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Lloyd’s syndicate wins dispute over settlement

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A settlement agreement that called for a Lloyd’s of London syndicate to pay for a $5.1 million settlement in a dispute involving claims management firm and an insurance agency, in which the syndicate was not involved, was “collusive and distorts the adversarial process,” a federal appeals court ruled on Friday.

Lloyd’s syndicate Novae Corporate Underwriting Ltd. had issued an insurance policy to Toronto-based Fairfax Financial Holdings Ltd., parent company of Birmingham, Alabama-based Cunningham Lindsey Claims Management Inc., that had a $1 million retention and covered both Fairfax and Cunningham, according to Friday’s ruling by the 7th U.S. Circuit Court of Appeals in Chicago in Diane M. Hendricks and Hendricks Holding Company Inc. v. Novae Corporate Underwriting Ltd.

While insured by Novae, Cunningham entered into an agreement with Westchester, Illinois-based American Patriot Insurance Agency Inc. to provide claims-handling services for insurance products marketed to roofing contractors, according to the ruling.

In December 2004, American Patriot and one of its shareholders, Ms. Hendricks, sued Cunningham in Texas state court, alleging Cunningham had made misrepresentations and negligently handled claims resulting in unwarranted or underpriced policy renewals, according to the ruling.

Six years later, while the Texas litigation was still ongoing, American Patriot filed for bankruptcy.  Novae “remained largely uninvolved” because the policy did not obligate it to defend Cunningham in any legal action, according to the ruling.

In 2012, Cunningham, Ms. Hendricks and American Patriot’s bankruptcy trustee reached a settlement agreement that included a $5.12 million judgment against Cunningham and an assignment to Ms. Hendricks and American Patriot of Cunningham’s purported right to recover against Novae in the coverage dispute.  The Texas court approved the settlement.

Ms. Hendricks and American Patriot’s bankruptcy trustee then sued Novae in U.S. District Court in Chicago, which held that the settlement agreement was neither enforceable nor binding against Novae. 

A three-judge appeals court panel unanimously agreed.  The “settlement-and-assignment distorted the litigation incentives of the parties,” said the ruling.

“In other circumstances, a settlement and assignment of rights against an insurer may not raise the specter of collusion or pervert litigation incentives – say, when the settlement follows an adversarial trial…But that is not this case. 

“This settlement arrangement distorted, complicated and prolonged the litigation by roping in an insurer that otherwise had no obligation to be involved, “said the ruling.