Monday, January 21, 2008

7th Circuit School for Smartypants

Judge Richard Posner of the Seventh Circuit Court of Appeals gave a lesson on legal anaylsis and brief writing last week. In Indiana Lumberman's Mutual Insurance Co. v. Reinsurance Results, Inc.,the court considered an appeal in breach of contract case involving a contract of reinsurance. What's that? An insurance company takes risk in exchange for premiums from its customers. That company (the insurer) usually wants to lay off some or all of this risk on someone else. So, an insurer enters into a reinsurance contract with a third party (a reinsurer) to do so. A single insurer may enter into many reinsurance contracts and sometimes needs help from a third party (a "servicer") to manage all its rights under all its reinsuranace contracts. To this end, Lumbermans entered into a contract with the defendant, Reinsurance Results, Inc. (Reinsurance), to take care of Lumberman's rights under its reinsurance policies. In its service contract with Reinsurance, Lumberman's agreed to pay Reinsurance 33% of the benefits Reinsurance obtained on Lumberman's behalf. The lawsuit involved a dispute between Lumberman's and Reinsurance in which Reinsurance claimed 33% of $2.2 million in "value" that Lumberman's received as a result of a change in its accounting practices regarding its reinsurance contracts. Lumberman's contended that it owed Reinsurance nothing and sued for a declaratory judgment.

The issue on appeal was whether the $2.2 million was a "benefit" Lumberman's received as a result of its contract with Reinsurance. Judge Richard Posner cut through the jargon that dominates discourse about reinsurance contracts, which in this case was covered with an even thicker layer of accounting terminology. He concluded that the $2.2 million advantage Lumberman's reaped because of the accounting change had nothing to do with the function Reinsurance was to perform under its contract. Judge Posner painted a clear picture of the case:

One who voluntarily confers a benefit on another, which is to say in the absence of a contractual obligation to do so, ordinarily has no legal claim to be compensated. If while you are sitting on your porch sipping Margaritas a trio of itinerant musicians serenades you with mandolin, lute, and hautboy, you have no obligation, in the absence of a contract, to pay them for their performance no matter how much you enjoyed it; and likewise if they were gardeners whom you had hired and on a break from their gardening they took up their musical instruments to serenade you.

So, the $2.2 million benefit to Lumberman's was like sweet violin music that Reinsurance made on a break from working in Lumberman's garden. And so the case which the parties' lawyers dressed in impervious jargon, was as simple as the case of the violin player who confers a benefit but who cannot recover from the grateful listener absent a contract.

Judge Posner revealed the lasting moral of Lumbermans v. Reinsurance:

A note, finally, on advocacy in this court. The lawyers’ oral arguments were excellent. But their briefs, although well written and professionally competent, were difficult for us judges to understand because of the density of the reinsurance jargon in them. There is nothing wrong with a specialized vocabulary—for use by specialists. Federal district and circuit judges, however, with the partial exception of the judges of the court of appeals for the Federal Circuit (which is semi-specialized), are generalists. We hear very few cases involving reinsurance, and cannot possibly achieve expertise in reinsurance practices except by the happenstance of having practiced in that area before becoming a judge, as none of us has. Lawyers should understand the judges’ limited knowledge of specialized fields and choose their vocabulary accordingly. Every esoteric term used by the reinsurance industry has a counterpart in ordinary English, as we hope this opinion has demonstrated. The able lawyers who briefed and argued this case could have saved us some work and presented their positions more effectively had they done the translations from reinsurancese into everyday English themselves.

To learn more about Judge and Professor Richard Posner, visit Project Posner, a searchable web site of his opinions, and Vol 74 of the University of Chicago Law Review, for reflections of Judge Posner's friends and colleagues commemorating his 25 years on the bench.

Hat tip to PSULaw student Marijana Predovan and WSJLaw Blog.

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