National Union Fire Ins. Co. of Pittsburgh v. American Re-Ins. Co.

Issue Discussed: Follow the Fortunes/Settlements

Submitted by Vincent J. Vitkowsky, Michael P. Thompson, Scott H. Casher

Date Promulgated: July 28, 2006

Issues Addressed: Reinsurer required to follow-the-fortunes of cedent’s settlement of underlying lawsuit.

In National Union Fire Ins. Co. of Pittsburgh, PA v. American Re-Ins. Co., the U.S. District Court for the Southern District of New York granted summary judgment to cedent National Union as against its reinsurer, American Re. It held that American Re failed to prove National Union’s settlement of several underlying claims against its insured was manifestly outside the scope of the policy reinsured by American Re, and further held that American Re failed to otherwise prove that National Union’s decision to pay the claims was fraudulent, collusive, or in bad faith.

National Union insured a machine-manufacturing company under consecutive annual liability policies for each year from 1988 to 1995. American Re reinsured the 1994-95 policy. Claims were brought against the insured for alleged personal injuries caused by metalworking fluids manufactured by the insured and used by the plaintiffs. The insured asserted that manifestation was the applicable trigger of coverage under Ohio law, and it divided and assigned the plaintiffs evenly to two policy years, 1993-94 and 1994-95, based on medical evidence that showed the injuries manifested during that period. National Union initially objected to the insured’s use of a manifestation trigger, but subsequently accepted its insured’s position on trigger of coverage and allocation of claims.

The court held that American Re failed to prove that National Union’s payment of the underlying settlement was clearly or manifestly outside the scope of the insurance coverage that was reinsured, and failed to prove that the settlement was fraudulent, collusive or in bad faith. Although the court agreed with American Re that there was conflicting evidence regarding the exact date that the underlying plaintiffs’ injuries manifested, it held that the underlying claims were “at least arguably within the scope of the insurance coverage that was reinsured.” The Court stated, “American Re, as a reinsurer bound to follow the fortunes of the reinsured, is not entitled to a ‘de novo review of [National Union]’s decision-making process.’ (quoting N. River Ins. Co. v. Ace Am. Reinsurance Co., 361 F.3d 134, 140 (2d Cir. 2004). There is thus no issue of material fact to be tried with respect to whether the underlying claims fell outside of the reinsured policy.”

The court rejected American Re’s next argument that National Union acted unreasonably in accepting its insured’s allocation, and held that the follow-the-fortunes doctrine prohibits judicial inquiry into the propriety of a reinsured’s post-settlement allocation if the settlement itself was in good faith, reasonable, and within the terms of the policies. The Court stated that “this argument must fail because it is exactly the type of inquiry that the follow-the-fortunes doctrine is intended to prevent.” The Court added, “Follow-the-fortunes, then, prohibits judicial inquiry into the propriety of a reinsured’s post-settlement allocation ‘if the settlement itself was in good faith, reasonable, and within the terms of the policies.’ (quoting Travelers Casualty & Surety Co. v. Gerling Global Reinsurance Corp., 419 F.3d 181, 189 (2d Cir. 2005) There has been no suggestion here that the underlying settlement was not taken in good faith or was unreasonable; indeed, American Re explicitly states that it ‘is not questioning the underlying settlement.’ Furthermore, as explained above, the settlement covered claims that were at least arguably within the terms of the policy. An inquiry into the reasonableness of National Union’s post-settlement allocation is therefore inappropriate in light of Travelers Casualty.”

Finally, the court also rejected American Re’s argument that summary judgment was inappropriate because there was evidence from which a reasonable fact-finder could conclude that National Union acted in bad faith with respect to American Re’s interests by accepting its insured’s allocation decision in an effort to maximize reinsurance recoverables. The court held that “even assuming that National Union was indifferent to the improper allocation of plaintiffs to the reinsured policy, it would not rise to the ‘extraordinary’ showing of bad faith required to avoid application of the follow the fortunes doctrine. The simple fact is that National Union had no duty to American Re to minimize its reinsurance recovery.” The Court added that “[l]ike the reinsurer in North River, American Re argues that the apparent inconsistency between National Union’s initial belief that [it insured’s] allocation decision was incorrect and its ultimate acceptance of that allocation in seeking reinsurance coverage is evidence of unreasonableness and/or bad faith. To the contrary, the most it evidences is that National Union took various legitimate factors and risks into account when deciding whether to settle the claims made against it, an examination of which is not an appropriate undertaking under the follow-the-fortunes doctrine.”

* Mr. Vitkowsky and Mr. Thompson are partners and Mr. Casher is an associate in Edwards Angell Palmer & Dodge LLP.