Charter Oak Oil Co. v. Applied Underwriters, Inc.

CHARTER OAK OIL CO., INC. d/b/a AIELLO HOME SERVICES, Plaintiff, v. APPLIED UNDERWRITERS, INC., et al., Defendants.

No. 3:17-cv-00689 (SRU)

UNITED STATES DISTRICT COURT DISTRICT OF CONNECTICUT

September 12, 2017

RULING AND ORDER

In this diversity action, the plaintiff, Charter Oak Oil Co., d/b/a Aiello Home Services ("Aiello"), alleges that its workers' compensation insurer, Applied Underwriters, Inc. ("Applied") and its affiliates, are liable for multiple violations of Connecticut insurance, unfair trade practice, and securities laws. The underlying dispute in this case involves a series of insurance and reinsurance contracts between Aiello and the defendants. One of the disputed contracts contains a mandatory forum selection clause requiring the parties to bring all suits in the State of Nebraska. Applied and its co-defendants, which are corporations based in Nebraska, Iowa, and California, have moved to enforce the forum selection clause by dismissing this case or, in the alternative, by transferring it to the agreed forum, the United States District Court for the District of Nebraska. Aiello opposes the motion, arguing that Nebraska law precludes the enforcement of forum selection clauses that impose an unreasonable inconvenience on the plaintiffs.

On August 7, 2017, I held oral argument on the defendants' motion to dismiss or transfer. For the reasons detailed below, that motion is denied.

I. Standard of Review

The defendants brought their original motion to dismiss for improper venue under Rule 12(b)(3) of the Federal Rules of Civil Procedure. Def.'s Mot. Dismiss, Doc. No. 13. Rule 12(b)(3) is an inappropriate method to enforce forum selection clauses when the plaintiff's chosen venue otherwise satisfies 28 U.S.C. § 1391. See Atl. Marine Const. Co. v. U.S. Dist. Ct. for W. Dist. of Tex., 134 S. Ct. 568, 578 (2013). The defendants not make any arguments in support of Rule 12(b)(3) dismissal in their brief; they appears to exclusively pursue transfer under 28 U.S.C. § 1404(a) or dismissal under forum non conveniens in the alternative. See Def.'s Br., Doc. No. 13-1.

A valid forum selection clause may be enforced through transfer to another federal district court under section 1404(a) if the destination forum is another federal district, or by dismissal under forum non conveniens if the movant seeks transfer to a state or foreign jurisdiction. Atl. Marine, 134 S. Ct. at 579-80. The distinction between forum non conveniens dismissal and section 1404(a) transfer is a procedural formality because the two mechanisms share a common doctrinal foundation. See Atl. Marine, 134 S. Ct. at 580 ("Section 1404(a) is merely a codification of the doctrine of forum non conveniens . . . [it] 'did not change "the relevant factors" which federal courts used to consider under the doctrine of forum non conveniens'." (quoting Stewart Org., Inc. v. Ricoh Corp., 487 U.S. 22, 37 (1988) (Scalia, J. dissenting))). The legislative intent of section 1404(a), however, strongly weighs against outright dismissal when there is an alternative federal forum to which the case could be transferred. See Atl. Marine, 134 S. Ct. at 580 ("[When] the transferee forum is within the federal court system . . . Congress has replaced the traditional remedy of outright dismissal with transfer."); Piper Aircraft Co. v. Reyno, 454 U.S. 235, 253-54 (1981) (Congress intended section 1404(a) as a "housekeeping measure" with a "remedial purpose" to allow "easy change of venue within aunified federal system"); Norwood v. Kirkpatrick, 349 U.S. 29, 32 (1955) ("Congress, in writing [section] 1404(a) . . . was revising as well as codifying. The harshest result of the application of the old doctrine of forum non conveniens, dismissal of the action, was eliminated by the provision in [section] 1404(a) for transfer.").

In evaluating motions to dismiss or transfer based on forum selection clauses, a district court typically relies on pleadings and affidavits from the parties. Martinez v. Bloomberg LP, 740 F.3d 211, 216 (2d Cir. 2014) (citing Phillips v. Audio Active Ltd., 494 F.3d 378, 384 (2d Cir. 2007)). For reasons discussed infra, courts applying section 1404(a) generally give "controlling weight" to any valid forum selection clauses that parties include in a written agreement. Atl. Marine, 134 S. Ct. at 579.

