Benchmark Ins. Co. v. Sunz Ins. Co.

BENCHMARK INSURANCE COMPANY, Plaintiff, v. SUNZ INSURANCE COMPANY; SUNZ INSURANCE SOLUTIONS, LLC; UNITED WISCONSIN INSURANCE COMPANY;BUTLER AMERICA HOLDINGS INC.; CENTURY EMPLOYER ORGANIZATION, LLC; PAYDAY INC., Defendants.

No. 20-908 (JRT/TNL)

UNITED STATES DISTRICT COURT DISTRICT OF MINNESOTA

February 23, 2021

MEMORANDUM OPINION AND ORDER

Anna Tobin, Lawrence M. Shapiro, Mark L. Johnson, and X. Kevin Zhao, GREENE ESPEL PLLP, 222 South Ninth Street, Suite 2200, Minneapolis, MN 55402 for plaintiff.

Anne M. Lockner, ROBINS KAPLAN LLP, 800 LaSalle Avenue, Suite 2800, Minneapolis, MN 55402, Christopher Stephen Carver and Jason Samuel Oletsky, AKERMAN LLP, 350 East Las Olas Boulevard, Suite 1900, Fort Lauderdale, FL 33301, for defendants SUNZ Insurance Company, SUNZ Insurance Solutions, LLC, and United Wisconsin Insurance Company.

Mitchel Krouse, THE KROUSE LAW FIRM, 9040 Town Center Parkway, Lakewood Ranch, FL 34202, Jessica C. Richardson, Kelly P. Magnus, and Rolf E. Sonnesyn, TOMSCHE, SONNESYN & TOMSCHE, PA, 8401 Golden Valley Road, Suite 250, Minneapolis, MN 55427, for defendants Butler America Holdings, Inc., Century Employer Organization, LLC, and Payday, Inc.

Plaintiff Benchmark Insurance Company filed an Interpleader Action arising out of a dispute between Benchmark and Defendants SUNZ Insurance Company ("SUNZ"), SUNZ Insurance Solutions, LLC ("SIS"), and various insureds over the dispensation of excess collateral held by Benchmark. The Interpleader Action named 35 defendants, some insurance companies, and some insured parties ("Defendant-Insureds"), who may possibly claim some interest in the interpleaded funds.

Two of those Defendant-Insureds—Century Employer Organization, LLC and Payday, Inc.—filed crossclaims against SUNZ, and a third—Butler America Holdings, Inc.—filed crossclaims against United Wisconsin Insurance Company ("UWIC"), a SUNZ affiliate. SUNZ and UWIC filed a Motion to Dismiss, or in the Alternative, to Compel Arbitration of the Crossclaims. Butler then voluntarily dismissed its crossclaims against UWIC, leaving only Payday's and Century's crossclaims against SUNZ. The Court will accordingly dismiss the claims against UWIC without prejudice and dismiss UWIC from this action.

Because the Court finds that Century's and Payday's crossclaims derive from the same case or controversy as the original action, the Court will deny SUNZ's Motion to Dismiss the crossclaims. Because SUNZ has not met its burden of demonstrating that the parties have an agreement to arbitrate and that the crossclaims fall within the scope of that agreement, the Court will also deny SUNZ's Motion to Compel Arbitration of the crossclaims.

By stipulation of the parties, SUNZ also filed counterclaims against Benchmark; Benchmark in turn filed counterclaims-in-reply against SUNZ and SIS. SUNZ and SIS havefiled a Motion to Dismiss, or in the Alternative, to Compel Arbitration of Benchmark's counterclaims-in-reply.

The Court finds that Benchmark's counterclaims-in-reply are compulsory replies to SUNZ's permissive counterclaims and will deny SUNZ and SIS's Motion to Dismiss. The Court further finds that SUNZ has failed to demonstrate that these claims are within the scope of an agreement to arbitrate between the parties and will deny the request to compel arbitration of Benchmark's counterclaims-in-reply. SIS filed a separate Motion to Dismiss, or in the Alternative, to Compel Arbitration of Benchmark's crossclaims for indemnification; Benchmark subsequently voluntarily dismissed its crossclaims. The Court will deny SIS's Motion as moot.

BACKGROUND

I. FACTUAL BACKGROUND

A. The Parties

This action arises out of a dispute between insurance companies. In 2015, Plaintiff Benchmark Insurance Company ("Benchmark") and Defendant SUNZ Insurance Company ("SUNZ") established a partnership to administer an insurance program for large-deductible workers' compensation policies (the "Benchmark/SUNZ Program"). (Civ. No.20-907, Compl. ¶¶ 10-11, Apr. 9, 2020, Docket No. 1.)¹ Benchmark appointed SUNZ Insurance Solutions ("SIS") as its agent to issue workers' compensation policies and administer the policies on Benchmark's behalf. (Civ. No. 20-908, Compl. ("Compl.") ¶¶ 1-2, Apr. 9, 2020, Docket No. 1.) The large-deductible workers' compensation insurance policies were sold to professional employer organizations in various states. (Civ. No. 20-907, Compl. ¶ 1.) The insured organizations that are parties to this action ("Defendant-Insureds") were issued policies from the Benchmark/SUNZ Program and have posted more collateral than is presently required to secure their obligations. (Compl. ¶ 9.) The Benchmark/SIS relationship ended in 2018 and no new policies have been issued or renewed since that time, but insureds may still make claims that arose during the coverage period. (Compl. ¶ 16.)

