Commercial Union Ins. Co. v. Swiss Reinsurance Am. Corp.

Issue Discussed: Follow the Fortunes / Settlements

Submitted by Cecilia Froelich Moss, David Byowitz

Date Promulgated: June 27, 2005

Commercial Union Ins. Co. v. Swiss Reinsurance Am. Corp., 413 F.3d 121 (1st Cir. 2005)

Court: United States Court of Appeals for the First Circuit

Issue Decided: Whether, under the follow-the-fortunes doctrine, a reinsurer was bound by its cedent’s settlement based on an annualization of policy limits in multi-year policies, when the reinsurance certificate does not clearly preclude annualization?

Factual Background:

Maryland Casualty issued several single-year and multi-year primary policies to W.R. Grace & Co. (“Grace”).  Each of the multi-year primary policies explicitly provided that their per-occurrence limits applied on an annual basis.

Commercial Union provided excess liability coverage through several multi-year umbrella policies.  The Commercial Union policies contained follow-the-form provisions which stated either that the excess policy would “not be construed any more restrictive” than the underlying policy, or that the excess policy would cover any occurrences covered by the underlying policy.

Swiss Re reinsured three of the multi-year Commercial Union policies, pursuant to three, multi-year facultative certificates.  Each certificate provided reinsurance for a share of Commercial Union’s loss for “each occurrence,” and contained both follow-the-form and follow-the-fortunes clauses.

Grace notified its insurers of potential property damage losses due to hazardous waste pollution at various Grace sites, and Maryland Casualty commenced a declaratory judgment action to clarify the insurers’ obligations.  Commercial Union settled with Grace, based on estimates of projected liability and on certain assumptions, including (i) that liability at each site should be allocated pro rata across the years of coverage at each site, and (ii) that the Commercial Union per-occurrence limits applied separately to each policy year in the multi-year policies.  When Commercial Union sought indemnity from Swiss Re, Swiss Re paid less than half of the amount sought on the basis that the per-occurrence limit should apply to each policy rather than each policy year.  Commercial Union then sued Swiss Re.

On summary judgment, the district court ruled in Swiss Re’s favor.  It held that the per-occurrence limit should apply once to a continuing leakage at a site over the multi-year policy period, rather than once for each policy year.  It found that this was an explicit limit in each certificate, overriding any follow-the-form or follow-the-fortunes provision.  Commercial Union appealed.

Key Holding:

Follow the Fortunes

The First Circuit vacated and remanded.

The Court first looked at Commercial Union’s potential liability to the policyholder, noting that the Commercial Union policies provided that continuous exposure to the same condition “shall be deemed to be one occurrence.”  While this definition is “hostile to annualization,” the Court found that, under the “strong follow-the-form clause[s]” in the Commercial Union policies, Commercial Union could arguably be required to follow the liability provisions of the primary policies, which explicitly provided for annualization.  In fact, Commercial Union’s coverage counsel provided a settlement analysis concluding that annualization was “a likely outcome” in the declaratory judgment action.

Regardless of whether this view of Commercial Union’s liability was correct, the Court held that Swiss Re would be bound under the follow-the-fortunes clause in the certificates, as long as Commercial Union’s settlement was reasonable and made in good faith.  While a follow-the-settlements clause would not compel Swiss Re to respect a settlement that was flatly inconsistent with the excess liability policy, that was not the case here, as the follow-the-form clauses in Commercial Union’s policies arguably incorporated the pro-annualization language of the underlying primary policies.  Further, the Swiss Re certificates did not define “occurrence,” and followed form to the Commercial Union policies.

The Court held that Commercial Union’s settlement based on annualization of policy limits was “seemingly reasonable” and “made (so far as we know) in good faith,” and that Swiss Re was therefore bound to accept the pro-annualization reading of the Commercial Union policy.  However, as the Court could not tell from the record whether the “good faith” of the settlement was at issue, it remanded the case for further proceedings.

Key Takeaway:

Absent specific language in a multi-year reinsurance certificate precluding annualization of policy limits, the follow-the-fortunes doctrine will bind a reinsurer to its cedent’s settlement based on annualization, so long as the settlement was reasonable, made in good faith, and not clearly excluded by the underlying policy.


* 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.

** David Byowitz is an associate of Chaffetz Lindsey LLP, and has experience representing clients in reinsurance disputes and commercial litigation.