Petition for Writ of Certiorari — Slautterback v. IPC Mutual Indemnity, Ltd.
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( \ Supreme Court, u.g,
U FILED
98 665 0cT 2 21996
No.
IN THE
Supreme Court of the Gnited States
October Term, 1998
.
RICHARD D. SLAUTTERBACK, SANDRA L. SLAUTTERBACK,
TRUSTEE, AMERICAN OWNER OPERATOR UNDERWRITERS, INC. and
AMERICAN TRUCK UNDERWRITERS HOLDING CORPORATION,
Petitioners,
VS.
IPC MUTUAL INDEMNITY, LIMITED,
Respondents.
PETITION FOR WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
RICHARD YOUNG, Esq.
Attorney for Petitioners
125 Town Park Drive, Suite 300
Kennesaw, GA 30144-5803
Tel.: (770) 420-8290
Fax: (770) 420-8201
DICK BAILEY SERVICE (212) 608-7666 (718) 522-4363 (516) 222-2470 (914) 682-0848 Fax: (718) 522-4024
1-800-531-2028
Bienes wsaceanis
i
QUESTIONS PRESENTED
1. Whether a federal court may hold that the statute of
limitations for fraud claims continues to run where two of three
parties to a fiduciary relationship not only concealed their
secret termination of one of three tripartite agreements binding
the three parties, and where those same two parties conspired
to and did falsely report to the Petitioner to conceal their fraud..
y Whether the federal court should have applied the
statute governing mutual accounts, that is, that the statute of
limitations for mutual accounts begins to run on the date of the
last item thereto, rather than beginning at the time of the
discovery of the alleged fraud.
a Whether the federal court should have applied the ten-
year statute of frauds governing causes of action against
fiduciaries.
4. Whether a federal court should litigate the three
contracts of an interlocking tripartite rent-a-captive
arrangement in one civil action, such that the true relationship
among the parties can be adjudged, considering the effect of the
terms of the related agreements, and where the rent-a-captive
relationship is a creature of Bermuda law, and with one of the
three contracting parties a Bermuda incorporated captive
insurance company.
. 2 Whether this Court should review this case of first
impression in regard to alternative to reinsurance programs
which are implemented through offshore rent-a-captives now
constituting 50% of all premium dollars of United States
insureds. There is no American case law governing this huge
multibillion dollar business, nor case law dealing with such
tripartite arrangements.
il
PARTIES TO THE PROCEEDINGS
In addition to the parties named in the caption, the
following subsidiary or sister corporations were parties before
the Court of Appeals:
330 Mad. Parent Corp.
AIC Financial Corp.
Allcity Insurance Co.
American Life & Casualty Insurance Co.
American Life Holding Co.
American Travelers Insurance Company of N.Y.
American Truck Underwriters, Inc.
American Investment Co.
American Life Holdings, Inc.
American Investment Financial
American Life & Casualty Marketing Division Co.
American Investment Bank, N.A.
American Travelers Life Insurance Co.
Balwin Forest Products, L.L.C.
Baldwin Enterprises, Inc.
Baldwin-CIS, L.L.C.
Bankers Life & Casualty
Bankers National Life Insurance Co.
Bankers Life Insurance Company of Illinois
Bankers Life & Casualty Co.
Bay Colony Insurance Co.
Bayside Casualty Insurance Co.
Bellpet, Inc.
Beneficial Standard Life Insurance Co.
Caja De Aharro y Seguro S.A.
Capital Management, Inc.
Centurion Insurance Co.
Certified Life Insurance Co.
Certified Life Insurance
ill
CFM Insurance Managers (Bermuda)
Charter National Life Ins. Co.
CITHC, Inc.
CIHC Entertainment Nevada, Inc.
CNC Real Estate, Inc.
College Life Development Corp.
Colonial Penn Group, Inc.
Colonial Penn Insurance Company
Colonial Penn Franklin Insurance Company
Commercial Loan Insurance Corp.
Commonwealth Risk Services (Europe) Limited (United
Kingdom)
Commonwealth P.isk Services, Inc. (Pennsylvania)
Commonwealth Risk Services (West) Ltd. (California)
Conseco Risk Management, Inc.
Conseco Entertainment, L.L.C.
Conseco Financial Services, Inc.
Conseco Services, L.L.C.
Conseco Entertainment, Inc.
Conseco Equity Sales, Inc.
Conseco Global Investments, Inc.
Conseco Marketing, L.L.C.
Conseco Mortgage Capital, Inc.
Conseco, Inc.
Conseco Private Capital Group, Inc.
Continental Life Insurance Co.
Conwed Corp.
CPAX, Inc.
CPI Investments, Inc.
Empire Insurance Group
Empire Insurance Co.
Florida Power & Light Company
FPL Group, Inc.
Great American Reserve Insurance Co.
Hamilton Management Ltd. (Wisconsin)
iV
HIF International (Bermuda)
HSD Venture
Intrameria Life Insurance Co.
IPC Group of America, Ltd. (Pennsylvania)
IPC Mutual Holdings Ltd. (Delaware)
Jefferson National Life Insurance Company of Texas
Larnar Life Insurance Co.
Legion Management Corporation (Oklahoma)
Legion Finance Corporation (Missouri)
Legion Insurance Company (Pennsylvania)
Leucadia National Corporation
Life Partners Group, Inc.
Lincoln American Life Insurance Co.
Lincoln Income Life Insurance
LNC Investments, Inc.
Lornas Financial Corp.
M & A Holdings, Ltd. (Bermuda)
Marketing Distributions Systems Consulting Group, Inc.
Massachusetts General Life Insurance Co.
MRM Reinsurance Brokers (Bermuda)
MRM (Vermont) Ltd. (Vermont)
Mutual Risk Management (Bermuda) Ltd.
Mutual Indemnity (Dublin) Ltd.
Mutual Indemnity Ltd. (Bermuda)
Mutual Indemnity (Barbados) Ltd. (Barbados)
Mutual Risk Management (Cayman), Ltd. (Cayman)
Mutual Risk Management Ltd.
Mutual Risk Management (Barbados) Ltd. (Barbados)
Mutual Finance, Ltd. (Bermuda)
Mutual Group, Ltd. (Delaware)
Mutual Indemnity (Bermuda) Ltd. (Bermuda)
National Fidelity Life Insurance Co.
Neward Corp.
MASC, Inc.
Park International Limited (Bermuda)
Vv
Pennpark Investors, L.L.C.
Philadelphia Life Insurance Co.
Philcorp, Inc.
Premium Securities Limited (Bermuda)
Professional Data Management, Inc.
Rastin Investing Corp.
Rerco, Inc.
Shoreline Mutual Management (Bermuda) Limited (Bermuda)
Silver Mountain Industries, Inc.
Solana Corp.
Sperry & Hutchinson Co., Inc.
Telluride Properties Acquisition, Inc.
Terreacor II
TLIC Life Insurance Co.
Transatlanta Truck Insurance Underwriters, Inc.
Transport Life Insurance Co.
Transportation Capital Corp.
Truck Office of America
Truck Underwniters of America, Inc.
United General Life Insurance Co.
Village of Inlet Beach, Inc.
Vulcan Life Insurance Co.
Wabash Life Insurance Co.
Wedgewood Investments, L.L.C.
Wells & Company, Inc.
Wellsco, Inc.
WMAC Investment Corp.
WMAC Credit Insurance Corp.
vi
TABLE OF CONTENTS
I os ee a ge i
See II Sat ee ii
BID ork Fig Dtctiuds bike os ook vc Sank vi
NE SII 3 dl ns Se Addwid dass ook Vili
oo) . ., ERS ET FESR eee l
nee oe 8... rR eres l
Constitutional and Statutory Provisions Involved ........ l
SOT ONIN is C0 5 2 ea kee fone vce 2
I. Background of the Rent-a-Captive
Alternative to Reinsurance Arrangement ......... 3
Il. The Tripartite Venture. .................... 6
Ill. The Federal Proceeding Below ............. 9
Reasons for Granting the Writ ...................... 1]
I. Active Fraud and Fraudulent Concealment
by a Fiduciary Tolls the Running of the
Limitations Period - Resolution of the Split
pe ere Freee See i
A. Fiduciary Relationship ............. 11
B. Fraudulent Concealment ............ 13
C. “Injury and Concealment” versus
“Separate and Independent Injury” ...... 14
Vii
D. Actual Cause of Action ............. 15
II. The Petition should be Granted because
the Court below Failed to Apply the Mutual
Accounts Statute of Limitations to this Case ..... 17
A. The District Court erred in granting
summary judgment for the Respondent
on the ground of expiration of the
gE rey rer rere 17
B. The District Court Should have found
that the Shareholder Agreement gave
Rise to a mutual account, as to which
under Georgia law the limitation period
does not begin to run until the date of
the Inst therm Chereot oko kc ccc cecs 18
C. The District Court should have found
Mutual Indemnity held Slautterbacks’
432,000 shares of preferred stock in a
constructive trust, so as to apply
Georgia’s ten-year limitation period
for actions against fiduciaries ...... eee
III. The Petition Should be Granted Because
there is no United States Case Law Governing
Rent A Captive, or Alternative to Reinsurance/
Self-Insurance, and the Arrangement Constitutes
50% of all U.S. Citizens’ Premium Dollars
which are Transmitted to Offshore Entities ...... 23
CN 55k SORES AES Coir ee ee wa eae ae 24
ane . | j
Viil
TABLE OF CITATIONS
Cases Cited:
Aetna Life Ins. Co. v. Weekes, 241 Ga. 169, 172
SUSE SI Alo. SAE RSS. 21
A.H. Kellos Construction Co. v. Balboa Insurance Co..,
495 G. Supp. 408 (S.D. Ga 1980) ................0008 11
Alder v. Hertling, 215 Ga. App. 769,
ae eRe PE aE Fs 65 es ae cts acecadvccees 16
Allen v. Sanders, 176 Ga. App. 647, 649(1),
SE Gene Es i chs 8 ss wie ie dee Chae eh eee 12
Bivens Gardens Office Building v. Barnett Bank,
906 F.26 1540-41 10s Cok. TOF oS oe ees 14, 15
Borden v. Sinskey, 530 F.2d 478 (3" Cir. 1976) ........ 21
Borse v. Piece Goods Shop, Inc., 963 F.2d 611, 614,
CO ne RE i ns Fes ELS 4eA CER ew ke 17
Carr v. Kupfer, 250 Ga, 106, 296 S.E. 2d 560 (1982). .... 18
Colonial Penn Ins. v. Slautterback, 36 F.3d 95
CE ye hes Gre Te i eS ei ee es 9,10
a e irance D’i France v.
New England ReinsuranceCorporation, 57 F.3d 56,
Fe Clee SOP sok ek os ns boa S ERS be DER Hobe se ; 22
Erie R.R. v. Tompkins, 304 U.S. 64, 58 S. Ct. 817,
gg ee rere PEE er ree 16
iX
Fincit Company II v. Hardin, 225 Ga.App. 232,
SES DE POD os. sab a dw oa btn es ae 11
v. Guy F. Atkinson Co., 209 Ga. 113, 70 S.E.
BEL TALEO de he a os he A ok oe A 17
Holmbers v. Armbrecht, 327 U.S. 392 (1946)........... 17
Indon Industries Inc. v. Charles S. Martin Distributing
Company, Inc. 234 Ga. 845, 218 S.E.2d 562 (1975) ..... 17
King Mfg. Co. v. Clay, 216 Ga. 118 S.E. 2d
wn EES) it Bees Se er er oo 20
Klaxon Co. v. Stentor Elec. Mfg. Co. 313 U.S. 487,
Gi S. CO FOR ie BO oi 5s avid ks knees 17
Klehr v. AO Smith Corp., U.S. Supreme Court
Case No. 96-663 (Fume, 1997). 2... oui ee eee ce 11,14
Klewit Eastern Co. v. L&R Constr. Co..,
44 F.3d 1194, 1201 n. 16 (3d Cir 1995)............... 17
Lehman v. Zuckerman, 198 Ga.App. 202,
SP ee Pe CR 5 ds oc ook Wi as Aw ke 12
Lloyd v. Prudential Secs., Inc, 211 Ga.App.
PS Ga Pe FEE: iv np cos teak casseecbaes 17
McClure v. Raper, 266 Ga. 50,
OG ee Bae EE oko foi eet ek 14
McLean v. Haden, 214 Ga.App. 413,
OSE OO... 3... a is as a cc 15
xX
Meinhard v. Salmon, 249 N.Y. 458, 464,
166 NE; 345, 346,62 ALR. O9ZB). oc ec cess 22
Phoenix Airline Services, Inc. v. Metro
Airlines, Inc. 194 Ga. App. 120, 390 S.E.2d
secs on oo 21
Pilkington v. United Airlines, Case No. 96-2539
ee ES Oy ARE agro eN ar a ra 15
Remediation Services, Inc. v. Georgia
Pacific Corporation, 209 Ga.App. 427,
ee RD EE Soos Cc i SNE Bo cle te eck ws 13
Shipman v. Horizon Corm., 245 Ga. 808, 8009,
yg Say "a 2. Se eee eee rere se 20
Slautterback v. IPC Mutual, 132 F.3d 47 (Table)
BRE es By Le Ra ae Se ea Sh 4 sn nena 1
Thomas v. Clarkson, 1125 Ga. 72, 54 S.E. 77 (1906) .... 17
Travelers Ins. Co. v. Buffalo Reinsurance Co.,
86 Civ. 3369 (S.D.N.Y. June 18, 1991)............ 22,23
Turner v. Davidson, 188 Ga. 736,
ee a oe os as ok se i io EO 18, 19
Vaught v. Showa Denko K.K., 1997 U.S. App.
Lae er ET ho ns Sia ped ab ims 18
Vitner v. Funk, 182 Ga.App. 39(2),
Se TIER, Se heks ad oe Camas cncdaees 12
Xl
White v. Mercury Marine, 129 F.3d 1428
CRG Ba ae eI eae 1 TE PERRO 16, 24
Statutes Cited:
Be Ra EAE ccs ee a SRS CEPR l
United States Constitution Cited:
PAM PANNE i os 652s C6 NEO 9 ]
State Statutes Cited:
AS Ra POE Ba a cs in ka aw ees Oe 16, 18, 19, 25
OSA. SG ii es SSeS IOS 20
PRADA Eee cs ks Pa de Seno awe ees 1, 16
SPE SEDs SPRL: go's oc bs Ven ca Cee ok eae 15
CPA ASPs © BOOS 05 0 io bee FAT has ee oe Ee 13
OLS AS 2206 oe ee as 13
Other Authority Cited:
Gang, “Developmentes in Litigation Involving Reinsurer,
Cedents and Insureds,” Reinsurance Litigation and
Beet, FO. PLA, USSD) oi naive ne ev Swen as 22
C.E. Golding, The Law and Practice of Reinsurance,
MOUS Gl COP ca 5 oso ok vn ds 0 Ee 21
xii
John S. Diaconis, “Utmost Good Faith and Rescission:
Non-Disclosure of Material Facts in Reinsurance
Agreements,” Reinsurance Litigation and
EN Ee 21
APPENDIX
Appendix A - Opinion of the United States Court
of Appeals for the Eleventh Circuit filed
SESE SE PEGS Fe PCE EEE ETe la
Appendix B - Order of the United States Court
of Appeals for the Eleventh Circuit filed
i EGO Gees eee haa tke seccccscce 3a
Appendix C -Order of the United States District
Court for the Northern District of Georgia,
Atlanta Division, filed December 16,1996 ............ 4a
Appendix D -AS&K GUIDE, Appelby,
Spurling & Kempe, Counsel for Respondent ......... 29a
Appendix E - Shareholder Agreement between
Petitioner and Respondent as rent-a-captive .......... 45a
Appendix F - Agency Agreement between
Petitioner and the fronting company, Colonial
ee EI CU es a Sb prec scces cca Sla
Appendix G - Reinsurance Treaty ostensibly between
Respondent and Colonial Penn Insurance Co. ......... 74a
Appendix H - Motion for Rehearing and Suggestion
I Ua ceccdgadaabepocesccccess 88a
Xill
Appendix I - Seif-Insurance Manuel, NILS
Pupeseng CONEY, T9G8 oa ees llla
l
Petitioners, Richard D. Slautterback, Sandra L.
Slautterback, Trustee, American Owner Operator Underwnters,
Inc., and American Truck Underwriters Holding Corporation
(“the Slautterbacks”), respectfully request that a wnt of
certiorari be issued to review the judgment of the United States
Court of Appeals for the Eleventh Circuit in this case.
OPINIONS BELOW
The opinion of the United States Court of Appeals for
the Eleventh Circuit is a non-published affirmance of the
District Court decision pursuant to 11th Cir. R. 36-1. (App. A)
The opinion of the District Court in Slautterback, et al. v. [PC
Mutual Indemnity Limited (N.D. Ga., December 13, 1996) is
not published. (App. C)
STATEMENT OF JURISDICTION
The judgment of the United States Court of Appeals for
the Eleventh Circuit (“Court of Appeals’) was entered on
December 1, 1997. The Court of Appeals denied a timely
petition for rehearing on July 23, 1998. (App. B)
The jurisdiction of this Court is invoked pursuant to 28
U.S.C. § 1254(1). |
CONSTITUTIONAL AND STATUTORY
PROVISIONS INVOLVED
The Fifth Amendment to the United States Constitution
provides in relevant part: “No person shall . . . be deprived of
life, liberty, or property, without due process of law... ..” If
one party is barred or deterred from bringing an action by the
fraud of the other party, the statute of limitations begins to run
only from the time of the discovery of the fraud. O.C.G.A. §
9-3-96.
The Shareholder’s Agreement which is the contract for
breach of which Petitioners have filed the underlying suit, is the
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2
product of Bermuda law, the Insurance Act of 1978 (Act No.
