Benchmark Insurance Company v. SUNZ Insurance Company

Background

Benchmark Insurance Company filed an interpleader action concerning $20,533,594 in excess deductible collateral connected to a large-deductible workers’ compensation insurance program that Benchmark and SUNZ Insurance Company established in 2015. Interpleader is a procedure that allows a party holding disputed money or property to ask the court to resolve competing claims to that fund. Thirty-five entities were originally identified as possible claimants; most later disclaimed any interest and were dismissed. The remaining insured parties were Century Employer Organization, LLC, Payday, Inc., and Butler America Holdings, Inc.

Century and Payday asserted breach-of-contract crossclaims against SUNZ. They alleged, among other things, that SUNZ improperly increased required collateral, imposed excessive fees, mishandled or misapplied payments, failed to account properly for collateral, and used negligent claims-management practices. Century also alleged that SUNZ wrongfully terminated its policy and improperly drew on a $100,000 letter of credit. Butler asserted a similar crossclaim against United Wisconsin Insurance Company, a SUNZ affiliate, but later voluntarily dismissed that crossclaim without prejudice.

SUNZ also asserted counterclaims against Benchmark. Benchmark responded with five counterclaims-in-reply against SUNZ and SUNZ Insurance Solutions, LLC, alleging breaches of contract, tortious interference, breach of fiduciary duty, and aiding and abetting a breach of fiduciary duty. Benchmark later voluntarily dismissed its indemnification crossclaims against SUNZ Insurance Solutions.

Court’s analysis

The court rejected SUNZ’s argument that Century’s and Payday’s crossclaims fell outside the court’s jurisdiction because they concerned separate contracts and alleged conduct involving non-Minnesota corporations. Under Federal Rule of Civil Procedure 13(g), a crossclaim must arise from the transaction or occurrence involved in the original action or relate to property involved in that litigation. The court concluded that the crossclaims were connected to the same excess deductible collateral involved in the interpleader action and supplied the basis for Century’s and Payday’s claimed interests in that collateral. The court also concluded that the claims would ordinarily be tried in one proceeding and that the Supreme Court’s decision in State Farm Fire & Casualty Co. v. Tashire did not broadly prohibit these crossclaims in an interpleader case.

The court separately considered SUNZ’s requests to compel arbitration under the Federal Arbitration Act. A party seeking arbitration must show both that a valid arbitration agreement exists and that the particular dispute falls within its scope. SUNZ argued that mediation and arbitration provisions in the Program Agreements covered Century’s and Payday’s crossclaims. The crossclaimants argued that their insurance policies and endorsements superseded the Program Agreements. Because the dispute included the validity and applicability of the Program Agreements themselves, the court found that SUNZ had not met its burden of showing that the parties agreed to arbitrate these disputes.

The court also rejected SUNZ and SUNZ Insurance Solutions’ motion to dismiss Benchmark’s counterclaims-in-reply. SUNZ argued that the counterclaims-in-reply were procedurally improper. The court determined that SUNZ’s counterclaims were permissive because they were filed under rules allowing supplemental claims based on matters that matured or were acquired after the original pleading. It then concluded that Benchmark’s counterclaims-in-reply were compulsory because they were logically related to SUNZ’s claims concerning the Trust Agreement and could provide defenses to those claims. The court further concluded that barring Benchmark’s claims while allowing SUNZ’s counterclaims to proceed could improperly restrict Benchmark’s defenses and create a later claim-preclusion problem.

The court declined to compel arbitration of Benchmark’s counterclaims-in-reply. Although some agreements between the parties contained arbitration provisions, the court noted that the Large Deductible General Agent Agreement required litigation in Minnesota state or federal court and that the Trust Agreement did not contain an arbitration clause. The court found that SUNZ had not shown that Benchmark agreed to arbitrate its disputes concerning the collection, management, and distribution of deductible collateral.

Disposition

The court ordered that United Wisconsin Insurance Company be dismissed from the action and recover nothing from the interpleaded funds, pursuant to Butler’s stipulated voluntary dismissal. The court denied SUNZ Insurance Company’s motion to dismiss or, alternatively, compel arbitration of Century’s and Payday’s crossclaims. It denied SUNZ Insurance Company and SUNZ Insurance Solutions, LLC’s motion to dismiss or, alternatively, compel arbitration of Benchmark’s counterclaims-in-reply. It denied as moot SUNZ Insurance Solutions’ motion concerning Benchmark’s indemnification crossclaims. The court also ordered the parties to confer with the Magistrate Judge about whether realigning the claims would promote efficient resolution of the interpleader action and related claims.