Washington Inter'1 v. Ashton Agency 10-cv-526-LM 9/10/12 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

Washington International Insurance Company and North American Specialty Insurance Company

v. Civil No. lO-cv-526-LM Opinion No.

Ashton Agency, Inc.

O R D E R

This case now consists of claims asserted by Washington

International Insurance Company and North American Specialty

Insurance Company (collectively "Washington") against Ashton

Agency, Inc. ("Ashton") for: (1) breach of contract; (2) breach

of fiduciary duty; and (3) specific performance. All three

claims arise from Ashton's alleged failure to remit premiums it

collected for commercial surety bonds it sold as Washington's

agent. Before the court is Washington's motion for summary

judgment. Ashton objects. For the reasons that follow,

Washington's motion for summary judgment is granted in part.

Summary Judgment Standard

"To prevail on summary judgment, the moving party must show

that 'there is no genuine dispute as to any material fact and

the movant is entitled to judgment as a matter of law.'" Markel Am. Ins. Co. v. Diaz-Santiago,

(1st Cir. 2012) (quoting Fed. R. Civ. P. 56(a)). Here, the

parties have "stipulate[d] that the remaining issues in this

case can be resolved on a motion for summary judgment." Stip.

(doc. n o . 56), at 1.

Background

Washington issues surety bonds. In 2004, Ashton entered

into an agreement with Washington (hereinafter "Agreement"),

under which Ashton sold Washington's bonds, collected premiums,

took a commission, and remitted the remainder, i.e., the net

premium, to Washington. Under the Agreement, Ashton "agree[d]

to pay [Washington] [the] net premium due on all business placed

by or through the Agent [i.e., Ashton] with [Washington] not

later than forty-five (45) days after the end of the month in

which the business written [became] effective . . . ." Loeffler

Aff., Ex. 1, Part B (doc. no. 65-2), at 7.

Pursuant to the Agreement, Ashton sold 834 Florida motor-

vehicle-dealer surety bonds for which Washington was the surety.

On each bond, the principal was a Florida motor vehicle dealer,

and the obligee was the Director of the Florida Division of

Motor Vehicles. The bonds ran to the benefit of persons who

purchased motor vehicles from dealers who violated certain

Florida statutes. Each bond had a term of May 1, 2010, through

2 April 30, 2011. It appears to be undisputed that the bonds

operate on an "occurrence" basis rather than a "claims-made"

basis. That means that the surety is on the risk for up to five

years after the end of the term of a bond, depending upon the

limitation period for the statutory violation underlying a claim

on the bond. Ashton collected premiums for all 834 of the

Washington bonds it sold, but, to date, has not remitted the net

premiums on any of those bonds to Washington.

In mid August of 2010, for reasons that are not material,

Ashton told Washington that it intended to "move" the 834

Washington bonds it had sold to the Great American Insurance

Company ("Great American"). Washington objected, but, on

October 1, 2010, Ashton issued between 551 and 578 Great

American bonds to the same auto dealers to which it had

previously issued Washington bonds.1 It appears to be undisputed

that Ashton remitted to Great American the premiums it initially

collected for the Washington bonds it replaced, to pay for the

replacement bonds. The Great American "replacement bonds" had

the same term as the Washington bonds they replaced, and,

according to Ashton, once Great American issued its bonds, the

Washington bonds they replaced "ceased to exist." Ashton Decl.

(doc. no. 68-5) 5 10. Based on the number of Great American

1Even though the parties stipulated that their dispute could be resolved on summary judgment, they disagree about the number of replacement bonds Ashton issued.

3 bonds Ashton issued, between 256 and 283 of the Washington bonds

Ashton issued remained in force for their full terms. The

parties agree that the net premiums associated with those bonds

amount to $482,199.33. On September 24, 2010, Washington

initiated the process for terminating the Agreement, and the

termination became effective on December 25, 2010.

