Rescission by Default in Bermuda Not Binding

Comity Not Available

Rescission of an insurance policy is appropriate if the policy was acquired by a misrepresentation or concealment of material fact. However, when a plaintiff is damaged by a default judgment of rescission in a foreign jurisdiction without allowing the plaintiffs the right to participate, further litigation will arise to eliminate the foreign jurisdiction.

In Robert D. Ferguson, Kansa International Corporation, Ltd., Bankruptcy Estate, Milo Family Limited Partnership, Imipolex LLC, v. Travelers Indemnity Company and Executive Risk Specialty Insurance Company, Superior Court of New Jersey, Appellate Division, 2017 WL 957732, DOCKET NO. A-0028-15T1, (March 10, 2017) the Appellate Division was asked to reverse a decision that enforced a default judgment rendered by the  Supreme Court of Bermuda.

FACTS

Plaintiffs Robert D. Ferguson, Kansa International Corporation, Ltd., Milo Family Limited Partnership, Imipolex, LLC, and Omphalos, LLC, appealed the trial court’s dismissal of their complaint against defendants Travelers Indemnity Company and Executive Risk Specialty Insurance Company (ERSIC).

Plaintiffs are former shareholders of Lion Holding, Inc., an insurance holding company. Lion’s principal operating companies were Clarendon America Insurance Company and Clarendon National Insurance Company. In 1993, Clarendon engaged Bermuda-based Raydon Underwriting Management Company Limited (Raydon) as a managing general agent.

In 1994, Raydon encouraged Clarendon to write reinsurance policies in a program known as LMX. LMX’s reinsurance program involved direct insurance policies that provided personal accident and death benefits to individuals. Raydon’s assessment of the program was fatally flawed, generating significant losses to Clarendon as a reinsurer.

When plaintiffs sold Lion and its subsidiaries, including Clarendon, it indemnified the new owners for up to $50 million in losses related to the LMX program and reduced its sale price by $25 million. Plaintiffs became contractually subrogated to Clarendon, including claims against Raydon. As a result of the reinsurance problems generated by the LMX program, nearly $24 million was withheld from the sale of the Clarendon companies and deposited in escrow. By 2005, Raydon was defunct. Plaintiffs obtained a judgment in the amount of $92.137 million in Bermuda, where Raydon was incorporated and functioned, for damages as a result of reinsurance losses. The judgment obtained by default was uncollectible, as Raydon not only failed to participate in the proceedings, it no longer existed and had no known assets.

Raydon was required by New Jersey law to obtain an “errors and omissions” liability insurance policy.  That policy, purchased in July 1997 through Gulf Insurance Company, ensured Raydon for losses up to $15 million incurred as a result of errors and omissions in rendering professional services. Defendant Travelers Indemnity is the successor company to Gulf Insurance. Defendant ERSIC issued an excess indemnity policy providing coverage of $10 million to Raydon to the extent losses exceeded $25 million.

Neither Travelers nor ERSIC took any action after plaintiffs filed their lawsuit against Raydon in the Supreme Court of Bermuda in December 2005. However, two days before a September 28, 2011 court hearing on plaintiffs’ damage application following the default judgment against Raydon, Travelers informed plaintiffs “that it was refusing to cover [p]laintiffs’ losses under [the Gulf Policy].”  Travelers maintained that it regarded the Gulf Policy as void for breach of warranty and that Travelers, alternatively, “’hereby avoids/rescinds the policy.”’ …. Likewise, ERSIC disputes plaintiffs’ claim that the Bermuda judgment is a covered loss under its Excess Policy.  Travelers commenced a civil action against Raydon in the Bermuda courts, seeking a declaration that the Gulf Policy was obtained by fraud and thus void, and that Travelers therefore possessed no obligation to indemnify Raydon.

Travelers obtained a judgment from a Bermuda court voiding the Raydon errors and omissions policy.

In their first point, plaintiffs challenge the determination that the judgment Travelers obtained against Raydon in Bermuda is binding upon them. That determination was essential to the judge’s analysis of forum non conveniens.

