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Pemaquid Underwriting Brokerage, Inc., United Messenger Courier, and v. Certain Underwriters At Lloyd's Nspire Re Ltd.

September 29, 2011


On appeal from the Superior Court of New Jersey, Law Division, Middlesex County, Docket No. L-5723-06.

Per curiam.


Argued May 16, 2011

Before Judges A.A. Rodriguez, Grall and C.L. Miniman.

Plaintiffs Pemaquid Underwriting Brokerage, Inc. (Pemaquid), United Messenger Courier (United), and D&H Alternative Risk Solutions, Inc. (D&H), individually and in their capacities as assignees of Cunningham Lindsey Claims Management, Inc. ("CL"), appeal from summary judgments entered in this declaratory-judgment action in favor of defendants Certain Underwriters at Lloyd's (Underwriters), nSpire Re Ltd. (nSpire), J.P. Flanagan Corp. and Hub International (collectively Hub/Flanagan), Aon Corp. and Aon Risk Services (collectively Aon).*fn2 We now affirm.


Pemaquid is a broker, underwriter, and managing general agent for workers compensation policies of insurance (WC policies). It evaluates the risks of a potential insured employer, calculates the appropriate premium, collects the premium, performs premium audits, and issues the applicable WC policy to each insured. It also evaluates potential third-party subrogation claims associated with the policies it underwrites and issues. United performs the exact same function as Pemaquid, except its business is limited to issuing WC policies to transportation and courier companies. Pemaquid and United were companies under joint ownership. D&H is a third-party administrator of WC insurance claims, coordinating the claims- handling process for clients, directly in some states and through subcontractors in others. Pemaquid and United utilize the services of D&H to administer claims made against the policies they issued. To administer such claims, Pemaquid and United entrusted D&H with claims fund monies in a fiduciary capacity. Those monies came from premiums paid by insureds of Pemaquid and United. D&H was responsible for the investigation and payment of WC claims and expenses related thereto. D&H serviced claims in only two states.

CL is a national third-party administrator (TPA) of insurance claims. D&H subcontracted with CL respecting WC claims against insureds of Pemaquid and United in states other than the two states handled by D&H directly. Pemaquid and United were the intended third-party beneficiaries of the contract between D&H and CL. In 1996 Pemaquid, and in 1998 United, entered into three-party contracts with CL and Legion Insurance Company (Legion) whereby CL agreed that for a negotiated fee it would, inter alia, administer claims for Pemaquid and United. D&H was retained to provide oversight for these claims. More specifically, CL was to: record new claims; investigate their propriety; procure proper and required documentation before authorizing payment of claims and expenses; ensure that payments were not duplicative, were legally warranted, and were recorded by CL in accordance with industry standards and legal requirements; investigate the possibility of subrogation; timely administer payments; ensure timely availability of monies for payment of claims; monitor claims for continued activity; and timely respond to inquiries from plaintiffs.

Underwriters issued Policy No. 823/FD0000493 to Fairfax Financial Holdings, LTD (Fairfax), doing business in Canada, under which CL was insured as a wholly owned subsidiary of Fairfax (the assureds). The Underwriters policy covered the period from May 31, 2000, to May 31, 2003. The policy was subsequently extended to May 31, 2004.*fn3 Part B, Section 4, the Errors and Omissions (E&O) section of the policy, contained policy limits of $250 million over a $1 million self-insured retention. The policy did not give Underwriters the right or duty to defend, but merely stated that it would reimburse the assured for the cost of litigation and in fulfillment of its indemnity obligations.

The E&O policy section provided coverage for any loss resulting from a claim first made against the "assured" during the policy period for a wrongful act in the performance of, or failure to perform, professional services. A claim was considered to be first made on the date that the assured provided written notice to Underwriters in accordance with the notice provisions of the policy. Notice was only required at the point in time when the assured reasonably believed that the claim could exceed $1 million. Notice was to be given in writing as soon as practicable after the assureds became aware of the claim, but in no event later than sixty days after the end of the policy period, i.e., May 31, 2004. Awareness of a claim was further defined as the date that the assureds' general counsel or risk management department "first becomes aware of such Claim or of such fact, circumstance or situation" and one of five conditions existed, including receipt of "a written settlement demand which exceeds 50% of the applicable Retention" or a reasonable belief by general counsel or the risk management department that the loss will exceed 50% of the retention. Despite this language, the policy further provided that:

Inadvertent omission or oversight by the Assureds in advising the Lead Underwriter of any claim or subsequent developments, including the failure to list any Claim on a bordereau,*fn4 shall not, in any way, affect the liability of Underwriters, unless they have been actually and substantially prejudiced thereby. Such delay shall be promptly reported to the Lead Underwriter as soon as the omission or oversight is discovered by the Assureds.*fn5

CL carried a primary, or fill-in, insurance policy with American International Specialty Lines Insurance Company (AISLIC) for the $1 million retention. The AISLIC policy included a $25,000 deductible and obligated AISLIC to defend claims against CL.

