Court Opinion

ID: 1019903
Source: CourtListenerOpinion
Date Created: 2013-07-04 22:42:47.386377+00
Date Added: 2024-06-11T15:38:21.961526
License: Public Domain

UNPUBLISHED

                    UNITED STATES COURT OF APPEALS
                        FOR THE FOURTH CIRCUIT

                             No. 05-2206

KANAWHA INSURANCE COMPANY,

                                              Plaintiff - Appellant,

           versus

EMPLOYERS REINSURANCE CORPORATION,

                                              Defendant - Appellee.

Appeal from the United States District Court for the District of
South Carolina, at Rock Hill. Margaret B. Seymour, District Judge.
(CA-03-2765-0)

Argued:   May 23, 2006                      Decided:   July 12, 2006

Before WILKINS, Chief Judge, DUNCAN, Circuit Judge, and Joseph R.
GOODWIN, United States District Judge for the Southern District of
West Virginia, sitting by designation.

Affirmed by unpublished per curiam opinion.

ARGUED: Howard Jonathan Bashman, Willow Grove, Pennsylvania, for
Appellant.   Jason A. Dunn, STINSON, MORRISON & HECKER, L.L.P.,
Kansas City, Missouri, for Appellee.     ON BRIEF: Kevin K. Bell,
ROBINSON, MCFADDEN & MOORE, P.C., Columbia, South Carolina, for
Appellant. Pope D. Johnson, III, MCCUTCHEN, BLANTON, JOHNSON &
BARNETTE, L.L.P., Columbia, South Carolina; Bruce E. Baty, STINSON,
MORRISON & HECKER, L.L.P., Kansas City, Missouri, for Appellee.
Unpublished opinions are not binding precedent in this circuit.
See Local Rule 36(c).

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PER CURIAM:

      Appellant Kanawha Insurance Company (“Kanawha”), an insurance

company based in South Carolina, brought this diversity action

against   Appellee     Employers    Reinsurance     Corporation       (“ERC”),   a

reinsurance1 company based in Kansas, raising claims for (1) breach

of   contract,   (2)     constructive    fraud,     (3)    breach   of    contract

accompanied by a fraudulent act, and (4) mutual mistake, unjust

enrichment and rescission. The parties filed competing motions for

summary judgment, and the district court entered judgment in favor

of ERC on all of Kanawha’s claims.           Kanawha appeals that portion of

the district court’s ruling that addressed its breach of contract

claim.    We affirm the district court’s order.

                                        I.

      Kanawha    began    issuing   long     term   care    (“LTC”)      insurance

policies to consumers in 1994.           LTC policies provide benefits to

cover the cost of a nursing home stay or home health care in the

      1
      “Reinsurance” means the ceding by one insurance company to
another of all or a portion of its risks for a stipulated portion
of the premium, in which the liability of the reinsurer is solely
to the reinsured, which is the ceding company, and in which
contract the ceding company retains all contact with the original
insured, and handles all matters prior to and subsequent to loss.
The true reinsurer is merely an insurance company or underwriter
which deals only with other insurance companies as its
policyholders.

Carolina Nat’l Ins. Co. v. S.C. Tax Comm’n, 182 S.E.2d 878, 880
(S.C. 1971) (quoting 13 John Alan Appleman, Insurance Law and
Practice, § 7681).

                                        3
event the policyholder requires such services. Kanawha charged its

LTC policyholders level premiums.    In other words, the premiums

remain constant throughout the life of the policy.

     The premiums paid in the early years of a LTC policy with

level premiums are generally more than sufficient to cover any

expected benefit pay outs.   However, as the policy ages, the level

premium becomes increasingly insufficient to cover the expected

benefit pay outs, which increase over time. South Carolina adopted

regulations to address this insufficiency that require the insurer

to establish active life reserves (“ALR”), also known as “contract

reserves,” that are funded with the premium over-sufficiencies in

the early years of a level premium policy.   See S.C. Code Regs. 69-

7 § IV.     The insurer can then use the ALR to cover the premium

insufficiency in the later years of the policy.

     In 1994, Kanawha entered into two reinsurance treaties2 with

ERC3 to reinsure a portion of the risk Kanawha assumed under the

LTC policies.   Under the “Quota Share Treaty,” ERC reinsured 7.5%

of the risk on each LTC policy for 7.5% of the premium Kanawha

received.   The treaty required ERC to maintain ALR for the risk it

assumed, thereby shifting responsibility for that portion of the

     2
      A contract for reinsurance is commonly referred to as a
“treaty.”
     3
      Kanawha also entered into two identical reinsurance treaties
with Cologne Life Reinsurance Company, neither of which are at
issue in this appeal.

