prior allegations, XL claims that Carvill breached duties including fiduciary and agency duties. XL reasserted a number of factual allegations, including the mischaracterization of the reasons for termination; the assertion that Carvill had a post-termination right to brokerage; the allegation to Benfield that any action taken by it would constitute interference; relying on the 1999 BOR, even though it was inappropriate to do so; and failing to provide information to XL after request. Further, XL alleged that Carvill negligently failed to disclose details of commission received; put its interests ahead of those of XL in negotiating the reinsurance contracts; failed to make certain reinsurance placements and failed to disclose this shortcoming to XL; failed to ensure that each reinsurer signed the final 2003 agreement; failed to ensure that all material terms and conditions were included in the reinsurance program. XL allegedly sustained damages as a result.
Count Seven
The seventh count alleges that XL relied to its detriment on certain statements made by Carvill and it relied on Carvill to make relevant disclosures. XL claims that instances of misstatements of fact and failures to disclose items include: 1) failure to disclose details of commissions or materially misstating such information; 2) failing to disclose concerns about the commission structure raised by reinsurers; 3) failed to disclose that certain reinsurance placements had not been made; 4) failed to disclose that not all the reinsurers had signed the 2003 agreements; and 5) failed to disclose that not all of the material terms and conditions had been included in certain placements, or made material misstatements about such facts. XL alleges that because of the nature of the relationship between XL and Carvill, XL's reliance was reasonable. Because of breaches of these duties, XL sustained substantial damages.
Count Eight
The eighth count is entitled "wanton, willful and reckless misconduct." It incorporates all of the prior allegations, then alleges that the acts in breach of various fiduciary and agency duties, in breach of the covenants of good faith and fair dealing, and in tortious interference with business and contractual relations were intentional, malicious and performed with the intent to cause harm and to obstruct contractual relations between XL, its reinsurers and Benfield. The count claims punitive damages.
Count Nine
The ninth count incorporates the prior allegations and alleges a violation of the Connecticut Unfair Trade Practices Act ("CUTPA") in violation of Connecticut General Statutes §§ 42-110a et seq. The count realleges various factual allegations also raised in prior counts: it claims that Carvill mischaracterized the basis for and validity of its termination by XL; said in writing to Benfield that any actions taken by Benfield on behalf of XL would constitute contractual "interference"; asserted that it had a right to payment of commission on premium payments made after the termination of its broker relationship with XL; improperly relied on the 1999 BOR agreement; and refused to provide contract and brokerage information to XL or to Benfield on request. Such actions allegedly violated the Connecticut Unfair Insurance Practices Act ("CUTPA"), Connecticut General Statutes § 38a-816(2) and constitutes unfair methods of competition, or unfair or deceptive acts in the conduct of trade or commerce in violation of CUTPA. Damages including punitive damages, costs and attorneys fees are claimed.
CT Page 7936
Count Ten
The tenth count requests an accounting. XL alleges that in the course of Carvill's acting as XL's intermediary Carvill received records, documents and compensation. XL claims that because of breaches of fiduciary duties, it is entitled to restitution and disgorgement of benefits which Carvill received improperly. XL alleges that it is also entitled to the information necessary to support Carvill's commissions and fees. XL claims an accounting is proper to determine the compensation Carvill earned in the course of its acting as intermediary and to discover the information learned by Carvill about XL.Count Eleven
Finally, the eleventh count claims injunctive relief. It restates the termination of Carvill's authority to act on XL's behalf as of August 13, 2003, and reasserts inappropriate behavior of Carvill after the termination. Carvill's refusal to act properly has presented an actual controversy, it is alleged, and it owes XL duties not to interfere with third party relations, to provide XL with information it learned in the course of its acting as intermediary, not to hold itself out as an intermediary of XL, and to disclose the amount of compensation it has earned as XL's intermediary. XL claims irreparable harm and the lack of an adequate remedy at law, and requests an appropriate injunctive order.
Count One
The discussion of the facts necessary for the determination of XL's case against Carvill is necessarily somewhat prolix. There is, however, no need for a protracted discussion of the first count, which requests a declaratory judgment as to the propriety of XL's terminating the 2001 BOR agreement and the impropriety of Carvill's receiving any commission payments after it was terminated. There is no dispute as to XL's ability to terminate the brokerage agreement at any time without cause, and therefore no need for a declaratory judgment to that effect. I previously addressed the question of Carvill's receiving commission payments after termination: because those payments are made pursuant to a separate contract with the reinsurers, and because Carvill's receipt of commission is consistent with industry custom and practice, Carvill was entitled to post-termination brokerage, subject perhaps to modification.
Count Two
The second count alleges breach of contract. XL claims that Carvill did not provide XL with quarterly accounts "accurately detailing all material transactions, including information necessary to support all commissions, charges and other fees received by, or owing to Carvill." Despite requests for such information, including the amounts of commissions, Carvill allegedly did not supply such information and XL allegedly sustained damages.
The 2001 BOR clearly prescribed certain disclosures. The language of the "Broker of Record Appointment Letter" (Exh. P 7) is as follows:
3. At least quarterly, Carvill shall render accounts to ELU accurately detailing all material transactions, including information necessary to support all commission, charges and other fees received by, or owing to, Carvill from ELU Carvill shall remit all funds due to ELU within 30 days of receipt.
* * *
4 . . . Upon ELU's request, Carvill shall furnish copies of records relative to deposits and withdrawals for or on behalf of ELU . . .
* * *
6. ELU shall have access to and the right to copy and audit all accounts and records maintained by Carvill related to its business in a form usable by ELU.
* * *
10 . . . There are no fees or other remuneration to be paid to Carvill by ELU under this appointment letter. Remuneration earned by Carvill will be paid entirely by the reinsurer(s) to which ELU's premium is ceded as is customary in the industry.
(Emphasis added.)
Carvill argues that there is no duty to disclose brokerage commission pursuant to the BOR appointment letter, because the language of paragraph three specifically refers only to an accounting of commissions and the like to Carvill from ELU. Because commissions are specifically not paid by ELU, the argument goes, then there is nothing to disclose under the terms of the contract.
Even if Carvill prevails on this point, there may nonetheless be a duty to disclose, whether pursuant to Conn. Gen. Stat. §§ 38a-760c or 38a-760d or pursuant to a more general fiduciary duty.
There is, however, an ambiguity in the BOR. Paragraph three refers to commissions "from ELU," while paragraph ten specifically states that there are no commissions due from ELU. Much of paragraph three would be meaningless if paragraph ten is given its logical meaning and if the term "from ELU" is applied narrowly and literally. If, however, the term "from ELU" in the context of paragraph three is meant to distinguish commissions generated by ELU business from commissions received by Carvill from other sources of business, then both provisions can be given a sensible construction and the broad trilateral structure of the reinsurance business can be recognized. In a broad sense, of course, Carvill's commissions did come, at least indirectly, from XL. It is of course true that the parties' intent governs contract disputes, and the intent of the parties is to be found in the first instance in the words used in the contract. Tallmadge Bros., Inc. v. Iroquois Gas Transmission System. L.P., 252 Conn. 479, 498 (2000). Where there is an ambiguity in the words used, aids to construction include the consideration of other provisions of the contract, so that none are "mere surplusage and inoperative"; Patron v. Konover, 35 Conn.App. 504, 518 (1994); Levine v. Advest, Inc., 244 Conn. 732, 753 (1998); and a contract will be interpreted, if possible, in a manner consistent with statutory mandates, so that any potential invalidity is avoided. See, e.g., Southington v. Commercial Union Ins. Co., 71 Conn.App. 715, 723-24 (2002); Panaroni v. Johnson, 158 Conn. 92, 104 (1969). Because there is an ambiguity in the contract, the ambiguity ought to be resolved in favor of a reading consistent with the mandate of § 38a-760c(2). The evidence showed additionally that the agreement was drafted solely by Carvill, and another aid to construction is the adage that ambiguities may be resolved against the drafter. See, e.g., Levine v. Advest, Inc., supra, 755-56.
It will be recalled that the plaintiff XL was at times referred to as the Executive Liability Unit, or ELU.
Carvill suggests that there is no ambiguity and that there was no duty to disclose brokerage commission or other charges and fees pursuant to the BOR. This argument is tenable, though not necessarily persuasive, if paragraph three is viewed in a vacuum. It is not the proper role of the court to create ambiguities, of course, and in the absence of ambiguity the intent of the parties is to be found solely in the language of the document. See, e.g., Tallmadge Brothers, supra. In the context of the overall agreement however, as noted above, the paragraph becomes ambiguous, and it would appear to be inconsistent with the language of § 38a-760c, which specifically provides for disclosures.
Even if the language of the BOR as a whole is ambiguous, Carvill suggests that other principles of contract construction compel a finding that there was no duty to disclose. Carvill relies on evidence of the history of transactions between the parties and the practice in the industry. See Putnam Park Associates v. Fahnestock Co., Inc., 73 Conn.App. 1, 10 (2002). I do find that the practice and custom in the industry was at relevant times to provide detailed commission information if, but only it requested by the reinsured. This convention was attested to by a number of witnesses and was not seriously contradicted. The course of conduct between the parties is somewhat less persuasive, however: there were scattered inquiries about commission at least since 2002, and the relationship existed for only four years in any event. In weighing the aids to construction, I find that the better interpretation favors a reading of paragraph three that requires disclosure of information including brokerage commission.
