SunTrust Mortgage, Inc. v. AIG United Guaranty Corp.

Citations: 784 F. Supp. 2d 600; 2011 U.S. Dist. LEXIS 45114Docket: Civil Action 3:09cv529

Court: District Court, E.D. Virginia; April 26, 2011; Federal District Court

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SunTrust Mortgage, Inc. filed a motion for judgment on the pleadings regarding Counterclaim Count IV, while United Guaranty Residential Company of North Carolina sought renewed summary judgment on the same counterclaim. The U.S. District Court for the Eastern District of Virginia held oral arguments on April 11, 2011. The court granted United Guaranty's renewed motion for summary judgment and denied SunTrust's motion. It determined that the insurance policy explicitly requires SunTrust to pay annual premiums to United Guaranty for the duration of the insured loans, even after United Guaranty had reached its Maximum Cumulative Liability (MCL) for losses on those loans. The court will issue a declaration enforcing this obligation based on its interpretation of the insurance policy.

The procedural history reveals that SunTrust initiated the action claiming breach of contract, prompting United Guaranty to file a counterclaim asserting that SunTrust was required to continue paying 'Renewal Premiums' under Section 3.4 of the Master Policy, despite the MCL being reached. Initially, the court found genuine disputes of material fact and denied United Guaranty’s motion for summary judgment. Upon further consideration, the court revisited this issue leading to the recent decisions. The central dispute revolves around the interpretation of Section 3.4 of the Master Policy, which both parties agree is pivotal to Count IV of the counterclaim.

Section 4.3 of the Master Policy, drafted by UG, establishes the terms regarding renewal premiums, specifying that the insured must continue to pay premiums for each loan after the initial premium, regardless of the Company (UG) having paid losses up to the Maximum Cumulative Liability (MCL) for that Policy Year. This obligation remains until one of four specified events occurs, which the parties agree have not taken place. Section 4.3(b) mandates that renewal premiums must be paid within 45 days of the anniversary of the Certificate’s Effective Date, and it is agreed that previous premiums were paid annually.

The applicable premium plan for most loans is detailed in the "2005 Flow Plan," which outlines that insurance coverage lasts for the life of the loan or until the loan is fully paid. ST acknowledges paying the initial premium as required by Section 3.3 and does not contest this obligation.

ST argues that Section 3.4 is clear and does not obligate it to continue paying renewal premiums once the MCL is met, asserting that the term "renewal premium" implies no premiums are due when no insurance coverage is provided. ST supports this argument with definitions from the Oxford English Dictionary, Couch on Insurance, and Black's Law Dictionary, all reinforcing that premiums are tied to active insurance coverage.

Virginia courts reference authoritative definitions to interpret undefined contract terms. ST contends that the terms 'premium' and 'renewal' in Section 3.4, titled 'Renewal Premium', imply a meaning distinct from UG's interpretation of it as a mandatory annual payment for the duration of insured loans. ST emphasizes that the language within Section 3.4 indicates that its obligation to pay renewal premiums ceases once the Maximum Cumulative Liability (MCL) is reached for a loan, particularly highlighting the phrase 'if any' as suggesting that payment is not obligatory if no renewal premium is due under the applicable premium plan. ST argues that the subsequent clause beginning with 'notwithstanding' becomes irrelevant if the prior condition is met, asserting that since the 2005 Flow Plan does not stipulate renewal premiums after reaching the MCL, no premium is owed. 

ST also posits that if Section 3.4 lacks clarity, any ambiguity should be interpreted against UG, the provision's author. While ST accepts that Section 3.4 requires payment of renewal premiums before reaching the MCL, it disputes any obligation to continue such payments thereafter. In contrast, UG maintains that Sections 3.3 and 3.4 collectively impose a clear obligation on ST to pay both initial and annual renewal premiums for the life of the loans, regardless of the MCL status. UG argues that the concluding clause of Section 3.4 underscores this obligation, as its interpretation hinges on the premise that payments could not cease if ST's interpretation were accepted. UG further clarifies that the 'if any' language pertains to the payment structure chosen by ST for the loans, whether as a prepaid lump sum or through an initial plus renewal premiums.

UG argues that the phrase "if any" does not grant ST broad discretion to renew or not renew coverage after reaching the MCL, asserting that such discretion contradicts the "notwithstanding" clause in Section 3.4(a). UG believes that the Flow Plans and terms of the Master Policy support its interpretation, specifically citing the 2005 Flow Plan, which states that insurance coverage lasts until the loan is fully paid or the insurance term expires. UG emphasizes that coverage is aligned with the Residential Loan Reporting Program Master Insurance Policy's terms and conditions. Furthermore, UG refers to Section 3.8 regarding cancellation procedures, which stipulates that either party may cancel the policy with thirty days' written notice, provided that prior approvals and certificates remain in effect. This indicates that ST cannot arbitrarily cancel coverage on loans; specific conditions and procedures must be followed before ending its obligation to pay renewal premiums. 

