Cananwill, Inc. v. EMAR Group, Inc.
| Decision Date | 05 March 1999 |
| Docket Number | No. 2:96CV00558,2:97CV00338.,2:96CV00560,2:96CV00558 |
| Citation | 250 BR 533 |
| Court | U.S. District Court — Middle District of North Carolina |
| Parties | CANANWILL, INC.; Reliance Insurance Company; and W. Joseph Burns, Trustee for Pilot Freight Carriers, Inc., Plaintiffs, v. EMAR GROUP, INC.; Walsh Group, Inc.; National Union Insurance Company of Pittsburgh, P.A.; American Home Insurance Company; AIG Risk Management, Inc; American International Group; Van Buerden & Associates Insurance Services, Inc., Defendants. |
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Eric P. Handler, Turner Enochs & Llyod, P.A., Greensboro, NC, for Cananwill, Inc., Reliance Insurance Company.
Robert E. Price, Jr., Robert E. Price, Jr. & Assoc., P.A., Winston-Salem, NC, for W. Joseph Burns, Trustee for Pilot Freight Carriers, Inc., plaintiff.
Michael F. Schultze, Cranford, Schultze & Tomchin, Charlotte, NC, for Van Buerden & Associates Insurance Services, Inc., appellant.
Kristen G. Lingo, Manning, Fulton & Skinner, Raleigh, NC, Michael T. Medford, Manning, Fulton & Skinner, Raleigh, NC, for EMAR Group, Inc., Walsh Group, Inc.
Kenneth Richard Jacobson, Jacobson & Beavers, Greensboro, NC, Robert E. Boydoh, Jr., Jacobson & Beavers, Greensboro, NC, for National Union Fire Insurance Company of Pittsburgh, PA, American Home Assurance Company, AIG Risk Management, Inc., and American International Group.
Michael F. Schultze, Cranford, Schultze & Tomchin, Charlotte, NC, for Van Buerden & Associates Insurance Services, Inc., defendant.
This matter is before the Court on appeal from an order of the United States Bankruptcy Court for the Middle District of North Carolina. For the reasons stated herein, and as a result of a de novo review, the decision of the Bankruptcy Court is affirmed to the extent that it is consistent, and reversed to the extent it is inconsistent, with the rulings set forth in this Memorandum Opinion.
In the Summer of 1988, Pilot Freight Carriers, Inc. ("Pilot Freight"), a North Carolina trucking company, retained the services of EMAR Group, Inc., and Walsh Group, Inc. (collectively "EMAR"), insurance brokers and agents located in New Jersey and New York, respectively, to solicit on its behalf a new workers' compensation insurance policy. Pilot Freight's current policy was due to expire on October 11, 1988.
As a result of EMAR's efforts, the National Union Insurance Company of Pittsburgh, P.A. ("National Union"), a New York-based insurance company incorporated in Pennsylvania, issued a workers' compensation insurance proposal on October 5, 1988 ("the October 5 proposal"). The October 5 proposal consisted of standard premium terms and retrospective terms. The retrospective terms called for an additional payment over-and-above the standard premium in the amount of $2,872,205.
The retrospective terms, if accepted, would convert the insurance agreement into a retrospectively rated policy. An insurance policy is "retrospectively rated" when it calls for a premium based on actual claims made. Although the insured pays an estimated premium at the inception of the policy period, an additional premium may be due, or excess premium may be refunded, depending upon actual losses incurred, a determination made at the end of the policy period. All parties involved understood the concept of retrospective rating and all parties acknowledge that the October 5 proposal provided for such a policy. Although Pilot Freight was prepared to accept the October 5 proposal, it informed National Union that it would not be able to secure a letter of credit for the $2,872,205, as was required according the terms of the offer. In response, National Union issued a revised proposal on October 12, 1988 ("the October 12 proposal"), which permitted Pilot Freight to satisfy its $2,872,205 obligation by making a cash payment of $2,872,205 at the inception of the policy period. The October 12 proposal, which had no other material changes, was duly accepted by Pilot Freight.