39 of 1978), July 7, 1978, Bermuda. That act provides that the
captive facility, i.e., the Respondent, “rents”’ its capital, surplus,
and license to the policy holder, i.e., the Petitioner, and the
rent-a-captive (Mutual) provides administrative services
(escrow and mutual accounts). The agreement itself, i.e., the
Shareholder’s Agreement, defines the relationshin of the parties
providing that the Respondent is the administrator or escrow
agent to merely receive the premiums generated by the
Petitioner, and accounts for them as fiduciary and escrow agent
for the benefit of the Petitioner/ Shareholder who rented the
Captive, 1.e., Mutual, the Respondent. As such, the mutual
accounts statute of limitations was the proper statute of
limitations to apply, and not the fraud or contract statute of
limitations. Bermuda law, defining the nature of a rent-a-
captive, and the shareholders agreement, made under Bermuda
law, governs the nature of the relationship of the parties, i.e., as
a fiduciary relationship running from Respondent to Petitioner;
and it is Georgia law, respecting the appropriate statute of
limitations, i.e., the mutual accounts statute, that applies
mandating the use of the ten-year statute of limitations
respecting fiduciaries as the proper statute to apply in this case.
STATEMENT OF THE CASE
A fundamental question in this case is whether the
statute of limitations in a contract case is tolled during the
active fraud of two party fiduciaries against a third party to a
tripartite “rent-a-captive” insurance venture. Secondly, should
another statute of limitations have been considered. Thirdly,
should the three contracts have been considered together which
comprise the tripartite arrangement known as alternative to
reinsurance, i.e., self-insurance as opposed to reinsurance.
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3
1. Background of the Rent-a-Captive Alternative to Reinsurance
Arrangement.
Creative entrepreneurs have found a way to allow the
managing general agency, i.e., the generator of insurance sales
and premiums, to obtain the underwriting profits, i.e.,
premiums less losses paid. A statutory requirement to
receiving underwriting profit, or acting as an insurance
company, is reinsurance or some alternative to reinsurance.
Under Bermuda law rent-a-captives provide for the alternative.
Through Bermuda law (no state in the U.S. has to date passed
enabling legislation authorizing rent-a-captives) 2n MGA could
rent a captive insurance company through the medium of the
purchase of non-voting preferred stock in a Bermuda
corporation that for a fee would act as an escrow agent for
premium dollars and administer the program of insurance by
taking the premium dollars ceded to it by the MGA and invest
those premiums, pay over sufficient premium dollars to the
MGA for the payment of claims; and, at designated times, pay
to the MGA all premiums in excess of claims paid plus
investment income as a preferred share dividend after
deducting its fee. The rent-a-captive would take no risk, and so
it has declared in SEC filings, in its New York Stock Exchange
Prospectus and in all World Wide Web Sites and other sales
literature. Respondent’s Bermuda counsel, Appleby, Spurling
& Kempe, have published a guide, AS&K GUIDE, regarding
special types of insurance vehicles, including a description of
rent-a-captives, which states unequivocally that rent-a-captives
take no risk and act as mere conduits of underwriting profits
and investment income for organizations like the Petitioners.
(Appendix D) The Sel/f-Jnsurance Manual, NILS Publishing
Company, 1988, (Appendix H) states in Section 12.3.3.1 that
rent-a-captives act as administrators only in alternative risk
arrangements, including the use of a fronting company such as
Colonial Penn.
4
In order to sell and issue policies in the U.S., the MGA
contracted with a licensed insurer qualified in all states in the
U.S. under an agreement that the licensed insurer would act
merely as a fronting company, 1.e., license the use of its name
on policies of insurance for a fee. The various states sanctioned
the practice as long as the fronting company assumed a
minimum of 10% of the risk, which Colonial Penn Insurance
Co. agreed to do.
Thus, the Petitioners purchased preferred stock in the
Respondent (Appendix E), the rent-a-captive, and through the
latter’s administration of the program Petitioners acted as the
reinsurer, because the Reinsurance Treaty provided that the
consideration for the reinsurance was 90% of the premiums to
be paid to the named reinsurer, i.e., Mutual, however, via the
Shareholder’s Agreement Mutual agreed to pay this 90% of the
premiums ceded to the Petitioners after claims paid.
The Agency Agreement (Appendix F) entered into
between the Petitioners and the fronting company, 1.e., Colonial
Penn, provided that the Petitioners, as attorneys in fact, would
place the reinsurance, which it did through the reinsurance
treaty signed by the rent-a-captive rented by Petitioner. The
reinsurance treaty (Appendix G) provides that it was entered
into for the consideration that 90% of the premium be paid to
the reinsurer, which, although listed as the Respondent, the
Respondent, via the Shareholder’s Agreement, committed to
pay all those premium dollars over to the Petitioners.
That is why all three contracts must be read together.
Otherwise, its like the parable of the blind men and the
elephant. One feels the trunk and thinks it a snake. Another
feels the leg and thinks it a tree. If the agency agreement is
read independently, Colonial Penn may seem to be the insurer,
rather than the fronting company, at risk for only 10% of the
premium and receiving only a fronting fee. If read
oe a
5
independently, the reinsurance treaty might seem to be between
an insurer and a traditional reinsurer, whereas, Mutual
Indemnity, Respondent, takes no risk and receives no premium
as consideration (as a traditional reinsurer must) according to
Bermuda law governing rent-a-captives, according to the
Mutual Indemnity’s SEC filings such as 10K and 10Q,
according to its prospectus on Wall Street to all its investors as
a publicly held company, according to all its sales literature,
and according to the Shareholder’s Agreement it entered with
Petitioners, which spells out in detail that Respondent is acting
as a mere administrator of the program premiums, or escrow
agent, receiving premium, paying over to Petitioners sufficient
premium dollars to pay claims as periodically demanded by
Petitioners, and finally paying over to Petitioners alone all
underwriting profits, i.e., all premiums less claims paid plus
investment income as a preferred share dividend as ownership
or rent for the rent-a-captive. Thus the ostensible reinsurer,
because it is “rented” by Petitioners under Bermuda law, signed
the reinsurance treaty on behalf of Petitioners, who are the real
reinsurer; or, to put it another way, the Petitioners were self-
insured, by means of this device, sanctioned by Bermuda and
the various states laws so long as a fronting company is used
and the fronting company takes a minimum of 10% of the risk.
Mutual has grown into a giant since this transaction,
now showing several billions in assets. Mutual has the
following World Wide Web addresses: www.comrisk.com;
www.mutrisk. com; www.producersforum.com; and
www.accessmrm.com, explaining the nature of a rent-a-captive
and Mutual.
Therefore, although at first blush from reading the
Reinsurance Treaty it appears that the rent-a-captive or Mutual,
i.e., the Respondent, is a traditional reinsurer contracting with
an insurer, i.e., Colonial Penn, in a traditional reinsurance
arrangement, further reference to the Shareholder’s Agreement
6
makes it clear that the arrangement is really a Bermuda rent-a-
Captive, or alternative to reinsurance arrangement, because the
Shareholder’s Agreement provides that 90% of premium
dollars is paid over to the Petitioners, and none retained by
Respondent, whe merely receives a fee for acting as a fiduciary
in administering the money that merely passes through iis
hands, i.e., the Respondent merely acts as an escrow agent and
as a fiduciary for the benefit of the Petitioners, and the
Petitioners, in effect, are self-insured, which is the objective of
the Bermuda rent-a-captive arrangement. Industry statistics
show that 50% of all U.S. premium dollars are now placed in
rent-a-captive arrangements of this kind, i.e., alternative to
traditional reinsurance arrangements, i.e., in fact no
reinsurance, but, rather, a mechanism for self-insurance.
I. The Tripartite Venture.
In 1985, Slautterback (Insured/shareholder), Mutual
Indemnity (Rent-a-Captive) and Colonial Penn (Fronting
Company) entered into a tripartite, alternative risk management
plan, through the execution of three contracts: (1) The
Shareholder Agreement between Slautterback and Mutual
Indemnity dated August 1, 1985, which is the subject of this
suit, a Quota Share Treaty (or reinsurance agreement) between
Colonial Penn and Mutual Indemnity, and an Agent Agreement
between Slautterback and Colonial Penn.
The relationship of the parties was expressed in three
basic contracts, all interrelated, and no one of which would
have been entered into by any of the parties but for the
existence of the others. In other words, each of the parties to
contract “A” was aware of the necessity for the other two
contracts, “B” and “C” which needed to be signed before that
party would agree to be bound under contract “A.” The
arrangement was called a “tripartite” contract. The three
contracts were 1) an agency agreement; 2) a share-holders’
7
agreement; and 3) a reinsurance treaty.
Pursuant to the Shareholder Agreement, Slautterback
purchased 432,000 non-voting preferred shares of Mutual
In¢emnity, by posting a $432,000 letter of credit. Insurance
premiums were then collected by Slautterback from the
policyholders, and Slautterback then issued the policies of
insurance using Colonial Penn’s name, and then remitted
premiums to Colonial Penn under the Agency Agreement.
Colonial Penn deducted its fronting fee, and forwarded the
remainder of the premiums to Mutual Indemnity as required by
the Quota Share Treaty. Mutual Indemnity was to deduct its
rental fee (rent-a-captive), then hold the balance of the
premiums for the benefit of Slautterback, investing the
premiums, paying premium dollars to Slautterback as
demanded through reports of claims generated by Slautterback
as claims manager, and finally, to return to Slautterback all
premiums remaining as underwriting profits (premiums less
claims paid under the program of insurance) plus investment
income during the holding period. Mutual Indemnity was then
to redeem the preferred stock on January 1, 1991.
During the existence of the tripartite arrangement,
Mutual Indemnity sent Slautterback annual financial statements
regarding “[its] preferred shares Series V4" in 1986, 1987 and
1988, showing investment income and ihe stock’s current
value. In 1989 and 1990, two of the three parties, i.c.,
Slautterback and Colonial Penn, were in litigation over the
venture, and on January 1, 1991, when Mutual Indemnity failed
to fulfill the scheduled stock redemption and to pay the funds
over to the Slautterbacks, a letter was written to the Bermuda
Monetary Authority concerning the stock. Slautterback learned
from the Authority that the shares had been canceled in 1987.
He also learned late in the litigation with Colonial Penn that in
December, 1987, Mutual Indemnity and Colonial Penn had
entered into a secret rescission of their Quota Share
8
Reinsurance Treaty, including a provision that Colonial Penn
would indemnify, defend and hold harmless Mutual Indemnity
from any liability it might incur with the Slautterbacks for
wrongful termination of the rent-a-captive Shareholders
Agreement. Thus, prior to that secret agreement, Mutual
Indemnity had somehow secretly, unilaterally and illegally
redeemed the Slautterback stock. This secret agreement was
actively and purposefully concealed from Slautterback until
March, 1989, when it was finally produced in discovery in the
litigation between Slautterback and Colonial Penn.
In the first law suit, Slautterback was sued by Colonial
Penn, the mere fronting company, which misrepresented to
Judge Tidwell that they were the 100% insurer rather than a
fronting company, and they sued on only one of the three
interrelated or tripartite agreements, and they denied that
Mutual Indemnity was an indispensable party, although the
latter was one of three parties tied together by the tripartite
arrangement, and they alleged that Mutual Indemnity sold
Colonial reinsurance, although Mutual Indemnity has declared
to the world that they take no risk (find a reinsurer that doesn’t
take risk and you have a strange anomaly), and on appeal they
said that Slautterback was no party to any thing and due
nothing, in spite of the Shareholders Agreement that says that
Slautterback gets it all as follows:
1) Slautterback was the party to get 100% of the
consideration for the reinsurance as stated in the Quota Share
Reinsurance Treaty by virtue of the fact that Mutual Indemnity,
to whom 100% of the consideration set forth in that reinsurance
agreement goes, but its must be understood that Mutual
Indemnity had by virtue of the Shareholders Agreement then
turned that entire amount over to Slautterback. This is
consistent with the nature of a rent-a-captive. A rent-a-captive
rents its status as a captive to the renter, i.e., in this case
Slautterback, and merely administers the premiums for the
9
benefit of the renter, i.e., in this case Slautterback.
2) Slautterback was to receive the entire
underwriting profits on 90% of the premiums (all premiums
less claims paid) plus all of the investment income on the
premiums administered, less Mutual Indemnity’s fee of 2 2%,
according to the Shareholder Agreement.
The result is that in the first case the court looked at
only one contract, the agency agreement. In the second case,
before Judge Julie Carnes, the Petitioners sued Mutual
Indemnity, who had been effectively excluded as an
indispensable party by the urgings of Colonial Penn and its
lawyer, Paul Burke. In the second case, Mutual Indemnity’s
lawyer, Paul Burke, argued that Slautterback was not a party to
the reinsurance agreement and had no standing to bring the suit.
But how could Mutual Indemnity be the reinsurer when it
declares to the world that it does not take risk? If the trial court
does look at the other contracts that constitute the tripartite
contract arrangement, it will see that one of the three contracts
sets forth that the consideration for the reinsurance, or 90% of
the premiums ceded, was required passed through to
Slautterback, making Slautterback effectively self-insured,
especially when it is written in the Shareholder Agreement that
the extent of reinsurance is 70% of premiums ceded, i.e, 70%
of the 90% maximum, i.e., self-insurance in its classic form.
This court may actually be able to see the whole picture and not
a third as the other District Court was limited because of the
misrepresentations of Colonial and Paul Burke, and the truth be
finally known.
II. The Federal Proceedings Below.
On March 31, 1987, Colonial Penn sued Slautterback in
U. S. District Court, Northern District of Georgia, Atlanta
Division, alleging violations of the Agency Agreement.
Colonial Penn v. Slautterback, et al., 36 F.3d 95 (11th Circuit
10
1994 per curiam) Slautterback sought to add Mutual Indemnity
as a party to the Colonial Penn lawsuit, over Colonial Penn’s
objections through counsel, Paul Burke. The District Court
denied the motion for joinder on July 20, 1987, and in its final
judgment and Order of September 29, 1993, the Court stated
that “. . . since MI is not a party to this litigation, this decision
does not purport to affect any rights Slautterback may have
against MI.”
Slautterback filed this action against Mutual Indemnity
in the District Court for the Northern District of Georgia,
Atlanta Division, on December 22, 1994, less than four years
after the January 1, 1991, date that Mutual Indemnity was
required by the Shareholders Agreement to redeem the
preferred shares. Slautterback alleged breach of contract and
fraud among its claims. Mutual Indemnity invoked its
indemnity clause under the secret rescission contract with
Colonial Penn, and Paul Burke now appeared to defend Mutual
Indemnity, Respondent. Mr. Burke filed a Rule 11 against
Slautterback’s counsel protesting that this suit was frivolous in
light of the findings in the Colonial Penn suit, although he was
privy to the proceedings in the Colonial Penn suit and the
court’s order that “. .. since MI is not a party to this litigation,
this decision does not purport to affect any rights Slautterback
may have against MI.” This threat of a Rule 11 intimidated
Slautterbacks’ counsel who, without informing the
Slautterbacks, traded a legitimate motion for contempt against
Mutual in consideration for dismissal of the Rule 11.
Following discovery, Mutual Indemnity filed various
motions, including a motion for summary judgment based upon
expiration of the statute of limitations. It is in this motion that
Mutual Indemnity, through Paul Burke under the indemnity
agreement, pleads falsely that Colonial Penn was a 100%
insurer rather than the 10% fronting company and that Mutual
Indemnity sold reinsurance to Colonial Penn rather than a
2 PEAS
11
Mutual Indemnity’s true role as a rent-a-captive and mere
administrator of premium funds for the benefit of Slautterback
as supported by the Shareholder Agreement (Appendix E) and
the AS&K Guide of their own counsel, Appleby, Spurling &
Kempe (Appendix D).
The District Court granted summary judgment in favor
of Mutual Indemnity on December, 13, 1996, on the grounds
that the claims were barred by statutes of limitations. An
appeal was taken to the 1 1th Circuit which affirmed the District
Court per curiam without opinion on December 1, 1997. (132
F.3d 47 (1997)). Rehearing was denied on July 23, 1998. It is
from this decision that application for a Writ of Certiorari is
made.
REASONS FOR GRANTING THE WRIT
I. Active Fraud and Fraudulent Concealment by
a Fiduciary Tolls the Running of the Limitations
Period - Resolution of the Split Among the
Circuits
In Klehr v. A. O. Smith Corp., Case No. 96-633 (June
1997) this Court declined to resolve the split in the various
circuits as to what facts either start or stop the running of the
statute of limitations, stating that the Court preferred to “. . .
wait for a case that clearly presents these or related issues,
providing an opportunity for full argument. . . ,” before it
attempted to resolve them. The facts and issues in the case
below provide just that opportunity.
A. Fiduciary Relationship
The relationship of the parties of a tripartite rent-a-
captive insurance venture are similar in nature to the tripartite
suretyship between a surety, principal and creditor. A. H.
Kellos Construction Co. v. Balboa Insurance, 495 F.Supp. 406
(S.D. Ga. 1980) concerned suit on a construction performance
12
bond. Although that case was dismissed for failure to state a
claim for negligence against the supplier of roofing material
where damages were economic, it presents suretyship as a good
analogy to the fiduciary relationship between a corporation and
its shareholder, and between an insurance reinsurer and the
insured.
A second example is that which existed in Lehman v.
Zuckerman, 198 Ga.App. 202, 400 S.E.2d 704 (1990), where a
builder and an investor formed a construction company for the
purpose of building houses. The investor put his own money
into the company which the builder managed. When the
company was dissolved, the builder agreed in wniting to repay
the investor for his financial contributions. When the builder
did not pay, the investor sued. The builder claimed at trial that
the investor’s claims for reimbursement and the procuring of
the agreement were fraudulent. The Georgia Court of Appeals
held that ‘a special relationship of trust or confidence exists
between partners, who owe a duty of ‘utmost good faith’ to
each other. [Cit.] Because of that confidential relationship, one
partner is entitled to rely on representations made by another
partner.” Allen v. Sanders, 176 Ga.App. 647 (1) (337 S.E.2d
428) (1985). There was sufficient evidence for the Court to
find the existence of a confidential relationship. Zuckerman
and appellant were equal partners in the construction company,
each providing his own experience toward a common business
objective. See Vitner v. Funk, 182 Ga.App. 39 (2) (354 S.E.2d
666) (1987). Lehman, 198 Ga.App. At 431.
