Article

Note:Employees Insurance of Wausau, Insurer, provided The Power P.E.O., Inc., Insured, with a proposal for a worker's compensation policy which required Insured to obtain a "clean and irrevocable" LC in the amount of US$ 85,000 to secure worker's compensation claim disbursements paid by Insurer. Insurer issued the policy for one year, although Insured did not provide the LC. Four months later, Insurer sent its form entitled "Clean and Irrevocable LC" which set forth the terms of the LC, including a provision for automatic annual renewal unless there was receipt of written notification of contract termination 30 days prior to automatic renewal. Insurer sent a second form entitled "Loss Payment Fund and Letter of Credit Use Agreement" which included time provisions for procuring a LC and for finding a lender acceptable to Insurer. It further provided that the LC:

"Shall be provided to [Insurer] during the term of the subject policies, and for a period of ____ years after the latest termination date of any subject policy, or until all known claim files and losses have been resolved by final settlement or judgment respecting any subject policy issued with an Endorsement(s), whichever period is longer (the "Coverage Period")."

There was no termination date in either of the two documents sent by the Insurer for the LC. The Insurer refused to accept cash collateral rather than the LC and refused an LC issuer proposed by the Insured. When Insurer found an issuing bank it deemed acceptable, the bank "refused to issue the LC because it found [Insurer's] LC terms unacceptable." Nine months later, Insurer cancelled its policy due to an inability to agree on terms regarding the LC.

Insured then filed suit seeking to enjoin Insurer from canceling the policy in order to keep their clients from losing their worker's compensation insurance. Insurer counter-claimed alleging breach of contract, bad faith, fraud, and unjust enrichment. The Superior Court in Maricopa County, Sticht, J., granted Insured's injunction but further ordered Insured to post US$ 130,000 bond.

On reconsideration, the court ordered Insured to obtain and provide an US$ 85,000 LC with "a lending institution approved by [Insurer] on a form provided by [Insurer]" as a condition of maintaining the worker's compensation insurance. The court also reduced the amount of the bond to US$ 90,000, "subject to further reduction should [Insured] provide the LC."

On appeal, the Court of Appeals of Arizona, Division One, Department C, affirmed the award of specific performance. The Insured contended that Insurer had an adequate remedy at law other than having Insured obtain the LC, that the court's finding of irreparable harm was clearly erroneous, and that the court unlawfully added terms to the LC agreement.

The appellate court treated the order that Insured post the LC as if it were separate award of mandatory injunctive relief. Noting that the Insurer demonstrated a likelihood of success on the LC issue because the contract called for an LC to be issued, the appellate court concluded that Insurer would sustain irreparable injury were an LC not posted. It concluded, "a preliminary injunction is a proper remedy in the nature of an order of specific performance."

The remaining inquiry posed by Insured was "whether the lack of a termination date renders the LC too uncertain to specifically enforce." Insurer argued that, "the requirement of an LC in a contract such as their contract cannot have a termination date because of the nature of workers' compensation insurance claims. Because claimants by law may petition to reopen their claims for previously undiscovered conditions, [Insurer] effectively contends that, in the case of an LC to secure reimbursements for workers' compensation claims, there is no termination date per se. Instead, an LC remains effective until all known claims arising during the policy period have been handled...." Focusing on the required LC clause that provided "or until all known claim files and losses have been resolved by final settlement or judgment respecting any subject policy issued with an Endorsement(s), whichever period is longer (the "Coverage Period")", the appellate court concluded that the quoted language "renders the LC termination date sufficiently certain to specifically enforce the LC. Until all workers' compensation claims arising during the policy period... are resolved, the LC remains in effect." The appellate court stated that this conclusion is consistent with public policy of Arizona's worker's compensation laws allowing employees to reopen claims for previously undiscovered injuries.

Comment: While the expiration event indicated by the court may seem reasonable to it, the provision ("until all known claim files and losses have been resolved by final settlement or judgment respecting any subject policy issued with an Endorsement(s), whichever period is longer") turns on an event that cannot be ascertained by the bank in the normal course of its banking activities. Were a bank to issue such an LC, it would violate the safety and soundness Section 7.1016(b)(iii) the Office of the Comptroller of the Currency's Interpretative Ruling that requires an LC to either have an expiration date or the ability to self-terminate by paying the proceeds of the LC. See LC Rules & Laws (2nd Ed. 2002). It would be no wonder that a bank would refuse to issue such an LC. Obviously, the court does not understand the nondocumentary character of its proposed expiration date. While the problem could possibly be fixed with some creative drafting, as proposed, the LC does not accord with standard international LC practice.

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

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.