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United States Fid. & Guar. Co. v. American Re-Insurance Co. (N.Y. Sup. Ct. 2010)

Issue Discussed: Follow the Fortunes / Settlements

Submitted by Mary Kay Vyskocil

Date Promulgated: August 20, 2010

Issues Decided: Reinsurers required to follow-the-fortunes of cedents’ settlement of underlying lawsuit.

In United States Fidelity & Guaranty Company v. American Re-Insurance Company, the New York Supreme Court, New York County, granted summary judgment in the amount of $262 million (plus statutory interest, resulting in a judgment of more than $420 million) for cedents United States Fidelity and Guaranty Company and St. Paul Fire and Marine Insurance Company (collectively “USF&G”) against reinsurers American Re-Insurance Company (“American Re”) and Excess and Casualty Reinsurance Association and its pool members (“ECRA” and together with American Re, the “Reinsurers”). The lawsuit arose from the Reinsurers’ refusal to indemnify USF&G for the reinsured portion of USF&G’s $987 million settlement on account of policies USF&G issued to a former seller and installer of asbestos-containing products.

Between 1948 and 1960, USF&G issued a number of liability insurance policies to Western Asbestos Company (“Western Asbestos”), a company that sold and distributed insulation products containing asbestos manufactured by Johns-Manville Company. In 1967, Western MacArthur Company (“Western MacArthur”) purchased most of the operating assets of Western Asbestos, which subsequently dissolved. In 1993, Western MacArthur initiated underlying coverage litigation against USF&G in California state court seeking damages and a declaration that USF&G had a duty to defend and indemnify Western MacArthur against asbestos-related personal injury claims.

In 2002, USF&G settled the underlying insurance coverage litigation for approximately $987 million. As contemplated by the settlement agreement, Western MacArthur and certain affiliated companies filed for bankruptcy protection. USF&G paid the bulk of the settlement proceedings into an escrow account and a bankruptcy trust that were used to pay individuals with asbestosrelated injuries.

USF&G then billed the Reinsurers for their share of the settlement, retaining more than half the settlement amount for its own account. Consistent with the underlying settlement, USF&G treated each individual asbestos claimant as a separate accident, billing only claims that exceeded the $100,000 retention, and following the rationale of the direct settlement, allocated USF&G’s losses and expenses to the 1959 treaty year.

In connection with the reinsurance litigation, USF&G, American Re and ECRA each filed summary judgment motions. The court granted USF&G’s summary judgment motion and denied American Re’s and ECRA’s motions for summary judgment and/or partial summary judgment. In granting summary judgment to USF&G, the court rejected American Re’s principal argument that its obligation to indemnify should be tied not to the loss incurred by USF&G in adjusting and settling its liabilities to Western Asbestos, but instead to what a given individual tort claimant received from the escrow account and bankruptcy trust years subsequent to the settlement. In rejecting American Re’s argument, the court held that “the treaty is a reinsurance contract between USF&G and American Re, and addresses USF&G’s losses pursuant to its underlying policy, not the actual recovery by individual claimants as against USF&G’s insured,” and that, “[a]ny further inquiry into the actual recovery of each claimant would constitute the kind of re-litigation that the follow the fortunes doctrine is designed to avoid.”

The court also rejected several arguments made by ECRA in support of its summary judgment motion, which challenged USF&G’s cession. Specifically, with respect to allocation, the court held that USF&G’s reinsurance allocation was not “at odds with its allocation of the loss with its insured,” and that USF&G “was not required to choose the [allocation] method that would have had the least impact on its reinsurers.” The court further held that ECRA had not presented any evidence that a portion of the settlement amount was attributable to Western MacArthur’s bad faith claim. Finally, the court held that USF&G properly treated each asbestos injury as a separate “loss” under the treaty.

In addressing American Re’s argument in opposition to USF&G’s motion for summary judgment, the court stated that, “[a] reinsurer who seeks to avoid application of the follow-the fortunes by claiming bad faith . . . must make an ‘extraordinary showing of a disingenuous or dishonest failure.’” In granting summary judgment for USF&G, the court found that the Reinsurers failed to make a sufficient showing of bad faith to require trial. As a result of the court’s decision, a judgment was entered against the Reinsurers remaining in the case (some of the ECRA pool members had settled before the court issued its ruling) for more $420 million.

*Ms. Vyskocil is a partner at Simpson Thacher & Bartlett LLP.