In our facts, Slautterback acted as the “investor” - its
funds (premiums) were sent to Colonial Penn, the “Builder,”
who deposited them into Mutual Indemnity, the “Construction
Company.” All three entities provided their own expertise
towards the common business objective of making money from
insurance policies. This clearly establishes the fiduciary/
confidential relationships as they related to the joint venture
13
itself. Mutual Indemnity is also a fiduciary with respect to its
relationship to its stockholder, Slautterback. Mutual Indemnity
held Slautterback’s money with the duty to invest and
eventually return it to the Shareholder. Slautterback held shares
of stock in Mutual Indemnity as its “collateral” or security for
the return of the money, although the actual physical stock
shares apparently never left Bermuda. Thus, by holding both
the money and the physical shares of stock themselves in
Bermuda, Mutual Indemnity was in a position to exert an
overwhelming influence over Slautterback’s interests. Under
Official Code of Georgia Annotated (O.C.G.A.) § 23-2-58,
“fajny relationship shall be deemed confidential, whether
arising from the nature, created by law, or resulting from
contract, where one party is so situated as to exercise a
controlling influence over the will, conduct and interest of
another or where, from a similar relationship of mutual
confidence, the law requires the utmost good faith, such as the
relationship between partners, principal and agent, etc.” All
that the law requires is the showing of a relationship in fact
which justifies the reposing of confidence in one party by
another. As provided in O.C.G.A § 23-2-53: “Suppression of
a material fact which a party is under an obligation to
communicate constitutes fraud. The obligation to communicate
may arise from the confidential relations of the parties or from
the particular circumstances of the case.” “[O.C.G.A § 23-2-
53] expressly goes beyond the strict fiduciary relations of the
parties and states that the obligation to communicate may arise
‘from the particular circumstances of the case.’” Remediation
Services, Inc. v. Georgia Pacific Corporation, 209 Ga.App.
427, 433 S.E.2d 631 (1993).
B. Fraudulent Concealment
Although the District Court found that the breach of
contract occurred in December, 1987, with the execution of a
secret rescission agreement between Colonial Penn and Mutual
14
Indemnity, the existence of this rescission agreement was
unknown by and concealed from Slautterback by Colonial Penn
and Mutual Indemnity until March of 1989, when the rescission
agreement was finally produced during discovery. Not only did
Colonial Penn and Mutual Indemnity actively conceal the
existence of the rescission agreement from Slautterback, but
Mutual Indemnity further perpetuated the fraud by continuing
to send false and fraudulent annual financial statements to
Slautterback showing the stock’s value in 1987 as well as in
1988, a year after the secret rescission was executed. These
active acts of concealment of the fraud were intended to and did
in fact cause Slautterback to “. . . remain in ignorance of it
without any fault or want of diligence or care on his part.”
Therefore, the “. . .bar of the statute does not begin to run until
the fraud is discovered.” Holmbers v. Armbrecht, 327 U.S. 392
(1946). See also McClure v. Raper, 266 Ga. 60, 463 S.E.2d
125 (1995).
Ss “Injury and Concealment” versus “Separate
and Independent Injury”
The 8th, 10th and 1 1th Circuits have adopted the “injury
and pattern discovery rule” as described in Bivens Gardens
Office Building v. Barnett Bank, 906 F.2d 1546, 1554-1555
(11th Cir. (1990)), while others apply forms of an “injury
discovery rule, and finally, the 3rd Circuit uses a “last predicate
act” rule in deciding whether the statute of limitations has run
on a RICO claim. In Klehr v. A.O. Smith Corp., U.S. Supreme
Court Case No. 96-633 (Decided June 19, 1997), the court
considered the case of a farm silo which produced moldy and
fermented cattle feed, despite false representations by the seller
that the silo would prevent such damages. The plaintiff sued,
claiming a civil RICO cause of action. The defendant
interposed a statute of limitations defense, and the district court
dismissed the claims. The Supreme Court affirmed, holding
that when the plaintiff did not exercise due diligence to
15
discover the fraud, the defendant’s acts of fraudulent
concealment do not toll the statute from running. This is in
contrast to Slautterback, where there was due diligence and the
active concealment of the fraud of Mutual Indemnity.
In the case at bar, the question also arises as to when the
final, separate injury occurred, which would mark the
beginning of the running of the statute of limitations. Bivens
Gardens Office Building, supra at 1556, and Pilkington v.
United Airlines, Circuit Case No. 96-2539 (11th Cir. 1997).
Although the district court found that our contract was breached
at the time of the wrongful S*areholder’s Agreement rescission
in 1987 (which fact was coucealed from Slautterback until
1989), Mutual Indemnity did not have a legal duty to redeem
the shares of preferred stock until January 1, 1991. It was this
failure to perform that legal duty which was the independent act
which inflicted a new independent injury upon Slautterback,
and thus the beginning of a new four year statute of limitations
period, which had not yet run when suit was filed on December
13, 1994.
D. Actual Cause of Action
In Georgia, allegations of fraud must be “stated with
particularity.” O.C.G.A. § 9-11-9(b) in order to have a valid
cause of action. Unless and until Slautterback could state the
“circumstances constituting fraud with particularity,” any suit
for fraud would have been dismissed by the Court. McLean v.
Haden, 214 Ga.App. 413, 448 S.E.2d 69 (1994). Under the
District Court’s analogy of the statute having commenced prior
to Slautterback being able to plead the facts, this would have
left Slautterback without a remedy. The District Court found
as fact that Mutual Indemnity concealed the existence of the
rescission agreement from Slautterback until March, 1989, at
the earliest. Since Slautterback could not have known the facts
which constituted fraud, suit could not have been filed.
16
O.C.G.A. § 9-3-96. A similar situation occurred in Fincit
Company II v. Hardin, 225 Ga.App. 2323, 483 S.E.2d 609
(1997), where the court considered a claim for damages and
fraud in real estate partnerships. The Georgia Court of Appeals
held that genuine issues of material fact remained as to when
the fraud was discovered and whether the defendant’s alleged
misrepresentation and concealment of the full extent of the
fraud prevented the plaintiff from discovering it. In our case,
the active concealment by Mutual Indemnity and Colonial Penn
of the facts concerning the rescission, the redemption of the
shares and the false financial statements, prevented
Slautterback from being able to allege the fraud, and thus the
statute must be tolled. Adler v. Hertling, 215 Ga.App. 769, 451
S.E.2d 91 (1994).
The requirement of having concrete facts to point to the
cause of an injury before starting the limitations bar from
running was also pointed out by the 11th Circuit Court of
Appeals in White v. Mercury Marine, 129 F3d 1428 (1 1th Cir.
1997). In White, that Court was interpreting the general
maritime statute of limitations and again, deciding whether the
“continuing tort,” “modified continuing tort,” or “discovery”
theory should be applied to determine when the cause of action
“accrued.” After analyzing each of the competing theories and
law from other circuits as well as this one, this Court held that
the cause of action accrues “when the Plaintiff knew or should
have known of his injury and its cause.” [emphasis supplied]
The plaintiff in that case was found to have waited too long to
file suit after knowing of his injury (hearing loss) and its cause
(engine noise), but not filing suit until the damages had
increased.
The evidence in our case shows that although
Slautterback might have suspected fraud, Mutual Indemnity
took significant steps to prevent him from discovering the facts
to support the claim, until they were finally disclosed in March,
wr |
4
‘
;
a
:
17
1989. Thus, the statute of limitations had not yet run on
Slautterback’s causes of action when it filed suit in December,
1994.
II. The Petition should be Granted because the
Court below Failed to Apply the Mutual
Accounts Statute of Limitations to this Case
A. The District Court erred in granting
summary judgment for the Respondent
on the ground of expiration of the
statute of limitations.
A federal court in a diversity case must apply the
substantive law of the state which encompasses its district, Erie
R.R. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188
(1938), including the conflict of laws rules of the forum state,
Klaxon Co. V. Stentor Elec. Mfg. Co., 313 U.S. 487, 61 S.Ct.
1020, 85 L.Ed. 1477 (1941). The federal court seeks to discern
how the Supreme Court of the forum state would decide the
issues involved. Klewit Eastern Co. v. L & R Constr. Co., 44
F.3d 1194, 1201 n.16 (3d Cir. 1995). When the forum state’s
Supreme Court has not addressed an issue, the federal court
may look to decisions of the intermediate courts for guidance.
Id.; Borse v. Piece Goods Shop, Inc., 963 F.2d 611, 614 (3d
Cir. 1992).
In Georgia, statutes of limitation are remedial and
procedural rather than substantive, Thomas v. Clarkson, 1125
Ga. 72, 54 S.E. 77 (1906), so Georgia courts apply Georgia
limitations rules even when the substantive law of another
jurisdiction controls. Jndon Industries, 'c. v. Charles S.
Martin Distributing Company, Inc., 234 Ga. 845, 218 S.E.2d
562 (1975), Lloyd v. Prudential Secs., Inc., 211 Ga.App. 247,
438 S.E.2d 703 (1993), Fimian v. Guy F. Atkinson Co, 209 Ga.
113, 70 S.E.2d 762 (1952); Cash v. Armco Steel Corporation,
18
462 F.Supp. 272 (N.D. Ga., 1978).
Georgia’s limitations of actions are codified in Title 9,
Chapter 3 of the Official Code of Georgia, with all limitations
periods and tolling provisions meshing as gears of a single
machine, integral parts of a unified whole. Therefore, while the
contract clause selecting Bermuda law would be upheld as to
substantive issues in Georgia, Carr v. Kupfer, 250 Ga. 106, 296
S.E.2d 560 (1982), Georgia tolling rules would apply because
a tolling rule is an integral part of a statute of limitations. See,
e.g., Vaught v. Showa Denko K.K., 1997 U.S.App. LEXIS
12786 (Sth Cir., 1997).
B. The District Court should have found that the
Shareholder Agreement gave rise to a mutual
account, as to which under Georgia law the
limitation period does not begin to run until the
date of the last item thereof.
The limitation period should be calculated from the date
that the Shareholder Agreement provided for the final stock
redemption, or January 1, 1991. O.C.G.A. § 9-3-7 provides
that “the statute of limitations for a mutual account begins to
run on the date of the last item thereof.
A mutual account must include an indebtedness on both
sides. Mere entries of credits of partial payment shall not be
sufficient.” In cases of mutual accounts, the statute of
limitations begins to run from the date of the last item
embraced within mutual dealings. Turner v. Davidson, 188 Ga.
736, 4 S.E.2d 814 (1939).
This statute, if applied, would start the limitations
period running from January 1, 1991. The District Court’s
Order, however, did not address the effect of this statute.
Under Georgia law it is a jury question as to whether or
not an account is mutual. Turner v. Davidson, 188 Ga. 736, 4
19
S.E.2d 814 (1939). Georgia law presumes that mutual
accounts, once established, run through all the course of
dealings of the parties. See, e.g., Gunn v. Gunn, 74 Ga. 555
(1985).
In this case, there were mutual accounts between
Slautterback and Mutual Indemnity. Slautterback gave Mutual
Indemnity a letter of credit for US $432,000, and Mutual
Indemnity in Bermuda issued to Slautterback 432,000 shares of
non-voting preferred shares of stock in Mutual Indemnity. The
contract provided that Mutual Indemnity would redeem the
432,000 shares on January 1, 1991, with the redemption
payment adjusted to account for investment income earned and
claims experience in the transaction. Mutual Indemnity, during
the life of the account, would pay to Slautterback amounts
necessary to pay claims. The letter of credit and shares would
remain outstanding and in existence until January 1, 1991.
Slautterback in turn, was obligated on the account to
pay Mutual Indemnity up to 70% of the premiums deposited in
that account for potential reinsurance claims for 90% of
premiums deposited. Slautterback was obligated to pay Mutual
Indemnity the latter’s fee of 2.5% for administration of the
account, plus other lesser fees for Mutual Indemnity’s investing
the premium dollars in the account.
Thus, the requirements of the Mutual Accounts statute
were met, i.e., that “A mutual account must include an
indebtedness on both sides.” Therefore, because the running of
the statute of limitations was tolled pursuant to O.C.G.A. § 9-3-
7, the limitation period in this case should be calculated to run
from January 1, 1991. The six year limitation period for
written contracts as we have here would thus expire January l,
1998. The four year limitations period for tort claims would
expire on January 1, 1996, over a year after the case at bar was
filed. If the ten year limitation period for claims against
20
fiduciaries, as we clearly have here as an administrator, escrow
agent for the account and corporation owes to its shareholder,
O.C.G.A. § 9-3-27 applies, and it would expire January 1,
2002.
Under Georgia law, corporate officers and directors
occupy a fiduciary relationship to the corporation and its
shareholders, and are held to the standard of utmost good faith
and loyalty. King Mfg. Co. v. Clay, 216 Ga. 581, 118 S.E.2d
581 (1961). Generally, the “mere silence” of a corporate officer
accused of fraud, occupying such a fiduciary relationship with
the shareholder, is sufficient to toll the statute. Shipman vy.
Horizon Corp., 245 Ga. 808, 8009, 267 S.E.2d 244 (1980).
Petitioners’ cause of action clearly alleges the intentional fraud
of the Respondent, and the officers and directors of a
corporation that has engaged in that kind of activity can be held
personally accountable under this theory of fiduciary and as
grounds for piercing the corporate veil.
od The District Court should have found
Mutual Indemnity held Slautterbacks’
432,000 shares of preferred stock in a
constructive trust, so as to apply
Georgia’s ten-year limitation period for
actions against fiduciaries.
0.C.G.A. § 9-3-27 provides that “all actions against
executors, administrators, guardians, or trustees, except on their
bonds, shall be brought within ten years after the nght of action
accrues. In this case the Respondent should have been deemed
to be the trustee of a constructive trust, and therefore subject to
the ten-year limitation period.
For purposes in this case of determining the procedural
issue of tolling of the limitation period, a constructive trust
arises with respect to property the title to which was acquired
ne eRe,
21
by fraud, or where, although acquired originally without fraud,
it is against equity that the title should be retained by the one
who holds it. Aetna Life Ins. Co. v. Weekes, 241 Ga. 169, 172,
244 S.E.2d 46 (1978); O.C.G.A. § 53-12-26. A constructive
trust is merely a type of equitable remedy designed to provide
relief against unjust enrichment. See generally 76 AmJur2d,
Trusts, §§ 221-2. In an appropriate case, a plaintiff can obtain
both an award of monetary damages and imposition of a
constructive trust, as adequate relief can be afforded only
through the use of both remedies. See, e.g., Phoenix Airline
Services, Inc. v. Metro Airlines, Inc., 194 Ga.App. 120, 390
S.E.2d 219 (1989); Borden v. Sinskey, 530 F.2d 478 (3rd Cir.
1976).
In this case, the Respondent should be deemed the
trustee of a constructive trust with regard to the 432,000 shares
of non-voting preferred shares of stock and the investment
income on those shares, which Respondent held pending the
scheduled redemption date of January 1, 1991. For purposes of
tolling of the statute of limitations is a procedural rather than a
substantive question controlled by the choice of law and
limitations rules of the forum state, Georgia -- the District
Court should have deemed the presence of a constructive trust
and should have applied the ten-year limitation period
prescribed by O.C.G.A. § 9-3-27.
Uberrimae fidei or “utmost good faith” is the guiding
principle in Anglo-American reinsurance law. See C.E.
Golding, The Law and Practice of Reinsurance. 4th Ed.,
(Brentford/Middlesex 1965). Uberrimae fidei is defined as “the
most abundant good faith; absolute and perfect candor or
openness and honesty; the absence of any concealment or
deception, however slight.” This duty of utmost good faith is
mutual; it is a duty owed by each party to the other. John S.
Diaconis, “Utmost Good Faith and Rescission: Non-Disclosure
of Material Facts in Reinsurance Agreements.” Reinsurance
22
Litigation and Arbitration 192 (Practicing Law Institute 1995).
The requirement of uberrimae fidei was explained well
by Justice Cardozo, before his ascension to the United States
Supreme Court, in another context but fully applicable here as
follows:
Many forms of conduct permissible in a
workaday world for those acting at arm’s length
are forbidden to those bound by fiduciary ties.
A trustee [or, in this case, a reinsurer] is held to
something stricter than the morals of the market
place. Not honesty alone, but the punctilio of an
honor the most sensitive, is then the standard of
behavior. As to this there has developed a
tradition that is unbending and inveterate.
Meinhard v. Salmon, 249 N.Y. 458, 464, 164
N.E. 545, 546, 62 A.L.R. 1 (1928).
This duty of utmost good faith in the reinsurance
context has been referred to as an “honorable engagement” and
“honorable undertaking” which extends throughout the life of
the agreement and may bind the parties years after its
termination to a higher and continuing standard of contract
performance and obligation, beyond the language of the
agreement, not found in other arm’s length contracts. Gang,
“Developments in Litigation Involving Reinsurers, Cedents and
Insureds,” Reinsurance Litigation and Arbitration 96
(Practicing Law Institute, 1995). “Parties to a reinsurance
contract . . . have been described as partners in a marriage or in
a business relationship, owing to each other the highest degree
of fidelity.” Compagnie De Ressurance D’ile De France v.
New England Reinsurance. Corporation, 57 F.3d 56, 72 (ist
Cir., 1995). “The hallmark of utmost good faith is absolute
candor and honesty coupled with the absence of any
concealment or deception.” Travelers Ins. Co. v. Buffalo Reins.
23
Co., 86 iv 3369 (S.D.N.Y. June 18, 1991) (jury instructions set
forth in trial transcript, quoted in Diaconis, Reinsurance
Litigation and Arbitration (Practicing Law Institute, 1995).
