American Home Assur. Co. v Starr Tech. Risks Agency, Inc.

[*1] American Home Assur. Co. v Starr Tech. Risks Agency, Inc. 2006 NY Slip Op 50169(U) [11 Misc 3d 1051(A)] Decided on February 8, 2006 Supreme Court, New York County Cahn, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on February 8, 2006
Supreme Court, New York County

American Home Assurance Company, NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, Pa., AMERICAN INTERNATIONAL SPECIALTY LINES INSURANCE COMPANY, BIRMINGHAM FIRE INSURANCE COMPANY OF PENNSYLVANIA, and NEW HAMPSHIRE INSURANCE COMPANY, Petitioners,

against

Starr Technical Risks Agency, Inc., Respondent.



600263/06

Herman Cahn, J.

Petitioners move (seq. no. 001) for a preliminary injunction in aid of arbitration, barring respondent from entering into a reinsurance agreement on their behalf with National Indemnity Co. ("NICO") or from entering into a managing general agency agreement with NICO, CPLR 7502 (c).

Facts:

The Parties' Principal/Agent Relationship:

Petitioners are all affiliates of the AIG insurance group of companies.[FN1] This proceeding arises out of the separation between AIG and its founder and former CEO, Maurice Greenberg. Greenberg left AIG last year, but apparently retains control of C.V. Starr & Co. ("C.V. Starr"), a privately held company. C.V. Starr, through its subsidiaries, acts as managing general agent of petitioners, who are AIG insurance companies. Respondent Starr Technical Risks Agency, Inc. ("Starr Tech"), is one such subsidiary.

Petitioners have used Starr Tech as their general managing agent, to act as intermediary between the insurance company and the retail brokers who deal directly with policy holders. The role of a general managing agent is to market the insurers' policies, underwrite and issue policies, collect premiums, adjust and pay claims, negotiate reinsurance agreements, all on behalf of the insurance company and all in exchange for a percentage of the premiums for the business underwritten.

By agreement dated January 1, 1992 (amended December 1, 1994, April 1, 1995, December 1, 2000, December 1, 2001, and April 1, 2003), the parties entered into a Management Agency Agreement (the "Agreement") (Mucerino Aff. [O.S.C.] Ex. A) formalizing respondent's role as general managing agent for petitioners. Petitioners allege that the Agreement was not authorized by them, acting through disinterested officers and directors; but rather, was influenced by Greenberg, who then controlled AIG. Petitioners allege this is a case of self-dealing, where [*2]Greenberg had large stakes in both AIG and Starr Tech, and used his control to arrange this contract from which he stood to earn substantial sums. However, the parties have operated under the Agreement in one form or another for almost 14 years. The court can not definitively decide the substantive issue of the validity of the Agreement on this motion.

The Agreement appointed Starr Tech as petitioners' agent with respect to the underwriting and adjustment of certain energy related risks, such as gas, petrochemical, and chemical risks.

Petitioners allege that respondent was not a stand-alone third party managing agent; but, in fact, operates as a division of AIG, as it shares offices with AIG, freely exchanges employees, and for years has done business only with AIG.

The Agreement also provides that AIG is to have free access to all books and records of respondent that pertain to the Agreement (Art V, ¶ 2).

Petitioners allege that they have instructed Starr Tech that they retain exclusive control over any prospective reinsurance agreements contemplated by respondent, referring to a memorandum from AIG's Reinsurance Officer, Richard S. Skolnik, dated February 22, 1999 (Skolnik Aff. [O.S.C.] Ex. A), and to a similar memorandum, dated March 10, 2003 (id., Ex. B).[FN2] Referring to Starr Tech as a "rogue agent" (Petition ¶ 1), the petition alleges that respondent entered into an unauthorized reinsurance agreement with NICO.

Respondent acknowledges having agreed to cede to NICO, on an obligatory facultative basis, 33.6 % of reinsurance risk. Respondent further acknowledges that results in a reduction in premiums which would otherwise be paid to AIG, and to other participating treaty reinsurers as a consequence of Starr Tech's agreement to cede a portion of reinsurance to NICO. Petitioners allege that respondent's reinsurance arrangement with NICO will not only siphon premiums away from AIG, but will also hurt its reputation because of the representations that it made to its other reinsurers as to the business that it would send them. Underlying all of petitioners' grievances herein is the seminal argument that they, and not respondent, possess the exclusive authority to approve or disapprove reinsurance contracts, notwithstanding respondent's status as their general managing agent under the Agreement.

