Employers Reinsurance Co. v. Mass. Mut. Life Ins. Co.

• Decision Date: 07 September 2011
• Docket Number: No. 10–3099.,10–3099.
• Citation: 654 F.3d 782
• Parties: EMPLOYERS REINSURANCE COMPANY, Appellant,v.MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

654 F.3d 782

EMPLOYERS REINSURANCE COMPANY, Appellant,

v.MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY, Appellee.

No. 10–3099.

United States Court of Appeals, Eighth Circuit.

Submitted: June 14, 2011.Filed: Sept. 7, 2011.

Bruce Baty, argued, Jodi M. Hoss, Adam T. Pankratz, on the brief, Kansas City, MO, for appellant.James R. Carroll, argued, Boston, MA, David S. Clancy, Alisha Q. Nanda, Boston, MA, James R. Jarrow, Kansas City, MO, on the brief, for appellee.Before BYE and MELLOY, Circuit Judges, and ERICKSEN,¹ District Judge.ERICKSEN, District Judge.

The primary issue in this appeal is whether a reinsurance agreement between Employers Reinsurance Company (“ERC”) and Massachusetts Mutual Life Insurance Company (“Mass Mutual”) contains a follow-the-settlements provision. Granting partial summary judgment in Mass Mutual's favor, the district court ² concluded that it does. The district court also concluded that ERC had breached the agreement by offsetting disputed damages. Later, the district court concluded that the statute of limitations barred most of ERC's challenges that survived the conclusion regarding the follow-the-settlements provision. We affirm.

I.

In late 1992 and early 1993, ERC and Connecticut Mutual Life Insurance Company (“CML”) discussed entering into a reinsurance agreement, but they did not reach an agreement at that time. Later in 1993, ERC and CML entered into an Excess Disability Income Reinsurance Agreement (“Treaty”). In 1996, Mass Mutual merged with CML and assumed CML's rights and obligations under the Treaty.

Article I of the Treaty provides that the “agreement applies to loss sustained by the Reinsured [Mass Mutual] under the disability income policies described in the Schedule ... (hereinafter called policies or policy) as a result of disabilities commencing on or after the effective date and prior to the termination date of this agreement.” It also provides that “[t]he date each disability commences shall be determined by the Reinsured in accordance with policy provisions.”

Under Article II, Mass Mutual retains a part of the loss, and ERC indemnifies Mass Mutual for a part of the loss:

RETENTION AND REINSURANCE. As respects loss pertaining to each person as a result of each disability regardless of the number of policies involved, the Reinsured shall retain as its own net retention under this agreement the part thereof indicated in Schedule Item 5, and the Corporation will indemnify the Reinsured against the part of such loss indicated in Schedule Item 6.

....

As respects each disability pertaining to each person, the Corporation shall indemnify the Reinsured for damages to which this agreement may apply by virtue of subparagraph (b) of Article IV in the same proportion that the amount of the loss ultimately borne by the Corporation bears to the total amount of the loss exclusive of such damages.

According to Schedule Items 5 and 6, Mass Mutual retained 100% of the loss for an initial period, Mass Mutual retained 10% of the loss after the initial period, and ERC indemnified Mass Mutual for the remaining 90% of the loss after the initial period.

Article IV defines “loss”:

DEFINITION OF LOSS. The word “loss” shall mean only such amounts as are actually paid by the Reinsured for disability benefits afforded under the policies, in settlement of claims for disability benefits under the policies, or in satisfaction of judgments for disability benefits under the policies. The word “loss” includes the amount of premium currently waived under the policies. The word “loss” shall not include:

(a) claim expenses or salaries paid to employees of the Reinsured;

(b) punitive, exemplary or compensatory damages arising out of the conduct of the Reinsured in the investigation, trial or settlement of any claim or failure to pay or delay in payment of any benefits under any policy; provided that, this subparagraph (b) shall not apply if the Corporation concurs in the Reinsured's course of conduct;

(c) any statutory penalty imposed upon the Reinsured on account of any unfair trade practice or any unfair claim practice.

Article IX addresses Mass Mutual's obligation to investigate, pay, settle, or defend claims, and to give notice to ERC of certain claims; ERC's obligation to reimburse Mass Mutual upon receipt of proof of payment; ERC's right to participate in the investigation, adjustment, or defense of certain claims; Mass Mutual's obligation to send to ERC quarterly summaries; and the allocation of lump sum settlements:

CLAIMS. The Reinsured agrees that it will cause to be investigated, paid, settled or defended all claims arising under the policies and that it will give prompt notice to the Corporation of any event or development which, in the judgment of the Reinsured, might result in a claim upon the Corporation hereunder, and will forward promptly to the Corporation copies of such claim documentation as may be requested by the Corporation.

