The United States Court of Appeals for the Eighth Circuit addressed the appeal No. 10-3099 involving Employers Reinsurance Company (ERC) as the appellant and Massachusetts Mutual Life Insurance Company (Mass Mutual) as the appellee. The primary issue was whether the reinsurance agreement between ERC and Mass Mutual included a follow-the-settlements provision. The district court granted partial summary judgment favoring Mass Mutual, affirming that such a provision exists and ruling that ERC breached the agreement by offsetting disputed damages. Additionally, the court determined that the statute of limitations barred most of ERC’s remaining challenges related to the follow-the-settlements provision, leading to an affirmation of the district court’s findings.
The background includes ERC's discussions with Connecticut Mutual Life Insurance Company (CML) regarding a reinsurance agreement in 1992-1993, culminating in the Excess Disability Income Reinsurance Agreement (Treaty) established in 1993. Following CML's merger with Mass Mutual in 1996, Mass Mutual assumed CML's rights and obligations under the Treaty. Key provisions of the Treaty are outlined, stating that it covers losses incurred by Mass Mutual under specified disability income policies for disabilities commencing within the agreement's effective dates. Mass Mutual retains a portion of the loss while ERC indemnifies the remainder, with specific retention percentages detailed in Schedule Items. Article IV defines 'loss' strictly, including amounts actually paid by Mass Mutual for disability benefits and excluding various costs and damages unless the Corporation consents to the Reinsured's actions.
Article IX outlines Mass Mutual's responsibilities regarding claims, including the obligation to investigate, pay, settle, or defend claims and to notify ERC of relevant developments. ERC must reimburse Mass Mutual upon receiving proof of payment for losses covered under the agreement. ERC retains the right to participate in investigations and defenses of claims, while Mass Mutual must provide quarterly summaries of outstanding claims. The allocation of lump sum settlements is based on dividing the settlement amount by the monthly benefit to determine the duration for loss allocation between the parties.
Article XII permits either Mass Mutual or ERC to offset balances due to premiums, commissions, or claims expenses under this and any previous reinsurance agreements. Following Mass Mutual's assumption of CML's rights, ERC raised concerns regarding its involvement in claims handling. In 1999, a Pilot Project allowed ERC and Disability Management Services (DMS) to review claims and recommend actions, but it was not extended beyond six months. In 2002, a Claims Review Agreement (2002 CRA) was established, allowing DMS to review claims with non-binding recommendations. Both parties confirmed that this process did not waive any rights under the Treaty and that Mass Mutual would retain final decision-making authority. Mass Mutual later terminated the 2002 CRA. Subsequently, a new Claims Review Agreement (2003 CRA) was formed in September 2003, permitting a different representative, Disability Insurance Specialists, LLC (DIS), to review claims with similar non-binding terms, maintaining that the Engagement did not constitute a waiver of rights under the Treaty.
Mass Mutual retained final decision-making authority in benefit determinations as per the Engagement Guidelines. In September 2004, Mass Mutual informed ERC that it had overcharged ERC $6 million due to misclassified claims and had also miscalculated residual benefits. After offsets totaling $712,305, ERC’s Claims Counsel highlighted serious breaches of the Treaty by Mass Mutual, including improper claims handling. In December 2005, ERC questioned twelve reimbursement claims, but Mass Mutual rejected these requests in January 2006. ERC subsequently filed a lawsuit in March 2006, alleging breach of the Treaty and seeking an accounting, alongside a declaration of non-obligation to follow Mass Mutual’s settlement actions. In response, Mass Mutual filed counterclaims for breach of contract and good faith duties, moving for summary judgment on various grounds.
The district court found the Treaty contained a follow-the-settlements provision, denying ERC's motion for partial summary judgment and granting Mass Mutual’s motion. It ruled that ERC could not question Mass Mutual's claims handling except for claims not covered under the Treaty or those made in bad faith. The court concluded that ERC breached the Treaty by ceasing reimbursements in April 2006, granting summary judgment in favor of Mass Mutual on its counterclaim for breach of contract and good faith. ERC later reimbursed Mass Mutual. The court mandated ERC to specify any intended challenges to individual reinsured claims, which led to eight claims being identified, but six were barred by Connecticut’s statute of limitations, with ERC abandoning the remaining two.
