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First Media Insurance Specialists, Inc. v. Onebeacon Insurance Co.

United States District Court, D. Kansas

May 4, 2015

FIRST MEDIA INSURANCE SPECIALISTS, INC., et al., Plaintiffs,
v.
ONEBEACON INSURANCE COMPANY, et al., Defendants.

MEMORANDUM AND ORDER

ERIC F. MELGREN, District Judge.

The success of First Media, a company owned and operated by Tracy Michelle Worrall Tilton and her father Lawrence Worrall, lead OneBeacon and its affiliate to acquire First Media and hire the services of Tilton and Worrall. The agreement was documented by an Asset Purchase Agreement and related agreements including non-compete agreements, and involved among other payments a multi-year profit sharing agreement allowing for additional sums to the sellers (Plaintiffs). Attempted implementation of the profit sharing formula revealed that the parties had widely varying interpretations of its terms. Negotiations gave way to refusals to accept payments, then refusal to tender them, and inevitably litigation.

The Plaintiffs filed a breach of contract action along with clams for fraud, negligent misrepresentation, and breach of fiduciary duty, as well as other claims later dropped voluntarily. In response to dispositive motions, the Court granted Defendants (buyers) judgment on the remaining non-breach of contract claims, finding them barred by the statute of limitations. With respect to the breach of contract claims, the Court granted Plaintiffs judgment on its claims regarding the use of incorrect premium amounts used to calculate the first two years' profit sharing payments and the failure of Defendants to tender non-conditional payments to Plaintiffs or even, in the later years, to make the profit sharing calculations. However, the Court ruled in Defendants' favor regarding the inclusion of deductions for losses for Incurred But Not Reported (IBNR) reserves in making the profit sharing calculations.

The parties agreed that, following those rulings, the issues remaining for trial were whether certain sign-on bonuses and certain Unallocated Loss Adjustment Expenses (ULAE) were properly deductible in making the profit sharing calculations. Even after these final profit sharing issues were resolved, however, the parties also differed on whether Plaintiffs were entitled to interest on delayed payments; and if so the amount of such interest.

The parties tried the case to the bench. The Court now issues its Findings of Fact and Conclusions of Law on the issues tried.

I. Findings of Fact

The Parties

1. Plaintiff First Media Insurance Specialists, Inc. ("First Media") was a managing general agency that underwrote media liability insurance policies and administered claims on those policies.

2. Plaintiff Tracy Michelle Worrall Tilton ("Tilton") founded First Media in 1998 and was an owner until the sale of First Media's assets to OneBeacon in May 2005. At First Media, she drafted media liability insurance policies, administered claims, hired staff, and managed vendor and carrier relationships in addition to other administrative duties. After First Media's sale to OneBeacon, Ms. Tilton became an employee of OneBeacon until OneBeacon terminated her employment in 2010.

3. Plaintiff J. Lawrence Worrall, Jr. ("Worrall") assumed an ownership interest in First Media approximately three years after its founding and continued an ownership interest until First Media's assets were sold to OneBeacon. After the sale to OneBeacon, Worrall worked for OneBeacon as a consultant until OneBeacon terminated his work in 2010.

4. Defendant OBIC is an insurance company that issues polices to insure a variety of risks, including media liability.

5. Defendant OBPI, an OBIC affiliate, sells specialty insurance products.

The Agreements

6. On or about May 2, 2005, Plaintiffs and OneBeacon entered into an Asset Purchase Agreement ("APA") that provided for the sale of the assets and business of First Media by Worrall and Tilton to OBIC. The May 2, 2005 agreement, among other things, contained: (a) an executed Asset Purchase Agreement (the "APA") and (b) related Non-Disclosure and Non-Compete Agreements with Worrall and Tilton (the "Non-Compete Agreements, " collectively with the APA, the "Agreements").

7. Under the Agreements, the parties agreed that, among other consideration, OneBeacon would pay Plaintiffs, collectively, a 25% share of the "Profit" (the "Profit Consideration") earned on future media liability insurance policies to be written by OBIC between May of 2005 and November of 2008 (the "42-month period")-15% to First Media under the APA, and 5% each to Worrall and Tilton as consideration under the Non-Compete Agreements.

8. The APA defines "Profit" for these payments in relevant part as follows: "Profit" means the excess of (A) total media liability insurance premiums written (whether or not fully earned) by Purchaser-affiliated insurance companies during the forty-two (42) month period from the Closing Date (the "Profit Sharing Period"), over (B) the sum of booked Losses, allocated loss adjustment expense ("ALAE") and general expenses during such forty-two month period, all on a GAAP basis (except as otherwise expressly permitted by this Agreement). General expense includes all the direct costs associated with operating the Fairway, Kansas office (including personnel, occupancy and related costs), all policy acquisition costs, insurer-paid premium taxes, provision for unallocated loss adjustment expense ("ULAE"), and an override for corporate overhead equal to one and one half percent (1.5%) of premiums (the "Corporate Overhead Charge").[1]

9. Pursuant to the APA, OneBeacon paid Plaintiffs $850, 000 at closing, including $500, 000 as an advance on Profit Consideration.

10. The remaining Profit Consideration payments were to be made in annual installments, based on the most recent data available, beginning in December 2008 and continuing annually for six years thereafter.