The issue of whether the contractual duty was breached is another matter, and requires a somewhat more detailed factual description of the dealings between the parties. By all accounts, the relationship began as one in which XL, though a division of a highly sophisticated insurance company, reposed considerable trust and confidence in the services of Carvill. The founders of XL approached Carvill because of prior experience with the broker. The initial agreements were all prepared by Carvill and letters by which XL Specialty sought XL Capital's approval of the reinsurance arrangements were ghost written by Carvill. The initial programs were carefully placed with an eye to protecting XL and allowing it to write policies with relatively high limits, which were essential to the ability to write directors' and officers' liability insurance for many markets. The climate in which XL was launched was not especially profitable: the technology bubble was about to burst and egregious failures, exemplified but not limited to Enron and WorldCom, were on the horizon. The pricing had not yet matched the loss potential, and D O policies were not generating profits for insurers. Of some significance was the structure of losses: the market was likely to experience a relatively infrequent number of losses altogether, but the losses which did occur were likely to be large. A strong program of reinsurance, then, was particularly essential.
Although the policies written by XL in the early years were not profitable, by 2002 XL had higher hopes for the future. Its volume of premium rose beyond expectations, and the strategy of writing fewer very large policies where losses seemed to concentrate looked as though it may begin to pay off. Through most of 2002 the claims picture was still doubtful, however, and several very large potential losses remained outstanding.
By early 2003, the financial picture brightened considerably. By this time premium income soared beyond expectations. In 1999, XL wrote roughly $5,000,000 in premium business. In 2000, the numbers went to the $50,000,000 range; in 2001, $140,000,000; in 2002, over $400,000,000 in gross written premium. (Ext. 239, p. XLS 007446.) By the Bermuda meeting in the spring of 2003, expected premium for 2003 was in the range of $800,000,000. The anticipated losses exceeded premiums in the early years, but the loss ratio was decreasing by 2002. In any event, Carvill's commission, figured as a percentage of premium, was soaring as well.
There was little discussion, at least according to the testimony and the exhibits, about the commission at the outset of the venture. It was represented to be "standard." As it turned out, Carvill's "standard" commission was the commission set in this case, and Carvill was consistently adamant that the amount of commission was not negotiable. Only two people in the entire operation, Messrs. Carvill and Carlier, were authorized to alter the commission charged. There was credible evidence that Carvill consistently represented to others in the industry that its commission could not be changed. Like that of others in the industry, however, Carvill's practice was not to divulge details about its commission without a specific request by the reinsured, and in this case the practice was executed.
The practice, as noted previously, was to send to the client-reinsured during the course of negotiations copies of the slips showing the terms of engagement on the part of the reinsurers; that portion of the slip which shows brokerage commission and other charges was left blank in the versions forwarded to the client-reinsured. In October 2000, however, Tom Phelan, a Carvill employee, sent copies of slips to Sean Hearn and Steve McGill at XL; these slips had not been redacted. These slips, to be effective for the 2001 XOL treaty, showed an effective commission rate of 2.8% (for a London placement). About a month earlier, in September 2000, Mr. McGill found himself standing in line at Heathrow Airport in London with Robert Marsden, the Carvill America employee who was, more or less, the Carvill employee responsible for the XL account. The subject of commission came up, and Mr. Marsden told Mr. McGill that the commission was about 2.5%. At the time McGill was not particularly concerned about the small discrepancy; his concern at the time of the Heathrow conversation was curious about how long it would take for Carvill to make any money on the XL account.
There is a difference in testimony between XL people and Carvill people as to whether and to what degree the subject of commission was raised after 2000. The matter seems to have become a bone of contention only after XL began projecting hundreds of millions of dollars in premiums. This corner wasn't turned until, speaking roughly, the end of 2002. It was only then that XL began seriously to protest the amount of money which Carvill was earning or about to earn.
Hearn testified that there were a number of rather informal requests for the information throughout much of the time that the relationship existed. There is no documentation of earlier requests in this heavily documented case, and I don't find such requests proved by a preponderance. McGill testified that requests were made in late 2002, and, given the changed circumstances at about that point, I credit his testimony.
The concern did not come primarily from the XL Specialty unit which was specifically the reinsured. Rather, in the spring of 2003, Paul Dowden, an XL executive based in Bermuda, higher in the XL hierarchy, presented a plan to the XL Capital board. Part of the plan was to improve XL's bottom line by insisting that reinsurance intermediaries receive less commission for brokerage services. As the business improved, brokers ought to be amenable to charging less. Dowden reviewed amounts that brokers received and determined that Carvill and Guy Carpenter might be high. Nick Brown, apparently the immediate superior to XL Specialty, began pressuring the local XL group to ascertain the amount of commission and to try to seek a reduction. It is quite plain from an examination of the emails and a consideration of the testimony that Brown wanted a rebate, that is, a payback of some kind for commissions already earned. There is some dispute as to whether "rebate" meant paying back money actually already received by Carvill or whether it meant reducing the amount to be received by Carvill pursuant to the contractual agreements in place. The more likely interpretation is that Brown wanted both.
McGill and several of the other "local" XL personnel were not comfortable with the position. McGill, a very credible witness, testified that in his opinion Carvill had done a good job for XL and had helped the company grow. McGill and others testified that in May 2003, they were receiving considerable pressure from Brown to discover the amount of the brokerage and to obtain a rebate. In answer to an inquiry as to how to proceed, Brown emailed to McGill on May 22, 2003, that there was a limit as to how far XL could expect Carvill to "reopen their books" but 2002 should still be "up for grabs." He wanted to get the amounts of brokerage for 2001 and 2002 to "shame them on the current contract year." In the face of pressure from Brown, the XL people talked with Marsden and others at Carvill in an effort to try to smooth the situation.
XL and Carvill regularly held annual joint meetings to discuss the progress of the business and to plan future conduct. The 2002 meeting had been held in Hilton Head, South Carolina. The 2003 meeting was held in Bermuda. Part of the reason for holding the meeting in Bermuda was a hope on the part of the local XL group to give Marsden and others at Carvill the opportunity to meet with Brian O'Hara, the chairman of XL Capital, and other senior XL executives. XL as a whole apparently was known as a "Guy Carpenter," company. Carvill was concerned that it would be replaced as soon as the business volume generated by XL Specialty became significant. The hope mutually shared by Carvill and the local XL group was that meeting XL executives could improve Carvill's chances of gaining rather than losing business. The Bermuda meeting did not work out as hoped. Though versions differ, it is clear that the issue of commissions came up and was not successfully resolved. Carvill representatives were pressed on the issue, and were not immediately responsive. XL representatives wanted a more or less immediate response. Carvill's representatives, supported by their notes, recall a "two part strategy." The first part was a response from Andrew Newman of Carvill to McGill, made with the intention that the materials would be forwarded to Nick Brown. The response contained materials which generally explained Carvill's commission policy: Carvill adhered to a strict policy of charging a "standard commission" and, in turn, also refrained from agreeing to market service agreements, under which a broker accepted payments additional to those provided for in the slips from reinsurers in return for steering large volumes of business. Carvill also did not discount or rebate commissions from reinsureds/clients, except in very rare situations such as the aftermath of Hurricane Andrew. The professed policy was one of transparency. The second part involved discussions primarily between Marsden and Bernard Horovitz, XL's actuary, about the amount of commission. The amount was not easy to figure precisely at any given time because it was a moving target, in that it was based on a percentage of premium received, which in turn was partly dependent on the loss experience. Horovitz suggested that if Marsden could give him the formula, Horovitz could figure out the amount of the premium. Marsden told him that the rate on the excess cessions treaty was 10% of the "net," and the rate on the excess of loss treaty was between 25 and 30 percent of the margin. When Horovitz wanted clarification, Marsden told him just to figure 2.5 or 2.6 percent of the subject premium. On June 19, 2003, Horovitz sent Marsden his computations of the amount of commissions. Marsden did not think they were entirely accurate, but by then the spiral leading to termination had begun.
Guy Carpenter was a competitor of Carvill in the reinsurance intermediary business. XL as a whole apparently placed much of its reinsurance business through Carpenter.
The broker's clients could be offered relief through "broker service agreements."
The "margin" was set at 10% and was the minimum amount of premium ceded to the reinsurers, even if there were no losses, on the XOL treaty.
Carvill agrees that it did not render periodic accounting, and under any reconstruction of the events its response to requests for the amount of brokerage commission was evasive and haphazard. I find that Carvill did breach the 2001 BOR by failing to provide accounts as provided for in paragraph three of the agreement. Any consequences of the breach will be addressed below.
Count Three CT Page 7943
The third count alleges breach of fiduciary and "agency" duties and, as stated above, lists the claimed defalcations in some detail. The law as to these claims is relatively easy to state, but is not always easy to apply.
Our law on the obligations of a fiduciary is well settled. "[A] fiduciary or confidential relationship is characterized by a unique degree of trust and confidence between the parties, one of whom has superior knowledge, skill or expertise and is under a duty to represent the interests of the other . . . The superior position of the fiduciary or dominant party affords him great opportunity for abuse of the confidence reposed in him." (Internal quotation marks omitted.) Konover Development Corp. v. Zeller, 228 Conn. 206, 219, 635 A.2d 798 (1994). "Once a [fiduciary] relationship is found to exist, the burden of proving fair dealing properly shifts to the fiduciary . . . Furthermore, the standard of proof for establishing fair dealing is not the ordinary standard of fair preponderance of the evidence, but requires proof either by clear and convincing evidence, clear and satisfactory evidence or clear, convincing and unequivocal evidence." (Citations omitted; internal quotation marks omitted.) Dunham v. Dunham, 204 Conn. 303, 322-23, 528 A.2d 1123 (1987). "Proof of a fiduciary relationship, therefore, generally imposes a twofold burden on the fiduciary. First, the burden of proof shifts to the fiduciary; and second, the standard of proof is clear and convincing evidence." Murphy v. Wakelee, 247 Conn. 396, 400 (1998).