Petitioners submit a copy of a letter, dated January 17, 2006, instructing respondent not to enter into, or perform, a reinsurance agreement with NICO, and to turn over all documents relating to such agreement (Mucerino Aff. Ex. C). The letter further instructs respondent not to enter into, or perform, a managing general agency with NICO whereby respondent would similarly serve NICO as a direct agent (id.). The letter includes the following admonitions: The NICO arrangement that Starr Tech appears to have put in place violates AIG's instructions to Starr Tech in that this treaty/facultative obligatory arrangement was entered into without the knowledge or approval of anyone at AIG. . . . [A]ll reinsurance treaties, including facultative obligatory arrangements, were to be overseen and approved by Richard Skolnik, AIU's senior reinsurance officer. . . .[*3]More fundamentally, the NICO arrangement is not in the best interests of the relevant AIG insurance companies on whose behalf Starr Tech acts. The NICO arrangement may financially harm AIG in, among other ways, the amount of premium that AIG is likely to earn . . . .Moreover, the materially lower ceding commission that NICO is paying as compared to the commission that the existing reinsurers are paying for participating proportionally on the same risks will likely engender substantial ill-will among the reinsurers.

(Id., at 1-2.)

Petitioners allege that respondent has disregarded these instructions, and continues to operate under reinsurance and managing agency agreements with NICO.

The Arbitration Clause:

Article XV of the Agreement contains a broad arbitration clause and provides that disputes regarding the Agreement are to be resolved by arbitration, where one arbitrator is to be selected by each of the parties. Notwithstanding petitioners' general assertion that the entire Agreement is the product of self-dealing by Greenberg, there seems to be no practical dispute among the parties that the instant controversy is arbitrable pursuant to that clause.

Arbitration has been demanded, and the parties have commenced the arbitrator selection process. This motion seeks a preliminary injunction in aid of arbitration, to maintain the status quo; essentially, by ordering Starr Tech:

1.To cease any activity in performance of any agreements with NICO to cede AIG business to NICO;

2.To cease any activity in performance of any agreements with NICO to serve as its agent;

3.To cease entering into any agreements of reinsurance without the approval of AIG's Reinsurance Officers; and

4.To furnish all documents relating to its agreements with NICO.

Discussion:

Section 7502 (c) of the CPLR provides that: The supreme court . . . may entertain an application for . . . a preliminary injunction in connection with an arbitrable controversy, but only upon the ground that the award to which the applicant may be entitled may be rendered ineffectual without such provisional relief. . . .

Recent Appellate Division, First Department, cases have held that the preliminary injunction criteria applicable in plenary actions under CPLR Article 63 must still be applied in the present Article 75 context (Erber v Catalyst Trading, LLC, 303 AD2d 165 [1st Dept 2003] ["the criteria for provisional relief set forth in CPLR articles 62 and 63 are not relaxed when such relief is sought in aid of arbitration pursuant to CPLR 7502 (c)"]; In re Cullman Ventures, Inc., 252 AD2d 222 [1st Dept 1998]).[FN3] [*4]

A preliminary injunction under CPLR 6301, et seq., may issue if the movant shows a likelihood of success on the merits, irreparable harm absent an injunction, and a balancing of the equities in its favor (e.g., Nobu Next Door, LLC v Fine Arts Housing, Inc., 4 NY3d 839 [2005]).

Likelihood of Success:

Respondent points to various provisions of the Agreement in arguing that petitioner has no right to inhibit its discretion as an agent. They include the following:

Article I, ¶ 1:

The Company [i.e., AIG] appoints said Agent [i.e., Starr Tech] . . . for the transaction of insurance . . . with authority to accept and decline such risks, . . . and generally, with all power and authority necessary to conduct the Agency for the Company including the placement of facultative and treaty reinsurance on such risks for the account of the company.

