Security Plans, Inc. v. Cuna Mutual Insurance Society

769 F.3d 807 (2nd Cir. 2014)

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Nature of the Case

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Facts

P specialized in the sale of credit-related insurance products, primarily to credit unions. P sold credit life and credit disability insurance, which promise to pay the outstanding balance on a loan in the event the borrower dies or becomes disabled. P agreed to sell substantially all of its assets to D. D agreed to pay $3 million immediately plus an additional performance-based payment to be made three years after the merger was concluded for P's property and book of business. The maximum possible earnout was $2.2 million on this earnout. D made three-year employment agreements with each of the three P shareholders. Each former P client would have to decide individually whether to accept D as its new insurer, and the earnout was therefore designed to encourage the shareholders to convert as many clients as possible. Two variables would largely determine the size of the earnout: a weighted average of total written premiums brought in by the acquired business, and a weighted average of the business's combined loss ratios. These two amounts would be used to calculate a preliminary total earnout, which would then be reduced by service fees and other reimbursements paid to credit unions. The reduced figure would represent the final payment. P contends D used incorrect figures to calculate loss ratios for these accounts, thereby leading to a lower earnout. Insurers are required by accounting rules and by statute to carry claim reserves, which are kept in anticipation of future liabilities. Claim reserves are, for accounting purposes, considered to be a component of incurred claims. Increases in incurred claims ordinarily will, all other things being equal, increase a company's loss ratio. Higher loss ratios would reduce P's earnout. D was already carrying abnormally high claim reserves on all of its business, including P's policies. D began to release claim reserves in 2006 to compensate for the problem, but it did not correct the reserves concerning P's book of business in time to affect the earnout. Ps suggest that rather than deliberately keeping high claim reserves as a strategic or actuarial decision, D failed to correct aberrations that distorted the performance data until 2006. P's book of business was actually performing better than the uncorrected loss ratios would indicate. P sued D. P asserted that D's handling of the claim reserves issue constituted a breach of the implied covenant of good faith and fair dealing. The court granted D summary judgment. P appealed.