Opinion ID: 1207962
Heading Depth: 2
Heading Rank: 5

Heading: Frustration of Fundamental Purpose

Text: Finally, Appellants contend the BAP erred in finding the fundamental purpose of the Reinsurance Contract was not frustrated when the NDOI placed American Growers in supervision and statutory liquidation and ordered American Growers to stop writing insurance in November 2002. Appellants claim a year of unprecedented flooding and a 100-year drought of a severity not seen since the 1930s led to unforeseeable losses, and any duty Appellants had under the Reinsurance Contract was discharged when the NDOI prohibited American Growers from writing MPCI. Iowa courts have adopted the reasoning of Restatement (Second) of Contracts § 265, which states: Where, after a contract is made, a party's principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary. See Mel Frank Tool & Supply, Inc. v. Di-Chem Co., 580 N.W.2d 802, 806, 807 (Iowa 1998) (quoting Restatement (Second) of Contracts § 265). A party may not be discharged of its duty under a contract due to frustration of purpose unless: (1) the purpose that is frustrated [was] a principal purpose of that party in making the contract, (2) the frustration is so severe that it is not fairly to be regarded as within the risks that [the party] assumed under the contract, and (3) the non-occurrence of the frustrating event must have been a basic assumption on which the contract was made. Id. at 806-07 (quoting Restatement (Second) of Contracts § 265 cmt. a). The bankruptcy court did not address Appellants' frustration of fundamental purpose argument because it had already determined Appellants were not required to pay the premium deposits due in January 2003, 2004, and 2005. The BAP addressed Appellants' frustration argument and found Appellants were not discharged of their duties under the Reinsurance Contract. The BAP determined neither the losses sustained by American Growers in its MPCI business nor the NDOI's placement of American Growers in supervision and liquidation frustrated the fundamental purpose of the Reinsurance Contract because both of these events were reasonably foreseeable. Appellants charge the BAP erred in its analysis when the BAP failed sufficiently to consider the magnitude and effect of the unprecedented losses, and determined the losses and NDOI's action were foreseeable events. Appellants also argue if there was any fault on the part of American Growers, that fault should not be extended to AICI or AIC. As an initial matter, we note Appellants, in their brief, mischaracterize the BAP's holding. Appellants assert the BAP found the fundamental purpose of the [Reinsurance Contract] was frustrated; but concluded the frustration was a reasonably foreseeable event and caused by actions and/or inactions of American Growers. Actually, the BAP held [n]either [the losses sustained by American Growers nor the NDOI's placement of American Growers in supervision and liquidation] frustrated the purpose of the contract. In reaching this conclusion, the BAP reasoned Appellants anticipated potential crop losses when entering into the Reinsurance Contract, and American Growers could have avoided being placed in supervision by maintaining adequate capital levels. Reviewing de novo, we conclude Appellants were not discharged of their duty to pay the $15 million premium by the frustration of fundamental purpose defense. The Reinsurance Contract had two principal purposes: (1) to provide reinsurance coverage at the 140% to 150% layer, and (2) to gain FCIC approval of the IGF Transaction, which would permit Appellants to purchase IGF's MPCI policies, and write their own MPCI policies. We conclude the losses and NDOI's placement of American Growers in supervision and liquidation did not frustrate the first primary purpose of providing reinsurance, because the parties did not actually expect Appellants' losses to reach the 140% to 150% layer. At trial, Martin testified it was impossible, or certainly improbable American Growers's losses would ever reach the 140% to 150% layer. Even with the magnitude of losses experienced by American Growers, those losses never reached anywhere near the 140% to 150% layer, which would have triggered Granite Re's duty to provide reinsurance coverage. [3] We likewise conclude American Growers's losses and NDOI's placement of American Growers in supervision and liquidation did not frustrate the second primary purpose of the Reinsurance Contract. Both parties are sophisticated insurance companies in the business of calculating the probabilities of losses and setting the price for premiums accordingly. Estimating and assuming risks is their business. The premium due under the Reinsurance Contract was a fixed premium of $15 million. That fixed premium was not responsive to the amount of insurance Appellants wrote during the entire five-year term, nor the individual years. Thus, Appellants were required to pay a $15 million premium regardless of whether Appellants wrote billions of dollars in insurance or wrote no insurance. We also emphasize Appellants entered into a five-year contract for a maximum $40 million reinsurance risk with Granite Re that did not provide for annual renewals or for an early termination. Appellants easily could have provided in the contract for the contingencies Appellants now plead for judicial relief. As stated above, one of the conditions that must be met to discharge a party's duty under a contract is that the frustration was so severe that it is not fairly to be regarded as within the risks that [the party] assumed under the contract. Restatement (Second) of Contracts § 265 cmt. a. The losses experienced by American Growers and the resulting placement of American Growers in supervision and liquidation may fairly be regarded as risks Appellants assumed under the Reinsurance Contract. As to Appellants' argument that any fault of American Growers should not be extended to AICI and AIC, we disagree. First, the Reinsurance Contract does not distinguish between AICI and its various subsidiaries. By the unambiguous terms of the contract, the Company, meaning AICI and AICI's subsidiaries, agreed to pay Granite Re a $15 million premium. Second, this is a contract action, not tort, and the allocation of fault has no particular relevance.