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Our Supreme Court has recently explained that "the application of . . . traditional principles of fiduciary duty" has historically been confined to cases involving "fraud, self-dealing or conflict of interest." Murphy v. Wakelee, 247 Conn. 396, 400, 721 A.2d 1181 (1998). For this reason, "it is only when the `confidential relationship is shown together with suspicious circumstances, or where there is a transaction, contract, or transfer between persons in a confidential or fiduciary relationship, and where the dominant party is the beneficiary of the transaction, contract or transfer, that the burden shifts to the fiduciary to prove fair dealing.' Id. at 405-06 (citation omitted)." Welty v. Criscio, No. 426110 (May 16, 2000) 2000 Ct.Sup. 5914, 27 Conn. L. Rptr. 253 (Blue, J.).
DeSarbo v. Reichert, 2003 Ct.Sup. 10880 bc-bd (Munro, J., 2003).
Our Supreme Court has recognized that fiduciary duties do not come in a "one size fits all" package. The nature of the duties of a conservator of an incompetent or a trustee for a minor may be entirely different from that of an agent of a sophisticated client in the business world. In Konover Development Corp. v. Zeller, 228 Conn. 206 (1994), the plaintiff entered into a partnership with the defendant and another for the purpose of developing a shopping center. The project eventually was abandoned, and the plaintiff, the managing partner, assessed the defendant for an amount covering its costs. An issue on appeal was whether the court's instructions to the jury in the area of fiduciary duty were adequate.
The court struck a middle ground between the traditional burden shifting, where one side relies entirely on the other in an unequal relationship, and the absence of fiduciary duty, where sophisticated parties enter into contractual relationships.
. . . [W]e recognize that the fiduciary relationship is not singular. The relationship between sophisticated partners in a business venture may differ from the relationship involving lay people who are wholly dependent upon the expertise of a fiduciary. Fiduciaries appear in a variety of forms, including agents, partners, lawyers, directors, trustees, executors, receivers, bailees and guardians. "[E]quity has carefully refrained from defining a fiduciary relationship in precise detail and in such a manner as to exclude new situations." Harper v. Adametz, 142 Conn. 218, 225, 113 A.2d 136 (1955). Simply classifying a party as a fiduciary inadequately characterizes the nature of the relationship.
Konover Development Corp. v. Zeller, supra, 222-23.
The court stressed that, "in general, the rights and duties of partners are subject to the agreement between the partners . . . `It is the "general rule . . . that competent persons shall have the utmost liberty of contracting and that their agreements voluntarily and fairly made shall be held valid and enforced in the courts.'" (Citation omitted.) Id., 224. Contractual terms, however, do not necessarily negate a fiduciary relationship if one inheres in the relationship. Rather, "[i]n such circumstances the better course is to maintain the fiduciary relationship, but to make clear that, in determining whether the (fiduciary) has dealt fairly with the (beneficiary), the factfinder should take into account all of the circumstances surrounding their business relationship." Id., 226.
Most significantly for the purpose of the present discussion, the court stressed the flexibility of the concept of fiduciary duty in the sophisticated commercial setting.
In Zeller, of course, the context is sophisticated real estate transactions rather than reinsurance, but the principles remain analogous.
Commentators have acknowledged that the fiduciary relationship in a commercial limited partnership may differ from other fiduciary relationships. "Categorical prohibitions of conflicting interests might be a coherent response [to problems of divergent interests endemic to the limited partnership form] . . . but a potentially fatal one as well for whatever assumed benefits of flexibility in capital formation the form provides. Categorical permission for conflicting interests might also be a coherent response, but one running all the risks that `fiduciary ideology' is supposed to prevent. What is desired is a scheme for containing conflicts, a fairness-promoting regime that ensures, to the extent possible, that investors in the limited partnership are not being exploited, overreached, or taken advantage of by the managers of their money." (Citations omitted; internal quotation marks omitted.) D. Reynolds, "Loyalty and the Limited Partnership," 34 Kan.L.Rev. 1, 26 (1985); see also II A. Bromberg L. Ribstein, supra, § 6.07, p. 6:70 (arguing for more flexible application of rules of fiduciary duty to commercial partnerships based upon availability of "extrajudicial controls, including joint management by the partners, the relatively equal expertise of the partners, the terminability of the relationship, and the alignment of incentives of the partners through profit sharing and personal liability for partnership debts").
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The courts of Illinois have developed a framework, which we endorse, that accommodates this need for balance. In Brown v. Commercial National Bank of Peoria, 42 Ill.2d 365, 247 N.E.2d 894, cert. denied, 396 U.S. 961, 90 S.Ct. 436, 24 L.Ed.2d 425 (1969), reh. denied, 396 U.S. 1047, 90 S.Ct. 680, 24 L.Ed.2d 693 (1970), the Supreme Court of Illinois held that, in the context of a claim that a bank had breached its fiduciary duty in dealings with a financially sophisticated beneficiary, the fiduciary's responsibility to establish that the transaction was fair was to be considered in light of all the circumstances. "Important factors in determining whether a particular transaction is fair include a showing by the fiduciary: (1) that he made a free and frank disclosure of all the relevant information he had; (2) that the consideration was adequate; and (3) that the principal had competent and independent advice before completing that transaction." (Internal quotation marks omitted.) Id., 369. We make explicit an additional factor that the Illinois court implicitly included in its analysis: (4) the relative sophistication and bargaining power among the parties.
This framework retains the principle of fiduciary honor, but also reflects the many different kinds of parties that enter into fiduciary relationships by requiring, in the calculus of the factors that constitute fair dealing, consideration of the nature of the relationship between the parties. It protects passive investors while preserving the flexibility required in commercial relationships.
Zeller, supra, 227-28.
Where allegations of self-dealing, fraud and conflicts of interest arise, then, in the context of sophisticated parties working with a contractual framework, the fiduciary will have the burden to show by clear and convincing evidence that the transaction in question was fair, as determined by all the circumstances of the transaction. I turn now to a consideration of the facts pertinent to the consideration of the claims of breach of fiduciary duties.
Zeller, supra, 230.
Complaint ¶ 61(i)
The first specific claim in the third count which alleges breach of fiduciary and agency duties, is that Carvill misstated to others the circumstances regarding XL's termination of Carvill's authority to act as reinsurance intermediary, including statements that the termination occurred only because Carvill refused to accede to the demand of brokerage rebate and that the BOR called for a five-year term. Carvill did write to reinsurers and stated that the termination was the result of a dispute that arose over the compensation of Carvill for services rendered. Carvill wrote to Benfield that the reason was Carvill's failure to acquiesce to a demand for a retrospective rebate. Although I have found that Carvill breached the BOR by failing properly to disclose information, I do not believe that that breach was a motivating reason for XL to terminate Carvill's authority to act as agent.
The members of XL's operating committee who testified at the trial quite uniformly were not at all displeased with Carvill's activities on XL's behalf for all but approximately the last two months of the engagement. Carvill had done XL's bidding, and had established and executed a reinsurance program which at least contributed to the survival and, by 2003, success of XL Specialty. The requests for disclosure of the specific amounts of brokerage were prompted by Nick Brown, and it is apparent from the context that those requests were made in order to gauge the amount of rebate to try to secure. Just before and during the Bermuda meeting, the XL Specialty representatives were feeling considerable pressure from Brown, and presumably others at XL, to secure the figure; Brown quite candidly wanted to "embarrass" Carvill into conceding some money. The XL Specialty representatives tried to give Carvill a "heads up" as to how adamant Brown was, and suggested that Carvill had better come up with a creative solution to the rebate issue if the relationship were to continue. The context was the rebate.
Marsden gave Horvitz a concise and accurate, though somewhat generalized, recitation of the formula used to compute the amount of the commission. Horvitz needed to fill in the amounts of ceded premium, which presumably XL knew because it was ceding the premium, in order to compute the amount of the formula. Before Marsden responded to Horovitz' resulting estimate, Sean Hearn told him, on June 20, 2003, that if Carvill did not agree to return brokerage to XL, then XL would replace Carvill with a successor intermediary. At approximately the same time Carvill was told to communicate only through counsel. Marsden figured that at that point the relationship was over. And so it was.
Brown had in fact indicated in June 2003, that if Carvill did not rebate commission, it would be terminated. As pointed out above, Brown's position was rather unequivocally transmitted to Carvill, whose personnel later told reinsurers and Benfield the truth. In context, I find by clear and convincing evidence that Carvill's statements in this regard were fair, in the circumstances presented and in the context of reinsurance.
There is some support in the evidence regarding Carvill's mention of the five-year term. It will be recalled that the expectation of five years was included in Schedule A of the 1999 BOR, and that even if it were intended to be a contractual term rather than a mere expectation, it was unenforceable in light of clear statutory language to the effect that reinsurance intermediary agreements were terminable at will. In a letter to Brown dated July 30, 2003 (Exh. P 34), Rory Carvill, the chairman of Carvill, wrote to Brown and rather emphatically protested Brown's behavior. He begins the letter by referring to the termination's having violated the "five year contract." To the extent it attempts to enforce a term of five years, it is of course misguided.
In materials circulated to reinsurers under date of August 13, 2003, Carvill suggested that although it had been terminated, Carvill was still legally entitled to the brokerage commissions. (Exh. P 40). Carvill appended copies of opinions by U.S. and U.K. attorneys. The UK opinion pointed out, at CAR 004640-42, that although XL/ELU had the legal right to terminate at any time, it had cancelled the agreement in violation of the "expectation" expressed in Schedule A. This would appear to be an accurate statement.