It is undisputed that plaintiffs were not made a party to Travelers’ action in Bermuda. New Jersey courts’ recognition of judgments from foreign countries is not automatic, and requires analysis under the doctrine. Comity is a principle involved in the relationships of nations or states with each other, that, when exercised by a court, leads to the recognition and enforcement of the laws of a foreign state.

In seeking dismissal on the basis of comity, the moving party has the burden of proving: (1) there is a first-filed action in another state [or country]; (2) both cases involve the same parties, the same claims and the same legal issues; and (3) the plaintiff will have the opportunity for adequate relief in the prior jurisdiction.

Plaintiffs were not made a party to Travelers’ action in Bermuda seeking rescission of the insurance contract, although Travelers had known for years that plaintiffs were pursuing substantial claims against its insured. With regard to the second and third factors, that Raydon’s assessment of the quality of the reinsurance risks assumed by plaintiffs may have been grossly inaccurate does not in and of itself constitute a basis for Travelers’ rescission of its errors and omissions policy.

Potential misrepresentations by Raydon to plaintiffs are different, and reviewable by different standards, than potential misrepresentations to Travelers that would rise to the level that the insurance contract should be voided.  If Travelers’ judgment stands, plaintiffs’ judgment becomes completely uncollectible. Therefore, dismissal premised on comity, due to the mere existence of Travelers’ Bermuda judgment, is not warranted.

The issue to be decided in this case is whether Travelers and ERSIC should be compelled to provide coverage and satisfy the judgment. The question of coverage was obviously not litigated in the prior proceeding. Where defendants’ argument clearly fails is that plaintiffs were not a party to the prior proceeding and were certainly not in privity with a party to the prior proceeding.

The only factor the trial judge actually found to be persuasive was the factor concerning “practical problems that make trial of a case easy, expeditious and inexpensive including the enforceability of the ultimate judgment.” It explained that this factor weighed heavily in favor of having the case heard in Bermuda because “we have a judgment from Bermuda already which is enforceable in New Jersey that says that there is no insurance policy.” The judge thus found that plaintiff’s best option would be to “go to Bermuda and get that lifted if they can and litigate their case there where essentially their case here was the answer and counterclaims that they should have filed in Bermuda in the first place.”

Thus the trial court, by assuming that the judgment was binding on plaintiffs because of a mistaken application of the concepts defining privity and of fundamental principles of due process, erred in its application of the doctrine of forum non conveniens. By assuming that the judgement was “enforceable,” his analysis of the factors was fatally flawed.

The Clarendon companies were New Jersey domiciled insurance companies, and compelled their general manager to obtain and maintain errors and omissions coverage pursuant to New Jersey law. Travelers is a Connecticut corporation licensed to do business in New Jersey. ERSIC, a member of the Chubb Insurance Group, is domiciled in New Jersey. The private interest factors thus tip the scale slightly to plaintiffs, because the entities which plaintiff stands in the interest of are New Jersey corporations. The witnesses are scattered around the country, and in Bermuda. Realistically, in weighing the private interest factors, whatever the jurisdiction, it will be relatively difficult to produce the necessary proofs for resolution of the dispute.

The public interest factors are tipped slightly in the balance of defendants as this matter will consume substantial judicial resources. Nonetheless, there simply is no basis for concluding that the choice of New Jersey as the forum for resolution is demonstrably inappropriate.

ZALMA OPINION

Although The insurers had sufficient evidence to convince a Bermuda Court that it could rescind the policy issued to Raydon – the defunct and penniless MGA – that decision could not keep the parties claiming the were entitled to collect their judgment against Raydon from the insurers. The insurers, being New Jersey citizens should have brought their rescission case against the plaintiffs and the default of Raydon.  Comity may have been required but the right of New Jersey citizens overcame the right to give credit to the Bermuda judgment and should, as a result, also give a right to retry the default judgment the plaintiffs obtained against Raydon.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

This article and all of the blog posts on this site summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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