Article I, ¶ 3: The Agent's judgment shall in all cases be final as to (A) what constitutes . . .

the . . . subject of insurance . . . .

Article XII, ¶ 1:

The Agent, at its sole discretion, shall adjust, settle and compromise all

losses . . . .

Article XVI, ¶ 1:

The Company gives the Agent the authority necessary to place reinsurance against loss in an amount in excess of the maximum liability per risk stipulated in Article I paragraph 2 of this Agreement for the account of the Company.

While the foregoing provisions clearly afford respondent wide discretion for as long as the agency is in effect, as a matter of law, a principal always retains the right to revoke or limit the agency (e.g., Wilson Sullivan Co., Inc. v International Paper Makers Realty Corp., 307 NY 20 [1954]; Fair Sky Inc. v International Cable Ride Corp., 23 AD2d 633 [1st Dept 1965]). The agent's remedy does not lie in restraining the principal from exercising that inviolate right not to be bound by the agent's actions; but rather, lies in an action for damages, for breach of the agency agreement (id.).

AIG issued instructions to Starr Tech in 1999 and afterward to cease reinsurance arrangements with NICO. By that notice, Starr Tech's authority to bind AIG by virtue of such arrangements was revoked, as a matter of law. Thus, AIG has a strong likelihood of success on the merits of its claim that Starr Tech is without authority to continue as its agent, at least with respect to the instructions conveyed relating to the reinsurance agreement with NICO (Mucerino Aff. Ex. C).

However, with respect to its right to act as a general agent for NICO or enter into [*5]a general agency agreement with NICO, the Agreement contains no exclusivity provision prohibiting Starr Tech from engaging in its own direct agency activities with other insurers, generally.[FN4] Absent an express provision restricting Starr Tech from engaging in business with others, the court rejects AIG's assertion of such a restriction based only on the general language requiring Starr Tech "to perform faithfully the duties" of the Agreement (Art IV, ¶ 1). Thus, AIG does not have a likelihood of success on the merits of its cause of action to restrain Starr Tech from entering into, or performing, a managing agency agreement with NICO.

However, the same is not necessarily true for a claim restricting Starr Tech from writing policies for AIG's current insureds. The solicitation of such insureds may very well breach the literal duty of faithfulness required of Starr Tech under the above-treated provision of the Agreement.

Irreparable Harm:

Absent an injunction, irreparable reputational harm may occur vis-a-vis AIG's other reinsurers, by virtue of the Starr Tech/NICO arrangement, which purports to bind AIG to funnel large amounts of reinsurance premiums to NICO, and away from its other reinsurers. As explained by AIG's Reinsurance Officer, Richard Skolnik, when AIG entered the reinsurance market in 2005, it made express written representations to potential reinsurers that it estimated reinsurance premiums of $410,000,000.00 (Skolnik Reply Aff. Ex. C at 3). The Starr Tech/NICO arrangement drains premiums away from the other reinsurers who, on the basis of AIG's representations, entered into a Quota Share Treaty with it. Insurers and reinsurers who enter into such arrangements create a relationship in which there is "1) no individual risk scrutiny by the reinsurer, 2) obligatory acceptance by the reinsurer of covered business, and 3) a long-term relationship in which the reinsurer's profitability is expected, but measured and adjusted over an extended period of time" (Matter of Liquidation of Union Indem. Ins. Co., 89 NY2d 94, 106 [1996]). In such a treaty, reinsurers receive a fixed percentage of premium. Thus, Starr Tech's diversion of reinsurance premiums from AIG's other reinsurers, with whom it contracted for Quota Share, irreparably harms AIG's reputation for reliability, as the total amount of reinsurance premiums available to the other reinsurers is reduced by the portion of such premiums allocated to NICO by Starr Tech.

The same would be true if, as managing agent for NICO or another company, Starr Tech writes policies for current AIG insureds. AIG will suffer irreparable harm because Starr Tech, rather than merely finding new customers for a new principal, would be using its influence as AIG's agent to take business from AIG, causing reputational injury.

Balance of Equities:

Failure to grant petitioners the relief herein granted would cause them immediate serious harm. Granting the relief does not cause the same level of harm to Starr Tech since it can continue representing NICO and others on new business for new customers. Further, Starr Tech is not without a remedy in respect of AIG's limitation of its agency. It is free to sue AIG for damages, as a breach of the Agreement (id.). That is an avenue of redress which Starr Tech may pursue in arbitration.

