The court refuses to dismiss claims in the RWI lawsuit

Court disputes related to agency and warranty (RWI) claims are rare, as many claims are settled prior to a formal dispute and many policies contain arbitration provisions. It is particularly noteworthy, therefore, that a New York State court recently denied a dismissal motion in a case involving reporting under RWI policy.

The case resulted from the acquisition by Novolex Holding of The Waddington Group (TWG), a manufacturer of food packaging and single-use products, worth $ 2.275 billion under an Equity Purchase Agreement (EPA). Following the transaction, Novolex alleged that various representations in the EPA had been violated. The violations concerned the overarching claim that TWG knew that its third largest customer, Costco, intended to significantly reduce its business with TWG. Novolex has claimed approximately $ 267 million in damages.

Illinois Union Insurance Company insured an excess layer of Novolex agency and warranty insurance. It refused to report and Novolex sued. The Illinois Union then dismissed portions of the lawsuit alleging TWG violated Section 3.18 of the EPA. The relevant part of this presentation stated that:

As of December 31, 2017, there has been no written notice or, to the knowledge of parents, of any such material relationship that that material relationship has been terminated, annulled, or adversely and materially changed, or that it intends to terminate, annul any contract between to adversely and materially change an acquired business and such material relationship.

In short, the Illinois Union argued in its motion to dismiss that Novolex did not allege that a “contract” had been terminated, terminated or adversely affected, or that there was, therefore, no violation of Section 3.18. The Illinois Union justified this with the fact that none of the written agreements between TWG and Costco imposed a legally binding obligation on Costco to buy from TWG in the future. According to the Illinois Union, Costco’s intention to reduce its purchases in the future was not to terminate or amend an existing “contract”.

The court dismissed the Illinois Union’s arguments for two reasons. First, the court found that so-called advertising contracts, which Novolex had referred to as a type of order and which included the sale of products before the holidays, were classified as “contracts” under Section 3.18. While the court found these advertising agreements qualified as a “contract,” it did not explain why it failed to make a similar finding for another type of order called a replenishment contract. Novolex had also relied on these supply contracts for the rejection of the termination application.

Second, the court found that Section 3.18 could be read to contain a statement that TWG was unaware that a material relationship would be terminated, terminated, or adversely affected, whether or not a “contract” was involved. The court focused on the use of the word “or” stating that it was “possible” that “or firstly relationships and secondly contracts”. Interestingly, Novolex did not specifically make this point in the motion to reject the briefing.

These results highlight the potential for uncertainty when asking courts to resolve disputes over claims under RWI guidelines. The disagreements can include dense corporate agreements with ambiguous, verbose provisions that are ripe for disputes between contracting parties and insurers. Adding another third party (the court) to the mix to fix these differences can even lead to interpretations that were not previously considered. The court is of course not limited to the objections of the parties in their motions and responses.

In the Novolex decision, the court reached two conclusions that the contracting parties may not have foreseen. First, it might have assumed that advertising agreements were included in representations in the sales contract that did not include other types of orders such as supply contracts. (It is not clear from the statements of the court in its oral decision whether it actually reached this conclusion.) Second, it interpreted a representation in the sales contract in a way that was not expressly brought forward by any of the contracting parties during the briefing.

In any event, the uncertainties this decision highlights may explain, at least in part, why RWI claims are more negotiated than ordinary insurance claims. And it might be helpful to explain why RWI guidelines often contain arbitration clauses that can result in subject matter experts resolving disputes rather than more general judges resolving disputes in court. The Novolex case now continues and, as one of the rare lawsuits RWI is involved in, is one to watch out for.

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