Second Circuit Determines Reinsurer Did Not Breach Broker Services Agreement

Royal Palm Ins. Co. v. Guy Carpenter & Co. Inc.  (2nd Cir., May 27, 2011)

This reinsurance litigation arose from the alleged breach of Broker Services Agreement (“BSA”) executed by the parties.  Defendant-appellant, Guy Carpenter, appealed from the district court's judgment in favor of plaintiff-appellee Royal Palm Insurance Company ("Royal Palm") in the amount of $4,243,581. Specifically, in April 2006, Royal Palm started its insurance business in Florida, and engaged Guy Carpenter to act as its broker pursuant to a "Reinsurance Intermediary Authorization" (the "RIA"). 

Thereafter, in November 2006, Royal Palm and Guy Carpenter entered into a Broker Services Agreement retroactive to June 1, 2006, whereby Royal Palm recognized Guy Carpenter as its primary intermediary in the treaty reinsurance market. The BSA provided for a three-year term commencing "as of June 1, 2006.  The BSA further provided:

We will provide services outlined in Appendix B attached hereto for as long as we continue as your reinsurance intermediary. Should you choose to discontinue our relationship, Guy Carpenter's obligation to provide such services shall terminate. . . . If you request additional services outside the scope of services set forth in Appendix B . . ., such additional services may result in extra charges.

Attached as Appendix A to the BSA was a retention schedule that provided for Guy Carpenter to retain 50% of the brokerage commissions for the first year and 60% for the second and third years with the balance to be remitted to Royal Palm. On February 15, 2008, Royal Palm advised Guy Carpenter that it had elected to award its reinsurance business to another broker, and that it was discontinuing its relationship with Guy Carpenter. Thereafter, Royal Palm commenced the subject diversity action for breach of contract and related claims.  The district court issued a decision relying principally on a Florida statute that provided:

A transaction between a reinsurance intermediary broker and the insurer it represents . . . may be entered into only pursuant to a written authorization . . . [that] must provide, at a minimum, that . . . [t]he insurer may terminate the reinsurance intermediary broker's authority at any time.

The district court concluded that this provision permitted Royal Palm to terminate its relationship with Guy Carpenter at any time. The district court rejected Guy Carpenter's argument that, even though the Florida statute gave Royal Palm the statutory right to terminate, Royal Palm could still be liable contractually for terminating the BSA before the expiration of its three-year term. On appeal the parties disputed whether the Florida statute barred a party from seeking contractual damages where an agreement does not provide, as Florida law requires, a right to terminate the agreement at will. The Second Circuit, however, noted that the underpinning of Guy Carpenter's claim was premised on the assertion that Royal Palm breached the BSA by terminating the relationship before the expiration of the three-year term. Thus, the applicability of the Florida statute need not be decided.

In holding that Royal Palm did not breach the BSA, the court highlighted the fact that under §3 of the BSA Royal Palm had the right — contractually — to discontinue the relationship at any time.  Secondly, although § 1 of the BSA provided for a three-year term, the two provisions were not inconsistent. Together, they provided for an outside limit of three years, subject to Royal Palm's right to terminate early, before the end of the three-year term. The Second Circuit noted that Guy Carpenter's construction of these provisions would render the language in §3 meaningless, which is disfavored by the courts. Third, the court noted that the BSA made no provision for any modification of the retention schedule in the event of early termination. Given this silence, the court determined that the plain reading of the BSA was that the retention schedule in Appendix A continued to apply for the duration of the relationship. In contrast, §3 specifically addresses the scope of Guy Carpenter's obligations, as set forth in Appendix B, and how those obligations would change in the event of termination. Lastly, Guy Carpenter argued that it had already earned $7 million in commissions for the first year by June 1, 2006, and that it agreed to remit 50% only because it was bargaining for a three-year agreement. The court noted that while that may be so, the fact is that the BSA, as executed, made no provision for modification of Appendix A in the event of early termination. Accordingly, based on the plain wording of the BSA and lack of ambiguity therein, the court held, as a matter of law, that Royal Palm did not breach its contractual obligations.

For a copy of the decision click here

Paul Steck and Jeffrey Kingsley

Add a Comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.