The Insurance Company of the State of Pennsylvania v. Equitas Insurance Limited, No. 17-CV-6850-LTS-SLC (S.D.N.Y. July 16. 2020)

Issue Discussed: Follow the settlements; application of UK law in US courts; all sums

Submitted by Charles Leasure

Date Promulgated: July 16, 2020

CaseThe Insurance Company .of the State of Pennsylvania v. Equitas Insurance Limited, No. 17-CV-6850-LTS-SLC (S.D.N.Y. July 16. 2020)

Issues Discussed: Follow the settlements; application of UK law in US courts; all sums

Court: U.S. District Court for the Southern District of New York

Date Decided: July 16, 2020

Issue Decided:  Whether the follow the settlements provision required EIL to indemnify ICSOP for the reinsured portion of a $30 million settlement of an environmental claim that spanned over 44 years, “notwithstanding the three –year stated policy period of each of the Reinsurance Policies” issued by EIL.

Submitted by: Charles E. Leasure III, Partner, Porter Wright Morris & Arthur, LLP.

Equitas Insurance Limited (“EIL”) (as successor to certain reinsurance contracts issued by syndicates at Lloyd’s of London, collectively, “Reinsurers”) reinsured The Insurance Company of the State of Pennsylvania (“ICSOP”) under two facultative reinsurance contracts purchased by ICSOP’s parent company, AIG.  The reinsurance contracts stated that the “[p]erils and interests reinsured hereunder” would be “[a]s original.”  They also contained a “follow-the settlements” provision.  ICSOP’s reinsured policy was an umbrella liability policy issued to a Dole Food Company predecessor (“Dole”) for a three- year period from 1968-1971.

Dole was sued by various homeowners in Carson, CA over pollution from hazardous levels of petroleum hydrocarbons in the soil and groundwater at a housing tract site developed by Dole.  Dole sought insurance coverage for the homeowners’ claims and eventually settled with its insurers for $30 million; $20 million of which was paid under the ICSOP umbrella policy that did not contain a pollution exclusion.  The umbrella policy provided that disputes between Dole and ICSOP would be governed by Hawaii law.  Hawaii follows the all sums doctrine for allocation of progressive environmental damage, which permits allocation of the entire amount of damage to any policy period where damage occurred.

ICSOP billed EIL under the two facultative reinsurance contracts for the reinsured portion of the entire $20 million settlement payment attributable to the ICSOP umbrella policy, which was approximately $7.2 million.  ICSOP contended that the billing was appropriate under Hawaiian all sums allocation principles and that EIL was obligated to “follow the settlements” and reimburse ICSOP under the facultative contracts for any settlement made within the terms of the umbrella policy.  ICSOP also argued that the reinsurance provided co-extensive coverage to its umbrella policy, requiring EIL to reimburse it in full for the settlement under the applicable Hawaiian law.  EIL disputed the billing, claiming it was being asked to pay for 44 years’ worth of pollution coverage even though it only issued three years’ worth of reinsurance.  EIL argued that temporal terms are “fundamental under English law” interpreting insurance policies.  EIL also argued that ICSOP provided it late notice of the claim, and that it should not have to pay ICSOP on that basis.

ICSOP sued EIL in the United States District Court for the Southern District of New York seeking to recover the $7.2 million it billed to EIL.  The parties agreed that English law governed the reinsurance contracts at issue.  Both parties moved for summary judgment.

The court noted that English law contains a strong presumption of “back to back” coverage in reinsurance cases, holding that liability under proportional facultative reinsurance is co-extensive with the underlying insurance.  The court agreed with ICSOP that EIL was obligated to follow the settlement of ICSOP for the full amount of the reinsured portion of the settlement paid by ICSOP to Dole under Hawaiian law – that is, payment for the entire 44 years of pollution damage, not just for a pro rata portion of the three reinsured years.  The court distinguished a factually similar English case argued by EIL that held an exception to the back to back presumption exists because of the temporal element contained in the insurance contracts under English law and that English law does not recognize the all sums allocation method.  The court reasoned that since the parties were aware that Hawaii law governed the underlying ICSOP policy (under the umbrella policy’s terms), the all sums allocation applied to the reinsurance contracts because the parties were aware of and could predict that Hawaii law would govern treatment of the umbrella policy.  The court did not accept EIL’s argument that the exception to the back to back presumption should apply under the theory that the parties could not have predicted what law would govern the underlying polices that were at issue in that case.

The court ruled that the “back to back” presumption under English law together with the follow the settlements principle required EIL to pay ICSOP the full $7.2 million portion of the $20 million payment made under the ICSOP policy to Dole (plus interest from the date payment was due).  The court denied EIL’s late notice motion.