Therefore, because Mutual Indemnity’s role as reinsurer
was inextricably bound together with its role as “rent-a-captive”
and with its shareholder agreement with Slautterback, Mutual
Indemnity owed to Slautterback a duty of the highest standard
of fidelity, honesty and candor, free from any concealment or
deception, beyond the language of contract or what is required
in other types of arms-length business transactions. Upon such
an obligation of absolute fidelity may a jury find the basis for
a relationship of trust sufficient to toll the statute of limitations.
II. The Petition Should be Granted Because there
is no United States Case Law Governing Rent A
Captive, or Alternative to Reinsurance/Self-
Insurance, and the Arrangement Constitutes
50% of all U.S. Citizens’ Premium Dollars
which are Transmitted to Offshore Entities
The alternative to reinsurance programs which are
implemented through offshore rent-a-captives now constitute
50% of all premium dollars of United States insureds! There is
no American case law governing this huge multibillion dollar
business. There is no case law dealing with the tripartite
arrangements, with the result that the Petitioner has had two
courts to come to opposing conclusions, the one District Court
determining that only one of the three contracts in the tripartite
arrangement would be considered and without joining the other
party to the tripartite arrangement, resulting in an out-of-context
reading of an agreement that was only a third of the
understanding of the parties, for without considering the three
contracts together, the one contract would mislead the court as
to the true relationship between the parties.
The other District Court, i.e., the trial court below, has
24
correctly adjudged the arrangement to be governed by a
tripartite set of contracts, but has still beer: misled as to the role
of each of the parties, e.g., thinking the Respondent a reinsurer,
when in fact if the Shareholder Agreement is read closely in
conjunction with the other two contracts it becomes obvious
that the Respondent was merely an administrator of the
premiums, for a fee and due no premiums, and not a traditional
reinsurer which would require a portion of the premiums as
consideration for taking risk as a reinsurer. Mutual merely
served as a vehicle for passing underwriting profit and
investment income to Slautterback. Mutual Indemnity’s own
World Wide Web sites, Wall Street prospectus and SEC Filings
and Insurance Commissioner filings all say that it takes no risk,
therefore, it cannot be a reinsurer and is what the Petitioner
pleads it to be, a rent-a-captive, a device to facilitate the
Petitioner being its own reinsurer, i.e., self-insured.
It is of vital concern to the American insurance industry
that the highest court of this land define the role of an offshore
rent-a-captive for what it is, an alternative to traditional
reinsurance.
CONCLUSION
The District and Circuit Courts erred by determining
that the statute of limitations begins to run when a party has the
mere suspicion of the existence of fraud, as mere suspicion does
not give rise to the “accrual” of a cause of action under White
v. Mercury Marine, supra. The confidential relationships
likewise toll the running of statutes of limitations, and for both
these reasons, the Court should grant Certiorari and hear the
appeal of the Petitioner. In addition, the District Court should
have used the statute of limitations applicable to mutual
accounts which provides that the limitations period begins to
run from the last act to be performed which was the redemption
of the shares of stock to take place on January 1, 1991, allowing
25
the timely filing of the case at bar. Finally, the District Court
should have used the statute of limitations pertaining to claims
against fiduciaries, a ten year statute of limitations, allowing the
timely filing of the case at bar. Any one and each of these
theories is proper on its own merits and legally sufficient to
reverse the District and Circuit Courts.
This Court should reverse the Per Curiam Order of the
United States Court of Appeals for the 11th Circuit of July 23,
1998, and the Order of the United States District Court for the
Northern District of Georgia, Atlanta Division, filed December
16, 1996, granting summary judgment and remand this case for
further proceedings consistent with finding the limitation of
actions was tolled until January 1, 1991, pursuant to O.C.G.A.
§ 9-3-7. Alternatively, the Court should reverse and remand for
further proceedings consistent with the statutes of limitation
having been tolled due to the concealment of fraud by the
Respondent and Petitioners’ discovery of the wrongful
rescission of the Shareholder Agreement on or about March,
1989. Alternatively, the Court should reverse and remand for
further proceedings consistent with the choice of the statute of
limitations governing claims against fiduciaries.
Respectfully submitted,
Richard Young, #782650
Attorney for Petitioners
125 TownPark Drive, Suite 300
Kennesaw, Georgia 30144
770 420-8290
PMR ew dutch sine BON.
APPENDIX A
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
No. 97-8050
D.C. Docket No. 1:94-CV-3402-JEC
RICHARD D. SLAUTTERBACK, SANDRA L.
SLAUTTERBACK, Trustee, AMERICAN OWNER
OPERATOR UNDERWRITERS, INC., AMERICA
TRUCK UNDERWRITERS HOLDING
CORPORATION, INC.,
Plaintiffs-Appellants,
versus
IPC MUTUAL INDEMNITY, LIMITED,
Defendant-Appellee.
Appeal from the United States District Court
for the Northern District of Georgia
(December 1, 1997)
Before TJOFLAT and BARRETT, Circuit Judges, and
PROPST*, Senior U.S. District Judge.
*Honorable Robert B. Propst, Senior U.S. District Judge for
the Northern District of Alabama, sitting by designation.
2a
PER CURIAM:
AFFIRMED. See 11th Cir. R. 36-1.'
”
“Costs taxed against Plaintiffs-Appellants.
Entered: December |, 1997
For the Court: Thomas K. Kahn, Clerk
By: s/ Matt Davidson
Deputy Clerk
ISSUED AS MANDATE: AUG 05 199
11th Cir. R. 36-1 provides:
When the court determines that any of the following
circumstances exist:
(a) judgment of the district court is based on findings of
fact that are not clearly erroneous;
(b) the evidence in support of a jury verdict is sufficient;
(c) the order of an administrative agency is supported by
substantial evidence on the record as a whole;
(d) summary judgment, directed verdict, or judgment on
the pleadings 1s supported by the record;
(e) judgment has been entered without a reversible error
of law:
and an opinion would have no precedential value, the judgment
or order may be affirmed or enforced without opinion.
3a
APPENDIX B
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
No. 97-8050
RICHARD D. SLAUTTERBACK, SANDRA LL.
SLAUTTERBACK, Trustee, AMERICAN OWNER
OPERATOR UNDERWRITERS, INC., AMERICA
TRUCK UNDERWRITERS HOLDING CORPORATION,
INC.,
Plaintiff-Appellants,
versus
IPC MUTUAL INDEMNITY, LIMITED,
Defendant-Appellee.
On Appeal from the United States District Court for the
Northern District of Georgia
BEFORE: TJOFLAT and BARRETT, Circuit Judges, and
PROPST*, Senior U.S. District Judge.
PER CURIA 7:
The p ition(s) for rehearing filed by the appellant is
denied.
ENTE?.ED FOR THE COURT:
s/ UNITED STATES CIRCUIT JUDGE
ORD-41
*Honorable Robert B. Propst, Senior U.S. District Judge for
the Northern District of Alabama, sitting by designation.
Pe
4a
APPENDIX C
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION
RICHARD D. SLAUTTERBACK, SANDRA L.
SLAUTTERBACK, Trustee, AMERICAN OWNER
OPERATOR UNDERWRITERS, INC., and AMERICAN
TRUCK UNDERWRITERS HOLDING CORPORATION,
INC.,
Plaintiffs,
vs
IPC MUTUAL INDEMNITY, LIMITED,
Defendant.
CIVIL NO. 1:94-cv-3402-JEC
ORDER
This case is presently before the Court on plaintiffs’
Motion for Reconsideration of Order Denying Extension of
Discovery [57], defendant’s Motion for Summary Judgment
[63], and plaintiffs’ Motion to Amend More Definite
Statement [68]. The Court has reviewed the record and the
arguments of the parties and, for the reasons set out below,
concludes that plaintiffs’ Motion for Reconsideration should
be DENIED, defendant’s Motion for Summary Judgment
should be GRANTED, and plaintiffs’ Motion to Amend
More Definite Statement should be DENIED.
Sa
BACKGROUND
This litigation arises out of an insurance program
which was formed in 1985. The program was comprised of
a tripartite agreement between plaintiffs, defendant, and
Colonial Penn, an insurance company which is not involved
in the present lawsuit. The agreement allowed plaintiffs to
sell insurance policies to truckers nationwide without
becoming licensed to sell insurance in each state. (Pl. Resp.
to Def. Mot. for Sum. J. [70] at 3.) The agreements were
written so that plaintiffs would perform the primary
functions of the insurer, such as claims handling,
administratiou, and underwriting profits made on the
program. (/d.) Colonial Penn, pursuant to an agency
agreement with plaintiffs, essentially rented the use of its
name and license to sell insurance to plaintiff. (/d. at 2.)
Defendant acted as the reinsurer of the program. (/d. at 4.)
Pursuant to the tripartite agreement, premiums were
collected by plaintiff, and subsequently sent by plaintiff to
Colonial Penn under the agency agreement. (/d.) The
premiums, less Colonial Penn’s fee, were then sent to
defendant by Colonial Penn pursuant to the reinsurance
agreement. Defendant was obligated to return to plaintiffs
funds from the premiums needed to pay any claims that
arose. If the premium funds were not used, defendant was
obligated to invest the premiums, returning to plaintiffs any
premiums remaining, less claims paid and defendant's fee,
in December of each year. These payments were to be made
to plaintiffs pursuant to a shareholder agreement between
plaintiffs and defendant, in the form of dividends on shares
of stock of defendant’s preferred series stock which the
contract between plaintiffs and defendant obligated plaintiff
to purchase with a $432, 000 letter of credit. (id. at 4.) On
6a
January 1, 1991, defendant was to return to plaintiffs all
money accumulated on the entire program that had not
already been distributed. The letter of credit was also to be
returned to plaintiffs on January |, 1991 if it did not have to
be used during the program to cover losses. The graphic
illustration attached to defendant’s motion for summary
judgment clarifies the way the program worked. (See Def.
Mot. for Sum. J. [63] at Ex. “F’’.)
Sometime in 1987 the parties began to experience
problems wilth the program, and Colonial Penn filed a
lawsuit against plaintiff alleging breach of contract. (id. at
10.) Soon after this, defendant signed an agrement to
rescind its reinsurance agreement with Colonial Penn.
Under the rescission agreement defendant agreed to return to
Colonial Penn all premiums it had received under the
program up to that point, less a $300,000 fee for its services.
(See Rescission Agreement, attached to Def. Mot. for Sum.
J. [63] at Ex. “K’’.) The agreement provided that no further
premiums would be forwarded to defendant under its
reinsurance contract with Colonial Penn. (id.) The
agreement also required defendant to draw down plaintiffs’
$432,000 letter of credit and place it in escrow pending the
results of the litigation between plaintiffs and Colonial Penn.
(id.) Thus, pursuant to the rescission of the reinsurance
agreement the link whereby premuims flowed from Colonial
Penn to defendant was destroyed.’
1. The case between plaintiffs and Colomial Penn was
tried in 1993, and resulted in a $5,637,039.00 verdict for
Colonial Penn on its breach of contract claim.
a
‘fF
4
3
7
m4
7a
Several months after the conclusion of the litigation
between plaintiffs and Colonial Penn, on December 22,
1994, plaintiffs filed this lawsuit against defendant primarily
on the basis of defendant’s failure to comply with the
shareholder agreement. Plaintiffs are alleging breach of
contract, fraud, conversion, and conspiracy, as well as a
Georgia Securities Act Claim. Defendant contends that all
of plaintiffs’ claims are barred by the statute of limitations,
and has moved for summary judgment. In response to
defendant’s Motion for Summary Judgment, plaintiffs have
filed Motion to Amend their More Definite Statement to add
a claim for RICO violations. Plaintiffs have also moved the
court to reconsider an Order entered on July 2, 1996 in
which the Court refused to extend the time allowed for
discovery.
DISCUSSION
L Plaintiffs’ Motion for R devas
Plaintiffs have filed a motion for the Court to
reconsider a discovery Order entered on July 2, 1996. In that
Order the Court denied plaintiffs’ Motion for Extension of
Discovery and Motion to Compel Production of Documents.
(See Order [56].) The Court also denied plaintiffs’ Motion
for Order that Matters are Admitted on Grounds of
Insufficiency of Answer or Objection, but directed
defendant to respond to plaintiffs’ requests for admission by
July 9, 1996. (id.) The Court issued its July 2nd Order
before receiving plaintiffs’ reply briefs, but within the time
which plaintiffs allowed to file reply briefs. Plaintiffs thus
urge the Court to reconsider their motions in light of the
arguments in their reply briefs that the Court did not have an
8a
opportunity to consider before entering the Order. The
Court has now carefully considered plaintiffs’ reply briefs in
support of each discovery motion made and concludes that
plailntiffs have not raised any new issues or made any
arguments in their reply briefs which necessitate a change in
the July 2, 1996 discovery Order.
A. Motion to Compel Documents
The Court noted in its prior Order considering
plaintiffs’ Motion to Compel Production of Documents that
defendant’s response indicated that it had disclosed all
requested discovery in its possession. (id. at /.) The Court
ordered defendant to disclose all requested discovery within
its constructive possession INSTANTER and warned
defendant that it would be subject to contempt proceedings
and sanctions if it were later discovered that it failed to tum
over requested discovery. (id. at 2.) The Court does not
see, and plaintiffs’ reply does not demonstrate, the need for
any additional relief to plaintiffs as to this request.
B. Requests for Admission
In its July 2nd discovery Order, in response to
plaintiffs’ Motion that Matters are Admitted on the Grounds
of Insufficiency of Answer or Objection, the Court directed
defendant to submit answers to plaintiffs’ requests for
admission by July 9, 1996. (id.) Defendant points out in its
response to plaintiffs’ Motion to Reconsider that it complied
with the Court’s Order and responded to plaintiffs’ requests
for admission by July 9th. (See Def. Resp. to Pl. Mot. to
Reconsider [61] at 2.) Plaintiffs’ reply, filed before
defendant had an opportunity to comply with the Court’s
July 2nd Order, obviously does not address this issue. Given
)
)
vate Ore a el ete
sewielteres «4
9a
defendant’s response to plaintiff's requests for admission,
the Court can provide no additional relief to plaintiffs with
regard to this motion.
3 Motion to Extend Discovery
Plaintiffs’ reply brief presents no new circumstances
which convince the Court to change its prior Order denying
plaintiffs’ Motion to Extend Discovery. In a January 23,
1996 scheduling order /33/], the Court stated:
[T]his case is on a four month discovery track. The
parties are requesting an additional four month discovery
period and the Court is allowing same. Accordingly,
discovery expires on SUNDAY JUNE 2, 1996. No
extension of this dated will be granted except in
exceptional cases where the circumstances on which the
request is based did not exist or could not have been
anticipated by counsel at the time the preliminary
statement was filed. Parties cannot reserve the right to
request additional discovery time. See Local Rule 225-1
(b).
In its July 2nd Order the Court pointed out that it had
previously indicated to the parties that it would not entertain
any motions for extension of discovery. (Order /56].) The
Court also noted that this case, at the time of that Order, was
over 18 months old and that there had been ample time for
discovery. (id.)
Plaintiffs raise no new factual or legal issues in their
reply in support of their Motion to Extend Discovery. As in
their original brief supporting this motion, plaintiffs argue
that discovery should be extended because defendant has
failed to properly respond to discovery requests. (See Pi.
10a
Reply in Support of Mot. to Reconsider [54] at 2.)
Plaintiffs’ argument that this allegation makes this case an
exceptional one, meriting an extension of discovery, is no
more persuasive in their reply than in their original brief *n
support of the motion. This case is not an “exceptional” on
“where the circumstances on which the request [to extend
discovery] is based did not exist or could not have been
anticipated by counsel at the time the preliminary statement
was filed.” (Scheduling Order [33].) Accordingly,
plaintiffs’ Motion to Reconsider the Court’s Order refusing
to extend discovery is denied.
tL Plaintiffs" Moti ) its M Pefini
Statement
Plaintiffs have filed a motion requesting leave to
amend their more definite statement in order to “clarify”
their statement of a claim against defendant for violating the
Georgia and federal RICO statutes, 18 U.S.C. § 1961 et
seq.’ Plaintiff makes this motion in response to defendant’s
Motion for Summary Judgment in which RICO was not
discussed. Plaintiffs’ Motion to Amend, filed on September
17, 1996, is in fact the first filing from either party which
mentions the possibility of a RICO claim.
2. As “Georgia RICO’s similarity to federal RICO has
prompted federal courts to apply the same analysis to both
statutes,” the Court will discuss only plaintiffs’ federal RICO
claim. Bowers v. Dairymen, Inc., 813 F. Supp. 1580, 1585
(S.D.Ga. 1991); see also Morastu v. Lance, 631 F. Supp. 474,
481 (N.D. Ga. 1986) (holding same).
vi
&
4
%
lla
Plaintiffs initially contend that the addition of a
RICO claim does not require an amendment to their More
Definite Statement. Relying on the liberal pleading rules of
the Federal Rules of Civil Procedure, plaintiffs argue that
their More Definite Statement already contains a “short and
plain statement showing that [plaintiffs] are entitled to
relief” under RICO, satisfying the minimal pleading
requirements of Rule 8(a). (Pl. Mot. to Amend [68] at 2. )
Plaintiffs’ argument is without merit because although the
pleading standard is liberal, plaintiffs’ pleading should still
serve to give defendant “fair notice of what plaintiffs’ claim
is and the grounds upon which it rests.” Quality Foods v.
Latin Am. Agribusiness Devel., 711 F.2d 989, 995 (11th Cir.
1983) (citing Conley v. Gibson, 355 U.S. 41, 78 S. Ct. 99,
103 (1983)). Plaintiffs’ More Definite Statement fails to
provide any kind of notice to defendant of potential liability
under the Georgia or federal RICO statutes.’