II. Background

The underlying dispute in this case concerns a novel insurance product known as "EquityComp" provided by Applied and its affiliates: California Insurance Company ("CIC"), Applied Risk Services ("ARS"), and Applied Underwriters Captive Risk Assurance Company, Inc. ("AUCRAC").¹ Applied marketed the EquityComp program to businesses throughout Connecticut as a workers' compensation insurance plan that would deliver substantial cost savings to insureds as long as workplace injury claims were minimized. Compl. at ¶ 10, Doc. No. 1-1; Notice of Removal at 8, Ex. C, Doc. No. 1-3. In November 2013, Aiello sought to purchase workers' compensation insurance through Sinclair Insurance Group, a Connecticut-based broker. Pl.'s Br. at 3, Doc. No. 16. Applied provided Aiello with a proposal for the EquityCompprogram. Id. After reviewing that proposal, Aiello requested that Sinclair issue a binder of workers' compensation insurance coverage through Applied. Id. Michael Jezouit, Aiello's president, executed a formal binder request November 14, 2013. Notice of Removal at 13, Ex. C, Doc. No. 1-3. In that binder request, Jezouit acknowledged that the issuance of insurance by Applied or its affiliates was contingent on Aiello's execution of a supplemental "Reinsurance Participation Agreement" ("RPA"). Id. Jezouit executed the RPA with AUCRAC on November 14, 2013. Def.'s Mot. Dismiss at 5, Ex. B, Doc. No. 13-4 (hereinafter "RPA Contract"). CIC issued its first workers' compensation policy to Aiello on November 15, 2013. Notice of Removal at 2, Ex. D, Doc. No. 1-4.

Applied structured the EquityComp program as a traditional workers' compensation policy coupled with a reinsurance facility in which the policyholder was required to participate. Notice of Removal at 8, Ex. C, Doc. No. 1-3. Aiello's traditional workers' compensation policy was written by CIC, who was the only Applied affiliate that was licensed to sell and issue insurance policies in the State of Connecticut. RPA Contract at 4, Doc. No. 13-4; see also discussion supra note 1. AUCRAC, the administrator of the reinsurance facility, entered into a treaty with CIC to reinsure losses under Aiello's workers' compensation policy. RPA Contract at 4, Doc. No. 13-4. AUCRAC, through the RPA, simultaneously entered into an agreement with Aiello that obligated Aiello to provide funding for a "segregated protected cell" within AUCRAC's reinsurance facility. Id.

The network of agreements had the practical effect of making Aiello act as its own reinsurer. Unlike traditional reinsurance mechanisms, the funds in Aiello's segregated cell were not pooled with those of similar cells funded by other EquityComp policyholders. Id. Aiello's basic obligation under the RPA was to apply the funds from its segregated cell toward the lossesaccrued under its own CIC workers' compensation policy, up to 128% of a predetermined annual "Loss Pick Containment Amount."² Id. at 9. There were three primary ways in which the segregated cell would be funded. First, Aiello was responsible for maintaining "capital deposits" in the cell equal to 10% of the Loss Pick Containment Amount. Id. Second, AUCRAC would help fund the segregated cell by periodically allocating a partial refund of "excess" premiums³ paid by Aiello to CIC; that amount was calculated quarterly according to a complex formula in which the total collected premiums were adjusted by factors that reflected Aiello's loss activity.⁴ Id. at 9-10. Finally, if Aiello's capital deposits and AUCRAC's premium allocations were insufficient to cover the policy's aggregate losses (up to the 128% threshold), Aiello was responsible for providing additional capital deposits into the segregated cell to make up the difference. Id. The RPA designated ARS as the "billing agent" with responsibility for "tru[ing] up" any amounts owed among the parties. Id. at 5. Applied acted as the overall administrator of the EquityComp program, issuing monthly statements that documented Aiello's current policy costs and the estimated total costs to be incurred at the end of the three-year program. Compl. at ¶ 27, Doc. No. 1-1.

Aiello enrolled in the EquityComp program for a three-year term. Notice of Removal at 13, Ex. C, Doc. No. 1-3. During that period, CIC issued three one-year insurance policies; Aiellorenewed its coverage on November 15, 2014 and November 15, 2015. Jezouit Aff. at ¶¶ 7-8, Doc. No. 16-1. During its three years of participation in EquityComp, Aiello paid all premiums due through a monthly electronic funds transfer from its Connecticut bank account. Id. at ¶ 10. For the first two years, Aiello appears to have had no disputes regarding its premium payment obligations under the EquityComp program. See Compl. at ¶¶ 25-31, Doc. No. 1-1. In April 2016, Aiello received a statement from Applied assessing an additional premium charge of $195,786.52, and reporting total estimated costs nearly $200,000 higher than the previous month's total cost estimate. Id. at ¶ 32. Aiello was "shocked" by the additional premium charge and questioned the increased premium through its insurance advisor. Id. at ¶ 34. Applied responded that the extra premium charge was due to the application of a LDF⁵ to a previously closed claim that had been reopened. The LDF used by Applied was allegedly higher than any figure that Aiello had contemplated, because it did not appear in any of the EquityComp quote materials. Id. at ¶ 35. Aiello attempted to cancel its policy, but Applied informed the company that there would be financial penalties for early cancellation. Id. at ¶¶ 37-38. Aiello decided to complete the policy term and made...