Opinion ID: 697655
Heading Depth: 2
Heading Rank: 2

Heading: Risks Obtained Directly from Primary Insurers

Text: 110 The district court's fraud determination rests also on findings of misrepresentations in the 1979 Placing Information concerning Graham Watson's intent to obtain reinsurance directly from selected primary insurers without intermediaries. The court found that (1) NERCO represented that it would produce 'non-system business' from primary, risk-bearing, insurance companies directly; (2) that in fact, it produced most of such business from [Managing General Agents] through intermediaries and from intermediaries themselves, and yet never disclosed these material matters to the Plaintiff reinsurers as it was required to do; (3) that plaintiffs had put their trust and confidence in, and entered into the SANS Treaties in reliance upon, the foregoing representations (as well as upon the supposed representation of individual risk certificate underwriting, rejected above); (4) that the inducing representations to produce and underwrite reinsurance from selected primary sources, and by a direct approach rather than through intermediaries, were knowingly false and were not kept by NERCO nor did NERCO intend to keep such promises. 111 Two complementary theories emerge from these findings. First, that defendants never intended, when in 1979 they wrote and circulated the Placing Information containing the challenged representations, to live up to them. Second, that when later, during the course of the Treaties, it became apparent that direct non-system business was unavailable, and defendants decided to seek non-system business through intermediaries, they did not disclose these material matters, as [they were] required to do.
112 The first theory amounts to fraud in the inducement. While the misrepresentations were of intentions as to a course of action in the future, the deliberate misstatement of present intentions can constitute fraud. 113 Present intention as to a future act is a fact. It is susceptible of proof. When such intention does not exist, ... it is a misrepresentation of a material fact.... The statement of fact as to present intention of the defendant, being susceptible of actual knowledge and being a fact alleged to have been false, may be made the foundation of an action for deceit. 114 Feldman v. Witmark, 254 Mass. 480, 481-82, 150 N.E. 329 (1926), quoted in Barrett Assoc., Inc. v. Aronson, 346 Mass. 150, 190 N.E.2d 867, 868 (1963). It is true the Placing Information was never incorporated into the contracts (consisting of the slips and Treaty Wordings). But defendants prepared and circulated the Placing Information specifically to induce persons and entities like the plaintiffs to enter into the Treaties. Knowingly false material statements therein inducing reliance would be actionable fraud. 30 115 Defendants respond that the representation in the Placing Information of an intention to develop a close working relationship with selected primary companies and related statements were accurate reflections of their intentions when made. In support of this, they point to evidence of their efforts after the Treaties were entered into to develop a working relationship with primary companies. They also argue that at all times they did have an ongoing direct relationship with First State. Utilizing brokers and MGAs to provide NERCO with reinsurance business was said to have occurred only after it was apparent that these earlier, sincere efforts had failed. 116 But the court was entitled to find otherwise, as it did. Anderson, 470 U.S. at 573-74, 105 S.Ct. at 1511-12 (if evidence is subject to more than one reasonable interpretation, it cannot be clearly erroneous). Before the Placing Information was written, there was evidence that NERCO commonly used intermediaries. Statements by defendants' witnesses at trial and in certain of defendants' planning documents issued prior to the SANS Treaties suggest an intention to continue to do so in the Graham Watson operation. And defendants' efforts, after the Treaties were in place, to secure non-brokered business could be found to be predictably ineffectual, further suggesting a lack of intention to secure the direct business described in the Placing Information. The Placing Information representations, it might be inferred, more reflected a calculated effort to entice plaintiffs to enter into the Treaties than honestly to project defendants' real business plans. While susceptible of another construction, the record adequately supports the court's finding that representations in the Placing Information as to Graham Watson's direct writing intentions were knowingly misstated. 117 Defendants argue that even though NERCO may have used intermediaries, it nonetheless complied with its representation that it would develop a close working relationship with primary companies. Defendants point out that the reinsurance it wrote with the aid of intermediaries came, for the most part, from highly regarded primary insurance companies. They also argue that the intermediaries enabled them to develop relationships with these companies that might, in time, become direct. But the court, as it did, was entitled to read the Placing Information as inconsistent with the securing of business through brokers and MGAs. The Placing Information says, for example, that [f]aculative reinsurance emanating from reinsurance intermediaries will continue to be written separately through NERFAC. While defendants seek to place a different meaning on this, the court was entitled to read this as saying that business through intermediaries would not be handled by Graham Watson. And there were other statements supporting the same impression. 118 The court was entitled to conclude that there were significant differences between a direct relationship between NERCO and selected primary insurers and a relationship by brokers and MGAs. These differences could affect the quality of the business, at least in some people's minds, and might have caused some plaintiffs, had they been aware of defendants' actual plans, to reevaluate their decision to participate in the SANS Treaties. In the case of business obtained through MGAs, for instance, the MGA underwrote the risk for the primary insurer (as opposed to the underwriting being performed by the primary insurer itself); communications, premiums, and reporting and accounting documents were routed through the broker. The MGA was not at risk should an actual loss arise. Bailey, a lead underwriter, strenuously objected to business underwritten by intermediaries, regarding it as of lesser quality. The court was entitled to believe that the non-system business provided through Baccala and Shoop and others was materially different from the business represented in the Placing Information. We, therefore, affirm the district court's finding that material and knowing misrepresentations were made in the Placing Information in 1979.