The Corporation shall reimburse the Reinsured or its legal representative promptly for loss against which indemnity is herein provided, upon receipt in the home office of the Corporation of satisfactory evidence of payment of such loss.

The Corporation shall have the right, at its own expense, to participate jointly with the Reinsured in the investigation, adjustment or defense of any claim which, in the judgment of the Corporation, it is or might become exposed.

Within 35 days after the end of each calendar quarter, the Reinsured shall mail to the Corporation a summary of the estimated values for the outstanding claims reinsured by this agreement as of the last day of the quarter.

As respects lump sum settlements, the amount of each settlement shall be divided by the person's monthly benefit and the quotient shall be expressed in months. Loss shall then be allocated between the Reinsured and the Corporation based on this number of months in accordance with Items 5 and 6 of the Schedule.

Article XII sets forth the ability of either Mass Mutual or ERC to offset:

OFFSET. The Reinsured or the Corporation may offset any balance, whether on account of premiums, commissions, loss or claim expenses due from one party to the other under this agreement or under any other reinsurance agreement heretofore or hereafter entered into between the Reinsured and the Corporation, whether acting as assuming reinsurer or ceding company.

After Mass Mutual had assumed CML's rights and obligations under the Treaty, ERC expressed concerns about its ability to participate in the investigation, adjustment, or defense of claims, and about Mass Mutual's claim adjudication. In 1999, Mass Mutual and ERC agreed to a Pilot Project in which ERC and its representative, Disability Management Services (“DMS”), reviewed disability claim files that were subject to the Treaty and provided recommendations to Mass Mutual. Mass Mutual and ERC did not extend the Pilot Project past its six-month term.

In 2002, Mass Mutual and ERC entered into a Claims Review Agreement (“2002 CRA”). Under the 2002 CRA, Mass Mutual and ERC agreed to allow ERC's representative, DMS, to review claims and to make non-binding recommendations to Mass Mutual. Mass Mutual and ERC agreed that the process envisioned by the 2002 CRA, known as the Engagement, did “not constitute a waiver of any rights or privileges of either party under The Treaty.” In their “Engagement Guidelines,” they also agreed that Mass Mutual “shall be the final decision-maker in all benefit determinations” and that the “agreement as to procedures for ‘The Engagement’ does not affect the contractual rights, duties and/or obligations of either party under their Reinsurance Agreement, nor limit any remedies available for either party.” Mass Mutual terminated the 2002 CRA.

ERC sought another agreement that would allow a third party to review claim files, and Mass Mutual agreed so long as ERC did not use DMS. In September 2003, Mass Mutual and ERC entered into a Claims Review Agreement (“2003 CRA”) that was similar to the 2002 CRA. Under the 2003 CRA, Mass Mutual and ERC agreed to allow ERC's representative, this time Disability Insurance Specialists, LLC (“DIS”), to review claims and to make non-binding recommendations to Mass Mutual. Mass Mutual and ERC agreed that the Engagement under the 2003 CRA did “not constitute a waiver of any rights or privileges of either party under The Treaty.” As in 2002, the Engagement Guidelines provided that Mass Mutual “shall be the final decision-maker in all benefit determinations” and that the “agreement as to procedures for ‘The Engagement’ does not affect the contractual rights, duties and/or obligations of either party under their Reinsurance Agreement, nor limit any remedies available for either party.”

After implementing a new reserve system and a new claim administration system, Mass Mutual notified ERC in September 2004 that it (Mass Mutual) had, over the span of the reinsurance relationship, overcharged ERC $6 million due primarily to misidentification of some claims as “continuing” instead of “new.” Mass Mutual also revealed that it had miscalculated, and thus undercharged for, residual benefits under certain policies. Mass Mutual made offsets according to the $6 million calculated overcharge and the undercharge, which amounted to $712,305.

According to ERC's Claims Counsel, the 2003 CRA revealed “serious breaches of the Treaty by Mass Mutual, including mishandling of claims, seeking reimbursement for claims that were not subject to the Treaty, and seeking reimbursements for other amounts not reimbursable under the Treaty.” In December 2005, ERC presented twelve claims that it questioned for reimbursement to Mass Mutual. Invoking “follow the fortunes” and “follow the settlements,” Mass Mutual rejected ERC's request for reimbursement in late January 2006.

In early March 2006, ERC sued Mass Mutual. ERC claimed that Mass Mutual had breached the Treaty and the implied duty of good faith and...