Reinsurers on the Hook for Settlement that Arguably Included Bad Faith Claims

United States Fidelity & Guar. Co. v. American Re-Insurance Co.
N.Y. App. Div. 1st DepaEUR(TM)t, Jan. 24, 2012

The case arose out of litigation concerning the underlying asbestos claims spanning several decades. The Appellate Court reviewed and affirmed the lower courts Order granting the reinsured summary judgment and denying the reinsureraEUR(TM)s motion for summary judgment. The reinsurance treaty involved was an excess of loss treaty with a $100,000 retention and a maximum $4.9 million payable by the reinsurers for any one loss subject to a $3 million limit for personal injury or property damage liability. The reinsureraEUR(TM)s refused to pay the reinsuredaEUR(TM)s claim for several reasons including the basis that the settlement included an amount for the settlement of bad faith claims which were not covered by the treaty.

The reinsurersaEUR(TM) argued that the lower court erred in applying the aEURoefollow the fortunesaEUR? doctrine. After a brief statement setting forth the purpose of the doctrine, the Appellate Court affirmed its applicability finding that it precluded the courtaEUR(TM)s review of the reinsuredaEUR(TM)s allocation of the loss, including any alleged bad faith claims. The court stated that the parties involved in negotiating the settlement confirmed that the settlement amount did not include costs for bad faith. Additionally, the court stated that the issue of payment for the bad faith claims was never aEURoeactually litigatedaEUR? despite statements in the bankruptcy court record that the insured had aEURoecolorable claims for bad faithaEUR? and that aEURoesome portion of the $2 billion contribution to the trust was attributable to those bad faith claims.aEUR?

The opinion drew a one judge dissent with the view that a triable issue of fact existed with regard to whether a portion of the $987.3 million was attributable to the bad faith claims not covered under the reinsurance treaty. The dissenting opinion notes the reinsuredaEUR(TM)s reliance on Peerless Ins. v. Inland Mut. Ins. for the proposition that bad faith damages are covered under the reinsurance treaty but distinguishes the cases based on the fact that the reinsurers here did not participate or acquiesce in the reinsuredaEUR(TM)s defense of the underlying action. Regardless, the dissent cites the New York Court of Appeals case, Travelers Cas. & Sur. Co. v. Certain Underwriters at LloydaEUR(TM)s of London for the proposition that a follow the fortunes clause does not serve to alter the terms of the contract or create coverage where none exists. The dissent points to language in the bankruptcy court opinion that clearly suggests that the court would not have approved the bankruptcy plan if it had believed that there was no payment for bad faith claims included in the settlement.

For a copy of the decision click here

Jeffrey Kingsley and Patrick Omilian

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