Plaintiff rely on the fact that their More Definite
Statement describes the facts surrounding their fraud,
conversion, and conspiracy claims, and that these same facts
are sufficient to state a claim for violating RICO. (Pl. Mot.
to Amend [68] at 2.) While it is true that RICO violations
often involve fraud or conspiracy, several elements must be
plead in order to state a RICO claim. A plaintiff must plead:
3. This conclusion becomes quite clear when
considering defendant’s Motion for Summary Judgment. In its
motion, defendant appears to have addressed any claim that
plaintiffs’ More Definite Statement could possibly be construed
to contain—including a claim for Georgia Securities law
violations to which plaintiff did not even respond. (See Def. Mot.
for Sum. J. [63].) That defendant never discussed RICO suggests
that plaintiffs’ More Definite Statement failed to provide notice
of a RICO claim.
(1) The conduct (2) of an enterprise (3) through a pattern
(4) of racketeering activity. Durham v. Business Mgmt.
Assoc., 847 F.2d 1505, 1511 (11th Cir, 1988) (quoting
Sedima S.P.R.L. v. Inex Co., Inc., 473 U.S. 479, 105 S. Ct.
3275 (1985)). Plaintiffs’More Definite Statement does not
allege a “pattern of racketeering activity” or point to the
existence of a criminal “enterprise.” See Farlow v. Peat,
Marwick, Mitchell & Co., 956 F.2d 982, 989 (10th Cir.
1992) (dismissing RICO claim and stating that “plaintiffs
must sufficiently allege each element of a RICO violation
and its predicate acts of racketeering with particularity, a
requirement justified by the threat of treble damages”’); and
Miranda v. Ponce Federal Bank, 948 F. 2d 41, 44 (1st Cir.
1991) (stating that “because Civil RICO is an unsually
potent weapon.....a civil RICO complaint must, at a bare
minimum, state facts sufficient to portray (i) specific
instances of racketeering activity within the reach of the
RICO statute and (ii) a causal nexus between that activity
and the harm alleged”). See also Reynolds v. East Dyer Dev.
Co., 882 F.2d 1249, 1251 (7th Cir. 1989) (holding that “‘it is
essential to plead precisely in a RICO case the enterprise
alleged and the RICO section allegedly violated”’).
Because plaintiffs’ More Definite Statement is
insufficient as it is currently written to state a claim for
RICO violations, an amendment to plaintiffs’ More Definite
Statement is required in order for plaintiff to pursue its
claims under RICO. Rule 15(a) of the Federal Rules of Civil
Procedure provides that a party may amend its pleading as a
matter of course at any time before a responsive pleading is
served. Because defendants have not consented to plaintiffs’
amendment and because defendants have filed a responsive
pleading to plaintiffs’ complaint, the Court must grant
plaintiffs leave to amend before they may amend the
13a
complaint.
Rule 15(a) provides that ieave to amend a pleading
shall be “freely given when justice so requires.” “Courts
have interpreted [amendment] provisions liberally, in line
with the Federal Rules’ overall goal of resolving disputes,
insofar as possible, on the merits and in a single judicial
proceeding.” Spartan Grain & mill Co. v. Ayers, 517 F.2d
214, 220 (5th Cir. 1975).* In explaining the amendment
standard, the Eleventh Circuit haas observed that “unless a
substantial reason exists to deny leave to amend, the
discretion of the district court is not broad enough to permit
denial.” Shipner v. Eastern Air Lines, Inc., 868 F.2d 401.
407 (11th Cir. 1989). In determining whether a substantial
reason exists to deny leave to amend, the district court
should consider the following facts: (1) undue delay, bad
faith, or dilatory motive on the part of the movant. (2)
repeated failure to cure deficiencies by amendments
previously allowed, (3) undue prejudice to the opposing
party by virtue of the allowance of the amendment, and (4)
futility of amendment. Nolin v. Douglas C ‘ounty, 903 F.2d
1546, 1550 (115h Cir. 1990.
The Court denies plaintiffs’ Motion to Amend on the
basis of plaintiffs’ undue delay. As defendant points out, the
reason that RICO was not discussed in its Motion for
Summary Judgment is that RiCO was not mentioned by any
4. In Bonner v. City of Prichard, 661 F.2d 1206, 1209
(11th Cir. 1981) (en banc), the Eleventh Circuit Court of Appeals
adopted as binding precedent all of the decisions of the former
Fifth Circuit Court of Appeals handed down prior to the close of
business on September 30, 1981.
l4a
party prior to plaintiffs’ Motion to Amend, which was filed
on September 17, 1996. Plaintiff makes this motion over a
month after defendant has filed for summary judgment, and
over three months after the completion of discovery.
Plaintiffs have offered no explanation as to why they did not
bring their RICO claim at the time of filing the original
complaint or in their More Defenite Statement. By their own
argument plaintiffs were aware of the facts underlying this
claim when the action was brought, but delayed until after
the discovery period and would subject defendants to further
expense as a result of plaintiffs’ dilatory actions.
Although amendments to complaints are to be
liberally granted “when justice so requires.” plaintiffs’
attempt to amend the complaint tat this late stage of the
proceedings cannot be allowed. Plaintiff has filed this
motion over a month after defendant filed its Motion for
Summary Judgment, over three months after completion of
discovery, and almost two years after the initial complaint
was filed. See Local 472, Etc, v. Georgia Power Co., 684
f.2D 721, 724 (11th Cir. 1982) (upholding denial of motion
to amend filed two years after action instituted, after
discovery was complete, and after defendants had filed
motions for summary judgment); Williams v. Mun. Water
Works, 21 F.3d 218 (8th Cir. 1994) (upholding denial of
motion to amend complaint where motion was filed 14
months after original complaint was filed and six days after
discovery cutoff date); and Coleman v. Ramad Hotel
Operating Co., 933 F. 2d 470, 473 (7th Cir. 1990) (denial of
motion to amend upheld where filed at close of discovery, a
month after defendant filed motion for summary judgment).
Plaintiffs’ argument that allowing the amendment
will not alter the defendant’s current defense strategy is
unpersuasive. Defendant has taken four depositions and in
all of them asked questions relevant to establishing statute of
limitations and collateral estoppel defenses for all claims
which plaintiffs’ complaint could be construed to contain,
including breach of contract, fraud and tort claims, personal
claims of plaintiff, and even « Georgia Securities Act claim.
(See pl. Resp. to Def. Mot. to Amend [71] at 5). Plaintiff
contends that it wishes to clarify the existence of the RICO
claim “so, if [djefendant believes they have a summary
judgment claim in regards to the RICO claim they can assert
them now so as to have all the issues before the Court.” (P1.
Mot. to Amend [68] at 2-3). At this point, however, when
defendant has already filed for summary judgment, and
when discovery ended three months ago, all of the issues
should already before the Court.
Moreover, plaintiffs have offered no explaination of
their decision to wait until this particular time to move to
amend their More Definite Statement. Plaintiffs claim that
this motion was inspired by their discovery in May of 1996
of defendant’s division of money which belonged to
plaintiffs. (P1. Mot. to Amend [68] at 2.) Plaintiffs do not
explain, hewever, why they did not file this motion in May,
before discovery ended and before defendant filed its
Motion for Summary Judgment. Also, this money was
divided as part of the distribution of an escrow account that
was established several years ago and of which plaintiffs
have at all times been fully aware. Allowing plaintiffs to
amend their More Definite Statement to add a RICO claim,
which subjects defendant to potential liability for treble and
punitive damages, at this stage in the litigation would unduly
prejudice defendant. Accordingly, piaintiffs’ Motion to
Amend their More Definite Statement to add a RICO claim
is denied.
l6a
IT. Defendant's Motion for Summary Judgment
A. Summary Judgment Standard
Summary judgment is not properly viewed as a
device that the trial court may, in its discretion, implement
in lieu of a trial on the merits. Instead, Rule t6 of the Federal
Rules of Civil Procedure mandates the entry of summary
judgment against a party who fails to make a showing
sufficient to establish the existence of every element
essential to that party’s case on which that party will bear the
burden of proof at trial. Celotex Corp. y. Catrettt, 477 U.S.
317, 322 (1986). In such a situation, there can be no genuine
issue as to any material fact, as a complete failure of proof
concerning an essential element of the non-moving party’s
case necessarily renders all other facts immaterial. /d. at
322-23.
The movant bears the initial responsibility of
asserting the basis for his motion. /d. at323; Apocoa, Inc. v.
Fidelity Nat'l \ank, 906 F.2d 610, 611 (11th Cir. 1990).
However, the movant is not required to negate his
opponent’s claim. The movant may discharge his burden by
merely “showing” -- that is, pointing out to the district court
--that there is an absence of evidence to support the non-
moving party’s case.” Celotex, 477 U.S. at 325. After the
movant has carried his burden, the non-moving party is then
required to “go beyond the pleading” and present competent
evidence’ designating “specific facts showing that there is a
genuine issue for trial.’” Jd. at 324 (quoting Fed. R. Civ.
5. The non-moving party may meet its burden through
affidavit and deposition testimony, answers to interrogatories,
and the like. Celotex, 477 U.S. at 324.
17a
P.56(e)). While the court is to view all evidence and factual
inferences in a light most favorable to the non-moving party,
Samples v. City of Atlanta, 846 F.2d 1328, 1330 (11th Cir.
1988), “the mere existence of some alleged factual dispute
between the parties will not defeat an otherwise properly
supported motion for summary judgment; the requirement is
that there be no genuine issue of material fact.” Anderson
v. Liberty Lobby, Inc., 477 U.S. 242. 247-48 (1986).
A fact is material when it is identified as such by the
controlling substantive law. Jd. at 248. An issue is genuine
when the evidence is such that a reasonable jury could return
a verdict for the nonmovant. Jd. at 249-250. The nonmovant
“must do more than simply show that there is some
metaphysical doubt as to the material facts. . . . Where the
record taken as a whole could not lead a rational trier of fact
to find for the nonmoving party, there is no ‘genuine issue
for trial.’” Matsushita Electric Indus. Co. v. Zenith Radio
Corp., 475 U.S. 574, 586-87 (1986) (citations omitted). An
issue is not genuine if it is unsupported by evidence, or if it
is created by evidence that is ‘merely colorable” or is “not
significantly probative.” Anderson, 477 U.S. at 249-50.
Thus, to survive a motion for summary judgment, the non-
moving party must come forward with specific evidence of
every element material to that party’s case so as to create a
genuine issue for trial.
B. Statute of Limitations
Plaintiff's More Definite Statement states claims for
breach of contract, conspiracy, fraud, conversion, tortious
interference with contract and violations of Georgia security
laws. Defendant contends that all of plaintiffs’ claims are
barred by the statute of limitations. The parties agree that
Georgia law governs the statute of limitations issue. (See
18a
P1. Brief in Resp. to Def. Mot. for Sum. J. [70] at 18).
1. Plaintiffs’ Georgia Securities Law Claim
Plaintiffs failed to respond to defendant’s statute of
limitations defense as to plaintiffs’ claim under the Georgia
Securities Law statute, O.C.G.A. § 10-5-14. Section 10-5-
14(e0 of this statute requires that a cause of action
commence within two years of the date of the transaction
upon which the action is based. Plaintiffs do not contest
defendant’s assertion in its brief that the sale of stocks on
which plaintiff bases its Georgia Securities Law claim
occurred in 1985, and that the two year statute of limitations
has long since run on this claim. The Court thus grants
summary judgment to defendant on plaintiffs’ Georgia
Securities Law claim.
2. Plaintiff's Breach of Contract Claims
The statute of limitations for breach of contract is six
years under Georgia law. O.C.G.A. § 9-3. .} provides that
“all actions upon simple contracts in writing shall be brought
within six years after the same become due and payable.”
The begins to run when a cause of action for breach of
contract accrues, which is at the time of the breach. Owen v.
Mobley Construction Co., 171 Ga. App. 462, 320 S.E. 2d
255 (1984).
Plaintiffs filed the original complaint in this action
on December 24, 1994. Any claims for breach of contract .
included in the complaint are thus barred if the breach
occurred before December 24, 1988. It is established
beyond question in plaintiff Slautterback’s deposition that
the breach of contract on which plaintiffs’ action is based
occurred in December of 1987, when defendant signed a
rescission agreement with Colonial Penn. The following
19a
exchange occurred in plaintiff's deposition:
Q: Is it [plaintiffs] contention in this lawsuit that
[defeiidant] somehow breached its contract with [plaintiff]
when it rescinded the quota share reinsurance agreement
that it had with Colonial Penn?
A: Absolutely
Q: Is it [pleintiff's] position that [defendant] somehow
breached its contract with [plaintiff] when it placed the $
432, 000 in an escrow account?
A: Both of which were in secret.
(Slautterback Depo. at 24-25, attached to Def Mot. for Sum.
J. [63] at Ex. “J”.) The rescission of the reinsurrance
agreement and the placement of the $432, 000 in escrow
occurred in December of 1987, over six years prior to when
plaintiff filed this action in December of 1994. (See
Rescission Agreement, attached to Def. Mot. for Sum. J.
[63] at Ex. “K”).
Indeed, given the way in which the three contracts
comprising the insurance program at issue here worked
together, the only logical conclusion is that defendant
breached its contract with plaintiff, if at all, when it signed
the rescission agreement with Colonial Penn in 1987. As
explained, defendant was obligated, under its contract with
6. Defendant contends that execution of the rescission
agreement was not actually a “breach” because at the time of its
execution plaintiffs’ actions had already caused a breakdown of
the entire insurance program justifying the rescission. (Def. Mot.
for Sum. J. [63] at 15.) The Court does not decide whether
defendant breached its contract with plaintiff by signing the
rescession agreement, but works from the assumption that if a
breach occurred, it occurred when the rescission agreement was
executed.
i
20a
plaintiffs, to accept premiums from Colonial Penn, to pay
claims from these premiums, and to invest the remainder of
the money. The investment income and profits made on the
program were to be returned to plaintiffs in December of
each year, and all of the profits made on the entire program
were to be returned to plaintiffs on January 1, 1991.
Defendant was also obligated to cancel plaintiff's $432, 000
letter of credit on January 1, 1991. The 1987 rescission
agreement brought this entire program, which involved a
continuous flow of funds from plaintiffs to Colonial Penn,
then from Colonial Penn to Defendant and eventually from
defendant back to plaintiffs, to a halt. The rescission
agreement obligated defendant to return all premiums it had
received under the program, less its own $300,000 fee, to
Colonial Penn. (See Rescission Agreement, attached to Def.
Mot. for Sum. J. [63] at Ex. “K”). The agreement provided
that no additional funds would flow from Colonial Penn to
defendant under this program. (/d.) Pursuant to the
rescission agreement defendant also drew down plaintiff's
$432, 000 letter of credit and placed it into escrow. (/d.)
Thus in complying with the rescission agreement,
defendant stopped receiving the premiums from Colonial
Penn which defendant’s contract with plaintiffs obligated it
to invest and ultimately return to plaintiffs. Moreover,
because defendant drew down plaintiffs’ letter of credit and
placed the proceeds in escrow, defendant could not possibly
have had anything to return to plaintiffs on the “redemption
date” of the contract, January |, 1991.
Plaintiffs’ attempt to resurrect its breach of contract
claim pursuant to the “divisible contract” doctrine is
unpersuasive. Although Georgia law provides that the
statute of limitations runs separately as to each individual
2la
breach of a divisible contract, the contract between plaintiff
and defendant was not divisible. See O.C.G.A. § 13-7-14
(providing that an action will lie for each breach of a contract
found to be severable). A contract is only divisible where
“the whole performance is divided into two sets of Partial
performances, each part of each set being the agreed
exchange for a corresponding part of the set of performances
to be rendered by the other promisor.” Piedmont Life Ins.
Co. v. Bell, 103 Ga. App.. 225, 235, 119 S.E. 2d 63, 71
(1961).
Although plaintiffs would characterize defendant’s
obligation to make yearly payments of investment income,
as well as defendant’s obligation to returns plaintiffs’ letter
of credit and all monies accumulated fromoperation of the
program to plaintiffs on January 1, 1991, as independent
obligations, an examination of the contract between
plaintiffs and defendant illustrates that these obligations of
defendant were an inseparable part of the entire insurance
program. The contract provides that “if on the redemption
date defendant continues to hold funds pursuant to the treaty
with the insurance company (Colonial Penn),” defendant
will make a final payout of these funds on January 1, 199].
(See Shareholder Agreement,, attached to P1. Resp. to Def.
Mot. for Sum. J. [70] at Ex. “3”). The contract thus provides
for the return to plaintiff, on January 1, 1991, of ail profits
and investment income accumulated from the operation of
the entire insurance program. Plaintiffs’ letter of credit was
also part of the consideration given for the entire contract, as
it was to remain in defendant’s possession from the initiation
until the termination of the contract, at which time it was to
be returned to plaintiffs if lossess incurred on the program
did not necessitate its use. (/d.)
22a
The contract between plaintiffs and defendant does
not evidence an intent by the parties to divide the contract
into yearly sets of performance. On the contrary, the yearly
return to plaintiff of income and profits accumulated on the
program seem to be merely a convenient manner of
periodically ceding the plaintiff portions of the underwriting
profit on the program. All of defendant’s obligations were
part of a single promise based on a single consideration.
This promise was breached, if at all, when defendant
removed itself from the program by signing a rescission
agreement in 1987. The rescission agreement severed the
treaty between defendant and Colonial Penn which provided
the flow of funds from which defendant was to make
investments and yearly payments to plaintiffs, completely
terminating defendant’s participation in the insurance
program. Plaintiffs’ breach of contract claim thus cannot
survive defendant’s Motion for Summary Judgment on the
basis of the “divisible contract” doctrine.
Plaintiffs argue further that the statute of limitations
on its breach of contract claim was tolled by fraud on the part
of defendant which deterred plaintiffs from bringing their
action. O.C.G.A. § 9-3-96 provides that “if the defendant or
those under whom he claims are guilty of a fraud by which
the plaintiff has been debarred or deterred from bringing an
action, the period of limitation shall run only from the time
of the plaintiff's discovery of the fraud.” under this code
section “time of discovery of the fraud” means the time at
which the fraud is or should have been discovered in the
exercise of reasonable diligence. Stricker v. Epstein, 213
Ga. App. 226, 229, 444 S.E. 2d 91, 94 (1994). The failure to
use reasonable diligence to discover fraudulent acts which
deter a plaintiff from bringing an action may be excused,
however, where there is a confidential relationship between
23a
plaintiff and defendant. Shipman v. Horizon Corp., 245 Ga.