The district court entered judgment after calculating the interest on reimbursements withheld by ERC from April 2006 to August 2008. ERC appealed, contesting three conclusions made by the district court: the existence of a follow-the-settlements provision in the Treaty, the application of Connecticut's statute of limitations to six challenges, and the assertion that ERC breached the Treaty by halting reimbursements to Mass Mutual in April 2006. In this diversity action, Connecticut law governs. The court reviews summary judgment and interpretations of state law de novo. ERC argues that the district court incorrectly found a follow-the-settlements provision in the Treaty, claiming such a provision does not exist in either express or implied terms and that the court improperly used extrinsic evidence. Under Connecticut law, reinsurance treaties are construed to reflect the parties' intent as expressed in the document, with unambiguous terms given their plain meaning. A reinsurance treaty is deemed ambiguous if it can be reasonably interpreted in multiple ways, with ambiguity being a legal question. The mechanics of reinsurance involve a ceding insurer transferring some risk to a reinsurer, which indemnifies the ceding insurer for liabilities covered by the reinsurance. A follow-the-fortunes clause mandates the reinsurer to accept the ceding insurer's good faith decisions, while a follow-the-settlements clause requires indemnification for reasonable and good faith settlements. The court found no ambiguity in the Treaty and concluded it contains a follow-the-settlements provision, as the relevant articles clearly outline ERC's obligations to reimburse Mass Mutual for disability benefits paid under the policies.
ERC's claim that reimbursable loss does not include payments or settlements by Mass Mutual beyond policy benefits is rejected. 'Loss' under the Treaty encompasses amounts paid for disability benefits and settlements of claims for those benefits. Mass Mutual's settlement payments are clearly reimbursable losses, limited by ERC’s ability to contest Mass Mutual’s coverage decisions only on grounds of bad faith or clear non-coverage under the policies. The certificates contain 'follow-the-fortunes' provisions, preventing ERC from disputing Mass Mutual’s settlement decisions as long as they are reasonably within the policy's terms and made in good faith. The district court determined that the Treaty is unambiguous regarding the follow-the-settlements provision, rendering extrinsic evidence unnecessary.
ERC argues that the district court incorrectly applied Connecticut’s six-year statute of limitations, asserting that Article VII of the Treaty acts as a tolling agreement. The district court found Article VII unambiguous and did not support tolling the statute of limitations, as it primarily addresses reinsurance premium adjustments without indicating an intent to toll. ERC also claims that Mass Mutual’s ongoing actions tolled the limitations period; however, the district court concluded that such tolling is not applicable under Connecticut law, which allows for tolling only when a continuing breach of duty occurs until that conduct ends.
Evidence of a 'continuing course of conduct' that tolls the statute of limitations requires proof of an ongoing breach of duty related to the original wrongdoing. The determination of whether such a course exists is a mixed question of law and fact. The district court analyzed whether the statute of limitations could be tolled under Connecticut law due to Mass Mutual's conduct, agreeing with the precedent set in Vanliner Insurance Co. v. Fay, which indicated that a defendant's actions could obstruct a plaintiff from addressing an initial breach. ERC did not contest the absence of a special relationship with Mass Mutual nor argue that Mass Mutual's subsequent actions warranted tolling the statute of limitations. The court found that Mass Mutual’s conduct did not obstruct an earlier lawsuit, indicating that tolling was not applicable under Connecticut law.
The doctrine of a continuing course of conduct aims to prevent premature lawsuits during ongoing relationships, as identifying specific tortious acts may be complex. ERC argued that a breach of contract claim regarding reinsurance accrues upon cession to the reinsurer, suggesting that a new cause of action arises with each reimbursement request. However, the court did not find support in Connecticut law for treating these reimbursement challenges as installment contracts. According to Connecticut Supreme Court precedent, a breach of contract cause of action is complete at the time the breach occurs, regardless of the plaintiff's awareness of damages, unless there is fraudulent concealment. The claims dismissed due to the statute of limitations were submitted over six years before ERC initiated its action, thus barred.
Mass Mutual counterclaimed for breach of contract and breach of the implied covenant of good faith and fair dealing following ERC's cessation of reimbursements. ERC contended it was in compliance with the offset provisions of Article XII of the Treaty, which allows either party to offset balances owed. The district court ruled that a balance is not considered 'due' under this provision if it is contested, agreeing that ERC could not unilaterally stop reimbursements based on its interpretation of Mass Mutual's claims.
ERC asserts it did not violate the implied duty of good faith and fair dealing when it withheld payments. Connecticut law recognizes this implied covenant within contracts, requiring that neither party take actions that would harm the other's right to receive the benefits of the agreement. A breach of this covenant occurs when one party's actions impede the other’s reasonable expectations under the contract and are taken in bad faith. Bad faith includes performing or interpreting the contract in a way that undermines its spirit and purpose. Determining bad faith is a factual question. ERC's unilateral withholding of reimbursements from Mass Mutual for over two years is seen as lacking good faith. The district court found no genuine dispute regarding this issue, leading to an affirmation of its conclusion.
