U.S. Fidelity and Guar. v. S.B. Phillips Co.
| Citation | 359 F.Supp.2d 189 |
| Decision Date | 08 March 2005 |
| Docket Number | No. 3:01CV2018(DJS).,3:01CV2018(DJS). |
| Parties | UNITED STATES FIDELITY AND GUARANTY COMPANY, Discover Reinsurance Company, and Discovery Managers, Ltd., Plaintiffs, v. S.B. PHILLIPS COMPANY, INC., Defendant. |
| Court | U.S. District Court — District of Connecticut |
Hartford, CT, Moffatt G. Mcdonald, Kevin A. Kauer, Haynsworth Sinkler Boyd, Greenville, SC, for Plaintiffs.
James Webster Oliver, Robert J. Caffrey, Michael P. Berman, Robert L. Keepnews, David Robert Levesque, Suzanne M. Laplante, Berman & Sable, Hartford, CT, Phillip Earl Reeves, Jennifer E. Johnsen, Gallivan White & Boyd, Greenville, SC, for Defendant.
Plaintiff United States Fidelity and Guaranty Company has moved for summary judgment on all counts of the complaint. Plaintiffs United States Fidelity and Guaranty Company, Discover Reinsurance Company and Discovery Managers, Ltd., in their capacities as counterclaim defendants, have moved for summary judgement on some of the counterclaims brought by both the defendant, S.B. Phillips Company, and defendant's CEO Sam Phillips. Discover Reinsurance Company and Discovery Managers, Ltd. have also moved to voluntarily dismiss their claims.1 The motion for summary judgment [doc. # 197] is GRANTED in part, and the motion to dismiss [doc. # 201] is GRANTED, for the following reasons.
This action arises out of a contract for the provision of insurance. Plaintiff United States Fidelity and Guaranty Company ("USF & G") is an insurance company organized under Maryland law. Defendant S.B. Phillips Company, Inc. ("S.B.Phillips") is a family-owned South Carolina corporation engaged primarily in the provision of temporary staffing services throughout the southeast region of the United States. As a result of its core business operations, S.B. Phillips is required to have large amounts of insurance coverage, especially workers' compensation insurance. During the 1990s, S.B. Phillips decided to explore options for reducing the rising costs of obtaining insurance. Marsh USA, Inc, an insurance brokerage firm incorporated in Delaware and operating in South Carolina, was retained by S.B. Phillips in 1996 for this purpose.
S.B. Phillips asked Marsh, in early 1999, to find insurance options that would lower the cost of insurance through monetary credit for S.B. Phillips's successful efforts to reduce the risk of its employees and, accordingly, the risk of loss under its insurance policies. Marsh contacted Discovery Managers, Ltd. ("Discovery") a Connecticut based subsidiary of Discover Re Managers, Inc. ("Discover Re"). Discover Re is a wholly owned subsidiary of USF & G, consisting of three separate companies engaged in the underwriting and reinsurance or a certain brand of high-risk insurance policies called Alternative Risk Transfer vehicles ("ARTs"). Discovery handles the underwriting and issuance of insurance policies. Discover Reinsurance Company ("Discover"), an Indiana corporation that reinsures the policies underwritten by Discovery, is also wholly owned by Discover Re and, in its turn, USF & G. All of the Discover Re companies operate out of facilities located in Farmington, Connecticut.
Discovery is licensed by USF & G to underwrite ARTs, including the species of policy known as a self-funded retention ("SFR"), so-called because these policies require the insured to pay a very large deductible on any claims. Marsh and Discovery approached S.B. Phillips and discussed the benefits of the SFR insurance policies with the defendant's CEO, Sam Phillips ("Sam"), and his son, Blanton Phillips ("Blanton"), the COO. Discovery's representative, Kristina Landini ("Landini"), met with Sam and Blanton on March 11, 1999 at the S.B. Phillips offices in Greenville, South Carolina. Also present at the meeting was Brian Morgan ("Morgan"), a representative of Marsh. Landini explained the parameters of the SFR program and also touted the virtues of a captive insurance company, an off-shore company owned by the insured that would provide numerous tax benefits of an unspecified nature. Critically for this case, Landini informed Sam and Blanton that security might be required to indemnify USF & G against any losses incurred up to the amount of the self-funded retention. According to Blanton, Landini said the security would "probably" be a one-year issue and any collateral offered by S.B. Phillips would not be held indefinitely. Sam and Blanton both testified that they understood the need for security to be a limited requirement subject to elimination after one year, although neither man can state precisely who gave them this impression. Marsh and its agents are credited as the source of the Phillips' beliefs regarding the collateral.
