New York Appellate Court Orders Reinsurers To Follow the Fortunes
In the recent decision, United States Fidelity & Guaranty Co. v. American Re-Insurance Co., et al, (a copy of which is available here), the New York Appellate Division, First Department, affirmed an insurer’s $420 million judgment against its reinsurers, applying the “follow-the-fortunes” doctrine which requires reinsurers to cover an insurer’s claim settlement that is “at least arguably within the scope of the insurance coverage that was reinsured.”
The underlying coverage action, which commenced in 1993, was brought by Western MacArthur Company (“MacArthur”), the successor to a company that sold, distributed and installed asbestos-containing products during the 1950s and 1960s. After being sued by thousands of individuals for asbestos-related injuries, MacArthur sought coverage from its insurers, including United States Fidelity & Guaranty Company (“USF&G”). In 2002, USF&G and other insurers paid $987.3 million to satisfy all asbestos-related claims against MacArthur. USF&G then ceded a portion of the loss to its treaty reinsurers, however, the reinsurers declined coverage primarily based on their belief that the settlement included amounts paid by USF&G for MacArthur’s bad faith claims against it.
In the reinsurance coverage action that ensued, the parties submitted cross-motions for summary judgment, and the lower court granted USF&G’s motion for summary judgment. The reinsurers appealed, arguing that the court erroneously applied the “follow the fortunes” clause contained within the reinsurance treaty.
In a majority decision, the Appellate Division held that the lower court correctly determined that the “follow-the-fortunes” clause required defendants to accept the reinsurance presentation made by USF&G, and, thus, it was precluded from considering the reinsurers’ arguments with respect to the settlement details on the merits. Specifically, the reinsurers sought to second-guess USF&G’s decisions concerning allocation of the loss, such as whether the settlement included the alleged bad faith claims, whether the decision not to spread the loss over the thirteen policy years was proper, the valuation of the lung cancer and mesothelioma claims, and the alleged alteration of the loss presentation from an accident to occurrence basis. Nonetheless, the majority found that even if it were permitted to consider the reinsurer’s arguments on the merits, it would still disagree that the reinsurers should be excused from their obligations.
The dissenting opinion found that “there is a triable issue of fact as to whether a portion of the $987.3 million settlement . . . was for bad faith claims, which are not covered by the reinsurance treaty.” Justice Abdus-Salaam opined that the treaty covers “any loss” arising out of an “accident” but that the plain language of the treaty indicates that extra-contractual liabilities are not included in the “ambit of a loss arising out of an accident .”
The majority opinion, addressing Justice Abdus-Salaam’s concerns, found that MacArthur’s prior bad faith claims have no bearing on the reinsurers’ obligations because the settlement agreement that resolved the underlying coverage action does not allocate any of the settlement funds to compensating MacArthur for USF&G’s alleged bad faith. Moreover, the parties that negotiated the settlement confirm that the settlement money was solely allocated to establish and administer a trust fund to compensate asbestos claimants and to reimburse MacArthur’s litigation fees and costs.