Association Cas. Ins. Co. v. Allstate Ins. Co., Civil Action No. 1:06cv954KS-RHW.
| Decision Date | 17 August 2007 |
| Docket Number | Civil Action No. 1:06cv954KS-RHW. |
| Citation | 507 F.Supp.2d 610 |
| Parties | ASSOCIATION CASUALTY INSURANCE COMPANY; Benchmark Insurance Company; Georgia Casualty & Surety Company; and National Security Fire and Casualty Company, Plaintiffs v. ALLSTATE INSURANCE COMPANY; Farm Bureau Mutual Insurance Company; Nationwide Mutual Fire Insurance Company d/b/a Nationwide Insurance Companies; State Farm Fire and Casualty Company; St. Paul Travelers Companies; Lorrie K. Brouse; Robert P. Arnold; Delma P. Locke, Jr.; Terry Blalock; Charles Rice; and Brad Little, Defendants. |
| Court | U.S. District Court — Southern District of Mississippi |
John H. Geary, Jr., E. Clifton Hodge, Jr., Phelps Dunbar, Michael B. Wallace, Wise Carter Child & Caraway, H. Mitchell Cowan, Janet McMurtray, Watkins Ludlam Winter & Stennis, P.A., W. Scott Welch, III, Amy Lewis Champagne, Baker, Donelson, Bearman, Caldwell & Berkowitz, PC, Jackson, MS, Rey P. Lennard, Matthew Keith Moskowitz, Jeffrey P. Lennard, Sonnenschein, Nath & Rosenthal, LLP, Chicago, IL, Charles Greg Copeland, Michael Scott Jones, Rebecca Blunden, Copeland, Cook, Taylor & Bush, Ridgeland MS, Jeremy U. Littlefield, John A. Chandler, Thomas W. Curvin, Southerland, Asbill & Brennan, LLP, Atlanta, GA, for Defendants.
This matter is before the court on Joint Motion to Dismiss [# 33] filed on behalf of the defendants pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. The court, having reviewed the motion, the response, the briefs of counsel, the pleadings and exhibits on file and being otherwise fully advised in the premises finds that the motion is not well taken and should be denied. The court specifically finds as follows:
FACTUAL BACKGROUND
This case involves allegations by four insurer members1 ("the plaintiffs") of the Mississippi Windstorm Underwriter's Association ("the Association" or "the MWUA") that five large private insurance companies ("insurer defendants") and certain named representatives ("individual defendants"), operating as the Board of Directors of the MWUA intentionally or negligently failed to procure reasonable and appropriate reinsurance for the Association because of a conflict of interest. The plaintiffs are ultimately seeking certification as class representatives on behalf of a class alleged to be more than one hundred non-defendant insurer members of the Association.
The Complaint alleges that the defendants' actions constituted negligence and breach of their fiduciary duty towards all members of the proposed Class, which caused the proposed Class unreinsured losses up to approximately $525 million. The overarching loss allegation is calculated by the plaintiffs as the difference between (1) the approximately $700 million in claims that the Association is estimated to pay to its insureds as a result of property damage claims arising out of Hurricane Katrina, and (2) the $175 million in reinsurance actually procured by the MWUA Board on behalf of the Association for the 2004 and 2005 hurricane seasons.
The Mississippi Windstorm Underwriting Association is a creature of the Mississippi Legislature, which acted "to provide a mandatory program to assure an adequate market for windstorm and hail insurance in the coast area of Mississippi." 1987 Miss. Laws, ch. 459, § 1. The MWUA is euphemistically referred to as the "windpool." In creating the MWUA, the Legislature made the following finding of public necessity:
The Legislature of the State of Mississippi hereby declares that an adequate market for windstorm and hail insurance is necessary to the economic welfare of the State of Mississippi and that without such insurance the orderly growth and development of the State of Mississippi will be severely impeded; that furthermore, adequate insurance upon property in the coast area is necessary; and that while the need for such insurance is increasing, the market for such insurance is not adequate and is likely to become less adequate in the future.
Id. As the defendants point out, for almost two decades, in accordance with its legislative purpose, the Association has made windstorm and hail insurance available to residents of the coastal counties of Mississippi who otherwise would not have been able to get such insurance in the normal insurance market.