On February 11, 2004, plaintiffs sued CL for breach of contract and negligent claims handling on a nationwide basis (the underlying action). Those claims were based on "Professional Services" and were covered by the Underwriters policy, as Underwriters admitted.*fn6 Prior to the institution of that suit, AISLIC in an internal memorandum from Jeffrey S. Desrosiers noted a pre-suit claim against CL by D&H with a demand for $600,000, a potential risk to the insured, and a loss exposure in excess of $1 million. As a result, he transferred the claim to the "complex department."

At the time of the underlying action, CL's TPA business had disbanded and its assets had been sold to a third party. CL was defended in the underlying action by AISLIC. AISLIC assigned the defense to the firm of Marshall, Dennehey, Warner, Coleman & Goggin (the Marshall firm). The parties attempted to settle the case in October 2004 when Pemaquid demanded $1 million (it had demanded $600,000 prior to suit), but CL only offered $250,000. The case did not settle at that time.

Underwriters learned of the underlying action during a claims review meeting on April 28, 2005, with representatives of its coverage counsel (Thomas Sheffield, Esquire, of Boundas, Skarzynski, Walsh and Black, LLC) (the Boundas firm), and Carine Evers, one of CL's few remaining representatives from CL'S Texas office. At this point, none of the reporting conditions within Section IV of the Underwriters policy had been triggered. Sheffield requested copies of written notification to it. On May 16, 2005, Sheffield sought further information from Evers, including information about D&H's claim. She relayed that she was trying to get her new office organized and documents unpacked. In a reply to a follow-up email the next month, Evers apologized and again advised that she was swamped with discovery and many, many other matters. Sheffield wrote that his requests were not urgent and that he could go to Texas and get the information.

On August 29, 2005, plaintiffs served the audit report of their expert, Robert Morrissey, in the underlying action. He had evaluated each and every claim handled by CL on behalf of plaintiffs nationwide amounting to over $42 million in payments. Morrissey determined the quantifiable liquidated damages, such as multiple duplicate payments of claims, continued payment of claims after they had been closed, payments under incorrect rate structures, and other liquidated damages. He found that 45% of the payments that CL had made on behalf of plaintiffs, or $19 million, could not be verified because there was no detailed payment information (i.e., hard copies of the bills) available. However, from the available data on documented payments, Morrissey found that CL had made erroneous payments amounting to a liquidated loss of $11,993,171. This figure was derived from $4,523,162 in duplicate payments and overpayments; $1,333,081 in excess payments to Genex; and $765,027 in indemnity-rate charges for medical-only files. All three categories totaled $6,621,270. That subtotal was 28% of the $23,424,246 in payments with reviewable documentation. Morrissey then applied the 28% error rate to the $19,185,358 of undocumented claims to arrive at an additional sum of $5,371,900 in damages.

Morrissey did not determine other damages that had some subjective element, such as the failure to pursue subrogation claims, simple negligence in adjusting claims, etc. This report put CL on notice that the damages exceeded the AISLIC policy and its self-insured retention under the Underwriters policy. It was only at this point that the magnitude of the claims became known.

A representative of CL further discussed the underlying action and policy issues with Underwriters in August 2005. On August 30 and September 7, 2005, Underwriters' counsel corresponded with CL's counsel regarding the Texas DETSIF action, described infra. Formal notice of plaintiffs' negligence claims was given to Underwriters' designated notice agents, Sedgwick, Detert, Moran & Arnold (the Sedgwick firm), on October 13, 2005, by Aon, CL and Fairfax's insurance broker. That notice was transmitted by the Sedgwick firm to Sheffield on October 19, 2005, but it was not until December 6 that Sheffield issued a reservation-of-rights letter.

On November 1, 2005, CL's general counsel, Daniel Schulz, sent an e-mail to CL's defense counsel, Lawrence Berg, and to ...

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