Neither statement qualifies as a breach of a fiduciary duty. By the time of the letter to the reinsurers, Carvill had been terminated and it felt compelled to assert its right to brokerage as a percentage of the premiums that it anticipated Benfield and the reinsurers would receive from XL. The reinsurers were placed on notice that Carvill intended to enforce the agreements with the reinsurers as reflected on the slips. The statement as to the five-year term was true, in context, and was fair. The letter from Carvill to Brown, though not entirely accurate from a legal point of view, did not constitute a breach of a fiduciary duty. By that time the parties had entered into a dispute over several matters, and one party was expressing its point of view to another. When the relationship between sophisticated equals has broken down, nothing prevents vigorous communications between the two over their respective positions; nothing prevents actions at law being brought against each other. Perhaps an added twist or two might make a difference: for example, if a powerful and knowledgeable fiduciary tried to bully a defenseless ward into an indefensible position, there may be consequences arising from misuse of the fiduciary relationship. There is nothing in the Carvill letter but a rather intemperate expression of his position.
A fiduciary duty presumably may exist for some purposes after termination.
Complaint ¶ 61(ii)
XL also has pled that Carvill breached its fiduciary duties by asserting a right to premium payments made after Carvill's termination. This issue has been discussed in the context of Carvill's counterclaim. In the context of commercial reinsurance, asserting a right is certainly a fair practice, especially if the assertion is correct.
Complaint ¶ 61(iii)
XL has alleged that Carvill breached fiduciary duties by asserting that Benfield could not act as XL's intermediary without proper authorization; if it tried to do so, there could be contractual interference. Carvill's counsel wrote to Benfield on August 18, 2003, and stated that any attempt by Benfield to "deliver premium, collect brokerage, relay communications, or otherwise represent itself as being the proper intermediary of treaties placed by Carvill, without proper legal authorization, would constitute intentional interference with contract." (Exh. D 74.) Carvill quite clearly was concerned that it might be cut out of its commission. Carvill not illogically adhered to the position that the termination of the BOR agreement did not by itself terminate the contracts between Carvill and the reinsurers, and that the reinsurers could not at the behest of Benfield ignore Carvill. XL's treaties with the reinsurers likewise identified Carvill as the intermediary through whom all correspondence and monies should be processed. XL and the reinsurers had the obligation to change the intermediary clauses in the treaties if they were technically to act according to the contractual framework.
The context of the communication is Carvill's attempt to avoid being cut out of the process. There would seem to be nothing unfair about reminding the others of the advisability of amending the contractual provisions to reflect the new reality. It may have been true that Benfield could not technically act as intermediary before the contracts were reformed; indeed, XL's expert Rivers agreed that was so. It further is difficult to find any damage flowing from the statement. In any event, in the context of the complex reinsurance world, I do not find that Carvill's correspondence was unfair to XL, and affirmatively find that it was not.
Complaint ¶ 61(iv)
Again in support of its claim that Carvill breached its fiduciary duties XL has alleged that Carvill publicly relied on the 1999 BOR agreement to support brokerage claims, when the agreement had been superseded by the 2001 agreement and, in any event, was in violation of Connecticut General Statutes § 38a-760c. This allegation apparently relates to the July 30, 2003, letter from Rory Carvill to Brown, discussed above. The letter was not "public" in the sense of defamation, because it was sent only to Brown. See, e.g., Springdale Donuts, Inc. v. Aetna Casualty and Surety Co. of Illinois, 247 Conn. 801, 810-11 (1999). The letter was also sent in the context of the post-termination dispute. The scope of Carvill's fiduciary duty was limited to acting on behalf of XL in the procurement and execution of the reinsurance program, and in that responsibility Carvill owed a fiduciary duty, both contractually and historically. See, e.g., Taylor v. Hamden Hall School, Inc., 149 Conn. 545, 552 (1926); Mickle v. Christie's, Inc., 207 F.Sup.2d 237, 244 (S.D.N.Y. 2002). Communications between the parties regarding the contractual responsibilities does not fall into the ambit of the fiduciary responsibilities of Carvill. Additionally, Rory Carvill's recitation of the term of engagement, though erroneous, would appear in context to be venting and, as noted previously, was soon corrected. Finally, I find no damages arising from the communication.
Complaint ¶ 61(v)
This subparagraph alleges that Carvill breached its fiduciary duty by refusing to provide basic contract and brokerage information to either XL or Benfield in response to specific requests for that information. To the extent that this subparagraph concerns XL's efforts to obtain brokerage information, the court has previously discussed the communications until the immediate aftermath of the Bermuda meeting. It will be recalled that Hearn spoke with Marsden on June 20 and indicated that unless a rebate was provided, there wasn't any point in going on. Marsden emailed Hearn on June 23 with a summary of what he perceived XL's position to be: that Carvill had to rebate a portion of the commission on the 2003 treaties, that the rebate had to be in the seven figure range, and that Carvill would be terminated if it did not agree to a rebate. Hearn wrote back on June 25 and suggested that Marsden had misstated the conversation, that XL no longer wanted to do business with Carvill and that all future communications were to proceed through counsel. XL's counsel later did request specific information and again was provided with the percentages of ceded premium. Though, as stated previously, the terms of the contract were breached because the reporting was not properly executed, I do not find a breach of fiduciary duty because XL was substantially informed according to the custom of the industry and because the communications between the parties are not directly within the scope of fiduciary responsibilities. As will be developed below, I also find no damages rose from any breach in this regard.
The more troublesome aspect is the balkiness of Carvill in transferring information to Benfield so that Benfield could properly perform its responsibilities as the new reinsurance intermediary. Benfield became the new agent effective August 13, 2003. Benfield and XL requested basic contract information from Carvill. Obviously, information regarding premiums, losses, the slips and other details were necessary for servicing the treaties in place. Equally obviously, servicing the account is squarely within the scope of Carvill's fiduciary responsibility. Carvill at first insisted on Benfield's executing agreements recognizing Carvill's right to all of the brokerage on the 2003 treaties, and stated that it would not provide any information until formal agreements transferring the accounts had been executed. In this regard I find that Carvill was motivated more by pique than by the interest of its client. I credit Mr. Rivers' testimony in this regard to the effect that the industry standard is to transfer information first, to allow as seamless a transition as possible, and to settle the commission questions later, should they prove nettlesome. I find, then, that Carvill has not proved by clear and convincing evidence that it acted in its client's interest by delaying "contract information" and that XL has therefore proved a breach of fiduciary duty in this regard.
Carvill had offered to continue servicing the 2003 treaties, but by this time relations had soured such that XL preferred to have Benfield service the agreements. This was a permissible choice.
There were, however, no ascertainable damages arising from this defalcation, nor was the action "fraudulent" or an exercise in self-dealing. No evidence was introduced showing any loss of any kind as a result of delay in the transfer of information, and Benfield soon had enough information to service the account properly.
Complaint ¶ 62(i)
This subparagraph alleges that Carvill breached its fiduciary duty by failing to disclose details about the commission earned as a result of reinsurance placements. This allegation has been discussed sufficiently in other contexts. Suffice it to say that I do not find that there is any violation of any fiduciary duty in that regard, in the context presented, nor are there any damages even if there were a breach.
Complaint ¶ 62(ii)
This subparagraph alleges that Carvill breached its fiduciary obligations by putting its interests ahead of XL's by "imposing a commission structure that adversely affected reinsurers' decisions to participate in XL's 2003 reinsurance program or caused reinsurers to condition their participation in the program." The "commission structure." has been discussed at some length and need not be further explained here. XL's claims that Carvill's commission and, presumably, other fees to reinsurers were so high that the program was difficult to place with reinsurers. The fundamental reasoning is that reinsurers may require a certain level of net remuneration to them in return for agreeing to accept a certain level of risk. The higher the payments that the reinsurers make to the broker, the less is left to compensate them for taking on risk. If the percentage of ceded premium remains the same for the same level of risk, then increased broker commissions logically decrease the enthusiasm of reinsurers to participate in the program, and increase the motivation of reinsurers to seek conditions regarding, for example, the sorts of risks and amounts of coverage which may be offered by the ceding company.
In some ways, XL's argument is counterproductive: the "program" in fact was placed with the commissions intact. The reinsurers were in fact willing to buy into the program. When a reinsurer sought to impose unacceptable conditions, Carvill simply advised that it, acting as agent for XL, could not agree, and other reinsurers were found.
First, and perhaps most striking, is that Carvill's commission was demonstrably not out of line with amounts charged in the industry. XL's experts opined that the commissions were "high," especially in light of the enormous growth of premium, and there was some grousing from reinsurers and potential reinsurers. There was ample testimony, however, that Carvill's "standard" brokerage was virtually identical to that of Aon, the largest reinsurance broker in the world, and in practice could work out to be less than Aon's. Guy Carpenter, a very large broker, charged essentially the same as Carvill on excess cessions treaties and an amount on excess of loss treaties that was structured somewhat differently but that overall worked out to be very similar. Willis, a broker who competed for XL Specialty's business at the time of Carvill's termination, proposed a commission charge similar to Carvill's.
To be sure, the opinion was also expressed that Carvill's brokerage in this instance was high because the volume of premium became so high. Some reinsurers raised an eyebrow, but in the context of testimony (frequently presented by videotape) it became clear that in the rough and tumble marketplace, reinsurers customarily sought advantages for themselves. If they could make more money on a deal, they would make the effort. Chubb and Axis, for example, two of the reinsurers, expressed concern at the amount of the commission but signed on nonetheless; that particular negotiating ploy had not worked. The Chubb underwriter expressly testified that his intention in requesting a reduction of the commission was to improve Chubb's bottom line. There was no specific credible testimony that reinsurers would reduce the amount ultimately charged to XL if Carvill were to reduce its commission.
Some other reinsurers such as Transatlantic and Odyssey sought to impose conditions on XL's writing insurance. These conditions were simply rejected and neither company participated in the 2003 excess cessions treaty. Hart Re, when solicited to participate in the renewal of the excess cessions treaty effective January 1, 2003, initially proposed terms including a 5% commission rate. When Carvill advised that it would not alter its commission structure, Hart Re agreed to participate — with the same premium from XL — on the 2003 treaty.