Based on the foregoing, Washington sued Ashton in nine

counts, three of which remain unresolved. In Count I,

Washington asserts a claim for breach of contract, and seeks to

recover the premiums Ashton collected for all 834 of the

Washington bonds it sold, both the ones that were replaced and

the ones that were not. Count IV is a claim for breach of

fiduciary duty. It alleges more or less the same conduct that

underpins Count I and seeks essentially the same damages. Count

VII is a claim for specific performance, based on Ashton's

alleged failure to: (1) hold the premiums it collected in trust;

and (2) remit those premiums to Washington in a timely manner.

Discussion

Washington argues that Ashton breached the Agreement and

its fiduciary duties by: (1) failing to remit the net premiums

it collected for the Washington bonds that were never replaced;

(2) failing to remit the net premiums it collected for the

Washington bonds that were replaced; and (3) replacing 551

4 Washington bonds with Great American bonds. Ashton agrees that

it owes Washington $482,199.33, i.e., the amount of the net

premiums it collected for Washington bonds that were not

replaced with Great American bonds. Necessarily, then, Ashton

admits liability on Washington's claims as to the bonds that

were not replaced. But, Ashton argues that it owes Washington

nothing with respect to the bonds that were replaced, because:

(1) it did not breach the Agreement by replacing Washington

bonds with Great American bonds; (2) it did not act in its own

self-interest by replacing Washington bonds with Great American

bonds; and (3) even if it did breach the Agreement by replacing

the Washington bonds, Washington cannot meet its burden of

proving damages.

First things first. Ashton devotes considerable attention

to what may be a meritorious argument that no provision of the

Agreement prohibited the replacement of Washington bonds with

Great American bonds. But, Ashton seems to ignore Washington's

claim that it also breached the Agreement by failing to remit

net premiums for the bonds it later replaced. However, if

Ashton breached the Agreement by failing to remit net premiums

on the bonds it did not replace, which it concedes, it also

breached the Agreement by failing to remit net premiums on the

rest of the Washington bonds it sold. As of July 15, 2010,

forty-five days after the last day of the month in which all 834

5 of the Washington bonds that Ashton sold became effective,

Ashton owed Washington the net premiums for all 834 bonds. When

July 15 came and went without Ashton remitting those premiums,

Ashton was in breach of the Agreement. Whether Ashton further

breached the Agreement ten weeks later by replacing the

Washington bonds with Great American bonds is an interesting

legal question, but one the court need not resolve, as

Washington does not indicate how the damages available for that

purported breach would be any greater than the damages available

for the breach that occurred on July 15. To sum up, Washington

is entitled to judgment as a matter of law that Ashton breached

the Agreement and its fiduciary duties by failing to remit the

net premiums it collected on the Washington bonds it later

replaced with Great American bonds.

Because Washington is entitled to judgment as a matter of

law on liability, all that remains is the matter of damages for

Ashton's breach of its contractual obligation to remit the net

premiums it collected on the bonds it later replaced.

Washington argues that it is entitled to the $1,024,373.84 it

was owed on July 15, 2010, for the subsequently replaced bonds.

In Washington's view, recovery of the full amount it was owed on

July 15, 2010, would place it in the same position it would have

been in if Ashton had fully performed its obligations under the

Agreement. In Ashton's view, awarding Washington the full net

6 premium would result in an enormous windfall because Washington

is no longer on the risk, due to the issuance of the Great

American replacement bonds. Ashton also argues that Washington

is not entitled to any amount of pro rata damages, because it:

(1) has not expressly asked for such relief; (2) is not on the

risk; and (3) has suffered no actual damages.

Based on the parties' briefing, several things are clear.

First, if the court were to award Washington the full amount of

the net premiums Ashton collected for the bonds it later

replaced, Washington would receive an unwarranted windfall. To

be sure, "the goal of damages in actions for breach of contract

is to put the non-breaching party in the same position it would

have been in if the contract had been fully performed." George

v. A1 Hoyt & Sons, Inc.,

(2011)

(quoting Robert E. Tardiff, Inc. v. Twin Oaks Realty Trust,

(1988); citing Hawkins v. McGee,

(1929)). Had the contract been fully performed, Washington

would have collected $1,024,373.84 in premiums from Ashton, and

would be on the risk until April 30, 2016. But, Washington is

not on the risk; Great American is. Awarding Washington over $1

million in premiums without exposure to any risk is a much

better position than the one Washington bargained for.

