Third Circuit Addresses Difficult Reinsurance Allocation Issue

Travelers Insurance v. Insurance Co. of North America (Third Circuit, June 9, 2010)

In Travelers Casualty Co. v. Insurance Co. of North America, the U.S. Court of Appeals for the Third Circuit confronted the difficult problem of how cedents and reinsurers allocate liabilities across 11 years of coverage and three layers of primary and excess insurance.

The original dispute involved Travelers and its insured over payment of claims submitted under 11 years of primary coverage.  Traveler and its insured eventually settled and Travelers allocated the loss among the excess carriers and determined that the reinsurer of the second layer, INA, was obligated to indemnify for $13,762,395.  INA disagreed with the allocation and refused to pay.

Travelers sued INA in the U.S. District Court for the Eastern District of Pennsylvania, and the district court upheld Travelers’ allocation except for the application of a separate occurrence limit to each year of the three-year policies.

Relying on the principle that the doctrine of “follow the fortunes” applies to post-settlement allocations, the Third Circuit found no bad faith with respect to Travelers' allocation among the excess layers. The court held that the allocations were reasonable under follow the fortunes and upheld Travelers’ allocation as modified by the district court.

For a copy of the decision click here 

Sarah Fang and Joseph Oliva

case provided courtesy of Lexis

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