To the extent that Starr Tech seeks to write policies for current AIG customers on [*6]behalf of a new principal, the harm which can accrue to AIG through the permanent loss of such business balances the equities further in its favor.

In sum, the balance of the equities is in petitioners' favor.

Ineffectuality of Award:

A preliminary injunction in aid of arbitration is appropriate to ensure that an

ultimate arbitration award will not be rendered ineffectual (CPLR 7502 [c]). With respect to the Starr Tech/NICO reinsurance arrangement, the lack of an injunction would permit Starr Tech to continue to erode AIG's reputation with its reinsurers, by continuing to siphon away reinsurance premiums away from them, to NICO. By the time an award is issued at the conclusion of arbitration, AIG may no longer be capable of doing business with the reinsurers to whom it made promises during the negotiation of the Quota Share Treaty. A restraint on Starr Tech's activities with NICO pending arbitration will serve to protect the viability of any future award favorable to AIG.

The same is true with the writing of new policies with current AIG insureds. The harm to AIG's business and reputation may be so permanent as to render ineffectual any possible, future, arbitration award in AIG's favor.

Conclusion:

For the foregoing reasons, petitioners are entitled to a preliminary injunction in aid of arbitration, and their petition for same is granted to the following extent.

Pending further order of the court, Starr Tech may not enter into, or perform, any contract of reinsurance with NICO, on behalf of AIG. Starr Tech shall remit to AIG any and all agreements and other documents relating to any of its pending reinsurance arrangements with NICO, within 15 days of the date hereof.

Petitioners' request for an order enjoining respondent from entering into, or performing, a managing general agency agreement with NICO, is denied. However, pending further order of the court, Starr Tech may not write any policies of insurance for any of AIG's current customers on behalf of any principal besides AIG, i.e., for NICO or any other company.

The above ruling shall be considered a temporary restraining order pending the entry of a long form order, or other further order of this court.

Settle order. The order shall contain a provision for a bond to be posted by petitioners, and respondents. Together with the Notice of Settlement, counsel may submit a brief letter recommending the amount of the bonds.

Dated:February 8, 2006

E N T E R :

/s/

J. S. C. Footnotes

Footnote 1:Petitioners refer to themselves collectively as "AIG." This decision adopts that reference.

Footnote 2:Reinsurance refers to situations in which other companies agree to indemnify the insurance companies for losses they experience pursuant to insurance policies they have issued. This spreads and diversifies the risk. Reinsurers receive a portion of the underlying premium in return for absorbing a portion of the risk. Reinsurance can be structured as "treaty" (covering an entire book of business) or "facultative" (covering a single risk). It can also be structured on a quota share (proportionate), or based on excess of loss (attaching above a certain dollar amount) (see, generally, Sumitomo Marine & Fire Ins. Co., Ltd. v Cologne Reins. Co., 75 NY2d 295 [1990]; Travelers Indem. Co. v Scor Reins. Co., 62 F3d 74 [2d Cir 1995]).

Footnote 3:This appears to be at variance with some earlier appellate decisions (Guarini v Severini, 233 AD2d 196 [1st Dept 1996], lv denied 90 NY2d 802 [1997] [no need to apply factors of likelihood of success, irreparable harm, and balancing the equities; only whether an injunction will assist in preventing an arbitration award from becoming "ineffectual"]; H.I.G. Capital Mgt., Inc. v Ligator, 233 AD2d 270 [1st Dept 1996] [same]). The parties herein have all proceeded under the stricter standard, which imputes the Article 63 criteria into this CPLR 7502 (c) motion for a preliminary injunction in aid of arbitration.

Footnote 4:Indeed, Article I, ¶ 4, of the Agreement provides that: . . . . Where for any reason the Agent shall issue a policy or other instrument of insurance in another of its agency companies, the Company shall become a quota share reinsurer of the writing compan(ies) for its proportionate share of the risk. This militates in favor of a finding that Starr Tech was not precluded from doing business with other carriers as a direct agent.