However, awarding Washington nothing would leave it in a

worse position than the one it bargained for. The position that

7 Washington bargained for was to retain as profit the difference

between net premiums it took in and the claims it paid out. The

profit that Washington would have realized from the bonds that

Ashton replaced cannot be known with exact certainty until April

30, 2016, the date on which Great American is no longer on the

risk that Washington initially insured. That said, the court is

confident that Washington's lost profits could be determined to

a reasonable degree of certainty, based on past history, current

trends, and all the other relevant statistical information that

is commonly relied upon in the actuarial realm of the insurance

world. But the record in this case, as currently developed,

does not permit the court to make a properly supported award of

lost profits.

Ashton's argument that Washington is entitled to no damages

for breach of contract is misguided for at least two reasons.

First, Ashton did breach the Agreement by failing to remit

premiums for 834 bonds to Washington. While Ashton now argues

that it remedied its breach by putting Great American on the

risk in place of Washington, the court is aware of no rule of

law that permits a breaching party to choose the manner in which

its breach is remedied, especially where, as here, the course of

action selected by the breaching party deprives the party that

was wronged of the very benefit it bargained for, i.e., the profit resulting from paying less in claims than it received in

premiums.

Second, Ashton's position ignores the fact that regardless

of the retroactive effect of the bonds Great American issued on

October 1, when those bonds were issued, Washington had been on

the risk for five full months, despite having received no

premiums from Ashton. That may be a compensable injury, as

there is a reasonable argument to be made that Washington's

operations, and in particular its decisions about cash

management, were affected by the risk to which it was exposed.

Under the terms of the Agreement, Washington was prepared to be

on the risk without the benefit of premiums until July 15, but

it did not agree to be on the risk for another ten weeks without

the benefit of premiums from which to pay claims. But, thanks

to Ashton's breach, that is precisely the position in which

Washington found itself.

So, here is where things stand. Washington is entitled to

judgment as a matter of law on liability; Ashton breached both

the Agreement and its fiduciary duties by failing to pay the net

premiums on 834 bonds on July 15. For that breach, Washington

is entitled to: (1) $482,199.33, i.e., the net premiums for the

bonds that were not replaced; and (2) the profits it would have

earned from the replaced bonds, an award that both puts

Washington in the position it bargained for and compensates it

9 for the ten weeks it spent on the risk without any premiums from

which to pay claims.

Because the parties have framed their arguments concerning

damages on an all-or-nothing basis, the court has no good way to

calculate Washington's lost profits. Accordingly, the hearing

currently scheduled for September 19, 2012, shall serve as a

case-management conference focusing on the procedural framework

for determining the correct measure of damages. As a guide to

the parties, the court notes Robert Ashton's testimony about

Washington's "'continuing concern' with the Florida DMV bond

program loss ratio," Ashton Decl. (doc. no. 47-5) 5 5. If that

testimony is accurate, it is possible that Washington's lost

profits may not be large enough to justify the expense of

documenting and litigating them. But, that is for the parties

to determine, in their own best interests. Finally, as Ashton

insists that Washington is no longer on the risk, and faces no

exposure to claims on the bonds it issued, Washington is

entitled to be held harmless by Ashton in the event that any

person attempts to make a claim against Washington on any of the

replaced bonds.

Conclusion

For the reasons and to the extent stated above,

Washington's motion for summary judgment, document no. 64, is

10 granted in part. The court will meet with the parties on

September 19 to make a plan for determining the correct measure

of damages.

SO ORDERED.

Landya McC^fferty United States Magistrate Judge

September 10, 2012

cc: Bradford R. Carver, Esq. Geoffrey M. Coan, Esq. Eric H. Loeffler, Esq. Jeffrey C. Spear, Esq.

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