808, 267 S.E. 2d 244 (1980).
The only fraudulent act plaintiff alleges as deterring
plaintiffs from filing suit until December of 1994 is
defendant’s preparation of false financial statements.
Plaintiffs’ reliance on this action by defendant to invoke
O.C.G.A. § 9-3-96 is undermined, however, by plaintiff
slauterback’s admissions in his deposition that he was aware
of defendant’s alleged frauduent conduct long before
December of 1988, which is the point to which the statute of
limitations has to be tolled in order to save plaintiffs’ breach
of contract action. The following exchange occurred in
plaintiff's deposition.
Q: When did you first become aware of the fraudulent
conduct of [defendant]?
A: Just shortly after the shareholder meeting which we
attended on June 4th, June Sth, 1986.
(Slautterback Depo. at 33.) Then later in the deposition:
Q: Let me ask you--let me rephrase the question.
Weren't you aware that by your own allegations the
shareholder agreement had been breached a good while
before [1991]?
A: We were aware right after the shareholder meeting
in 1986 that there was something bad wrong, the fidelity
was not there, but we could not . . . make an allegation or
file a suit without something tangible in hand.
(/d. at 43, attached to Def. Mot. for Sum. J. [63] at Ex. “J”.)
As to the last sentence of plaintiff quoted above, see Owen,
24a
171 Ga. App. at 463 (stating that “mere ignorance of facts
constituting a cause of action does not prevent the running of
a statute of limitations).
Moreover, the record contains items of
correspondence and documents confirming plaintiffs’
awareness of defendant’s allegedly fraudulent conduct prior
to December of 1988. Defendant apparently stopped making
payments to plaintiffs, pursuant to the rescission agreement
with Colonial Penn, in 1987. On September 25, 1987
plaintiffs’ attorney wrote a 1987. On September 25, 1987
plaintiffs’ attorney wrote a demand letter to defendant
requesting the return of plaintiffs’ letter of credit and
investment income. (See Def. Mot. for Sum. J. [63] at Ex.
“R”). On March 17, 1988 plaintiffs’ attorney wrote another
letter demanding the return of premiums held, charging
defendant with unlawfully drawing down its letter of credit,
and threatening to “advise the insurance commissioners of
the 50 states of [defendant’s] attitude and proceed with such
other actions as this situation may warrant.” (See Def. Mot.
for Sum. J. [63] at Ex. “S”).
Plaintiffs present absolutely no evidence in response
to these items of correspondence from which the inference
can be drawn that plaintiffs were deterred by defendant’s
fraudulent conduct from bringing suit until December of
1994. Plaintiffs instead rely on the assertion that there was
a confidential relationship between plaintiffs and defendant,
suggesting that the existence of this relationship alone tolls
the statute of limitations whenever fraud is alleged. (See P1.
Resp. to Def. Mot. for Sum. J. [70] at 15). Although a
confidential relationship may excuse the use of diligence in
discovering fraud on the part of defendant, the existence of
a confidential relationship does not help plaintiffs’ case
25a
because plaintiffs admit to having actual knowledge of the
alleged fraudulent conduct of defendant. A plaintiff seeking
to invoke O.C.G.A. § 9-3-96 must be deterred from filing an
action. See Jim Walter Corp. v. Ward. 245 Ga. 355, 356,
265 S.E. 2d 7,9 (1980) (recognizing that fraud sufficient to
toll statute of limitations under O.C.G.A. § 9-3-96 must
be fraud that conceals existence of a cause of action from
plaintiff); and Averill y. Akin, 219 Ga. App. 32, 33, 463 S.E.
2d 730, 731 (1995) (holding that shareholder attempting to
invoke § 9-3-96 on basis of a confidential relationsip cannot
“negligently refuse to acquire knoledge that was open and
available to him through the inspection of corporate books
and records”).
There is simply no evidence that defendant
committed any act of fraud which concealed plaintiffs’ cause
of action or in any sense deterred plaintiffs from filing suit
until after December 21, 1988. Even assuming a
confidential relationsip between plaintiffs and defendant, as
well as fraudulent behavior on the part of the defendant in an
attempt to conceal plaintiffs’ cause of action, plaintiffs
cannot invoke § 9-3-96 to tol] the statute of limitations on
their breach of contract claim because statement by plaintiff
Slautterback in his deposition, as well as several items of
correspondence, establish plaintiffs’ knowledge of the
existence of a cause of action for breach of contract well
before December of 1988. Because the statue of limitations
on plaintiffs’ breach of contract claim began to run when the
contract was breached in 1987, and because the contract was
not divisible and the statute of limitations was not tolled by
fraud on the part of defendant, the Court grants summary
judgment to defendant on plaintiffs’ breach of contract
Claim.
26a
3. Plaintiffs’ Tort Claims
Plantiffs’ More Definite Statement contains tort,
conspiracy, fraud, conversion and tortious interference with
contract claims, all of which are subject to the four year
statute of limitations in O.C.G.A. §§ 9-3-31 and 9-3-32. See
McLendon v. Georgia Kaolin Co., 782 F.Supp. 1548 (M.D.
Ga. 1992) (recognizing that O.C.G.A. § 9-3-31 is
applicable to actions seeking damages for fraud). Those
code sections provide that “actions for injuries to (or the
conversion of ) personalty shall be brought within four years
after the nght of action accrues.” O.C.G.A. § 9-3-32. Like
plaintiffs’ claim for breach of contract, plaintiffs tort, fraud
and conspiracy claims are primarily based on the 1987
rescission agreement between defendant and Colonial Penn.
Plaintiffs allege that defendant “entered into a secret contract
whereby the [p]laintiffs were deprived of any and all profit
or benefit under the program, and [Colonial Penn] agreed to
hold the [d]efendant harmless form any section taken by the
[p]laintiffs.” (Pl. Brief in Resp. to Def. Mot. for Sum. J.
[70] at 23.) “As part of their fraud, conspiracy, and plan of
conversion,” plaintiffs further state, “the Defendant also
entered into a secret escrow agreement with [Colonial
Penn].” (id.) Plaintiffs are thus relying on the 1987
rescission agreement between defendant and Colonial Penn
as the basis of their fraud, conversion and conspiracy claims.
Plaintiffs admit to having had an opportunity to read
the rescission agreement between defendant and Colonial
Penn in March of 1989. (See Slautterback Depo. at 33,
attached to Def. Mot. for Sum. J. [63] at Ex. “J” (stating
that letter plaintiff received in March of 1989 “was the last
piece of the puzzle to show fraud’’)). Plaintiff Slautterback
also says in his deposition that he was aware of “ things
27a
going on behind the scenes” as early as 1986, (/d.) Also, as
iscussed while considering plaintiffs’ breach of contract
to make income and profit payments and defendant’s
drawing down plaintiff's letter of credit, in 1987. (See Def.
Mot. for Sum. J. [70] at Ex. “R” and Ex. ae
Plaintiffs’ attempt to revive their claim with the
“continuing tort” theory cannot be entertained. The
continuing tort theory is only applicable to cases involving
Personal injury. Stocks y. Glover, 220 Ga. App. 557, 588,
469 S.E. 2d 677, 678 (1996) (citing Corp. of Mercer Uniy. y
Nat. Gypsum Co., 258 Ga 36., 368 S.E. 2q 732 (1988)).
Plaintiffs’ complaint does not state a claim for personal
injury.
Plaintiffs’ argument that the stainte of limitations has
not run on its conspiracy claim because several separate acts,
some of which were completed within the Statute of
revive their breach of contract claim, plaintiffs attempt to
characterize defendant’s refusal on January 1, 199] to
redeem stock under the shareholder agreement as an
independent act. Plaintiffs contend that this act was in
furtherance of the conspiracy alleged in plaintiffs’
complaint. (See Pl. Brief in Resp. to Def. Mot. for Sum. J.
[70] at 23.) Plaintiffs also point to a division of funds in
furtherance of the alleged conspiracy. (/d at 25.) Both of
these actions were taken, however, pursuant to the rescission
agreement which was executed in 1987 and about which
28a
plaintifff had knowledge at least by March of 1989. The
agreement specifically provides that these funds would be
placed in escrow until the completion of litigation between
plaintiff and Colonial Penn. (See Rescission Agreement,
attached to Def. Mot. for Sum. J. [63] at Ex. “K”.) As
discussed, the agreement also expressly provides for the
return of all premiums to Colonial Penn and the termination
of the agreement by which funds would flow to defendant
and, from defendant, eventually to plaintiffs. (Jd.) Plaintiffs
have thus failed to produce any evidence that defendant
committed any act of fraud, conspiracy or conversion within
the period of limitaions for maintaining these actions.
Accordingly, the Court grants summary judgment to
defendant on plaintiffs’ tort, fraud, conversion, and
conspiracy claims.
CONCLUSION
For the foregoing reasons, the Court concludes that
plaintiffs’ Motion for Reconsideration is DENIED,
plaintiffs’ Motion to Amend its Complaint is DENIED, and
defendant’s Motion for Summary Judgment is GRANTED.
SO ORDERED, this 13 day of December, 1996.
s/ JULIE E. CARNES
UNITED STATES DISTRICT JUDGE
29a
APPENDIX D
AS&K GUIDE
Section 5 - SPECIAL TYPES OF INSURANCE VEHICLES
A. Rent-A-Captives Revisited
Bermuda has long been recognized as the domicile of choice
for the world’s captive insurance industry. One reason for
Bermuda’s preeminence is the success of arrangements
which may be structured under its insurance laws, which
offer alternatives to more conventional risk management
options available in the “traditional markets og
A “captive” is a closely-held insurance company whose
insurance business is primarily supplied and controlled by its
Owners - in the sense that the owners have and exercise direct
involvement and influence over the company’s major
operations, such as its underwriting, claims management and
investment policies - and in which the original insureds are
the principal beneficiaries. The “rent-a-captive”’ represents
an evolution of the “captive” insurance company, and has
been employed for specialized situations for nearly as long as
more standard forms of captives have been operated.
A rent-a-captive program can be structured so that
effectively unrelated parties may participate in the
underwriting profits generated by the risks which they insure
(or arrange to insure) via the captive. In addition, rent-a-
captive policyholders (or the owners of such policyholders)
may by negotiation secure a significant degree of influence
Over both the investment of underwriting reserves
maintained by the captive in respect of the programs with
which they are associated, and control the rate of the “flow
of funds” through the captive (in the sense of the timing of
30a
permitted distributions). Such advantages over traditional
insurance arangements have long been the hallmark of the
rent-a-captive, and in recent years innovations in Bermuda
insurance laws have extended the options for structuring
rent-a-captives, leading to a resurgence of interest in their
use.
1. What is a Rent-a-Captive?
A rent-a-captive is a company, typically established in an
offshore domicile like Bermuda, which “rents” its capital
surplus and legal capacity to engage in underwriting
activities (i.e. its insurance license) to policyholders who are
not its voting shareholders. The rent-a-captive will often
provide its policyholders (‘program participants”) with
required administrative services. As such, the term “rent-a-
captive” applies to any arrangement where the insured party
obtains equivalent benefits to those provided by standard
forms of captives without actually participating in ownership
or management.2
One of the principal characteristics of a rent-a-captive is that
the account established for each program participant is
segregated in some manner from accounts established for
other program participants. This is done to achieve a
separate accounting basis for the insurance business
attributable to each program participant. Such segregation
may be accomplished administratively by the rent-a-captive
itself, or there may be a full legal segregation which results
in statutory protection for losses attributable to other
program participants.
2. Advantages of a Rent-a-Captive
Rent-a-captive programs have long been acknowledged as
alternatives to commercial insurance and as structures which
offer more cost-effective and flexible risk management
3la
solutions, particularly with regard to workmen’s
compensation but also for general liability, automobile
liz bility and professional liability programs.
A rent-a-captive program offers program participants many
of the advantages of a wholly-owned captive without
requiring the insured party (or its owners) to make an
equivalent commitment to fund the Captive’s start-up and
management expenses. These advantages include the facility
to customize the insurance programs and contro] premiums,
pricing and access to reinsurance. Establishment of the rent-
a-captive in a select domicile (e.g. Bermuda) results in
favorable (yet responsible) governmental regulation.
Additionally, the rent-a-captive can often secure coverage for
specialized risks when this is unavailable in the commercial
insurance markets. However, the main advantage of rent-a-
captives may lie in enabling the program participants to
obtain a retu-n of underwriting profit and investment income
earned on the reserves held in their respective insurance
programs. Such returns will of course depend on the loss
experience of the particular case.
Typically, each program participant will retain a portion of
its own risks, insuring the balance with the rent-a-captive.
This arrangement creates powerful incentives to program
participants to be proactive with loss control and claims
handling measures. Such measures wil] often be co-ordinated
by agreement between the program participant and the rent-
a-captive, and perhaps with professional claims handling
service providers.
3. Ownership and Corporate Structure
There are various ways to own and structure a rent-a-captive,
depending on whether the proposed program participants are
single corporations, or a group or association. There may be
32a
tax and other factors to consider, from the standpoint of both
the proposed program participants and the sponsors of the
rent-a-captive.
One of the more common rent-a-captive structures involves
the sponsors forming a Holding Company which owns 100%
of the voting shares of a Reinsurance Subsidiary. The
Reinsurance Subsidiary in turn reinsures each program
participant, in association with an Jssuing Carrier which
issues the policies of insurance to the program participants.
The Issuing Carrier will usually be an insurance company
which is licensed in the jurisdiction(s) in which the program
participants are resident. The program participant will be
afforded access to the rent-a-captive program when it
arranges for a policy to be issued by the Issuing Carrier and,
in association with this, it will purchase one or more
preferred non-voting shares in the Holding Company. Such
shares will be purchased pursuant to the provisions of a
shareholder agreement wherein the Holding Company
agrees to cause a dividend to be declared to the owner of
record of the preferred shares. Dividend payments will also
be controlled by the shareholder agreement, e.g. on a date
indicated in an appendix, being an annual payment date or
the termination date of the particular program. Dividends
will be calculated according to a specific formula involving
investment income earned and underwriting gain or loss.
Payment of dividends will be subject to the availability of
surplus funds (i.e. surplus of the statutory reserve
requirements) in the related account.
The shareholder agreement will provide for indemnification
of both the Holding Company and Reinsurance Subsidiary
by the program participant, the indemnity being designed to
protect these entities in respect of any net underwriting
losses, loss expenses and collateralization expenses arising
from the related insurance program. As collateral for this
33a
indemnity, the program participant will usually agree to
provide the Reinsurance Subsidiary with a letter of credit (or
substitute cash collateral).
The shareholder agreement will also provide for the payment
by the program participant of all premiums due to the rent-a-
captive. Failure will constitute a material breach of the
agreement. The amount of any such non-payment, together,
together with interest may be deducted from any surpius
reserves held for the account of the particular program, or
any dividend due to the program participant.
Dividends on the preferred shares issued to each program
participant will be declared and paid separately, i.e. as a
separate class or series. Such shares will also be redeemable
at face value upon the termination of a program. However
whe-= the capital required for the particular program has
ben. “rented” from the rent-a-captive, the shares will be
redeemed less financing costs.
In other cases, the structure may not involve a holding
company, leaving a reinsurance company which stands alone
as the rent-a-captive. In such an arrangement, it will be this
stand-alone reinsurance company which issues the preferred
shares and enters into the shareholder agreement with the
program participant. This alternative is not otherwise
different from the structure illustrated above.
A growing number of rent-a-captives use a private Act of the
Bermuda Legislature, a sample of which is provided in the
following Exhibit, so that they may achieve legal segregation
of the assets and liabilities of each insurance program which
they underwrite, so that there is no potential for “cross
liability” of one such program resulting from the experience
of another. Where the rent-a-captive is so structured (and
34a
depending upon the precise language of the private Act), the
complete segregation of each program participant’s account
can be achieved, the assets from each program participant
being isolated and protected from the liabilities of other
program participants and the failure of the rent-a-captive
itself.
The advantages of such a structure will be clear. Pursuant to
the typical provisions of such a private Act, a liquidator is as
a matter of law bound to recognize the separate nature of the
segregated account established for each program, and may
not apply assets identified as the assets of any one program
to pay claims of insureds under other policies issued by the
rent-a-captive, or the rent-a-captive’s mon-insurance
creditors. In addition, the liquidator typically has no power
to void or cancel the terms of any policy, deed or contract
issued in respect of any program.
Not all rent-a-captives will be structured to take the benefits
afforded by private Acts of this kind. Some rent-a-captive
owners take the view that their program participants may not
be able to deduct premiums for tax purposes if there is
demonstrably less risk-sharing among program participants.
Rather than issue preferred shares, some rent-a-captives
simply enter into a form of profit sharing agreement with
their program participants. This is an alternative means by
which program participants may directly participate in the
underwriting and investment income arising out of their
respective programs.
4. How does the Rent-a-Captives Work?
In the typical scenario, the program participant (either on its
own or with the assistance of a broker or the rent-a-captive or
35a
both) wiil negotiate with the Issuing Carrier, which will be an
admitted insurance company (or “fronting” company) for the
provision of policy-issuing and related Services in the relevant
jurisdiction for the policyholder. The fronting company wil]
then issue the policy and cede the working layer to the rent-a-
captive. For this service, the fronting company charges a fee,
which may range anywhere from 5%-14% of gross premium.
The fronting company will also be required to deduct certain
federal and/or state taxes. As a matter of law, the fronting
company will be primarily liable for the risk. However, the
reinsurance agreement with the rent-a-captive will invariably
require the latter to provide the fronting company with a clean,
irrevocable letter of credit. The letter of credit is ultimately
paid for a backed by the program participant, typically as a one
time charge of 1/2% of premium, or an annual fee of 3/8% of
the premium deducted from the dividend. The guarantee for
the letter of credit is the program participant’s own funds held
by the rent-a-captive. In addition, the rent-a-captive itself wil]
Charge an underwriting fee of perhaps 2%-3 1/2% of
premiums.
