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PCH Mutual Insurance Company, Inc. v. Casualty & Surety

November 15, 2010

PCH MUTUAL INSURANCE COMPANY, INC., PLAINTIFF,
v.
CASUALTY & SURETY, INC., DEFENDANT.



The opinion of the court was delivered by: Colleen Kollar-kotelly United States District Judge

FINDINGS OF FACT AND CONCLUSIONS OF LAW

This action arises out of an alleged breach of an Administrative Services Agreement (the "Agreement") entered into by and between Plaintiff PCH Mutual Insurance Company, Inc. ("PCH") and Defendant Casualty & Surety, Inc. ("CSI"). After removing this action from the Superior Court for the District of Columbia, CSI filed a [8] Motion to Compel Arbitration and Stay Proceedings. Finding that a genuine issue was presented as to whether the parties' Agreement provides for mandatory arbitration of disputes arising out of the Agreement, this Court conducted a one-day bench trial on the threshold question of arbitrability. Based on the evidence adduced at trial, the Court concludes that CSI has failed to meet its burden of establishing the existence of a mandatory agreement to arbitrate. Accordingly, the Court shall DENY CSI's [8] Motion to Compel Arbitration and Stay Proceedings. The Court's Findings of Fact and Conclusions of Law are set forth below.

I. PROCEDURAL BACKGROUND

On January 22, 2008, PCH filed a four-count complaint against CSI in the Superior Court for the District of Columbia (Case No. 08-00499). See Compl., Docket No. [1-4]. On February 19, 2008, CSI removed the case to this Court, and, on March 7, 2008, filed a Motion to Compel Arbitration and Stay Proceedings. See Def.'s Not. of Removal, Docket No. [1]; Def.'s Mot. to Compel Arbitration and Stay Proceedings, Docket No. [8]. PCH opposed the motion, CSI filed a reply, and PCH filed a sur-reply. See Pl.'s Mem. in Opp'n to Mot. to Compel Arbitration and Stay Proceedings, Docket No. [15]; Def.'s Reply Br. to Pl.'s Opp'n to Def.'s Mot. to Compel Arbitration and Stay Proceedings, Docket No. [19];Pl.'s Sur-Reply in Opp'n to Def.'s Mot. to Compel Arbitration and Stay Proceedings, Docket No. [22-1].

On August 5, 2008, after conducting a searching review of the parties' respective submissions, this Court concluded that a genuine issue existed as to whether the Agreement provides for mandatory arbitration of disputes. See PCH Mut. Ins. Co., Inc. v. Cas. & Sur., Inc., 569 F. Supp. 2d 67, 69 (D.D.C. 2008). Because the making of an agreement for arbitration was "in issue," the Court, consistent with the requirements of the Federal Arbitration Act, determined that further limited proceedings were necessary to determine the arbitrability of the parties' dispute. Id. at 77; see also 9 U.S.C. § 4 ("If the making of the arbitration agreement . . . be in issue, the court shall proceed summarily to the trial thereof."). Accordingly, this Court conducted a one-day bench trial on the threshold question of arbitrability. See Min. Order (Feb. 3, 2009); Tr. of Bench Trial (Feb. 2, 2009) ("Tr."), Docket No. [61].

During the course of the trial, the Court heard live testimony from three witnesses and received documentary evidence presented by the parties. Thereafter, CSI and PCH each submitted proposed Findings of Fact and Conclusions of Law for the Court's consideration. See Pl.'s Proposed Findings of Fact and Conclusions of Law, Docket No. [53]; Def.'s Proposed Findings of Fact and Conclusions of Law in Respect of Limited Trial on Arbitrability, Docket No. [54]. CSI also filed a rebuttal to PCH's proposed Findings of Fact and Conclusions of Law. See Def.'s Resp. to Pl.'s Proposed Findings of Fact and Conclusions of Law, Docket No. [58]. The matter is now fully briefed and ripe for adjudication.

II. FINDINGS OF FACT*fn1

After listening to the testimony presented at trial, personally observing the demeanor and credibility of the witnesses,*fn2 reviewing the evidentiary record, and making all reasonable inferences to be drawn therefrom in accordance with the Federal Rules of Evidence, the Court finds that the following facts have been established by a preponderance of the evidence:

A. The Parties

1. Plaintiff PCH is a "risk retention group" domiciled in the District of Columbia providing insurance coverage to assisted living facilities in Pennsylvania and neighboring states. Pl.'s Ex. 4 (Agreement) at 1; Def.'s Ex. I (Dec. 10, 2003 Ltr. from T. Winch to D. Condon) at CSI49.

