Note: Zurich American Insurance Co. (Insurer) entered into a "retrospective premium agreement" in connection with a "commercial general liability" insurance policy, which required Insurer to make annual adjustments based on incurred losses. If total incurred losses had increased during the year, Insurer was to invoice Watts Regulator Co. (Insured) for additional amounts at the end of the year. Following a dispute over several of the adjustments, Insurer sued Insured.

Pursuant to another agreement, Insured/Applicant delivered to Insurer/Beneficiary a "Clean Irrevocable Letter of Credit" in a form and amount required by Insurer/Beneficiary. The agreement also gave Insurer/ Beneficiary the right to draw on this standby in order to collect any amounts Insurer/Beneficiary claimed were outstanding. Six years later, the agreement was terminated and Insured/Applicant's obligation to provide an LC was also terminated and the LC was returned.

During this period, Insurer demanded payment to be used as a reserve, which Insured refused to pay, claiming that the matter was closed. The parties disputed the amount and a decade after parties' original agreement they entered into a new, separate insurance contract that required Insured to provide a standby, which it did. The LC itself did not limit its use to this new contract, but the contract stated that Insurer/Beneficiary was permitted to draw on the LC in order to "pay any sum under this Agreement which is beyond its due date".

Insurer/Beneficiary did not draw upon the new LC because it was not allowed to do so under the new contract. When Insured failed to pay more than six years later, Insurer sued it for breach of contract. Insurer/Beneficiary claimed prejudgment interest, but Insured/Applicant argued that Insurer/Beneficiary was precluded from recovering this interest because it failed to draw on the LC and that granting interest would constitute a windfall for Insurer/Beneficiary. Ruling that Insured/Applicant did not establish that there was an LC in place on which Insurer/Beneficiary could have drawn and that prejudgment interest did not constitute damages for which there is a duty to mitigate,



The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.