A second meeting was held in Greenville in April, although the record is not clear regarding who attended the second meeting. Other than the March 11 meeting, it appears that all communication between S.B. Phillips and Discovery, throughout the course of the events underlying this litigation, took place indirectly through Marsh, which works with S.B. Phillips's risk manager, Kara DeBorde ("DeBorde"). Generally, either Sam or Blanton would tell DeBorde their concerns regarding the insurance situation and DeBorde would transmit those concerns to agents of Marsh who then worked with Discovery and Discover to resolve disputes. The impressions Sam and Blanton developed about the security and collateral arose as a result of this communication process.
The plan developed by Marsh and Discovery worked in the following manner. S.B. Phillips, under the insurance policy issued in 1999, received insurance subject to a $250,000 deductible (the self-funded retention) per claim. No premiums were required for this policy, but S.B. Phillips was required to indemnify USF & G for all losses that might occur within the SFR. Discover reinsured USF & G for all losses and, pursuant to their reinsurance agreement, was entitled to all benefits, and fully assumed all risks, under the insurance contract and Indemnity Agreement. A similar arrangement existed under the renewed insurance policies issued in 2000.
S.B. Phillips, during April 1999, decided to purchase an SFR product from USF & G. Marsh and Discovery worked out the details that have already been described. Discovery issued policies, in USF & G's name, for worker's compensation insurance, general liability insurance and errors and omissions insurance effective for a period of one year from April 30, 1999. The worker's compensation policies had a $250,000 deductible and the general liability policies had a $200,000 deductible.2 Discovery, upon completion of an internal audit of S.B. Phillips's finances decided that the company was not a suitable candidate for an SFR product, although this conclusion was, at least based on the record, not made known to S.B. Phillips and it did not stop Discovery from selling the SFR policies to the defendant. Approximately two weeks after the policies went into effect, Discovery sent Marsh a copy of the Indemnity Agreement that included the description of the collateral required to secure the SFR.
Apparently as a result of the review of S.B. Phillips's finances, Discovery determined that a much larger amount of security would be required than Sam or Blanton had understood to be necessary. The Indemnity Agreement called for a $1.9 million security in the form of an "evergreen" letter of credit, so-called because it can be drawn on by the beneficiary at any time for any reason. Sam and Blanton testified that they were surprised and shocked by the amount of the security, but they felt constrained by their legal obligation to carry insurance, since any rejection of the Indemnity Agreement would end their insurance coverage and, simultaneously, their legal ability to do business as a temporary staffing agency. Further, Sam and Blanton believed the security would be reduced after one year, although the express terms of the Indemnity Agreement did not provide for such a reduction. Again, Sam and Blanton claim to be relying on general statements of reassurance made by Discovery, through Marsh. S.B. Phillips signed the Indemnity Agreement and arranged for the Branch Banking & Trust Company ("BB & T") to provide the letter of credit, which was issued on May 26, 1999, with Discover Reinsurance as the beneficiary.
A similar pattern of events occurred in April 2000, when the initial policies were subject to renewal. S.B. Phillips was informed, close to the expiration of its insurance, that a much larger amount of security would be required for the second year of coverage, in spite of S.B. Phillips's work to hold claims to a minimum. Plaintiffs required an additional $2,509,175 as security for the re-issuance of the insurance policies. S.B. Phillips agreed to provide the increased security, and USF & G agreed to amend the Indemnity Agreement, although the parties do not present these changes as a reciprocal arrangement. The exact result of Amendment No. 1, which took effect April 30, 2000, is the subject of this lawsuit. There is no dispute that BB & T renewed the initial letter of credit and also issued a second letter of credit on April 27, 2000, with Discover as the beneficiary of both.
S.B. Phillips, its assets encumbered as collateral for the letters of credit, began to search for a new insurance provider in early 2001, and the active relationship between USF & G and S.B. Phillips ended in May 2001. The Indemnity Agreement was amended a second time, on May 1, 2001, to reflect an extension of the coverage period under the second insurance policy from May 1, 2001 to May 15, 2001. No further security was requested at the enactment of Amendment No. 2, although S.B. Phillips was required to maintain security under the now expired...
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