5. Capital Requirements
In order to meet the Bermuda premium underwriting
requirements (i.e. the ratio of premium to capital and surplus),
4 program participant must itself either provide or “rent” the
necessary capital. If the program participant elects to rent, the
rent-a-captive will often supply such funds from its own
common share capital (usually for a fee of 1%).
Where capital is pro: ided by the program participant, this is
generally accomplished through the purchase of the rent-a-
Captive’s prefereed non-voting shares, in an amount equal to
1/5th of the first year’s net premuum.
Purchasing the shares acchieves two purposes. First, it
36a
provides the rent-a-captive with adequate capital for
regulatory purposes. Second, as ownership of the shares
constitiutes beneficial ownership of the rent-a-captive, it may
provide a basis for the taxable transfer of income back to the
program participant through deemed dividends.
6. Rent-a-Captive Account Expenses
Rent-a-captive account expenses are typically 25%-35% of
Original gross premium (“OG?”"), although they can be
higher. These include boards, bureaus, taxes and assessments
(3%-4%), claims handing (3%-4%), onshore broker
commission (4%-5%) federal excise tax (1%), cost of
specific excess (3%-6%), cost of aggregate excess (2 1/2%-
4%), fronting company fees (5%-9%), rent-a-captive’s
underwriting fee (2%-3 1/2%) and use of rent-a-captive's
capital and what is left after fees and commissions (generally
60%-70% of OGP) and loss reserves may be temporarily
available to the program participant. Meanwhile, the rent-a-
captive will invest these funds (typically through a
professional investment adviser in order to maximize
investment portfolio performance) and return investment
income to the program participant through dividends on the
prefeered shares, less a service income fee to the rent-a-
captive (generally 1% of the value of the portfolio).
Provided that the rent-a-captive complies with applicable
minimum solvency and liquidity ratio requirements (or,
where there are segregated accounts pursuant to a private
Act, where each program for which a separate account is
maintained complies with such requirements), Bermuda law
permits complete freedom of investment managemient with
regard to selection of asset classes.
37a
7. Profile of a Prospective Program Participant
A prospective program participant will generally:
- be too small for, or not interested in, establishing and
operating a wholly-owned captive for itself: and
~ generate at least $750, 000 of annual premium onshore
(be it a single-owner or association program of insurance).
(Workers’ compensation programs in California, which may
be underwritten with less premium, are an exception to this)
- In the case of association programs (which are thought to
account for about one third of total rent-a-captive premium
income in the Bermuda market), association members are
typically characterized by:
- similar exposures;
- a willingness to share risk within the mutual account:
~ a combined loss ratio of 50% or less;
- a single or related exposure such as_ workers’
compensation, general liability or automobile liability; and
~ a consensus on the allocation of underwriting profit and
investment income.
8. Does the Rent-a-C, aptive Itself Assume Risk?
Many of the rent-a-captives formed in Bermuda do not
assume substantial risk in respect of the insurance programs
of their program Participants. Rather, these rent-a-captives
view themselves as service companies and in fact require
ageregate excess protection in some form as a condition of
accepting a particular program. All financial agreements are
typically backed up with letter of credit ultimately
guaranteed and paid for by the program participant.
In recent years, the Registrar of Companies of Bermuda has
made it clear that his office is prepared to consider
applications to establish rent-a-captives which wil] accept
38a
risk for their own account, subject always to meeting relevant
solvency and liquidity requirements.3
1. 1995 Captive Insurance Company Reports.
2. 1986 Captive Insurance Company Reports.
3. The use of rent-a-captives can provide a number of
business advantages. However, achieving the desired tax
results requires careful tax planning. The above discussion is
not intended to, and does not, constitute tax advice.
Accordingly, readers should consult their own tax advisers
for advice in relation to specific cases.
Captives & Reinsurance
What Is A Captive?
WHAT IS A CAPTIVE?
Originally a captive was a company created and controlled by
either a parent company or professional association through
which the parent or association could insure its own risks.
The concept has been broadened and expanded. It now
includes not only the insurance of the parent or association,
but in many cases, the insurance of those risks of other
companies which can be controlled or directed by the parent
or association.
Currently captives take the form of a Single Parent Captive,
Association Captive, Group Captive and Rent-A-Captive.
SINGLE PARENT CAPTIVE
Is an Insurance or reinsurance company which is a wholly
owned subsidiary formed primarily to insure the risks of its
non-insurance parent or affiliates.
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THE ASSOCIATION CAPTIVE
Is a company owned by a trade, industry, or service group for
the benefit of its members.
THE GROUP CAPTIVE (Stock or Mutual)
Is a company jointly owned by a number of companies
created to provide a vehicle to meet a common insurance
need.
RENT-A-CAPTIVE
Where an owner of a captive offers to interested parties a
division of the captive for a fee.
Where the captive is a reinsurance company, and by
arrangement with a conventional insurance company,
reinsures the risks of its parents or affiliates, the conventional
insurance company is generally referred to as the “fronting”
company.
Black, Davis & Shue Agency, Inc. has further broadened the
concept by using a more conservative approach to captive
insurance. We have joint ventured with insurance companies
to form a_ partnership whereby a 50/50 quota share
arrangement is used. Appropriate Caps are applied thus
protecting the captive so losses are properly managed.
CAPTIVE INSURANCE ARRANGEMENTS
Rent-a-Captives
A “rent-a-captive” is an alternative method of nsk financing
which brings tangible benefits to the insured including the
following:
- Surplus funds accrue to the benefit of the insured.
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- Lower cost risk financing for firms with low claims
experience.
- Tax advantageous pre-funding of your own claims.
Special arrangements can be made for groups who are
prepared to share risks, through the establishment of a group
fund.
The Product
This is a specially designed method of risk financing enabling
businesses or partnerships to achieve the benefits of captive
insurance without the disadvantages of establishing their own
captive. It is also a means of maintaining a certain amount of
independence from the commercial market.
How does it work? Each policyholder purchases a policy. The
premium is paid into a separate fund which is kept distinct
from others and can only be used for purposes of meeting a
claim under the policy. Each fund contributes its share of the
administration costs and the administration costs relating to
the policyholder’s own insurance.
Special arrangements can be made for groups who are
prepared to share risks, through the establishment of a group
fund.
The Rationale
Many companies decide to, or are obligated to retain risk.
Some have considered reserving a proportion of revenue each
year to deal with claims as they arise. The main
disadvantages of using this method are that tax relief is not
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granted on the balance and the money cannot be used for
other purposes.
Some companies have considered setting up their own
captive. These have several advantages, including the
following:
- Risk management
- Lower insurance premiums
- Premiums which reflect your own claims experience
- Ability to determine own policy conditions and scope of
cover
- Smoothes out cash flow
- Access to reinsurance markets.
Whilst establishment of one’s own captive market
commercial sense for larger organizations, there are a number
of drawbacks:
Cost
- Minimum first year costs wil] be about £35,000.
- Capitalisation requirement of £100,000 equity or letter of
credit.
- 90% of profits to be remitted to the UK parent company to
Satisfy CFC rules.
- Running costs £30,000 per annum minimum.
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Ownership
- For partnerships there can be difficulty over the ownership
of surplus funds in the event of a split of the partners, leading
to a winding up of the captive.
Time
- Business time is expended setting up and administering the
Captive.
Equity
- Difficulty of maintaining balance between policyholders.
KEY BENEFITS OF A ‘RENT-A-CAPTIVE’
The disadvantages of a captive are extinguished or minimised
with a rent-a-captive for the following reasons:
- No initial start up costs
- Control of Foreign Companies rules not applicable
- Fund can be discontinued without the need to wind up the
captive
- Profit can be taken out on termination of cover
- Shared administration costs make the arrangement cost
effective
- Flexibility, enabling potential new captive owners to test the
water
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Risk Management
TAX IMPLICATIONS
The motivation for using a rent-a-captive should always be
insurance driven rather than tax driven. A rent-a-captive can
be compared to a conventional insurance or an internal fund.
Premiums paid to external insurers are usually tax-
deductible.
In the UK, as in many other countries, reserves for future
claims are not deductible. A reserve will only be allowable
for Therefore the creation of an internal fund by a general
Provision will not generate a UK tax deduction. However, the
payment of a premium to a captive, which itself creates a
reserve, will provide tax relief to the premium paying
company.
Any attack on profits by the Revenue would have to be:
- on the basis that the rent-a-captive was in fact controlled and
managed in the UK; or
profits; or
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- under the anti-avoidance legislation contained in Section
739TA 1988 (Transfer of Assets Abroac).
CONTROLLED FOREIGN COMPANIES (CFC)
We do not consider that CFC legislation would be applicable
to an offshore captive beneficially owned directly by a
professional partnership, though it would be relevant if 20%
or more of the captive’s share capital were owned by, say, a
UK resident service company owned by the partnership.
TARGET MARKET
Collegiate is suitable for professional businesses, e.g. legal
(solicitors), architectural, accountancy, engineering, medical
services, insurance company agencies, industry bodies or
groups, and organisations with low claims records in relation
to their premium expenditure.
The first year’s premium is likely to be between £25,000 and
£250,000, depending on the arrangements required.
Information Request Form
Select the items that apply, and then let us know how to
contact you.
X Send product literature
_ Send company literature
_ Have a salesperson contact me
Name
Title
Company
Address
Phone
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APPENDIX E
SHAREHOLDER AGREEMENT
THIS AGREEMENT, made and entered into as of
August 1, 1985 by and between MUTUAL INDEMNITY
LTD. (formerly Aneco Mutual Ltd.), a company organized
under the laws of the Islands of Bermuda (hereinafter
“MUTUAL”) and AMERICAN OWNER OPERATOR
UNDERWRITERS, INC., a corporation organized and
existing under the laws of the State of Delaware (hereinafter
“SHAREHOLDER’”).
WiTNESSETH:
WHEREAS, SHAREHOLDER is desirous of
purchasing four hundred thirty-two thousand (432,000) non-
voting preferred shares of MUTUAL designated Series “V4”
preferred shares (hereinafter “PREFERRED SHARES”) for
the purchase price hereinafter set forth; and
WHEREAS, MUTUAL is desirous of repurchasing
the PREFERRED SHARES at the close of business on the
first day of January, 1991 for the purchase price hereinafter
set forth; and
WHEREAS, MUTUAL has entered into a
Reinsurance Agreement (the “TREATY”) effective August 1,
1985 with Colonial Penn Insurance Company (hereinafter the
“INSURANCE COMPANY ”) pursuant to which MUTUAL
has reinsured certain of the liability of INSURANCE
COMPANY on policies of insurance produced by
SHAREHOLDER.
NOW, THEREFORE, in consideration of the mutual
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promises and undertakings set forth herein the parties do
hereby agree as follows:
1. SHAREHOLDER agrees to purchase the
PREFERRED SHARES agrees to pay MUTUAL the amount
of Four hundred thirty-two thousand dollars ($432,000.00)
(herein the “Purchase Price”). This amount shall be payable
by the delivery to MUTUAL within 30 days of the execution
of this Agreement of a clean, irrevocable, unconditional letter
of credit in the amount of four hundred thirty-two thousand
dollars ($432,000.00) drawn upon a United States Bank
approved by MUTUAL. Thereafter, SHAREHOLDER shall
either continue to maintain the letter of credit so that at all
times it remains in force or replace the letter of credit by
paying MUTUAL four hundred thirty-two thousand dollars
($432,000.00) in cash prior to the expiration of the letter of
credit.
2. Commencing on the first day of December, 1986
and annually thereafter on the first day of December of each
succeeding year to and including December 1, 1990
(hereinafter the “DIVIDEND DATE”) MUTUAL agrees to
cause a dividend to be declared to the owner of record on
such date of the PREFERRED SHARES in an amount equal
to the sum of the following:
The amount of investment income, if any, earned by
MUTUAL during the calendar year immediately preceding
such DIVIDEND DATE resulting from the investment of the
cash funds received by MUTUAL as the purchase price of the
PREFERRED SHARES, if any, as set forth in paragraph (1)
hereof, less an amount equal to one half per cent (1/2%) per
annum of the average amount of investment funds held by
MUTUAL as a result of the purchase price of the
PREFERRED SHARES.
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(B) Plus or minus the amount of investment income
earned by MUTUAL in the calendar year preceding the
DIVIDEND DATE, resulting from the investment of funds
received by MUTUAL under the TREATY with
INSURANCE COMPANY less an amount equal to one per
cent (1%) per annum of the average amount of such funds
held by MUTUAL during the preceding year. It is understood
and agreed that such funds are held by MUTUAL as loss
reserves and premium reserves and may be repaid to
INSURANCE COMPANY pursuant to the terms of the
TREATY.
(C) Plus or minus the amount of underwriting gain or
loss realized by MUTUAL on the TREATY during the policy
year preceding the DIVIDEND DATE. Underwriting gain
shall be computed by the following formula:
Net premium received by MUTUAL after all deductions for
€xpenses, taxes and other items; minus all losses incurred
including losses incurred but not reported; minus two and
one-half per cent (2.5%) of the original gross premium under
the TREATY.
3. If on the Redemption Date, as defined in this
Agreement, MUTUAL continues to hold funds pursuant to
the TREATY with INSURANCE COMPANY, MUTUAL
agrees to annually pay SHAREHOLDER as additional
dividends the amount of investment income earned by
MUTUAL during the preceding year resulting from the
investment of such funds less an amount equal to one per cent
(1%) of the average amount of such funds plus the amount of
additional underwriting gain, if any, as defined in paragraph
2 (C) hereof until such time as the amount of funds held by
MUTUAL is less than Five thousand dollars ($5,000.00) at
which point liability under this paragraph shall cease.
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4. On the first day of January, 1991 (hereinafter the
“REDEMPTION DATE”) MUTUAL agrees to repurchase
from the SHAREHOLDER the PREFERRED SHARES
upon presentation of the share certificate representing the
PREFERRED SHARES duly endorsed for cancellation for
the price of four hundred thirty-two thousand dollars
($432,000.00) minus the amount by which the cumulative
sum of the amounts calculated under Sections 2(A), 2(B) and
2(C) of this Agreement is less than zero by reducing or
returning the letter of credit or repaying the amount of cash
paid by SHAREHOLDER at purchase price for the
PREFERRED SHARES.
5. It is agreed that the PREFERRED SHARES issued
to SAYAREHOLDER pursuant to this Agreement are being
purchased by the SHAREHOLDER for purposes of
investment only. The said PREFERRED SHARES have not
been registered under the United States Securities Act of
1933, as amended. The said PREFERRED SHARES shall
not be sold, transferred, hypothecated, pledged or otherwise
assigned or encumbered and will bear the following legend:-
“These Securities have not been registered under the
Securities Act of 1933, as amended. These Securities
have been acquired for investment and may not be
sold, transferred, hypothecated, pledged or otherwise
assigned or encumbered.”
6. This Agreement may not be modified, amended or
changed in any manner except in a writing signed by all the
parties hereto.
7. All notices, requests, demands or other
communications provided for herein shall be in writing, shall
be delivered by hand or by first-class mail, postage prepaid
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and shall be addressed to the parties hereto at their respective
addresses listed below or te such other persons or addresses
as the relevant Party shall designate as to itself from time to
time in a writing delivered in like manner:
If to Mutual Indemnity Ltd., to it at:
Trimingham Building
Front Street
P.O. Box 1254
Hamilton 5, Bermuda
If to American Owners Operator Underwriters, Inc.
to it at:
1655 Peachtree Street
Suite 520
Atlanta, Georgia 30309
8. This Agreement has been made and executed in the
Islands of Bermuda and shall be governed by and construed
in accordance with the laws of the Islands of Bermuda.
9. All amounts referred to herein are expressed in
United States Dollars and all payments shall be made in such
dollars.
IN WITNESS WHEREOF, the parties have set their
hand,
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At Atlanta, Georgia
Date: 11-22-85
AMERICAN OWNER OPERATOR UNDERWRITERS,
INC.
By: s/ Chairman
At Hamilton, Bermuda
Date: 1 November 1985
MUTUAL INDEMNITY LTD.
By: s/ Robert A. Mulderig
Executive Vice President
Sla
APPENDIX F
AGENT AGREEMENT
THIS AGREEMENT IS MADE THIS ist day of
April 1985 by and between the Colonial Penn Insurance
Company, an insurance corporation having its principal place
of business at 5 Penn Center Plaza, Philadelphia,
Pennsylvania (hereafter referred to as the “Company”) and
American Owner Operator Underwriters, Inc., having its
principal place of business at 1655 Peachtree Street, Suite
520, Atlanta, GA 30309 (hereafter referred to as the
“Agent’”’).
FOR AND IN CONSIDERATION OF the mutual
covenants and agreements contained herein, and intending to
be legally bound hereby, the parties hereto agree as follows:
SECTION ONE
TERM OF AGREEMENT
This Agreement shall be effective as of April 1, 1985
and shall continue in full force and effect until terminated in
accordance with the provisions of Section Twenty-Three.
However, the Agent shall have no authority to bind risks
hereunder until the effective date of the reinsurance treaties as
set forth in the attached Addendum to this Agreement.
SECTION TWO
APPOINTMENT OF AGENT
A. The Company hereby nominates, constitutes and
appoints the Agent as its legal representative and true and
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lawful attorney to act in the Company’s behalf in the
procuring, underwriting and servicing of binders, policies,
contracts, agreements, treaties, certificates and other written
evidences of insurance or reinsurance including the handling
and servicing of all claims, losses and suits resulting
therefrom. This appointment shall apply only with respect to
lines of property/casualty insurance business as set forth in
the attached Addendum((s) to this Agreement.
B. Such authority shall be exercised only in
accordance with the terms of this Agreement and such
conditions and limitations as are from time to time
established by the Company.