11. The APA sets forth the following payment schedule for when Profit Consideration payments were to be made:

The remaining Profit Consideration shall be payable as follows: (x) within thirty (30) days after expiration of the Profit Sharing Period, [OneBeacon] will pay 60% of the Profit Consideration (basing Profit computations on the most recent data then available), less the $500, 000 Advance; (y) within thirty (30) days after the first anniversary of the expiration of the Profit Sharing Period, [OneBeacon] will pay 100% of the Profit Consideration (again basing Profit computation on the most recent data then available), less all Profit Consideration payments already paid, either at Closing or in the prior year; and (z) within thirty (30) days after each of the subsequent five anniversaries of the expiration of the Profit Sharing Period, [OneBeacon] will pay [First Media] 100% of Profit Consideration (basing Profit computation on the most recent data then available), less all Profit Consideration payments already paid.[2]

12. Under the Agreements, the first Profit Consideration calculations and any resulting payments were due to Plaintiffs by December 2, 2008.

13. The December 2, 2008 Profit Consideration payments were to be for 60% of Plaintiffs' portion of the total "Profit, " as defined in the APA, minus the Cash Advance.

14. The next Profit Consideration calculations and any resulting payments were due to Plaintiffs by December 2, 2009. The 2009 payments were to reflect 100% of Plaintiffs' share of the "Profit" minus all amounts previously paid for Profit Consideration and the Cash Advance.

15. On each of the five anniversaries following the December 2, 2009 payment, OneBeacon was required again to calculate the "Profit, " and if that calculation resulted in an increase in "Profit, " OneBeacon was to pay the amount of any such increase to Plaintiffs.

The 2008 Profit Consideration Payment

16. Before Plaintiffs' first Profit Consideration payment became due, the parties, through legal counsel, debated the proper method for calculating Plaintiffs' payments. Plaintiffs contacted OneBeacon to express concern that OneBeacon's 2008 Profit Consideration calculation contained inaccurate and unauthorized figures.

17. Plaintiffs challenged that OneBeacon used an incorrect gross written premium amount of $40, 614, 244. This figure undervalued by $801, 266 the amount of premium attributable to policies written during the 42-month period.

18. Among other items, [3] Plaintiffs also objected to OneBeacon's inclusion of a separate line-item deduction for "Net ULAE Reserve Increase" in the amount of $379, 985.

19. ULAE, or "unallocated loss adjudged expense, " accounts for any expense related to the in-house costs of handling claims but that cannot be associated with a particular claim. ULAE, for example, includes the costs (salaries, benefits, and travel expenses) of operating a claims department.

20. ULAE expenses are further partitioned into one of two categories, ULAE Incurred or ULAE Reserve. ULAE Incurred includes amounts that relate to the current expenses of the claims department. ULAE Reserve records amounts established for the future payment of claims department expenses.

21. The APA's Profit formula expressly authorizes OneBeacon to include in the Profit calculation "provision for unallocated loss adjustment expense (ULAE')" as an item of "general expenses." The APA does not mention ULAE Reserves.

22. The APA Profit formula also directs that "general expenses" be considered on a GAAP basis.

23. Generally accepted accounting principles ("GAAP") require that both ULAE Incurred and Reserve be recorded.

24. The "Net ULAE Reserve Increase" included in OneBeacon's 2008 "Profit" calculation thus signifies amounts set aside by OneBeacon for the estimated future claims-handling costs of either known or unknown claims arising from policies written during the 42-month period but that would be handled after the end of the 42-month period.

25. The parties also engaged in discussions through their counsel about now to handle payment in light of the parties' ongoing disputes.

26. Plaintiffs' counsel informed OneBeacon's counsel that Plaintiffs were very concerned that OneBeacon would contend that Plaintiffs' cashing of the checks was a waiver of Plaintiffs' rights, because [Plaintiffs] were disputing the amount of the checks and the manner in which the profit share had been calculated.

27. Some time prior to November 14, 2008, OneBeacon's counsel proposed to Plaintiffs' counsel terms under which OneBeacon would make and Plaintiffs would accept the 2008 Profit Consideration payments.

28. On November 14, 2008, Plaintiffs' counsel emailed OneBeacon's counsel, stating:

I was able to catch up with Michelle Tilton and discuss your proposal on payment. As I had mentioned earlier, we are comfortable with an initial payment from OneBeacon but with the clear understanding that our clients are not waiving any rights to dispute the method for calculating the payment and our clients are also not waiving their rights under the various agreements related to the OneBeacon acquisition of [First Media Insurance Specialists].[4]

29. "[I]n connection with [Plaintiffs'] ongoing evaluation of OneBeacon's basis for payment, " Plaintiffs' counsel's November 14, 2008 email also proposed the following steps as appropriate:

1. Please let us know what amount OneBeacon intends to pay and provide us with a calculation for such amount under the contract.
2. We will be sending a model prepared by our actuary for [First Media Insurance Specialists'] calculation of the payment under the contract. This model is based, in part, on information which you earlier provided to us. There are still questions from our earlier emails for which we would request information but we will seek to provide our proposed model, and any remaining question, all at once.
3. We would suggest that a specified date be agreed for final determination of the basis for the profit share calculation. I would suggest two weeks from today's date.
4. Our expert would still like the opportunity to contact your actuary to discuss the basis for your calculations. As mentioned previously, we still have additional questions based on the numbers and information you have requested, and feel that this would give us an opportunity to ...

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