119 The court also found that NERCO never disclosed these material matters to the Plaintiff reinsurers as it was required to do. This appears to be a finding that, while the Treaties were in effect, NERCO violated its good faith duty to disclose to plaintiffs matters coming to its attention material to the risk--most notably its growing use of intermediaries for non-system business and its abandonment of the plans set out in the Placing Information to establish direct relationships with primary insurers. See Unigard, 4 F.3d at 1069. This trend, however, was not totally unannounced by defendants. In the 1981 Anniversary Information, defendants revealed that, although the preponderance of that year's business was system business from First State, a relatively small proportion of the non-system business had been written on an excess of loss basis emanating from Baccala and Shoop Insurance Services. At this time, Bailey was already well aware that NERCO was receiving the Baccala and Shoop business. He objected to it, but finally went along for that year. Because Bailey was a lead underwriter, this conceivably (although we do not decide) put all the plaintiffs for whom he was acting on notice that more such business could be anticipated in the following year, yet neither he nor anyone else took the simple precaution of inserting a prohibition against this type of business in the renewal slips for 1981 and following years. 120 The district court dismissed the 1981 Anniversary Information disclosure in the following finding: 121 Although the Plaintiff reinsurers were aware that Baccala and Shoop, an MGA, had ceded to the SANS Treaties approximately five percent of the total business during the first year, 1980, they were never apprised that, during the ensuing three years, Baccala and Shoop would cede the majority of non-system business and that other MGAs and intermediaries would cede, in conjunction with Baccala and Shoop, most of the non-system business to the SANS Treaties. 122 This finding does not explain, however, why Bailey and others, once on notice that business was being accepted that was contrary to representations in the Placing Information, did not continue to protest and try to head off the acceptance of further such business. Moreover, the court made no reference to other evidence that certain of the plaintiffs may have learned a considerable amount about the nature and source of defendant's business during the life of the SANS Treaties. Such evidence is relevant, under discovery principles, to the various statutes of limitations, including the three year fraud statute, infra. It may also be substantively relevant to plaintiffs' fraud claims and the recovery rights of individual plaintiffs. Although we have sustained the district court's finding that defendants deliberately misstated their business plans in 1979, if certain plaintiffs renewed their annual participations in the SANS Treaties even after becoming aware that defendants were using intermediaries and lacked direct business, this could affect their right to recover in fraud for subsequent Treaty business, and might conceivably cast doubt as to their right to recover at all, on some theory of acquiescence or waiver. These matters require the making of further findings as to what information became known to whom, and when, and determination of the legal effect of any such knowledge and/or notice. 123 Therefore, although we affirm the district court's finding that knowing misrepresentations were made in the Placing Information, we direct that reconsideration be given on remand to the legal significance of the information revealed in the 1981 Anniversary Information, and any other information the court finds was subsequently received by the plaintiffs, or some of them, as it relates to plaintiffs' rights to abandon their reinsurance obligations under the SANS Treaties, and recover damages for losses already paid. In considering such matters, the district court should take into account, among other things, defendants' duty of utmost good faith, the identity of those plaintiffs affected by the particular information, the legal effect on plaintiffs of information possessed by Bailey because of his special role as a lead underwriter, and the fact that the Treaties were renewable annually. The district court did not discuss or make findings on these matters. So as to leave a clear field on remand, we vacate (without, however, necessarily disapproving) and leave for further evaluation by the district court, the court's finding that NERCO never disclosed these material matters to the plaintiff reinsurers, as it was required to do. However, we affirm the district court's finding that the defendants' made material misrepresentations in the Placing Information regarding plans to obtain business directly from primary insurers and related matters. 124 On remand it will also be necessary for the court to consider exactly which of the SANS Treaties were infected by the misrepresentations made in the Placing Information. This question may be affected not only by which information came to what plaintiffs during the term of the SANS Treaties, but also by the fact that the business produced by First State was obtained directly, without the involvement of any intermediary. No part of that business, therefore, was seemingly affected by these misrepresentations although we do not foreclose the issue. In addition, because the district court made no subsidiary findings concerning the various arrangements under which Graham Watson assumed non-system business, we cannot tell whether all of that business involved the use of brokers and/or intermediaries, or whether some portion of it was obtained directly from primary insurers. On remand, the district court should take into account all such issues in determining--assuming the statutes of limitations and other matters do not stand in the way of recovery--what relief to provide.