The fiduciary duty in the reinsurance broker context cannot require that the broker "put the interests" of the ceding client ahead of its own in every conceivable way. To take the position to its logical absurdity — that a broker has the legally enforceable obligation to charge the least amount that a hired expert — in hindsight thinks is fair — is to ignore the practical realities recognized in Zeller and to substitute the subjective view of the reviewing court for the contractual realities. If XL thought it was paying too much for its reinsurance package, it was free to try to negotiate another package, and it ultimately and perhaps appropriately did so. Much testimony, for example, concerned the Hilton Head conference in the spring of 2002 and the planning for the placement of the 2003 treaties. XL had every opportunity to reduce commissions, for example, by taking on a greater proportion of the risk at the level of high losses, but it expressed satisfaction with the existing program and consciously chose to stay with the status quo. There were discussions regarding the restructuring of the XOL treaties in 2002, because from an actuarial point of view XL may well have been able to bear more of the risk at the lower level of reinsurance and have ceded less premium. Consistently, however, XL chose to stay with the program, at least until the loss ratio improved dramatically.
In retrospect, there are always points on which parties can differ. I find on clear and convincing evidence, however, that Carvill acted consistently with the needs of XL in placing the program and its "commission structure" was neither unfair nor a violation of any fiduciary duty. As testified to by Mr. McGill, by late 2002 Brown had already formed his own opinion that Carvill's commissions were excessive, and yet XL consciously decided to renew the treaties on substantially the same terms for 2003. Carvill had done a good enough job on behalf of XL that XL did not want to terminate Carvill or to substantially alter its reinsurance structure.
Complaint ¶ 62 (ii)
XL has alleged that Carvill failed to make certain reinsurance placements on the 2003 treaty and failed to inform XL of those failures. It is not clear precisely what defalcations are alleged. Suffice it to say that I find that the 2003 treaty was placed, in practical effect.
Complaint ¶ 62 (iv)
This claim alleges that Carvill breached a fiduciary duty by failing to ensure that every reinsurer sign the 2003 treaty. One of the reinsurers, Converium, had not signed the treaty prior to Carvill's termination. The evidence showed that the standard practice in the industry was to work out the wording of the treaties after their effective dates. In this case Carvill was terminated before the standard allowed time of nine months had elapsed, and in any event there was no harm to XL as a result. There was no actionable breach of fiduciary duty in this regard.
Complaint ¶ 62(v)
XL finally claimed that Carvill failed to ensure that the placement included a special termination clause in the 2003 treaties. The clause in question was strongly advocated by people at XL to whom the "operating group" reported in September 2002; because it was more onerous than most from the point of view of reinsurers, Carvill expressed doubts that many would willingly go along. When there was silence for two months, Marsden thought the issue had been dropped. In November the demand resurfaced. Carvill included the clause demanded by XL in a draft placement slip, despite its doubts regarding reinsurers' acceptance.
The special termination clause would allow parties to the reinsurance treaties to cancel on the occurrence of certain conditions. Some conditions are reasonably standard; for example, if the financial condition of a reinsurer becomes precarious, the ceding company can in some circumstances cancel its participation. Other conditions are not standard, and XL wanted both.
Hart Re, one of the reinsurers, signed a slip for the excess sessions contract which provided that the clause was "to be agreed." It was standard practice for the fundamental terms, such as percentages of the loss accepted and of ceded premium, to be agreed to in the slips, and the more detailed language of the formal treaty to be negotiated after the effective date of the treaty. The XOL treaty effective January 2001, had provided XL with a unilateral right to cancel the treaty at its anniversary with 90 days notice. Hart Re conditioned its participation on the excess cessions contract effective January 1, 2003, on an agreement to change the unilateral right to cancel the XOL treaty to a bilateral right. Carvill so advised XL, and it also advised that a right to cut off participation at an anniversary was different from a termination clause that could terminate prior to an anniversary; the latter, generally, was triggered by some objective concern about the solvency of the reinsurer. In any event, XL and Hart Re ultimately agreed to a bilateral right to cut off participation at an anniversary. In September 2003, after Carvill's termination, a representative of Hart Re objected, mistakenly, to the special termination clause and refused to sign the final version of the contracts. By that time, Carvill had been relieved of any ability to negotiate or to straighten out the problem.
I find that Carvill acted as diligently as it could in the circumstances and did not violate its fiduciary duty. It negotiated faithfully on behalf of XL; again, it had been terminated before the customary time in which to secure final, signed treaties had expired. Perhaps most significantly, there is no evidence of any harm or monetary damages arising from any problems with any loose ends.
Count Four. The fourth count alleges breach of the covenants of good faith and fair dealing. The specific allegations simply reallege, with some change of order, those claims set forth in paragraphs 61 and 62 in the third count alleging breach of fiduciary duty. The discussion regarding this fourth count, then, may be much more concise.
Although the allegations of malfeasance in the fourth count are identical to the claims of the third count, the conceptual analysis pertinent to the cause of action of breach of the covenant of good faith and fair dealing differs from the analysis underlying the tort of breach of fiduciary duty. The elements necessary to prove a breach of the covenant of good faith and fair dealing has been concisely set forth in Ruiz v. Dunbar Armored, Inc., 2005 WL 1869028 n. 3 (Hiller, J., 2005).
"[A]n action for breach of the covenant of good faith and fair dealing requires proof of three essential elements, which the plaintiff must duly plead: first, that the plaintiff and the defendant were parties to a contract under which the plaintiff reasonably expected to receive certain benefits; second, that the defendant engaged in conduct that injured the plaintiff's right to receive some or all of those benefits; and third, that when committing the acts by which it injured the plaintiff's right to receive benefits it reasonably expected to receive under the contract, the defendant was acting in bad faith." ShareAmerica, Inc. v. Ernst Young, Superior Court, judicial district of Waterbury, Docket No. CV 93 0150132 (July 2, 1999, Sheldon, J.). "Bad faith in general implies . . . a neglect or refusal to fulfill some duty or some contractual obligation, not prompted by an honest mistake as to one's rights or duties, but by some interested or sinister motive . . . Bad faith means more than mere negligence; it involves a dishonest purpose." (Citations omitted; internal quotation marks omitted.) Habetz v. Condon, 224 Conn. 231, 237, 618 A.2d 501 (1992).
The implied covenant of good faith and fair dealing is a rule of contract construction: even if the literal tents of a contract are not violated, the implied covenant can be violated in circumstances where, for example, the reasonable expectations of the parties are thwarted by one side's purposefully dishonest actions. See, e.g., Magnan v. Anaconda Industries, Inc., 193 Conn. 558, 566-67 (1984). "`Every contract carries an implied covenant of good faith and fair dealing requiring that neither party do anything that will injure the right of the other to receive the benefits of the agreement . . . Essentially it is a rule of construction designed to fulfill the reasonable expectations of the contracting parties as they presumably intended . . . Conversely, [b]ad faith means more than mere negligence; it involves a dishonest purpose.' (Citations omitted; internal quotation marks omitted.) Middletown Commercial Associates Ltd. Partnership v. Middletown, 53 Conn.App. 432, 437, 730 A.2d 1201, cert. denied, 250 Conn. 919, 738 A.2d 657 (1999)." Barber v. Jacobs, 58 Conn.App. 330, 338, 753 A.2d 430 (2000). In contradistinction to breach of fiduciary duty, of course, the breach of the covenant of good faith and fair dealing underlies a cause of action in contract rather than tort, and the usual burdens of proof apply. The rules governing damages arising from a such breach are the same as those arising from any breach of contract. See Schink v. Baker, 2002 WL 442380 (Adams, J., 2002).
I have previously found that Carvill did breach that portion of the 2001 BOR by not providing documentation required by the plain wording of the contract; I also found that Carvill breached its fiduciary duty in that it did not sustain its burden regarding fidelity in transferring account information to Benfield. Nothing is added by this fourth count: I do not find that Carvill acted with a dishonest or improper purpose, with the possible exception of the transfer problem. It was clear from the evidence that at the time, no one in the industry volunteered disclosures and XL didn't make any request until late 2002 or early 2003; it further is clear that no additional damages would arise from a violation of this count. Again, the damages discussion will occur at the conclusion of this memorandum.
Count Five
XL's fifth count claims that Carvill tortiously interfered with XL's business and contractual relations with Benfield and with its reinsurers. It claimed that the interference was accomplished by suggesting to reinsurers that XL had terminated Carvill for reasons other than the real reasons and that a binding five-year term governed the relationship between XL and Carvill; that Benfield's acting on behalf of XL would constitute interference; that it had a right to brokerage payments on premiums made after Carvill's termination; that Carvill relied on the 1999 BOR agreement after it had been superseded and despite its conflict with statutory mandates; and that it refused to supply contract and brokerage information to either Benfield or XL despite specific request.
The elements required for pleading and proving a tortious interference claim were stated during the discussion of Carvill's claims against XL and are specifically incorporated here. The facts alleged in the instant count have been previously discussed. It is not disputed that XL had business relationships with Benfield and its reinsurers. The question whether Carvill tortiously interfered with those relationships is disputed.
The first specific allegation of the third count is virtually identical to the first specific claim of this fifth count i.e., that Carvill misstated the basis for its termination and its statement regarding a five-year term in the BOR. As noted in the court's prior discussion of this issue, I find Carvill's stated basis for its termination to be supported by the record and to be substantially true. The second specific allegation refers to Carvill's statement to the effect that Benfield could not hold itself out as XL's representative without proper legal authorization. This statement again is, so far as it goes, true. The reinsurers may have not yet expressly agreed to work through Benfield; those contracts presumably would have to be amended. The third ground is that Carvill asserted that it had a right to brokerage commission on premium payments made after Carvill's termination. As discussed above, that statement is true. One cannot tortiously interfere with a business relationship by asserting one's own prior valid contractual rights.