B. Contracts and Collateral

The Benchmark/SUNZ Program is governed by multiple contracts and agreements between Benchmark, SUNZ, SIS, other SUNZ-affiliates, and the Defendant-Insureds. Six types of agreements are at the root of the claims addressed in the pending Motions:

(1) Program Manager Agreement ("PMA"): between Benchmark and SIS, under which SIS issued large-deductible policies on Benchmark's behalf and in Benchmark's name, (Civ. No. 20-907, Decl. J. Compl. ¶ 12-13);

(2) Quota Share Reinsurance Contract ("Reinsurance Contract"): between Benchmark and SUNZ, which required SUNZ to accept 100 percent of Benchmark's "Gross Liability" for policies SIS issued on Benchmark's behalf and required SUNZ to post collateral to secure its obligations to Benchmark, (id. ¶ 14);

(3) Reinsurance Treaty Trust Agreement ("Trust Agreement"): between Benchmark and SUNZ, which required SUNZ to deposit securities into a trust account at Fifth Third Bank and governed the terms of the trust account's management, (id. ¶ 15);

(4) Large Deductible General Agent Agreement ("LDGAA"): between Benchmark and SIS, which required SIS to collect Deductible Collateral from insureds under policies issued by SIS on Benchmark's behalf and to obtain Program Agreements from each insured, (id. ¶ 19);

(5) Program Agreements²("Program Agreements" or "LD Agreements"): between Benchmark and the insureds, collected by SIS and addressing Deductible Collateral requirements, claims administration, and other topics, (id. ¶ 19); and(6) Policies and Endorsements (also referred to as "LD Endorsements"): large-deductible workers' compensation insurance policies and endorsements underwritten by SIS on behalf of Benchmark and purchased by insureds, (id. ¶¶ 12-13).

These agreements also establish different forms of collateral to insure the parties' obligations to each other.³ (Civ. No. 20-907, Compl. ¶¶ 2, 13, 14, 28.) SUNZ has alleged that Benchmark is "overfunded and over-collateralized," and that Benchmark holds $50.5 million of excess collateral. (Civ. No. 20-907, Compl. ¶ 28.) Of particular significance to this action is Deductible Collateral, which the insureds posted to offset their obligations to reimburse Benchmark for deductible claims that Benchmark paid, but for which the insureds are contractually liable.⁴ (Civ. No. 20-907, Compl. ¶ 13.) Benchmark has determined that it is currently holding $20,533,594 in Excess Deductible Collateral posted by insureds under their various Policies and Program Agreements. (Compl. ¶¶ 2-3.)

II. PROCEDURAL HISTORY

In early 2019, SUNZ initiated a series of negotiations with Benchmark regarding various types of excess collateral that Benchmark held related to the Benchmark/SUNZ Program. (Civ. No. 20-907, Compl. ¶¶ 21-24.) On January 27, 2020, SUNZ served an arbitration demand on Benchmark, seeking broad relief related to Benchmark's collateral holdings and the release of $50.5 million in excess collateral to SUNZ. (Id. ¶¶ 25-27.) On April 9, 2020, Benchmark filed the Interpleader Action to manage adverse claims to $20,533,594 in excess Deductible collateral.⁵ (Compl. ¶ 4.)

Through the Interpleader Action, Benchmark identified thirty-five entities, the Defendant-Insureds, that purchased insurance policies through the Benchmark/SUNZ Program and may claim an interest to some portion of the $20.5 million excess Deductible Collateral. Thirty-two of the Defendant-Insureds have disclaimed interest in the excess collateral and have been dismissed from the Interpleader Action; the only remaining Defendant-Insureds are Century, Payday, and Butler.

A. Defendant-Insureds' Crossclaims

On June 4, 2020, Defendant-Insureds Century and Payday filed counterclaims for breach of contract against Benchmark and crossclaims for breach of contract against SUNZ. (Payday Crosscl., June 4, 2020, Docket No. 163; Century Crosscl., June 22, 2020, Docket No. 227.)⁶ On July 9, 2020, SUNZ filed a Motion to Dismiss, or in the Alternative, to Compel Arbitration of the crossclaims. (Mot. Dismiss Crosscl., July 9, 2020, Docket No. 295.)

Payday and Century (collectively "Crossclaimants") allege that they individually engaged SIS to provide large deductible workers compensation insurance policies, and that SIS presented Crossclaimants with Program Agreements that presented a quote for the proposed terms of the insurance coverage that SIS would seek to obtain from SUNZ. (See e.g. Payday Crosscl. ¶ 1-2.) Crossclaimants each subsequently signed insurance policies with SUNZ. (See e.g. id. ¶ 5.) Crossclaimants allege that the policies superseded and excluded the Program Agreements from application, but that SUNZ sought to improperly modify the terms of the policies by applying the Program Agreement terms. (See e.g. id. ¶¶ 10-14.)

In particular, Crossclaimants allege that SUNZ improperly increased the amount of collateral required under the policies, imposed excessive fees that wrongfully depleted the Crossclaimants' respective collateral funds, and that SUNZ misapplied and misappropriated payments made by Crossclaimants by improperly comingling collateral funds with other funds, and failed to properly account for...