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Allstate Ins. Co. v. American Home Ins. Co.

Issue Discussed: Follow the Fortunes / Settlements

Submitted by Cecilia Froelich Moss, Karen Baswell

Date Promulgated: June 12, 2007

Allstate Ins. Co. v. American Home Assur. Corp., 837 N.Y.S.2d 138, 43 A.D.3d 113 (N.Y. App. Div., 1st Dep’t 2007)

Court:                         New York State Supreme Court, Appellate Division, First Department

Issues Decided:          Whether, under the follow-the fortunes doctrine, a reinsurer is bound to its cedent’s single-occurrence-per-site allocation when the allocation directly contradicts both the cedent’s and the underlying insured’s pre-settlement positions, and a federal court’s order finding multiple occurrences.

Factual Background

American Home issued two multi-year commercial property insurance policies to United Technologies Corporation (“UTC”).  Under both policies, UTC had a self-insured retention of $200,000 for “any one occurrence.”  American Home purchased reinsurance from Allstate under two multi-year facultative certificates, each of which attached excess of $1 million of any single occurrence loss.

UTC sued American Home in federal court for indemnification for environmental pollution losses at various sites.  During that litigation, both parties argued that there were multiple occurrences at each site.  However, they disputed the number of occurrences, with American Home arguing for a higher number and UTC arguing for a lower number of occurrences.  Due to the number of sites at issue, the court handled the litigation in phases.  During the first phase, a jury determined that UTC had proved loss or damage to seven different areas within the Windsor Locks site during the period covered by the American Home policies.  Following the jury’s verdict, the parties sought summary judgment as to the number of occurrences and the judge ruled that there had been seven occurrences at that site.

While American Home’s motion for a retrial was pending, the parties settled with respect to the Windsor Locks site, but neither party conceded the number of occurrences.  The litigation continued with respect to 16 other sites.  During settlement negotiations, American Home argued that there had been 95 occurrences at the 16 sites; UTC argued that there had been 44.  Eventually, the parties reached a global settlement.

After the settlement, American Home prepared an allocation for reinsurance purposes on a one-occurrence-per-site basis.  Under this allocation, losses at four sites triggered Allstate’s certificates.  When American Home sought payment from Allstate, Allstate noted the inconsistency between American Home’s multiple-occurrences-per-site position in the litigation and its single-occurrence-per-site allocation for reinsurance purposes.  Allstate then refused to pay because American Home’s settlement with UTC would not have reached the attachment point of Allstate’s certificates if the allocation had been consistent with either American Home’s or UTC’s positions in the underlying litigation.

Allstate then sought declaratory judgment against American Home, and both parties moved for summary judgment.  American Home argued that its allocation was reasonable, and that Allstate was bound by the follow-the-fortunes doctrine.  In contrast, Allstate argued that follow-the-fortunes did not apply because the allocation was unreasonable.

The motion court granted American Home’s motion, relying on North River Ins. Co. v. ACE Am. Reins. Co., 361 F.3d 134 (2d Cir. 2004), and Travelers Cas. & Sur. Co. v. Gerling Global Reins. Corp. of Am., 419 F.3d 181 (2d Cir. 2005).  It found that follow-the-fortunes applied even though the loss allocation was inconsistent with the cedent’s pre- and post-settlement allocation positions.  Allstate appealed.

Key Holding

The Appellate Division reversed, rejecting the notion that follow-the-fortunes always requires deference to a ceding company’s allocation.  The court focused primarily on the facts that: (i) in the underlying litigation, neither party asserted a single-occurrence position and American Home argued for a significantly higher number of occurrences than UTC did, but then (ii) American Home argued for a single occurrence at the reinsurance level.  Based on the particular facts of this case, the court concluded that applying the follow-the-fortunes doctrine to American Home’s allocation would “lend[] the court’s imprimatur to defendant’s playing by two sets of rules: one, applied at the insured’s claim level where the occurrence deductible is used as often as possible to minimize the amount of the insurer’s exposure and loss, and later, in the same loss setting, another where the occurrence deductible is used as sparingly as possible to maximize the reinsured’s recovery against the reinsurer.”  Thus, it held that, while the follow-the-fortunes doctrine “extends to a post-settlement allocation despite ‘an inconsistency between that allocation and the [reinsured’s] pre-settlement assessment of risk,’ it applies only ‘as long as the allocation meets the typical follow-the-settlements requirements, i.e. is in good faith, reasonable, and within the applicable policies.’” (quoting North River).

The court then concluded that American Home’s allocation was not reasonable because it: (i) ignored the federal court ruling as to the number of occurrences at the Windsor Locks site; and (ii) contradicted the multiple-occurrence position that both American Home and UTC asserted in the underlying litigation and settlement negotiations.  The court also found that it was “disingenuous” for American Home “to assert aggressively the maximum number of occurrences at each site to minimize its liability to its insured in the UTC litigation, and then completely change its position in allocating its loss to [Allstate] under the reinsurance certificates.”  The court also noted that, “the follow-the-fortunes doctrine was intended to foster consistency in the treatment of losses at both levels, insured and reinsured, not to allow an insurer to use a different set of rules at each level.”

As it was undisputed that there would be no liability under the Allstate certificates had American Home allocated the settlement consistent with the multi-occurrence position it took with its insured, the Appellate Division reversed the lower court and declared that Allstate had no obligation to pay American Home.

Key Takeaways

The follow-the-fortunes doctrine will not bind a reinsurer to follow a cedent’s allocation if the allocation is unreasonable or in bad faith.

Bases for finding that an allocation was not reasonable may include: (i) if it is inconsistent with both the cedent’s and the insured’s pre-settlement arguments; and (ii) if it ignores prior judicial decisions, in an effort to maximize reinsurer liability.

[1] Cecilia Froelich Moss is a founding partner of Chaffetz Lindsey LLP, where her practice focuses on representing major insurance companies in reinsurance disputes and in coverage litigation.  Ms. Moss also handles large scale commercial disputes in court and in international arbitration.

Karen C. Baswell is an associate of Chaffetz Lindsey LLP, focusing on insurance and reinsurance dispute resolution.  Ms. Baswell also has experience representing clients in commercial litigation and international arbitration.