The overall context of course, was at that point an effort on the part of Carvill to protect its perceived right to brokerage payments. The statement about Benfield's need to secure proper authorization is material only in context.
Reliance on the 1999 BOR agreement has been substantially discussed above. Part of the brokerage commission which Carvill was seeking to preserve arose from the treaties placed pursuant to the 1999 BOR and thus was appropriately invoked. As noted above, I do not hold that, in context, Carvill had any intention to enforce a five-year term and in fact Carvill recognized that it could not. Because the entire industry knew that BOR agreements were terminable at will, any mention of a contrary term had no substantial prejudicial effect. Finally, I have previously held that Carvill was slow in providing information to Benfield and I have found that Carvill's fiduciary duty was thereby breached. To the extent that the activity also constitutes tortious interference with contract, the damages, to be discussed later, are identical.
Count Six
This is a negligence count. XL in this count incorporates all of the prior pleadings and alleged that "Carvill owed XL various duties, including fiduciary and agency duties of full disclosure, loyalty, prudence and selflessness." (¶ 76.) The more specific claimed breaches of duties include the mischaracterization of the basis for Carvill's termination and the assertion of a five-year term; asserting a right to brokerage after termination; telling Benfield that it could be acting in a way to constitute contractual interference; relying on the 1999 BOR; refusing to provide basic contract and brokerage information to XL or Benfield; failing to disclose to XL details about commissions earned; putting its interests ahead of XL's by "imposing a commission structure" that caused reinsurers to think twice about participating on the treaties or to impose conditions on participation; failure to make certain placements and to disclose such failure to XL; failure to ensure signatures by the reinsurers; and failure to ensure that certain terms and conditions were included in the treaties.
In order to plead and to prove a cause of action in negligence, a plaintiff must satisfy the following elements: the existence of a duty, a breach of the duty, causation and actual harm. See, e.g., RK Construction, Inc. v. Fusco Corp., 231 Conn. 381, 384 (1994); Right v. Breen, 277 Conn. 364 (2006). The factual allegations are, without material difference, identical to those advanced in support of the third count alleging breach of fiduciary duty. The holding of the court is the same as to this count, although one observation should be added. It is true that not all of the actions of Carvill took place in its role as a fiduciary. To the extent that its setting of its own fees and commission may be considered to be outside the fiduciary context, I nonetheless find that XL has not proved that even if there was a duty to XL regarding the size of the fees, any duty was breached by the size of the fees, in light of the previous discussion regarding fees. The prior discussion regarding the various signatures by the reinsurers has also been discussed and no useful purpose is served by duplicate verbiage. There was no breach of duty additional to the breach of fiduciary duty previously found.
I also note that the evidence overwhelmingly established that risk was transferred by the programs and that by traditional actuarial standards value was provided by the reinsurance programs. As time went on and the amount of premiums grew, XL Specialty was better able to absorb greater risk and may well have decided that it was not financially advisable for it to transfer so much of the premium and to keep more of the risk. This is an option which was available to XL at any termination point in the treaties, as was in fact discussed in connection with the XOL treaty toward the end of 2002. XL decided to keep the program as it was at that point.
Count Seven
XL's seventh count alleges that XL relied on various statements made by Carvill about the reinsurance placements and was harmed as a result. This would appear to be a cause of action in negligent misrepresentation. The elements of a cause of action for negligent misrepresentation include (1) a false representation made as a statement of fact and for the guidance of the other party; (2) failure to exercise due care on the part of the party making the statement; (3) justifiable reliance to its detriment by the harmed party. "The governing principles [for this cause of action] are set forth in similar terms in § 552 of the Restatement (Second) of Torts (1977): One who, in the course of his business, profession or employment . . . supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information. (Citations omitted; internal quotation marks omitted.)" Craine v. Trinity College, 259 Conn. 625, 661 (2002).
As discussed above, Carvill did disclose to XL the fundamental structure of the fee commission on several occasions, and, in context I make the reasonable inference that XL, especially in that it received guidance and authorization from XL Capital and other XL entities, was generally well aware of what fees reinsurance intermediaries typically charged. The evidence showed that Carvill was not out of the range of other intermediaries. Similarly, the conversations between Marsden and McGill at Heathrow were not misleading. In fact, McGill's statement in the UK litigation indicates that he later had no concerns about the difference between the 2.5% figure given as to the XOL treaty and the 2.8% figure which was actually assessed. Similarly, statements that Carvill's commission were "standard" were substantially accurate and, in any event, caused no harm: there is no persuasive evidence that XL would have done anything different had it had more detailed information. As stressed previously, the operating committee of XL Specialty was generally very pleased with Carvill's performance at least until the time of the 2003 Bermuda meeting, at which point the 2003 treaties were already in effect.
XL has claimed that it knew nothing about the fees for claim handling that appears on the slips executed on the London or European market. Very little evidence was introduced at trial regarding the fees. There was a suggestion that the fees did not take effect until a certain level of claims handling was reached, and that Carvill provided extra servicing by transferring information more rapidly and efficiently than most intermediaries. In any event, there was no credible evidence as to how great the fees actually were, and I find that XL could not have relied to their detriment on statements vaguely omitting reference to the fees nor do I find that, prior to and including the 2003 placements, XL would have acted any differently had it had precise information about the claims handling fees.
The reactions of the reinsurers to the commission structure have already been noted. Although some thought the commission on the 2003 treaties was "high," there was no evidence that the commission structure in fact adversely affected in any material way the treaties that were negotiated. The failures to disclose several difficulties in the negotiation process and reinsurers' tardiness in signing had no material effect on the ultimate obligations of the parties.
Throughout the course of the case XL has argued forcefully that it "really" paid the commissions, and, therefore, the greater the commission, the less money for XL. While superficially appealing, this position does not change the nature of the commission as being directly paid by the reinsurers, as reflected by the fundamental contracts and the accounting procedures. The reinsurers are paying for the business and, to a lesser degree, for the servicing.
Count Eight
This count incorporates all of the preceding counts and alleges that the breaches of fiduciary duty, breaches of the covenant of good faith and fair dealing and tortious interference with contractual relationships between XL, its reinsurers and Benfield were "wanton, willful and reckless," because they were carried out with the intent to cause XL harm and were malicious. The count seeks the award of punitive damages as a result.
I do not find that Carvill acted in any regard with the requisite degree of intent to prove wanton, willful and reckless conduct. Prior to termination, Carvill acted consistently with industry standards and custom — though not precisely in accord with statutory requirements. After the termination, Carvill acted primarily to protect its own legitimate interest in the brokerage commission. There can be no doubt that Rory Carvill had his feathers ruffled, but no harm, other than aggravation, fell to XL's interests. I do not find that XL has sustained its burden of proof as to punitive damages. See, e.g., Sherman v. Lafayette Bank Trust Co., 4 Conn.App. 39, 45-46 (1985); Elliott v. Waterbury, 245 Conn. 385, 415 (1998) ( quoting from Dubay v. Irish, 207 Conn. 518, 532-33 (1988)) ("In order to establish that the defendants' conduct was wanton, reckless, wilful, intentional and malicious, the plaintiff must prove, on the part of the defendants, the existence of `a state of consciousness with reference to the consequences of one's acts . . . [Such conduct] is more than negligence, more than gross negligence . . . [I]n order to infer it, there must be something more than a failure to exercise a reasonable degree of watchfulness to avoid danger to others or to take reasonable precautions to avoid injury to them . . . It is such conduct as indicates a reckless disregard of the just rights or safety of others or of the consequences of the action . . . [In sum, such] conduct tends to take on the aspect of highly unreasonable conduct, involving an extreme departure from ordinary care, in a situation where a high degree of danger is apparent.' (Citations omitted; internal quotation marks omitted.)")
Count Nine
This count alleges a violation of the Connecticut Unfair Trade Practices Act ("CUTPA"), Connecticut General Statutes §§ 42-110a et seq. I find that XL has not sustained its burden of proof in proving that any conduct of Carvill was in violation of the "cigarette rule"; see, e.g., A-G Foods, Inc. v. Pepperidge Farm, Inc., 216 Conn. 200, 215 (1990); and thus no CUTPA violation has been proved.
There further is no ascertainable loss, as required to prove a violation of CUTPA. See Connecticut General Statutes § 42-110g(a). "Thus, in order to prevail in a CUTPA action, a plaintiff must establish both that the defendant has engaged in a prohibited act and that, `as a result of' this act, the plaintiff suffered an injury. The language `as a result of' requires a showing that the prohibited act was the proximate cause of a harm to the plaintiff." (Emphasis in original.) Abrahams v. Young Rubicam, Inc., 240 Conn. 300, 306, 692 A.2d 709 (1997).
Counts Ten and Eleven
In the tenth count, XL seeks an accounting of the amounts Carvill received in commissions in order to ascertain the correct amount of damages it claims. In the eleventh count, XL seeks injunctive relief in the form of the court's ordering Carvill to recognize that it has been terminated and to comport itself accordingly; additionally, XL seeks an order to the effect that Carvill is to communicate with Benfield and the reinsurers clearing the air and an order declaring that Carvill is not owed any further brokerage. Due partly to the passage of time, most of the injunctive relief requested is no longer necessary, if it ever was. Because I do not award any damages to XL, the accounting is unnecessary.
IV. DEFENSES
Carvill has alleged a number of special defenses. To all counts, Carvill claims that XL has "unclean hands" because of its behavior in wresting earned premiums from Carvill. To the first four of XL's counts, Carvill alleges that, because of similar behavior, XL's claims are barred by the covenant of good faith and fair dealing. To all counts, Carvill claims that there were no complaints from XL until the time it sought the commission rebate, and its claims are barred by estoppel. These defenses have not been adequately briefed and, in any event I do not find that they bar relief on any of XL's claims.
