Wal-Mart Stores, Inc. v. Crist

• Decision Date: 06 July 1987
• Docket Number: Civ. No. 85-5036.
• Citation: 664 F. Supp. 1242
• Court: U.S. District Court — Western District of Arkansas
• Parties: WAL-MART STORES, INC., Plaintiff, v. Lewis R. CRIST, Receiver for Transit Casualty Company in Receivership, Defendant. WAL-MART STORES, INC., Third-Party Plaintiff on Counterclaim, v. ALEXANDER & ALEXANDER, INC., Third-Party Defendant on Counterclaim.

664 F. Supp. 1242

WAL-MART STORES, INC., Plaintiff, v. Lewis R. CRIST, Receiver for Transit Casualty Company in Receivership, Defendant.

WAL-MART STORES, INC., Third-Party Plaintiff on Counterclaim, v. ALEXANDER & ALEXANDER, INC., Third-Party Defendant on Counterclaim.

Civ. No. 85-5036.

United States District Court, W.D. Arkansas, Fayetteville Division.

July 6, 1987.

Stuart Cotton, Rein, Mound & Cotton, New York City, Robert Robinson, Hatfield, Robinson, Hodges, Marshall, Jordan & Shively, Little Rock, Ark., and Robert R. Rhoads, Asst. General Counsel, Bentonville, Ark., for Wal-Mart Stores, Inc.

W.H. Sutton and C. Tab Turner, Friday, Eldredge & Clark, Little Rock, Ark., for Lewis R. Crist.

Philip J. Walsh, Wilson, Elser, Edlman & Dicker, New York City, and Patrick J. Goss, Wright, Lindsey & Jennings, Little Rock, Ark., for Alexander & Alexander, Inc.

MEMORANDUM OPINION

H. FRANKLIN WATERS, Chief Judge.

I. The Litigation

This is exceptionally complex litigation between Wal-Mart Stores, Inc., one of the largest retail concerns in the country, and the Receiver of an insolvent insurance carrier, Transit Casualty Company, which wrote workers' compensation insurance covering Wal-Mart's employees in eighteen states in which Wal-Mart then had facilities.

The litigation started as a declaratory judgment action filed by Wal-Mart against Transit (prior to it being declared insolvent) seeking to enforce the provisions of an agreement that it says it entered into with Transit through one of Transit's agents, calling for Transit to provide workers' compensation coverage in those states for two separate policy periods, one commencing February 1, 1983, and ending January 31, 1984, and the second beginning February 1, 1984, and ending January 31, 1985. It is alleged that this agreement called for Wal-Mart to pay premiums not to exceed $3,500,000 for each policy year for such coverage.

Transit answered, substantially denying the allegations of the complaint, and alleging that the agreement which Wal-Mart seeks to enforce in this litigation is contrary to law and, thus, unenforceable. It counterclaimed, seeking to recover, in addition to the $7,000,000 in premiums already paid by Wal-Mart for the coverage, additional premiums approximating $20,000,000.

In its reply to the counterclaim, Wal-Mart denied its allegations, and affirmatively pled that, in the event the agreement referred to is contrary to law, then Transit is barred from recovery on its counterclaim because it is in pari delicto. Subsequently, Wal-Mart amended its complaint to include allegations in relation to certain retroactive coverage that it says it contracted for which it claims Transit had, since the original complaint was filed, ceased performing the obligations required by such coverage. In addition, Wal-Mart brought into the lawsuit, as a third-party defendant, Alexander & Alexander, Inc., (A & A) an insurance brokerage firm which it claims provided consulting services during the period relevant to this litigation. It seeks recovery from A & A of any amounts that it is required to pay to Wal-Mart.

Approximately sixteen months after the original complaint was filed, and after numerous amended pleadings and various motions were filed and disposed of, the Circuit Court of Cole County, Missouri, acting on a petition for liquidation of Transit filed by the Acting Director of the Division of Insurance, Department of Economic Development, State of Missouri, found Transit to be insolvent and appointed a Receiver for it. After a short stay of all litigation, this matter was allowed to proceed with Transit's interests being pursued by the Receiver, Lewis R. Crist, who was also at the time Director, Division of Insurance, Department of Economic Development, State of Missouri.

After substantial additional pretrial motions, including a motion for partial summary judgment, were filed and disposed of by the court, the matter was tried. Initially, a jury was selected at the request of one or more of the parties, and the case was tried to that jury for a period of approximately four and one-half days. At that time, all parties advised the court that they would waive a jury and would agree to have the matter tried and decided by the court. Whereupon, the jury was excused, and testimony was completed in two and one-half additional trial days.