In the context of summary judgment, it is noted that such a judgment is appropriate when no genuine issues of material fact exist. The burden falls on the opposing party to demonstrate a genuine dispute, where a material fact's existence could lead to different jury outcomes. Summary judgment requires that evidence be viewed favorably for the non-moving party, and cannot be based on mere speculation. The court has indicated it will revisit the summary judgment issue concerning UG's Count IV Counterclaim, with no procedural barriers to deciding the motions for summary judgment at this stage.

Under Virginia law, insurance policies are interpreted based on the written intent of the parties, as reflected in the policy terms, provided they comply with statutory requirements and public policy. Clear and unambiguous terms are construed in their plain and ordinary sense, and courts are not permitted to look beyond the policy language for meaning. The interpretation of whether a policy is ambiguous is a legal question for the court, and disagreement between parties does not inherently indicate ambiguity. Ambiguity arises when policy language can reasonably have multiple interpretations or when reasonable persons can reach opposite conclusions. Courts must interpret the policy holistically, ensuring every part is meaningful. Virginia courts favor interpretations that grant coverage to the insured, especially since insurers typically draft the policies. Any ambiguity is construed against the drafting party, reflecting a core principle of contract law. In the analysis of UG's Counterclaim, the court determined that Section 3.4 of the Master Policy clearly obligates ST to pay annual renewal premiums for the duration of the insured loans, even after the maximum coverage limit (MCL) has been reached.

Section 3.4(a) of the policy establishes that the insured (ST) is obligated to pay premiums for each loan insured, regardless of whether the maximum cumulative liability (MCL) has been reached in a policy year. ST's request to exclude the 'notwithstanding' clause from the interpretation of the policy was challenged during oral arguments, where ST failed to provide a reasonable justification. ST's position hinges on the assertion that the 2005 Flow Plan, which amended the Master Policy, does not repeat this clause, thus implying it is not bound by it. This interpretation contradicts two key principles of Virginia contract law: contracts must be read as a whole, and unambiguous language must be adhered to as written. There is no evidence in the 2005 Flow Plan indicating an intent to modify the obligations outlined in Section 3.4(a). ST's argument regarding the 'if any' clause, suggesting it absolves them from paying renewal premiums on loans with reached MCL, is also dismissed. The presence of the 'notwithstanding' clause indicates that ST is indeed required to pay renewal premiums, as failure to do so would undermine the clause's purpose. The 'if any' clause serves to clarify that renewal premium obligations may vary depending on the chosen premium plan, which ST opted to pay in annual installments instead of a lump sum.

ST faces a significant financial obligation, estimated at around $200 million, for only $300 million in insurance coverage due to a risk-sharing agreement with UG. This arrangement ties ST's annual renewal premiums directly to the number of defaults in its insured loan pools. With many loans now in default, ST is required to pay higher premiums than anticipated, even after reaching the Maximum Cumulative Liability (MCL) for numerous loans. 

The court must interpret the insurance policy as a whole, ensuring that no part is rendered meaningless. ST's interpretation of Section 3.4 of the policy is flawed as it disregards the 'notwithstanding' clause, while UG's interpretation aligns with the entire contract and Virginia law. The 2005 Flow Plan supports UG's stance by confirming that insurance coverage is intended to last beyond a year, contingent on the loan's status.

Further, Section 3.5 stipulates that coverage cannot be canceled except upon full loan prepayment, indicating that specific events were expected to trigger coverage cessation. Section 3.8 reinforces this by requiring written notice for cancellations and ensuring that previously issued certificates remain in force under their original terms. Lastly, Section 6.3 acknowledges that once UG's payouts equal the MCL for a policy year, UG's obligations cease, regardless of additional premiums due. ST's argument against the arrangement on public policy grounds is unsubstantiated, as UG assumed risk in insuring ST's loans.

ST chose a variable rate structure for its insurance premiums under the 2005 Flow Plan to reduce costs. However, an unexpected economic decline led to substantial premium obligations for ST without corresponding insurance payouts due to numerous loan defaults. While ST likely did not foresee this outcome, it is acknowledged as a possibility within the insurance policy's terms. Even if ST argues that the definitions of 'renewal' and 'premium' differ from their application in the policy, the language in Section 3.4 of the Master Policy clarifies the meaning of 'renewal premium' in this context, which is not in ST's favor. Additionally, ST continues to pay premiums on loans even when the Minimum Coverage Level (MCL) is met, based on the agreed payment structure in the 2005 Flow Plan. ST's interpretation of the policy terms misrepresents the agreement and contradicts fundamental Virginia contract law principles by overly emphasizing the title of Section 3.4 while neglecting its substantive language and related provisions. Consequently, the court grants United Guaranty Residential Company's renewed motion for summary judgment on Counterclaim Count IV and denies SunTrust Mortgage, Inc.'s motion for judgment on the pleadings or alternative renewed request for summary judgment. The court also noted that it would postpone addressing the joint proposed pretrial order until after resolving the outstanding motions. Additionally, it clarified that the Master Policy, not just the 2005 Flow Plan, governs the applicable premium plan.