The MWUA is composed of all insurers who write property insurance on a direct basis anywhere in Mississippi. Miss.Code Ann. § 83-34-3 (2006). Insurers are required by statute to participate in the MWUA as a condition of transacting insurance anywhere in the state. Id. All members of the Association participate in the MWUA's writings, expenses, profits, and losses in the proportion that the net direct premiums written by each such member bears to the aggregate net premiums written in the state by all members of the Association. Id., § 83-34-9. Each member, however, receives a credit for windstorm and hail insurance it voluntarily writes in the coast area which results in a reduction of the writing member's total responsibility for general windpool losses. This is to encourage insurers to write such insurance. Id.
The statute required the Association, within forty-five days after the date of passage, to submit a proposed plan of operation for review and approval by the Commissioner. Miss.Code Ann. § 83-34-13 (2006). With the Commissioner's approval, the Association adopted a Plan of Operation ("Plan") and Articles of Agreement, effective October 1, 1987. By statute, the power to amend or modify the Plan remains solely in the discretion of the Commissioner. Miss.Code Ann. § 83-34-13 (2006).
The Mississippi State Rating Bureau manages the day-to-day operations of the Association. The Plan, however, vests the administration of the business affairs and activities of the Association with its Board of Directors, subject to review by the Commissioner. Plan, § XI(1). The Board consists of five representatives of the member companies of the Association and three licensed Mississippi agents from the coast area, all of whom are appointed annually by the Commissioner. Miss.Code Ann. § 83-34-7 (2006); Plan, § XI(2). The Commissioner also appoints a member of his own staff to serve as a nonvoting Board member. Plan, § XII(10). The Board is empowered by the Plan to perform all duties necessary or incidental to the administration of the Plan, including the statutory discretion to "purchase reinsurance in [sic] behalf of [MWUA's] members." Miss.Code Ann. § 83-34-5 (2006); Plan, § IX(1), XIII(2).
The five insurer defendants and their representatives, some of whom are individual defendants, were the appointed members and Board of the MWUA at all times complained of. The defendants allege that individual defendants Terry Blalock and Charles Rice were never members of the Board of the MWUA and are the subject matter of a separate motion for summary judgment which will be dealt with at a later time.
The statute authorizes the Commissioner, in his discretion, to examine the affairs of the Association and require the Association, "at any time," to furnish him with additional information with respect to "any other matter which the Commissioner deems to be material to assist him in evaluating the operation and experience of the association." Miss.Code Ann. §§ 83-34-25, 27 (2006). Furthermore, under the Plan, the Board must also submit an annual written financial report to the Commissioner. Plan, § XIII(3). All decisions of the Association are subject to formal review by the Commissioner under the statutory appeals provision. The statute provides that "[a]ny person ... or any affected insurer who may be aggrieved by an act, ruling or decision of the association" may, within thirty days after such ruling, appeal to the Commissioner. Miss. Code Ann. § 83-34-19 (2006). Orders of the Commissioner, in turn, are subject to judicial review. Id. The defendants argue in support of their motion to dismiss that the plaintiffs failed to exhaust this administrative remedy by not appealing the decision to the Commissioner regarding the amount of reinsurance purchased by the MWUA and thus they are not entitled to litigate the issue in this court.
The plaintiffs allege that, due to the mechanism under the Plan for distribution of expenses and losses among MWUA's member companies, the Individual Defendants, as members of MWUA's Board, "did not purchase adequate and reasonable reinsurance." They allege that the Board dismissed at least three of four companies which provided risk analysis concerning the purchase of reinsurance, and then ignored the advice of the fourth to purchase enough reinsurance to cover a 500 year catastrophe. The Board instead purchased $175,000,000 dollars of reinsurance which they contend covered a 250 year event versus the recommendation to purchase $283,000,000 to cover a 500 year event. The plaintiffs contend that the Board actually only purchased enough reinsurance to cover a 100 year event. This conflict is not relevant to the motion to dismiss but will certainly prove relevant in any assessment of damages, if necessary.
The plaintiffs contend that the defendants were responsible for fifty percent of all expenses of the Association, including premiums for the purchase of reinsurance, by virtue of their net sales. This made them liable for fifty percent of the first ten percent of unreinsured losses. However, because of the volume of Essential Property Insurance these defendants wrote in the coast area, they were responsible for little if any of the remaining ninety percent of unreinsured losses. Thus, as a result of the defendants' actions, the plaintiffs claim that their pro rata share of unreinsured losses for the 2005 hurricane season "greatly increased" to the point that they are liable for nearly ninety percent of unreinsured...
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