Illinois ex rel. Hammer v. Twin Rivers Ins. Co., No. 16 C 7371, 2017 U.S. Dist. LEXIS 103833 (N.D. Ill. Jul. 5, 2017).

An Illinois federal court dismissed a complaint filed by the Illinois Director of Insurance, in her capacity as rehabilitator of a defunct cedent, against a reinsurer alleging breach of contract, breach of the implied covenant of good faith and fair dealing, unjust enrichment and violation of RESPA. Finding the complaint did not state a claim upon which relief could be granted, the court dismissed the claims with prejudice, provided however that the court granted the Director an opportunity to amend her complaint to state a breach of contract claim.

According to the complaint, the defunct cedent sold PMI that was reinsured by the reinsurer. The reinsurer was affiliated with the banks that originated the underlying mortgages. In the course of originating mortgages, the affiliated banks would refer borrowers to the cedent and the reinsurer would reinsure PMI only on those loans originated by the affiliated banks. Under the reinsurance agreement, the cedent would pay a percentage of premium to the reinsurer, which was deposited in trust accounts. The trust accounts were used to pay reinsurance claims and dividends to the reinsurer and the affiliated banks.

The Director alleged that the reinsurer breached its agreement by failing to provide disclosures to referred borrowers as to the benefits the reinsurer derived from the captive reinsurance arrangement consistent with disclosure requirements imposed by HUD. In its motion to dismiss, the reinsurer argued no provision of the agreement obligated it to provide HUD disclosures to borrowers and, even if there were a contractual obligation to do so, the Director sustained no harm. In response, the Director pointed to a warranty provision in the agreement that stated that the reinsurer would not violate any "agreement with, or condition imposed by, or consent required by... any governmental... body" in executing or performing the agreement. Finding that this warranty only related to specific and individual legal constraints precluding the reinsurer from executing or performing the agreement, and did not require the reinsurer to provide HUD disclosures to borrowers, the court held the complaint failed to state a breach of contract claim. Nonetheless, the court granted the Director 60 days to amend her claim, giving her the chance to assert a cognizable claim.

In her claim for breach of the implied covenant of good faith and fair dealing, the Director alleged that the reinsurer selectively referred borrowers to the cedent that had the highest risk of default. In dismissing this claim, the court noted that a breach of good faith and fair dealing claim could only succeed where an agreement vests a party with discretion to perform an obligation and that discretion is exercised in bad faith, unreasonably or inconsistent with the expectation of the parties. In reviewing the compliant, the court found the Director did not allege that the agreement vested the reinsurer with discretion to refer borrowers selectively to the cedent. In addition, it was undisputed that the cedent had the right to reject any borrower referred to it for coverage. For these reasons and others, the court dismissed the good faith and fair dealings claim with prejudice.

The Director also alleged that the reinsurer violated RESPA on the ground that the premium ceded to the reinsurer constituted kickbacks paid in exchange for the reinsurer referring borrowers to the cedent. This claim was dismissed with prejudice based on the statute of limitations applicable to RESPA claims. The court also dismissed the Director's unjust enrichment claim on the ground that unjust enrichment cannot be asserted in circumstances where an express contract governs the relationship of the parties.