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Charter OAK OIL Co., Inc. v. Applied Underwriters, Inc.

United States District Court, D. Connecticut

September 12, 2017

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

          RULING AND ORDER

          STEFAN R. UNDERHILL, UNITED STATES DISTRICT JUDGE.

         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 a unified 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 EquityComp program. 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 losses accrued 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” premiums[3]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; Aiello renewed 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 LDF[5] 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 arrangements with Applied to pay the outstanding premium balance via an installment plan. Id. at ¶ 40-41. To implement the payment plan, Applied offered Aiello a promissory note for $54, 886.52, which Aiello executed. Id. at ¶ 41.

         Aiello did not renew its EquityComp coverage following the expiration of the three-year term on November 15, 2016. Jezouit Aff. at ¶ 15, Doc. No. 16-1. In December 2016, Aiello received a statement from Applied demanding $264, 277 in unpaid premiums. Id. On December 15, 2016, Applied attempted to electronically transfer funds from Aiello's bank account in the amount of $264, 677.38. Id. at ¶ 16; Compl. at ¶ 50, Doc. No. 1-1. Aiello placed a hold on its bank account to prevent the transfer of the disputed funds. Jezouit Aff. at ¶ 16, Doc. No. 16-1. In January 2017, Aiello received a letter from Applied claiming that Aiello owed an additional $268, 646.38 in unpaid premiums. Id. at ¶ 17. Applied sent another letter in February 2017 demanding that Aiello pay $236, 352.71. Id. at ¶ 20. That amount was less than Applied demanded in its January 2017 letter, and both the January and February letters sought a different amount than Applied attempted to electronically transfer in December 2016. Id. With each letter, Applied attached EquityComp statements that explained that the past-due amount under the “Worker's Compensation Program” was calculated “based upon [Aiello's] actual claims applying run-off Loss Development Factors (LDF's) and an additional capital deposit of $48, 000.” See, e.g., Pl.'s Br. at 4, Ex. D, Doc. No. 16-5.

         On March 28, 2017, Aiello filed suit in Connecticut Superior Court, Judicial District of Hartford, alleging that Applied and its affiliates violated the Connecticut Unfair Insurance Practices Act (CUIPA), Conn. Gen. Stat § 38a-816, the Connecticut Unfair Trade Practices Act (CUTPA), Conn. Gen. Stat. § 42-110g, and the Connecticut Uniform Securities Act, Conn. Gen. Stat. § 36b-29. See Compl. at ¶¶ 65-93, Doc. No. 1-1. Aiello also sought a declaratory judgment that the unpaid premiums and capital deposit demanded by Applied were not based upon any premium calculation factors on file with the Connecticut Department of Insurance, and the disputed premiums were therefore unenforceable under Connecticut law. Id. at ¶¶ 55-64. Applied and its affiliates filed a Notice of Removal with this court pursuant to 28 U.S.C. §§ 1332, 1441, and 1446. Notice of Removal at 1, Doc. No. 1. This motion to dismiss followed.

         The RPA Contract contains a choice-of-law provision specifying that the agreement is to be construed exclusively under the laws of Nebraska:

This Agreement shall be governed by and construed in accordance with the internal laws of the State of Nebraska without giving effect to any choice or conflict of law provision . . . that would cause the application of Laws of any jurisdiction other than those of the State of Nebraska.

         RPA Contract at 6, Doc. No. 13-4. The agreement also contained a forum selection clause that was one of only two clauses in the agreement printed in capital letters:

ANY LEGAL SUIT, ACTION, OR PROCEEDING ARISING OUT OF, RELATED TO OR BASED UPON THIS AGREEMENT, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY MUST ONLY BE INSTITUTED IN THE FEDERAL COURTS OF THE UNITED STATES OF AMERICA OR THE COURTS OF THE STATE OF NEBRASKA, IN EACH CASE LOCATED IN OMAHA AND THE COUNTY OF DOUGLAS, AND EACH PARTY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS IN ANY SUCH SUIT, ACTION, OR PROCEEDING. . . . THE PARTIES IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY OBJECTION TO THE LAYING OF VENUE OF ANY SUIT, ACTION, OR ANY PROCEEDING IN SUCH COURTS AND IRREVOCABLY WAIVE AND AGREE NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH SUIT, ACTION, OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.

Id. at 6-7. The CIC workers' compensation insurance policy did not contain any similar forum selection clause. Applied filed the current motion in an attempt to enforce that forum selection clause by dismissing Aiello's case, or in the alternate, transferring it to the United States District Court for the District of Nebraska. Def.'s Br. at 1, Doc. No. 13-1.

         III. Discussion

         When deciding a typical section 1404(a) or forum non conveniens motion not involving a forum-selection clause, a district court must evaluate both the private interests of the parties and various public-interest considerations to determine whether the transfer or dismissal is warranted.

         Atl. Marine, ...


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