2. Broadly speaking, a "risk retention group" is a corporation or limited liability company designed to assume and spread the liability exposure of its group members -- i.e., businesses that are engaged in similar or related fields (here, assisted living services). See 15 U.S.C. § 3901(a)(4). Risk retention groups provide a vehicle for businesses that cannot readily obtain insurance on favorable terms to essentially "self-insure their own risk" and obtain access to reinsurance markets. Tr. at 18:15-18:25 (Condon Test.).

3. Defendant CSI is an insurance wholesale broker and insurance program manager based in Alabama and operating in approximately thirty-nine states across the country. Tr. at 89:8-89:15 (Godfrey Test.); Pl.'s Ex. 4 (Agreement) at 1.

B. Early Discussions Surrounding The Formation Of PCH

4. The events surrounding the formation of PCH were the subject of a fair amount of attention at trial, in part because PCH was not actually formed until on or about April 29, 2004, when its Articles of Incorporation were filed with the D.C. Department of Insurance and Securities Regulation, meaning that PCH was not formed until shortly after the agreement containing the "arbitration clause" now at issue was negotiated and executed. Tr. at 39:14-39:25 (Condon Test.); Pl.'s Ex. 4 (Agreement) at 1; Pl.'s Ex. 5 (Articles of Incorporation) at CSI45.

5. Several parties, corporate and individual, had a hand in the formation of PCH, but its origins are found in preliminary discussions between James Godfrey ("Godfrey"), CSI's President and founder, and Brian Barrick ("Barrick"), a retail insurance agent operating his Personal Care & Assisted Living Insurance Center ("PCALIC") out of Pennsylvania. Tr. at 17:11-17:13, 69:4-69:9 (Condon Test.); Tr. at 88:12-89:5 (Godfrey Test.); Pl.'s Ex. 7 (Feb. 20, 2004 E-mail from B. Barrick to D. Condon) at PCH000005.

6. Specifically, sometime in 2002 or 2003, Godfrey and Barrick discussed the difficulties that an assisted living facility association familiar to Barrick was having in obtaining satisfactory insurance coverage. Tr. at 90:17-90:24 (Godfrey Test.).

C. Condon Enters The Scene And Animates The Formation Process

7. As a outgrowth of their discussion, Godfrey arranged for Barrick to speak with David Condon ("Condon"), an insurance wholesale broker working for CSI who, among other things, assists in the creation of insurance programs. Tr. at 15:18-16:2, 17:23-18:6 (Condon Test.); Tr. at 89:18-89:22, 90:21-91:3 (Godfrey Test.).

8. At some point in 2003, Condon and Barrick discussed the possibility of creating an insurance program to better meet the needs of assisted living facilities. Tr. at 17:23-18:6 (Condon Test.). Condon, who had some prior experience with risk retention groups, was first to propose forming a risk retention group as a possible insurance coverage alternative for assisted living facilities. Tr. at 17:19-17:22, 18:7-18:12 (Condon Test.).

9. At some unidentified point early on in this process, Barrick approached Matt Harvey ("Harvey"), the President of an association of assisted living facilities in Pennsylvania, to determine whether the association's membership would support the formation of a risk retention group. Tr. at 72:7-73:1 (Condon Test.).

10. As discussions progressed, Condon assumed an important -- but by no means exclusive -- role in coordinating the formation of PCH as a risk retention group for assisted living facilities. Indeed, Condon was the self-described "motivating force" in the formation of PCH. Tr. at 66:3-66:14 (Condon Test.).

D. Condon Brings Risk Services Into The Formation Process

11. Condon assumed responsibility for establishing relationships with various service providers for the future PCH -- e.g., vendors, reinsurers, and third-party administrators. Tr. at 66:3-66:11 (Condon Test.). Most notably, in or about late 2003, Condon reached out to non- party Risk Services, LLC ("Risk Services"), inviting Risk Services to become involved in the formation of PCH. Tr. at 30:13-30:25 (Condon Test.).

12. Condon had previously worked with Risk Services -- a company that, among other things, provides services to risk retention groups across the United States and in offshore domiciles -- in setting up an unrelated risk retention group for intermodal trucking companies in California. Tr. at 20:9-20:11, 30:13-30:25 (Condon Test.).

13. On or about November 4, 2003, Condon wrote Mike Rogers, President of Risk Services, enclosing what he described as "a rather complete proposal" for the formation of PCH. Pl.'s Ex. 2 (Nov. 4, 2003 Ltr. from D. Condon to M. Rogers) at CSI47; see also Tr. at 35:23-37:4 (Condon Test.).