SECTION THREE
TERRITORY
A. The Agent shall have non-exclusive authority to
operate in all states of the United States of America and the
District of Columbia; subject to the applicable licensing
authority of the Company. The Agent’s authority will extend
to risks located outside the United States of America and the
District of Columbia if the coverage is written in conjunction
with ani is incidental to risks located within the
aforementioned geographic areas; provided the extension of
such coverage is not prohibited by the jurisdiction where such
risk is located.
B. Either party shall have the mght to conduct
business for its own account without regard to this
Agreement. Either party shall have the right to conduct
business for its own account with any insurance or
reinsurance entity or insurance or reinsurance intermediary.
SECTION FOUR
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LIMITATIONS OF AUTHORITY OF AGENT
A. The Agent shall have no authority to waive any
forfeiture, grant any permit, collect any premiums except for
those policies which are subject to this Agreement, or bind
the Company in any way except as herein expressly stated.
B. The Agent shall not commit the Company to any
risk where the Company’s gross aggregate per occurrence
exposure exceeds the limits set down in the attached
Addendum(s).
SECTION FIVE
GENERAL DUTIES OF COMPANY
The Company will:
A. Procure and maintain licenses and/or certificates of
authority as an insurance company in such states as the
Company shall deem necessary to the fulfillment of this
Agreement.
SECTION SIx
GENERAL DUTIES OF AGENT
The Agent will
A. Make such filings, including filings of policy
forms, rates and rules on behalf of the Company as are
approved by the authorities of the states in which the Agent
is Operating for the Company.
54a
B. Appoint such agents or representatives of the
Company and make such agreements with them as the Agent
deems desirable for the furtherance of this Agreement,
subject always to the prior approval of the Company.
C. Supervise, direct and implement the production,
underwriting, premium collection, accounting, statistical, and
other work necessary or incidental to the insurance business
written under this Agreement.
D. Procure and maintain Treaty and Facultative
Reinsurance in terms and with companies acceptable to the
Company.
E. Supervise, direct and implement the loss
investigation, adjustment, settlement, compromise and
subrogation functions, legal defense, and other work
necessary or incidental therefor, including the payment of
losses, for all claims arising out of insurance business written
under this Agreeiment.
F. Set up and maintain such books and records in the
manner and as required by the Company to record the
transactions pursuant to this Agreement.
G. Compile and file with the Company such statistical
information as is customarily completed by insurance
companies for the business written hereunder.
H. Furnish, render and provide all services and
facilities for the business it transacts, as are customarily
furnished, rendered and provided by insurance companies for
the business written hereunder.
I. Cancel policies, contracts or certificates for cause.
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SECTION SEVEN
RECE™@T OF FUNDS: ACCOUNTS
A. Accounts of money due the Company on the
business written by the Agent with the Company are to be
rendered monthly so as to reach the Company not later than
the twentieth (20th) day of the following month; the balance
therein shown to be due the company shall be paid not later
than sixty (60) days after the end of the month for which the
account is rendered.
B. All premiums collected by the Agent are to be held
in trust for the Company and are the property of the
Company. The Agent has no interest in the premiums
collected by it and shall make no deductions therefrom before
paying the same to the Company except for the compensation
authorized in Section Fifteen and amounts required to pay
current losses and amounts required to pay reinsurers. The
Agent shall not make personal use of such premium funds
either in paying expenses of the Agent or otherwise. It is
understood that interest accruing from the trust account
inures solely for the benefit of the Agent.
C. If, at any time, the Agent determines that
premiums on hand are not sufficient to pay current losses and
the compensation authorized in Section Fifteen, the Agent
may request a special remittance from the Company and the
Company wili make such remittance to the Agent within
fifteen (15) days of the rendering of such a request, subject
however to such verification from the Agent as is required by
the Company.
D. The Agent shall report to the Company, in a form
and manner acceptable to the Company, all insurance issued,
accepted and/or bound pursuant to this Agreement.
56a
E. Agent shall prepare and submit to the Company a
report, not later than thirty (30) days after the close of each
quarter, summarizing:
1. Paid losses.
2. Outstanding loss reserves (both reported losses and
an estimate of incurred but not reported losses).
3. Allocated loss adjustment expenses paid.
4. Commissions paid.
SECTION EIGHT
BOOKS AND RECORDS
A. The Agent shall maintain true, accurate and
complete records and accounts of all transactions arising out
of this Agreement. Said records and accounts shall be
maintained at all times in such a manner and form as may be
agreed to by the Company and in accordance with generally
accepted accounting and insurance practices.
B. It shall be the duty of the Agent, unless the
Company relieves it of the same, to prepare and submit to the
Company and the underwriting and statistica: data applying
to the business it does for Company’s Annual Statement and
other reports required of the Company by states, for business
the Agent does for the Company.
C. All records and accounts or other documents
relating to the business of the Company arising out of this
Agreement are the property of the Agent and shall be subject
at all reasonable times to inspection, duplication and/or audit
57a
by a duly authorized representative of the Company,
including representatives of regulatory agencies. In the event
of termination of this Agreement, such records, accounts and
documents will be made available to the Company for
inspection and copying at the Agent’s offices after
termination. The Agent shall maintain such materials for a
period of five (5) years after the date of termination of this
Agreement.
D. All supplies furnished to the Agent by the
Company shall remain the property of the Company and shall
be returned to the Company upon termination of this
Agreement.
E. The books and accounts of the Company shall be
accepted as full and final evidence in all matters relating to
this Agreement.
SECTION NINE
COMPLIANCE WITH REGULATION AND LAWS
A. In the conduct of business under this Agreement,
the Agent will observe and comply with all rules and
regulations of the Company now existing or hereafter
promulgated and with all applicable laws, regulations and
rulings by any governmental authority, agency, bureau or
commission having jurisdiction. Al] binders and policies of
insurance and reinsurance wil] be issued and delivered. and,
when required, countersigned, pursuant to the applicable
laws, regulations and rulings of any governmental authority,
agency, bureau or commission. Al] agents or representatives
of the Company appointed by the Agent shall be properly
licensed as required by applicable laws and regulations. Any
fine, fee or penalty assessed against the Agent by reason of
aaa
58a
the Agent’s action or failure to act hereunder shall be the
responsibility of the Agent and the Agent will not be entitled
to any reimbursement by the Company therefor.
B. In the conduct of business under this Agreement,
the Company will observe and comply with all applicable
laws, regulations and rulings by any governmental authority,
agency, bureau or commission having jurisdiction. Any fine,
fee or penalty assessed against the Company by reason of the
Company’s action or failure to act hereunder shall be the
responsibility of the Company and the Company will not be
entitled to any reimbursement by the Agent therefor.
C. The Agent shall, at its sole expense, provide for
required countersignatures on policies written pursuant to this
Agreement. Agent shall not bind the Company to any risk
with regard to which the Company shall previously have
notified the Agent in writing that such risk is excluded from
the business hereunder. The Agent will cancel any risk
forthwith, at the instruction of the Company.
SECTION TEN
ADVERTISING AND SOLICITATION MATERIALS
The Agent agrees that no pamphlets, booklets,
advertising materials, or any other promotional materials
relating to the Company shall be used, issued or circulated by
it unless specifically authorized by the Company.
SECTION ELEVEN
CANCELLATION OF POLICIES
All policies written under this Agreement shall be
59a
subject to cancellation by the Company on any anniversary
date upon not less than thirty (30) days’ prior written notice
unless a longer period of time or special terms are required by
law or have been specifically granted by the Company.
SECTION TWELVE
AGENT NOT TO INCUR INDEBTEDNESS
The Agent shall pay and discharge the expenses of
conducting its own business and shall not incur any expenses
chargeable to the Company, other than those authorized
herein, without the Company’s written approval.
SECTION THIRTEEN
ADJUSTMENT OF LOSSES
A. The Agent shall promptly notify the Company of
any claim or loss arising out of business written pursuant to
this Agreement which comes to its attention involving claims
for punitive and/or exemplary damages or for which, in
Agent’s best judgment, the amount of damages recoverable is
likely to exceed fifty thousand dollars ($50,000.00).
B. Agent shall have ultimate and full authority and
control of all claims and losses arising out of the insurance
contracts written pursuant to this Agreement, subject to
Company’s right to intercede and assume authority and
control with respect to any claim when the Company deems
it to be in its own best interest to assume such authority and
control.
60a
SECTION FOURTEEN
EXPENSES
A. The Agent shall incur, accept and pay all expenses
in connection with the production, marketing and servicing of
the insurance business, written under this Agreement,
including but not limited to the following:
1. Printing of proposals, booklet certificates,
solicitation brochures, premium notices, records and reports,
and all documents and other materials required to fulfill the
obligation of the Agent under this Agreement.
2. Promotional advertising and public relations
expenses.
3. The Agent’s general office expenses, including, but
not limited to rent, salaries, utilities, transportation, furniture,
fixtures, equipment, supplies, telephone, postage and other
general overhead expenses.
B. The Company shall not be responsible for any fees
or expenses incurred by the Agent, its employees, agents or
brokers to obtain or maintain licenses required to perform
activities relating to this Agreement.
SECTION FIFTEEN
COMPENSATION
Subject to compliance by the Agent with the terms
and conditions of this Agreement, the Company will allow
Agent the following as full compensation for all services
rendered and expenses incurred by Agent.
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A. An amount equal to a percentage of the Gross
Written Premium specified in the attached Addendum(s) on
the business coming under this Agreement. Gross Written
B. Amounts necessary to reimburse the Agent for
allocated claims costs arising from the investigating,
adjusting, settling, compromising and subrogating claims.
SECTION SIXTEEN
COMMISSION REFUNDS
Commissions paid to the Agent on cancelled policies,
reduced premiums and uncollected premiums shal] be
refunded to the Company at the same rates at which such
commissions were Originally earned by the Agent.
SECTION SEVENTEEN
OFFSET AGAINST COMPENSATION
The Agent shall not be entitled to any compensation
for services of any kind rendered to or on behalf of the
Company except as described in this Agreement. The
Company may offset against said compensation any claims
made by it against the Agent arising out of this Agreement or
any other contracts by and between the parties hereto or
between Agent and any of the Company’s affiliates or
subsidiaries.
SECTION EIGHTEEN
LAWS GOVERNING
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This Agreement, including the provisions relating to
arbitration, shall be governed by the laws of the State of
Pennsylvania.
SECTION NINETEEN
ERRORS & OMISSIONS
A. Agent shall, at all times during this Agreement,
maintain an Errors and Omissions Policy and separate
Fidelity Policy on all of its employees providing a minimum
of $1,000,000.00 coverage.
B. Inadvertent delays, errors and/or omissions made
in connection with this Agreement shall not relieve either
party from any liability which would have attached had such
delays, errors or omissions not occurred; provided that such
delays, errors or omissions shall be rectified as soon as
possible after discovery.
SECTION TWENTY
ARBITRATION
A. Any controversy or claim between the parties
hereto arising out of or relating to this Agreement, or the
breach of the same, shall be settled by arbitration to be held
in Pennsylvania. Each party shal! choose one arbitrator, and
the two arbitrators shall then mutually agree on a third
arbitrator. The arbitrators shall hold a hearing and render an
award in accordance with the rules of the American
Arbitration Association, and judgment upon the award
rendered by a majority of the arbitrators may be entered in
any court having jurisdiction. The arbitrators shall be
required to decide matters submitted to them upon the custom
63a
and usage of the business in a spirit of equity rather than of
technicalities or of legal requirements.
B. All arbitration expenses shall be borne equally by
the Company and the Agent.
SECTION TWENTY-ONE
AGENT TO ACT AS INDEPENDENT CONTRACTOR
The Agent shall be and act as an independent
contractor. Nothing contained herein shall be construed to
create the relationship of employer and employee between
the Company and the Agent.
SECTION TWENTY-TWO
INDEMNIFICATION
A. Agent agrees to indemnify, defend and hold the
Company harmless from and against any and all claims, suits,
actions, liability, loss, expense or damage (including
compensatory and punitive or exemplary damages), which
the Company, its affiliates, directors, officers, agents, or
employees, may sustain, due to or arising out of any act by
Agent, its affiliates, directors, offices, agents, representatives,
or employees provided that the Company has not contributed
to Or compounded such act.
B. The Company agrees to indemnify, defend and
hold Agent harmless from and against any and all claims,
Suits, liability, loss, expense or damages (including
compensatory and punitive or exemplary damages) which
Agent its affiliates, directors, officers, agents or employees
may sustain, due to or arising out of any act by the Company,
64a
its affiliates, directors, officers, agents, representatives, or
employees provided that Agent has not contributed to or
compounded such act.
C. In no event does the Company agree to indemnify
and hold the Agent harmless for the actions of brokers or of
the Agent or its employees or agents.
SECTION TWENTY-THREE
TERMINATION
A. This Agreement may be terminated at any time by
the mutual agreement of the parties.
B. Except as otherwise provided herein, this
Agreement may be terminated for any reason by the giving of
not less than ninety (90) days notice in writing by either party
to the other unless a shorter period is agreed to by the parties
in writing.
C. Termination in whole or in part of reinsurance of
the Company on business covered by this Agreement shall
result in the suspension of all authority granted to the Agent
under this Agreement to assume business on behalf of the
Company. This suspension of authority shall be effective the
same date as effective for the termination of reinsurance and
shall remain in effect until such reinsurance is again in effect
in accordance with Section Six, paragraph D.
D. This Agreement shall terminate automatically
without notice in the event of the bankruptcy, insolvency,
receivership, liquidation or assignment for the benefit of
creditors by either party or if there is any material change in
the ownership or control of the other party.
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E. In the event of default in any material term of this
Agreement, the non-defaulting party shall give notice ¢ of such
default to the defaulting Party and this Agreement shall
terminate thirty (30) days after the date of such notice unless
the defaulting party has remedied such default prior to the end
of the thirty (30) day period.
G. Upon termination of this Agreement, no charges
shall be made by the Agent for services in settlement of
accounts or winding up of affairs between the Company and
the Agent.
H. If this Agreement is terminated, neither party shall
have any claim against the other for loss of prospective
profits or fees or damage to business arising therefrom.
I. In the event of termination of this Agreement, any
business written hereunder and remaining with the Company
shall be permitted to continue to normal expiration, or in the
annual renewal date.
J. In the event of termination of this Agreement:
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1. The Agent shall promptly cease all solicitation
activities provided for hereunder.
2. The administration obligations of the Agent to the
Company including, but not limited to, policy
servicing claims handling, record keeping and
reporting functions, specified in this Agreement
shall survive and shall continue to be discharged
promptly by the Agent until all legal and/or regulatory
obligations of the Company under or in connection
with insurance business written pursuant to this
Agreement have terminated and all applicable
claims have been paid.
3. Upon termination of this Agreement and subject
to the provisions of Section Twenty-Three J., 4.,
below, Agent shall be the owner of all insurance
expirations as that term is used and understood
in the industry and all records and other documents
relating to the business of the Agent are the property
of the Agent and shall be left in the Agent’s
possession, and the Company’s record or
knowledge of names of insured and expiration
dates shall not be disclosed by the Company to any
agent, broker or other person unless required by
law, nur used by the Company for any purpose
which shall abridge the Agent’s rights of ownership,
use and control.
4. Should the agent fail to properly account for and
pay all premiums due to the Company for which the
Agent is liable, or should the Agent breach any other
material term or provision of this Agreement, the use
and control of all expirations including the night,
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title and interest in and to the records thereof
shall be vested in the Company.
SECTION TWENTY-F OUR
LEGAL ACTION
legal action involving the Company with respect to any
matters which are the subject of this Agreement.
SECTION TWENTY-FIVE
PRIVACY
personal or Privileged information about individuals
collected or received in connection with insurance
transactions. Since the disclosure of such information is
protected by law, Agent agrees that it will not redisclose such
information without the individual’s written authorization,
unless such disclosure is permitted by law.
SECTION TWENTY-SIX
NOTICES
To be validly given, all notices, requests, consents
and other communications by either party, arising out of this
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Agreement, must be in writing and mailed by first-class mail
postage-paid, to the last known address of the party.
SECTION TWENTY-SEVEN
CURRENCY
All amounts due to either party hereunder shall be
payable in United States currency.
SECTION TWENTY-EIGHT
ASSIGNMENT
This Agreement shall not inure to the benefit of any
successor-in-interest of the Agent nor may any interest under
this Agreement be assigned by the Agent without the prior
written consent of the Company.
SECTION TWENTY-NINE
HEADINGS
Headings or titles to the several Articles herein are for
identification purposes only and shall not be construed as
forming a part hereof.
SECTION THIRTY
MODIFICATION
This Agreement may only be revised or modified in a
writing that is accepted by both the Company and the Agent.
No other change, modification, addition or deletion to any
portion of this Agreement will be valid or binding upon either
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the Company or the Agent. Neither a representative of the
Company nor the Agent has authority to waive any of the
provisions of this Agreement or to modify or change any of
its terms and conditions, except as provided herein.
SECTION THIRTY ONE
EXECUTION
This Agreement shall not go into force until duly
executed on behalf of the Agent and the Company.
IN WITNESS WHEREOF , the parties have set their
hands this Ist day of April, 1985.
COLONIAL PENN INSURANCE COMPANY
BY: S/ Title: Sr. Vice President
ATTEST: S/Title: Vice President
AMERICAN OWNER OPERATOR
UNDERWRITERS, INC.
BY: S/ Title: President
ATTEST: s/ Title:
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ADDENDUM NUMBER ONE
This Addendum, by consent of the parties, becomes a
part of and is subject to the Agent Agreement between the
parties, effective April, 1985, and this Addendum is effective
April 1, 1985.
CROSS COMMISSIONS LIFE OF CROSS
ALLOWED AGENT INSURANCE BINDING
(New & Renewal) AUTHORITY
*57.5% Fuel Tax & 10,000 Any
Related Bonds One Bond
*2.5% Overwrite, payable by Agent to Submit Intermediaries, Inc.
Gross binding authority limits may be exceeded by
Agent only when Agent procures reinsurance acceptable to
Company, limiting Company’s exposure to the foreg
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