The matter was taken under advisement so that the attorneys for the parties could file briefs in relation to the issues. The attorneys for the parties, all of whom performed admirably during the trial of this complex litigation, also favored the court with excellent post-trial briefs. In addition, an amicus curiae brief was filed in behalf of the Director of the Missouri Division of Insurance and was joined in and adopted by the State of Texas acting through its Attorney General. The court has considered the briefs, and after a careful consideration of the evidence received at the trial, is prepared to rule.

II. The Facts

Transit Casualty Company was, at least when compared to other insurance carriers, a relatively small insurance carrier which, during the 1960s and 1970s, specialized in transportation related insurance, insuring primarily truck and bus operations. However, it had authority to write most types of insurance in most of the states.

By the late 1970s, because of changes in the transportation industry and increased competition from other carriers, Transit was "watching itself go out of business," according to Robert J. Olson, an officer with the company at the time. In approximately 1981 Transit's management decided to "get into the captive movement" and use captive insurance companies to reinsure Transit policies. In this manner, Transit hoped and intended to write insurance policies in lines of business in which it had not previously been involved and in which its employees had little if any experience. The officers of the company decided to proceed into those areas in that manner because, according to Olson, the idea was "that you don't have an insurance risk, you have a credit risk."

Because Transit had little if any experience in this area of insurance, its management decided that it needed to create a relationship with someone or some entity that did. Negotiations began with Donald F. Muldoon who had prior experience with the types of insurance that would be involved, particularly in "captive programs." These discussions resulted in the formation of a company known as Donald F. Muldoon & Co., Inc. (Muldoon), which was established in 1981 to "do fronting" for Transit. Transit retained a 24% ownership interest in Muldoon.

In January of 1982 Transit and Muldoon entered into a "Managing Agency Agreement" which substantially gave Muldoon the authority to issue any Transit policy which Transit was authorized to issue in any state in which it was qualified to issue insurance policies. The agreement contained certain limitations which do not appear to be material to the issues in this case, except that the agreement provides that Muldoon had the authority to issue coverages on behalf of the company using "policies, contracts, certificates, utilizing rates and forms, endorsements and binders on behalf of the company which have been approved by the company and which have been approved by and/or conform with any applicable state insurance department laws and regulations." The agreement provided that Muldoon would "observe and comply with all insurance laws, rules and regulations of all states and the District of Columbia wherein any business is transacted for and on behalf of the company."

The Managing Agency Agreement authorized Muldoon to request, from time to time, that certain sub-agents be appointed with substantially the same authority as Muldoon in relation to the production and issuance of Transit insurance policies. Shortly after Muldoon was appointed Transit's managing agent, a former Alexander & Alexander, Inc., employee introduced Donald F. Muldoon to Carlos Miro, himself a former A & A employee. Mr. Muldoon recommended Miro, then doing business as Miro & Associates Risk Management, Inc. (Miro), to become a sub-agent of Transit. Miro was appointed a sub-agent and a "Managing Agency Agreement" (Wal-Mart Ex. 19) was entered into between Donald F. Muldoon & Co., Inc., and Miro & Associates, Inc. The agreement authorized Miroto

solicit and bind only the types and lines of business as hereinafter stated, under the terms and conditions of this agreement, subject to and in accordance with the insurance laws and regulations of each state, and in accordance with rates, filings, forms, policy limits, underwriting guidelines governing acceptance of such business, and procedures, all as directed, filed and promulgated by the company from time to time; and to issue policies and certificates of such insurance on forms provided by the company, utilizing rates filed by the company pertaining to such coverages; and to amend such policies by endorsements authorized by the company; and to cancel such policies.

Muldoon provided Miro with blank policy forms to issue on Transit's behalf, and all of Miro's business was to be written or fronted on Transit policies and reinsured with Miro's captive reinsurers. For providing its insurance policies, name, filings, and, in effect, guaranty, Transit was to receive a fronting fee of 9% of the premium paid.

Under the agency agreement, Transit had the right to audit its agent's records and it recognized that there was a danger that the agent would exceed its authority. Accordingly, Transit had the right to cancel coverages if an audit revealed that an agent had exceeded its authority.

After Muldoon's appointment as Transit's managing agent, and Miro's appointment as a sub-agent, the Transit captive program grew very fast. According to Olson, in 1981 premiums from the program went from "zero to $40,000,000; and in 1982 it exceeded $100,000,000." By 1983, Miro was...