In order to make the necessary $2,872,205 payment to National Union, Pilot Freight entered into an Insurance Premium Finance Agreement ("Premium Finance Agreement") on October 12, 1988, with Cananwill, Inc., a Pennsylvania company specializing in insurance premium finance and which was owned at the time by Reliance Insurance Company (collectively "Cananwill"). Pursuant to the Premium Finance Agreement, Cananwill loaned Pilot Freight $5,361,811 so that Pilot Freight could pay the workers' compensation insurance premiums to National Union. The Premium Finance Agreement included the following security agreement:
Pilot Freight assigns to Cananwill as security for payment of the loan all sums payable to Pilot Freight with reference to the National Union insurance policy, including, among other things, any gross returns or unpaid premiums and any payment on account of loss which results in reduction of unearned premium.
(Ex. 187.) In order to carry out the transaction, Cananwill sent a check for the entire loan amount to EMAR with the understanding that the entire sum would, in turn, be remitted to National Union. EMAR, however, at Pilot Freight's direction, did not remit the entire amount to National Union at that time. Instead, it deposited the $5,361,811 into its own bank account, issued checks to National Union in the amounts of $2,872,205 and $625,503, and transferred the remaining $1,864,103 into a newly-created trust. The trust funds would be used to make monthly payments to Cananwill and National Union for the premium finance loan and for the workers' compensation insurance, respectively.
The two checks issued to National Union were deposited in National Union's bank account and commingled with funds received from other policyholders. National Union maintains its insurance accounts on a modern computer system. This system tracks each policyholder's account. Therefore, at any given time National Union can determine, among other things, how much money has been received from a particular customer and how many claims have been filed under a particular policy.
On October 22, 1988, National Union issued a Workers Compensation and Employers Liability Insurance Policy ("the Standard Policy")1 to Pilot Freight, effective October 11, 1988. This Standard Policy contained two merger clauses. The first appeared on the bottom of the first cover page: "THESE POLICY PROVISIONS WITH THE INFORMATION PAGE AND ENDORSEMENTS, IF ANY, ISSUED TO FORM A PART THEREOF, COMPLETE THIS POLICY." The second appeared on page one:
This policy includes at its effective date the Information Page and all endorsements and schedules listed there. It is a contract of insurance between Pilot Freight ... and National Union.... The only agreements relating to this insurance are stated in this policy. The terms of this policy may not be changed or waived except by endorsement issued by National Union to be part of this policy.
The parties to the Pilot Freight insurance policy duly signed the Standard Policy. On November 14, 1988, and December 12, 1988, EMAR, on behalf of Pilot Freight, sent National Union checks for insurance premiums in the amounts of $625,502 and $625,503, respectively.
On or about November 17, 1988, National Union, through EMAR, sent Pilot Freight a Premium Deferral Agreement which set forth the retrospective terms contained in the October 5 and October 12 proposals, and requested that Pilot Freight sign and return the document. The Premium Deferral Agreement was reviewed by Kenneth Gerrity ("Gerrity"), Pilot Freight's Director of Risk Management. In a letter dated November 21, 1988, and addressed to John Rapier of EMAR, Gerrity objected to several provisions of the Premium Deferral Agreement. Among other things, Gerrity took issue with the section entitled "EARNED PREMIUM COMPUTATION." He wrote:
If a retrospective return is due Pilot Freight ..., I expect that we receive 100% of this return. National Union is currently holding over $2.8 million of our money in collateral, therefore I see absolutely no need for National Union to hold on to additional retrospective returns. We have never been involved in a retrospectively rated policy that did not return 100% of a retrospective return when it was due to the company.
(Ex. 368.) The Premium Deferral Agreement was never signed by Pilot Freight.
Despite the fact that Gerrity also wrote that "the Premium Deferral Agreement is not acceptable in its current form," (id.), he testified during discovery as follows:
(Gerrity Dep. Vol. I at 177-78.) It should be noted, however, that National Union never filed any of the documents constituting the Pilot Freight insurance policy with state regulators.
Soon thereafter and prior to January 1989, Pilot Freight removed EMAR as its insurance broker of record and began using the services of Van Buerden & Associates Insurance Services, Inc. ("Van Buerden"), a California insurance agent. In January 1989, Van Buerden, on behalf of Pilot Freight, met with representatives of National Union to discuss the possibility of reducing the $2,872,205 held by the insurance company. National Union concluded...
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