                                 4
state mandated ALR from Kanawha to ERC.       The treaty allowed either

party to terminate the agreement as to new business and then allow

the ALR to expire as the corresponding in-force policies expired.

The Quota Share Treaty also provided that Kanawha could cancel or

re-capture the in-force business and, in such event, obligated ERC

to return the corresponding ALR to Kanawha.

     Under the second agreement, the “Excess Treaty,” ERC agreed to

reinsure 42.5% of the LTC risk for any benefits paid for greater

than two years in return for 18% of the premiums Kanawha received.

The Excess Treaty specifically disclaimed ERC’s obligation to

maintain ALR for its risk under the treaty.           The Excess Treaty

provided that either party could cancel the treaty upon notice and,

in   such   event,   only   obligated   ERC   to   return   any   unearned

reinsurance premiums. The Excess Treaty did not require ERC to pay

any money upon termination to fund or otherwise compensate Kanawha

for ALR.

     It is undisputed that the two treaties were negotiated at

arm’s length by the parties and reviewed by their counsel prior to

execution. Kanawha readily admits that it signed the Excess Treaty

under the assumption that “ERC would agree to make the Excess

treaty guaranteed renewable.”      J.A. 34a.       Kanawha believed that

such an agreement would negate the risk it faced because of the ALR

disclaimer.    As the treaty was written, ERC could unilaterally

terminate the agreement without returning any monies to Kanawha to

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fund the portion of the state-mandated ALR that corresponded to the

risk ERC assumed under the treaty.

     Between 1994 and 2000, Kanawha asked ERC to modify the Excess

Treaty in relation to the ALR disclaimer on numerous occasions.

ERC never agreed to any such modification.            In 2000, ERC cancelled

the Excess Treaty and returned the unearned insurance premiums to

Kanawha, as required by the Excess Treaty.            Kanawha demanded that

ERC also transfer the ALR to it.            ERC had established no ALR and

refused to transfer any monies to Kanawha beyond the unearned

reinsurance premiums.       According to Kanawha, this allowed ERC to

retain $2,000,000 in premiums paid by Kanawha that ERC should have

used to create ALR for its portion of the risk under the Excess

Treaty.

                                   II.

     In its motion for partial summary judgment and in response to

ERC’s motion for summary judgment, Kanawha argued that ERC breached

the Excess Treaty by failing to maintain ALR and return such monies

to Kanawha when ERC cancelled the treaty.              This argument flowed

from Kanawha’s contention that the ALR disclaimer in the Excess

Treaty was unenforceable because it violated South Carolina law,

primarily S.C. Code Regs. 69-7 § V.4           Kanawha argued that section

     4
      This regulation provides:

     Increases   to,   or    credits       against   reserves   carried,

                                       6
V required reinsurers to establish ALR when reinsuring risk on LTC

policies funded with level premiums.

     The district court rejected this argument.                       It held that

section   V   “cautions   [a]   ceding       insurer      that    with    respect    to

calculating credit for insurance on a financial statement, see S.C.

Code Regs. 69-53, minimum reserve standards must be protected.”

J.A. 1363a.    The district court further held that it “discern[ed]

nothing in Regulation 69-7 that would restrict a [sic] ERC and

Kanawha from negotiating responsibility for the ALR obligation

arising from LTC policies sold at a level premium.”                      Id.   On that

basis, the district court held that the ALR disclaimer in the

“Excess Treaty is not violative of South Carolina law or public

policy” and, therefore, was enforceable.               Id.       Because ERC had no

obligation to do so, the district court concluded that ERC did not

breach the Excess Treaty by not establishing ALR or returning

monies to Kanawha at termination to fund ALR.

                                    III.

     On   appeal,   Kanawha     raises       the   same   arguments       as   in   the

district court, which comprehensively and correctly considered and

     arising because of reinsurance assumed or reinsurance
     ceded, must be determined in a manner consistent with
     the[] minimum reserve standards [of S.C. Code Regs 69-7]
     and with all applicable provisions of the reinsurance
     contracts which affect the insurer's liabilities.

S.C. Code Regs. 69-7 § V.

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rejected   them.   Upon   review       of   the   parties’   briefs   and

consideration of their oral arguments, it is hereby ordered that

the order under review is affirmed on the basis of the well-

reasoned opinion of the district court.

                                                                AFFIRMED

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