Carvill's first defense alleges that XL, by virtue of misappropriating the post-termination commission due to Carvill, has unclean hands and its claims against Carvill are barred. The second alleges that XL wrongfully misappropriated commission on premiums, was unscrupulous and violated the implied covenants of good faith and fair dealing, and thus its claims are barred by the covenant of good faith and fair dealing. The third alleges that XL expressed no complaints about Carvill's performance until the time that Carvill refused to rebate commissions, and the claims are therefore barred by estoppel.
None of the defenses bars the nominal relief afforded XL. Although I found that XL tortiously interfered with Carvill's business relations with the reinsurers, I do not find that such conduct equitably should bar the nominal recovery for Carvill's tardiness in transferring documents and in not providing all of the information required by law. The allegation of breach of the covenant of good faith and fair dealing seems to be a restatement of much the same proposition: as a means of construction of contracts, the covenant of good faith and fair dealing does not bar by itself the relief granted in this case. Finally, XL factually did complain about the tardiness of transferring documents, such that estoppel would not bar recovery of nominal damages on that score. I do not believe there is any credible evidence that Carvill relied on XL's silence in not providing documents; in fact, Carvill took the consistent position that XL was not entitled to any information about commissions unless it specifically asked for it. There factually could have been no reliance, and without reliance, there is no effective estoppel. See, e.g., Lombardo's Kitchen, Inc. v. Ryan, 268 Conn. 222, 237-39 (2004).
It is likely that the defenses, in context, were addressed more to XL's claims regarding retention and disgorgement of the commission payments than to the claims on which nominal relief was granted.
XL has also filed defenses to Carvill's counterclaim. The first claims that Carvill cannot recover as to the first and second counts of the counterclaim because Carvill breached the covenant of good faith and fair dealing. The gravamen of the defense is that Carvill breached the duty because the commissions it seeks, and the contracts under which payment may be due, are "contrary to public policy," onerous and excessive. In essence, the defense alleges, Carvill sacrificed XL's interest in a reasonable reinsurance program on the altar of its commission structure, and therefore ought not recover its commissions.
I have previously discussed the issue, and I do not find that Carvill's commission structure was unreasonable in the circumstances. The defense does not bar recovery of the commissions.
XL's second special defense to the first and second counts in unclean hands, on the grounds that Carvill offered a BOR agreement that did not comport with state law, in that it did not allow XL to terminate at any time and that Carvill charged remuneration that compromised XL's ability to secure the best available reinsurance program. These claims have been discussed in other contexts and are rejected.
The third special defense to both counts of the counterclaim alleges that to the extent that Carvill relies on custom and practice in the application of the contractual arrangement, that practice and custom violates public policy and ought not be sanctioned. The count specifically references the custom that commissions are earned when the treaties incept; because such an understanding would be inconsistent with the statutory right to terminate at any time and with a public policy against remuneration for services not rendered. These concerns have been previously addressed and the defense does not bar recovery.
A difficulty in XL's position is that the specific contracts on which Carvill relies for recovery are the "slips" forming contracts between Carvill and the reinsurers, not the BOR agreements between XL and Carvill.
The fourth defense claims that Carvill is barred by principles of estoppel from collecting payment of commissions. The defense alleges that statutory law requires that the responsibilities of each party be specified in a written contract, that Carvill drafted the contracts, and that Carvill is estopped from claiming that there was any ambiguity or implied term in any of the contracts. Carvill's recovery is premised on unambiguous clauses of the slips with the reinsurers, and not on any implied or ambiguous term. The defense does not help XL.
The fifth defense claims that Carvill cannot recover because there are express terms requiring Carvill to service the reinsurance program and allowing Carvill to be terminated at any time. If Carvill's services are terminated, the defense suggests, then it no longer can service the contract so that the basis of remuneration vanishes: it cannot collect payment for contractual services which it cannot perform. As noted above, however, it is the reinsurers who are paying for the business, and some deduction has been made for the servicing by Benfield, the successor intermediary. Relief pursuant to the fifth defense is denied.
The sixth defense alleges that Carvill cannot recover commissions because its termination was caused by its own "unfaithfulness, malfeasance and actionable omissions." I do not find the proposition to be factually correct or legally plausible, given the tripartite contractual arrangement.
The seventh defense seeks a set-off of any amount that XL should owe to Carvill by the amount that Carvill might owe XL. This would be done if damages were other than nominal.
The eighth defense seeks recoupment. It seems to allege that XL has held back some of the amounts that Carvill claims are commissions owed to it. Because the amount of the "hold-back" represents part of the damages due to XL, the withholding is equitable; Carvill's claims to an equitably justifiable withholding are barred by recoupment. This defense adds nothing to the prior analysis.
The ninth defense is somewhat difficult to understand. It seems to allege that Carvill represented that all of the contract terms comported with statutory law, which in turn requires that BORs be terminable at will. The contracts expressly provided that Carvill was to procure and to service the reinsurance program. Any implied term to the contrary, then, such as a term to the effect that Carvill is entitled to post-termination commission, is unenforceable "because Carvill amended the engagement agreement by ratification to incorporate terms overriding to those implied terms." This defense appears to be an exercise in contract construction. Because the contracts have been discussed above, no useful purpose is served by further explication. The defense does not bar Carvill's recovery.
V. DAMAGES
I have found that XL did interfere with Carvill's right to receive the brokerage commission after the termination. The proper measure of damages in the context of this case is the amount of money which Carvill would have received had there been no interference. The gross amount of commissions earned on premium ceded by XL, after Carvill's termination, pursuant to the treaties placed by Carvill, as determined by Benfield's analysis and apparently confirmed by both XL and Carvill, is $4,485,629.12 (E.g., Exhs. P 139; D 226; D 283). This amount overstates to a degree the financial position which Carvill would have been in had the contracts been properly executed, though, because there is some servicing work and expense which Carvill avoided because of the termination. Although I have found that Carvill's right to remuneration survived the termination, I also find, consistent with Benfield, supra, that a just award of damages requires a deduction to reflect the expense Carvill saved by not having to service the treaty after termination. Otherwise, Carvill would be awarded a greater amount because of the interference than it would have netted without the interference. See, e.g., Restatement (Second) Contracts § 344(a), Comment a, Illustration 1.
No direct evidence of the cost of servicing was entered into evidence, but there is reasonably persuasive indirect evidence. When XL hired Benfield as the successor intermediary, XL required Benfield to withhold the amount of the commission from the amount forwarded to the reinsurers and to keep the same in an escrow account. XL specifically allowed Benfield a fee of 10% for servicing the remaining work on the account. Although the number is not entirely satisfactory, it is better than nothing. I find that damages awarded to Carvill, then, include as compensatory damages the amount of $4,037,066.21 — 90% of the unpaid commissions.
Carvill also claims interest pursuant to Connecticut General Statutes § 37-3a, which allows for interest of ten percent per year for the wrongful detention of money. The award of such interest is discretionary:
"Prejudgment interest pursuant to § 37-3a has been applied to breach of contract claims for liquidated damages, namely, where a party claims that a specified sum under the terms of a contract, or a sum to be determined by the terms of the contract, owed to that party has been detained by another party." Foley v. Huntington Co., 42 Conn.App. 712, 740, 682 A.2d 1026, cert. denied, 239 Conn. 931, 683 A.2d 397 (1996). "[T]he determination of whether interest pursuant to § 37-3a should be awarded is a question for the trier of fact." Id., 738. "It is clear that Connecticut case law establishes that prejudgment interest is to be awarded if, in the discretion of the trier of fact, equitable considerations deem that it is warranted." Paulus v. LaSala, 56 Conn.App. 139, 147, 742 A.2d 379 (1999), cert. denied, 252 Conn. 928, 746 A.2d 789 (2000). Prejudgment interest in accordance with § 37-3a normally is awarded for money wrongfully withheld, and provides for interest on money that is detained after it becomes due and payable. Fitzpatrick v. Scalzi, 72 Conn.App. 779, 788, 806 A.2d 593 (2002).
* * * *
To award § 37-3a interest, two components must be present. First, the claim to which the prejudgment interest attaches must be a claim for a liquidated sum of money wrongfully withheld and, second, the trier of fact must find, in its discretion, that equitable considerations warrant the payment of interest. See Fitzpatrick v. Scalzi, supra, 72 Conn.App. 788.
CT Page 7966 Ceci Bros., Inc. v. Five Twenty-One Corp., 81 Conn.App. 419, 427 (2004).
In the circumstances, I find that although money was effectively withheld because of XL's efforts, and the withholding was wrongful in that it was not justified, I find that equitable considerations warrant the application of prejudgment interest pursuant to § 37-3a only insofar as the money in the segregated account established by Benfield at XL's direction earned interest. The legal situation was not entirely clear; the parties have been able to locate only one case, Benfield, which directly addresses the situation, and that case was decided in 2006, after the operative events in this matter had occurred. XL and, for that matter, Benfield, did take the salutary measure of placing the funds in a segregated fund, and I am including in the award of damages 90% of the interest earned on those funds. And Carvill is not entirely blameless in the scenario: the court has found that Carvill breached the BOR agreement as well, and breached its fiduciary duty by not cooperating to the extent it should have in the transfer of accounts. I do hold in this regard that the interest which has accrued on the escrow account should be transferred in a proportionate manner to Carvill, so that Carvill rather than XL will receive the benefit of the use of the money. XL should not be subject to any additional damages, however, including punitive damages.
