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North River Ins. Co. v. CIGNA Reins. Co.

Issue Discussed: Follow the Fortunes / Settlements

Submitted by Cecilia Froelich Moss, Justinian Doreste

Date Promulgated: April 13, 1995

 

North River Ins. Co. v. CIGNA Reins. Co., 52 F.3d 1194 (3d Cir. 1995)

Court: United States Court of Appeals for the Third Circuit

Issues Decided: Whether, under the follow the fortunes doctrine, the reinsurer was obligated to indemnify the cedent for defense costs because the costs were reasonably within the scope of the underlying policies and the reinsurance certificates.

[This case also addresses the duty of good faith which is not covered by this summary.]

Factual Background

North River issued excess insurance to Owens-Corning.  North River purchased facultative reinsurance from CIGNA.  The reinsurance certificates did not expressly exclude coverage for defense costs.  The disputed issue was whether the certificates covered Owens-Corning’s defense costs, which North River was ordered to pay.

As part of the Wellington Agreement (an industry-wide agreement providing for a standardized mechanism to resolve asbestos-related insurance claims to which North River and Owens-Corning were signatories), insurers and policy holders were required to “schedule” their policies to specify features of coverage.  Under the Wellington Agreement, if the policy holder scheduled its policy to include coverage of defense costs and the insurer failed to submit a schedule stating otherwise, the insurer was deemed to have agreed to the policy holder’s designation.

Owens-Corning scheduled the policies as providing coverage for defense costs in addition to the policy limits.  North River failed to schedule the policies as not covering defense costs.  Instead, North River informed Owens-Corning that it did not agree that defense costs were covered.

North River and Owens-Corning ultimately proceeded to binding arbitration over the defense costs issue.  The arbitrator ruled that North River was obligated to cover Owens-Corning’s defense costs both under the terms of the insurance policy and according to the provisions of the Wellington Agreement.

When North River sought to collect from its reinsurers, CIGNA denied coverage for defense costs.  North River brought suit and, on the issue of follow the fortunes, the district court held that CIGNA was not required to follow North River’s fortunes because defense costs were not a risk CIGNA had assumed.  North River appealed.

Key Holdings

The Third Circuit reversed, finding that it could not say that defense costs were outside the scope of coverage provided by the reinsurance certificates.

The Third Circuit found that, under New York law (which the parties agreed applied to the reinsurance contracts), the “‘follow the fortunes’ doctrine . . . requires indemnification for all payments made in good faith that are reasonably within the scope of the policy’s coverage.”  Id. at 1204-05.  The Court further stated that the doctrine applied to both judgments and settlements, and that judgments included arbitral decisions.  The Third Circuit concluded that the district court erred in limiting the follow the fortunes clause to settlements.  Instead, it concluded that the doctrine applies “generally to all outcomes of coverage disputes, whether in the form of settlements or judgments” and precludes a de novo review of that underlying decision.  Id. at 1205.  Lastly, the Court noted that the follow the fortunes doctrine did not apply to any additional risks undertaken under the Wellington Agreement because the doctrine does “not require the reinsurer to cover risks undertaken after the certificate of reinsurance is issued.”  Id. at 1204.

Applying these principles, the Third Circuit determined that the underlying insurance policies (which the parties agreed were governed by Ohio law) provided coverage for defense costs.  In particular, the Court noted that, in light of conflicting provisions in the policies, the arbitrator’s finding that the underlying policies did not exclude defense costs was not unreasonable.  The Court found that under the follow the fortunes doctrine, CIGNA “must show that the arbitrator’s decision allowed coverage of defense costs that were not reasonably within the scope of the policy” and it had failed to do so.  52 F.3d at 1209.  The Third Circuit concluded that the District Court erred when it concluded that the arbitrator’s decision was not supported by the underlying polies.  The Court further dismissed the argument that the obligation to pay for defense costs arose solely out of the Wellington Agreement, finding instead that the standards under Ohio law were “substantially the same” as those provided for under the agreement.  52 F.3d at 1211.

Key Takeaways

A follow the fortunes clause obligates a reinsurer to indemnify the cedent whenever the cedent, in good faith, resolves a coverage dispute, be it through settlement or binding determination, and the disputed issue is reasonably within the scope of the underlying policy and the reinsurance certificate.

 

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.

Justinian Doreste is an associate of Chaffetz Lindsey LLP, and has experience representing clients in insurance and reinsurance dispute resolutions, international arbitration, commercial litigation, and class action.