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Security Plans, Inc. v. CUNA Mutual Insurance Society
United States Court of Appeals, Second Circuit
769 F.3d 807 (2014)
Security Plans, Inc. (plaintiff) was a company that sold insurance policies for loans. Security sold its book of business (i.e., the insurance policies it had issued) to CUNA Mutual Insurance Society (defendant) for $3 million plus an additional earnout payment that would be calculated three years after the sale. This earnout payment was meant to measure the performance of Security’s book of business. The sale contract specifically gave CUNA the discretion to operate its business using its best business judgment with no obligation to maximize Security’s earnout payment. Under the sale contract, the earnout payment would be calculated using a formula that involved some further discretion by CUNA, but primarily looked at both the premiums brought in by the acquired business and the loss ratios for the acquired business. The loss ratios included both actual losses under the policies (e.g., benefits paid out to policyholders) and the cash reserves that insurance companies are required to hold for possible claims. However, during the period used to calculate the earnout payment, CUNA kept unusually high claim reserves for all its businesses. CUNA claimed that holding high reserves had been a business decision, but it did eventually reduce the size of its reserves to more normal levels. Security claimed that CUNA’s high reserve levels were a systemwide mistake by CUNA. The abnormally high reserve levels meant that the loss ratios for Security’s book of business were also unusually high, making Security’s performance look worse than it actually was. Several CUNA managers noticed that the reserve levels had distorted the calculations for Security’s earnout. These managers took some steps to recalculate the earnout using more accurate loss figures, but they never completed a revised calculation. Security sued, claiming that CUNA’s actions had violated the implied duty of good faith and fair dealing in the sale contract. CUNA moved for summary judgment on this claim.
Rule of Law
Holding and Reasoning (Sack, J.)
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