The transfer of interest earned on the segregated account is similar to a traditional award of interest pursuant to § 37-3a and is intended to accomplish the same purpose. A difference, however, is that there is an existing concrete sum in the case at hand, and the question is who gets what portion of that sum. If interest were to be awarded in a traditional manner pursuant to § 37-3a, the court would simply set a percentage of interest, with the presumed starting point of the analysis being the statutory rate. The court will allow short briefs, should the parties wish, as to whether the interest portion of the segregated sum should be subject to offer of judgment interest.
Turning to damages arising from the allegations of the complaint, the court has found that XL has proved a breach of the contract and a breach of fiduciary duty. The breach of contract, it will be recalled, arose from a failure of Carvill to make full disclosures as required by both BOR's. The difficulty with XL's position, though, is that there are no damages arising from the breach. XL claims that had it known fully what the commissions and, presumably, claims handling fees were, it would have renegotiated or otherwise changed its position sooner. This position is entirely speculative, however, and is not supported by credible evidence. In fact, XL was generally pleased with Carvill's services at least until the spring of 2003, at which point the last set of treaties negotiated by Carvill were already in effect. Where there are no discernable damages, there can be no recovery of anything but nominal damages. See Coughlin v. Anderson, 270 Conn. 487, 512 (2004); Wasko v. Manella, 87 Conn.App. 390, 400 n. 8 (2005). Damages are awarded in the amount of one dollar in favor of XL.
Breach of fiduciary duty is a tort. Ahern v. Kappalumakkel, 97 Conn.App. 189, 192 n. 3 (2006). Ordinarily, actual damage is an essential element of a negligence claim; Right v. Breen, 277 Conn. 364 (2006); the cause of action of breach of fiduciary duty may be treated somewhat differently. No pecuniary harm has been shown, and, in the absence of any further consideration, by analogy to negligence, there would be no recovery. XL claims, however, that the traditional remedy for breach of fiduciary duty is disgorgement. See, e.g., Risdon-AMS v. Levine, 2004 Ct.Super. 3585, 36 Conn. L. Rptr. 534 (Schuman, J., 2004); Breen v. Larson College, 137 Conn. 152, 157 (1950) ("[I]f (the servant) proves radically unfaithful to his trust or is guilty of gross misconduct he forfeits all right to compensation.").
The law to be applied is clarified somewhat by the Restatement of Agency. According to Restatement (Second) Agency (1958) § 400, damages for breach of duties of loyalty are governed generally by the law pertaining to contracts. Stated very generally, the ordinary premises of contractual damages are to place the parties in the positions they would have been in had the contracts been fully performed. Here, there are no pecuniary damages proven by credible evidence to have resulted from Carvill's breach of fiduciary duty: the sluggish transfer of documents caused no harm, other than annoyance. Section 401 states that "[a]n agent is subject to liability for loss caused to the principal by any breach of duty"; comment (b) to § 401 states that where there are no damages, "[a] failure of the agent to perform his duties which results in no loss to the principal may subject the agent to liability for nominal damages for breach of contract, under the rule stated in Section 400, to liability for any profits he has thereby made (see § 403), to discharge (see § 409), or to loss of compensation (see § 469), but not to an action of tort." Section 403, in turn, states, "If an agent receives anything as a result of his violation of a duty of loyalty to the principal, he is subject to liability to deliver it, its value, or its proceeds, to the principal." (Emphasis added.). Section 469, relied upon by Judge Schuman in Risdon, states, "An agent is entitled to no compensation for conduct which is disobedient or which is a breach of his duty of loyalty; if such conduct constitutes a wilful and deliberate breach of his contract of service, he is not entitled to compensation even for properly performed services for which no compensation is apportioned." Several of the comments to § 469 are helpful:
Carvill has presented evidence which shows that Benfield had virtually all of what it needed within the time period immediately surrounding the effective date of its having been hired.
a. The duties of loyalty of the agent to the principal are stated in Sections 387-398. An agent who, without the acquiescence of his principal, acts for his own benefit or for the benefit of another in antagonism to or in competition with the principal in a transaction is not entitled to compensation which otherwise would be due him because of the transaction. This is true even though the conduct of the agent does not harm the principal, and even though the agent believes that his conduct is for the benefit of the principal and that he is justified in so acting. Thus, if, without disclosing his ownership, he sells his own goods to the principal, even at or below the market price, the agent is not entitled to compensation for his services in the transaction, and the principal is entitled to rescind it. An agent is entitled to no compensation for a service which constitutes a violation of his duties of obedience. See § 385. This is true even though the disobedience results in no substantial harm to the principal's interests and even though the agent believes that he is justified in so acting.
b. A serious violation of a duty of loyalty or seriously disobedient conduct is a wilful and deliberate breach of the contract of service by the agent, and, in accordance with the rule stated in Section 456, the agent thereby loses his right to obtain compensation for prior services, compensation for which has not been apportioned.
Section 456, in turn, provides:
§ 456. Revocation For Breach Of Contract Or Renunciation In Breach Of Contract
If a principal properly discharges an agent for breach of contract or the agent wrongfully renounces the employment, the principal is subject to liability to pay to the agent, with a deduction for the loss caused the principal by the breach of contract:
(a) the agreed compensation for services properly rendered for which the compensation is apportioned in the contract, whether or not the agent's breach is wilful and deliberate; and
(b) the value, not exceeding the agreed ratable compensation, of services properly rendered for which the compensation is not apportioned if, but only if, the agent's breach is not wilful and deliberate.
Comment:
a. This Section is a special application of the rules stated in the Restatement of Contracts as to the rights of a contracting party who is in default. See especially § 357. As stated in Section 409 of the Restatement of this Subject, the principal is entitled to discharge an agent for a material breach of duty; if he discharges an agent for a less serious breach, he himself is guilty of a breach of contract and the rule stated in Section 455 is applicable, the damages against the agent being reduced by the damage caused by such breach.
b. Apportioned services. If an agent is paid a salary apportioned to periods of time, or compensation apportioned to the completion of specified items of work, he is entitled to receive the stipulated compensation for periods or items properly completed before his renunciation or discharge. This is true even if, because of unfaithfulness or insubordination, the agent forfeits his compensation for subsequent periods or items.
c. Unapportioned services. If the agent has rendered services, compensation for which is not apportioned in the contract of service, and his renunciation or other breach of contract is not wilful, he is entitled to an amount equal to the fair value of his services, not exceeding the agreed compensation, minus any damage caused to the principal by his breach of contract. A breach of contract is wilful and deliberate, as those words are herein used, only when the agent, in complete disregard of his contractual obligations, fails to perform or misperforms the promised services and has no substantial moral excuse for so doing, or is guilty of disloyal or grossly insubordinate conduct.
The Restatement, then, provides that where the breach is flagrant, as explained in comment c to § 456 and comment b to § 469, then compensation is forfeited by the agent. In other cases, an inquiry into the relationship between the breach and any damage to the principal and/or profit to the agent as a result of the breach is made. The principal is entitled to any loss resulting from or caused by the breach, and the agent may as well be required to forfeit any profit gained by the breach. See applications in cases such as Musico v. Champion Credit Corp., 764 F.2d 102, 112-14 (2d Cir. 1985); 2660 Woodley Road Joint Venture v. ITT Sheraton Corp., 369 F.3d 732, 744 (3d Cir. 2004); Simulation Systems Technologies, Inc. v. Oldham, 634 A.2d 1034 (N.J.App.Div. 1993).
The same principle applies in situations where an agent's compensation can be apportioned according to period of time or to task.
I find in the case at hand that the breach was not deliberate in the sense contemplated by the Restatement of Agency. I find that the defalcation was not serious, caused no specific harm and was not performed to benefit Carvill at the expense of XL. The breach consisted of slow action rather than harmful action and a reliance on perhaps overly punctilious compliance with every detail. Carvill didn't benefit at all by the breach. Because there are no specific damages and because the breach was not flagrant, willful or intentional, as those words are used in context, I find that only nominal damages are to be awarded to XL.
VI. OFFER OF JUDGMENT
I have reviewed the file and discovered that Carvill filed an offer of judgment in the amount of $4,000,000.00 on September 16, 2005. Because the court has found that the amount of $4,037,066.21 in compensatory damages payable to Carvill, the offer of judgment provisions are triggered. Pursuant to General Statutes § 52-192a(c), interest in the amount of eight percent is to be awarded from the time the complaint is filed if the offer of judgment is filed "not later than eighteen months from the filing of (the) complaint." The file entry date recorded in the computer system for the original action brought by Carvill is March 22, 2004. This is apparently the earliest date on which the complaint could have been filed. The eighteen-month period from March 22, 2004, expires on September 22, 2005. The offer of judgment was, then, filed within eighteen months of the complaint. Offer of judgment interest is to be computed at the rate of eight percent from March 22, 2004, through May 31, 2007, the date this decision is filed and judgment is entered. The yearly interest is $322,965.29; monthly interest is $26,913.77; daily interest is $884.84. Interest for three years, two months and ten days amounts to $1,031,571.76. Judgment shall enter in the total amount of $5,068,583.97.
Carvill and XL originally brought separate complaints in separate files with separate docket numbers. The cases were later streamlined, and Carvill's original complaint became, in substance, the counterclaim in the file under consideration. For purpose of determining dates applicable to the computation of offer of judgment interest, it makes functional sense to refer back to the pleading first making the substantive claim on which relief is granted. See, in a somewhat different context, Ceci Bros., Inc. v. Five Twenty-One Corp., 81 Conn.App. 419, 431-35 (2004).
After the cases were streamlined, the action in the file originally brought by Carvill was withdrawn. The withdrawal triggered automatic destruction of the file pursuant to document retention schedules. I have reconstructed from computer records what appears to be the earliest possible filing date of the complaint: if the complaint was in fact filed later, it wouldn't matter for the purpose of computing interest.
For purposes of calculation, I have disregarded the theoretical set-off of nominal damages.
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