14. On or about December 10, 2003, Risk Services responded to Condon's letter with one of its own, describing, among other things, Risk Services' anticipated role in connection with the formation of PCH. Def.'s Ex. I (Dec. 10, 2003 Ltr. from T. Winch to D. Condon); see also Tr. at 37:12-38:1 (Condon Test.).

15. That role, at least as envisioned by Risk Services, would include serving as PCH's Captive Insurance Company Manager, consulting with PCH to develop an appropriate organizational structure, facilitating regulatory approval of the risk retention group, acting as a "liaison" between PCH and its service providers in preparing the documents required for regulatory approval, working with PCH to ensure that it had the requisite capitalization, and, subsequent to formation, overseeing internal financial management and regulatory compliance. Def.'s Ex. I (Dec. 10, 2003 Ltr. from T. Winch to D. Condon) at CSI55; Tr. at 29:2-29:14 (Condon Test.); Tr. at 99:19-99:24 (Harkavy Test.).

16. In exchange for these services, Risk Services anticipated receiving some amount of compensation, most likely a percentage of the gross earned premium payments received by or on behalf of PCH for liability insurance coverage. Def.'s Ex. I (Dec. 10, 2003 Ltr. from T. Winch to D. Condon) at CSI53. The precise form the compensation Risk Services expected is immaterial; all that matters is that Risk Services, like all the parties involved, had a financial interest in facilitating the formation of PCH.

E. The Agreement Between PCH And CSI

17. From the outset, CSI was expected to serve as the Program Administrator for the future PCH. In accordance with this expectation, on March 31, 2004, CSI and PCH entered into an Administrative Services Agreement (that is, the Agreement), pursuant to which CSI was to provide program administrative services for the future PCH's liability insurance programs. Pl.'s Ex. 4 (Agreement) at 1.

18. The Agreement was executed by Godfrey, on behalf of CSI, and Harvey, on behalf of PCH. Tr. at 60:2-60:5, 76:7-76:16 (Condon Test.); Pl.'s Ex. 4 (Agreement) at 7. Although PCH was technically about a month shy of incorporation at the time the Agreement was executed, Harvey subsequently became the first president of PCH and a member of its Board of Directors. Tr. at 73:7-73:16 (Condon Test.); Pl.'s Ex. 5 (Articles of Incorporation) at CSI46. In any event, neither party has suggested that the Agreement is not binding on PCH on this basis.

19. As the Program Administrator, CSI was responsible for, among other things, the development, preparation, and issuance of insurance policies and adherence to insurance underwriting guidelines. Pl.'s Ex. 4 (Agreement) ¶ 2.

20. At least within the contours of the Agreement itself, in its role as Program Administrator, CSI would operate as an independent contractor. Pl.'s Ex. 4 (Agreement) ¶ 2(c).

21. In exchange for its services as Program Administrator, CSI was entitled to some amount of compensation, a fee tagged to the percentage of the gross earned premium payments received by or on behalf of PCH for liability insurance coverage. Pl.'s Ex. 4 (Agreement) ¶ 8. Again, the precise form the compensation CSI expected is immaterial; all that matters is that CSI, like all the parties involved, had a financial interest in facilitating the formation of PCH.

22. The parties' contractual relationship was, absent further action, designed to be ten years in duration; the Agreement would expire by its terms on March 31, 2014. Pl.'s Ex. 4 (Agreement) ¶ 1.

23. Three specific provisions of the Agreement merit further attention here. First, Paragraph 17 of the Agreement (the "Arbitration Clause") -- the locus of the parties' disagreement at this stage of the proceedings -- provides as follows:

17. Arbitration. Any disputes concerning any aspect of this Agreement may be submitted to binding arbitration. The prevailing party shall be entitled to recover all costs incurred, including reasonable attorney's fees.

Pl.'s Ex. 4 (Agreement) ¶ 7.

24. Second, Paragraph 14 of the Agreement (the "Injunction Clause") provides as follows:

14. Injunction. In the event that [CSI], its employees, agents, brokers and/or representatives, attempt to breach the terms of this Agreement, [PCH] shall, in addition to its rights and remedies available to it at law or in equity, have the right to seek an injunction against [CSI] to enforce the provisions of this Agreement. [CSI] agrees to be responsible for and to reimburse [PCH] for any attorney's fees and costs associated with any legal action taken by [PCH] to enforce the terms of this Agreement.

Pl.'s Ex. 4 (Agreement) ¶ 14.

25. Finally Paragraph 23*fn3 of the Agreement (the "Savings Clause") provides as follows:

[23]. Partial Validity. If any term or provision of this Agreement or the application thereof to any person or circumstance shall to any exten[t] be invalid or unenforceable, the remainder of the Agreement . . . shall not be affected thereby, and each term and provision of the ...


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