Utica Mutual Ins. Co. v. Munich Reins. Amer. Inc. and Utica Mutual Ins. Co. v. Century Indem. Co

Issue Discussed: Defense expenses in addition to limits; Follow the settlements

Submitted by Charles Leasure

Date Promulgated: July 29, 2021

CaseUtica Mutual Ins. Co. v. Munich Reins. Amer. Inc. and Utica Mutual Ins. Co. v. Century Indem. Co.,, 2021 U.S. App. LEXIS 22476 (2d Cir. July 29, 2021)

Issues Discussed: Defense expenses in addition to limits; Follow the settlements

Court: U.S. Court of Appeals for the Second Circuit

Date Decided: July 29, 2021

Issue Decided:  Whether facultative reinsurance contracts issued by the reinsurers of an umbrella insurance policy were obligated to cover defense expenses in addition to the limits of the umbrella policy

Submitted by: Charles E. Leasure III, Partner, Stevens & Lee

Munich Reinsurance Company of America (“Munich Re”) and Century Indemnity Company (“Century”) reinsured Utica Mutual Insurance Company (“Utica”) under two facultative reinsurance contracts purchased by Utica to reinsure an umbrella policy issued by Utica to Goulds Pumps, Inc. (“Goulds”).  Utica’s reinsured policy was an umbrella liability policy issued to Goulds in 1973 for $25 million.  The facultative contracts issued by both Munich Re and by Century each contained a $5 million limit.

Utica defended and indemnified Goulds for several years against asbestos claims made by and litigation from various claimants alleging injury from asbestos.  During the course of the asbestos litigation coverage issues arose between Goulds and Utica, including whether certain primary policies issued by Goulds contained aggregate limits.  Eventually, Goulds and Utica agreed to settle their coverage disputes relating to the asbestos claims.  Important to this decision, Goulds and Utica entered into a settlement agreement that incorporated an aggregate limit of $300,000 in the primary policy issued in 1973 and stated that the 1973 umbrella policy provided coverage for defense expenses within limits. Utica billed its reinsurers for a portion of the settlement it reached with Goulds, billing each reinsurer its limit of $5 million in indemnity and billed both reinsurers an additional $2.7 million each for defense costs that Utica paid and allocated to its 1973 umbrella policy under the settlement agreement.

Utica contended that its billing was appropriate and that Munich Re and Century were obligated to “follow the settlements” and reimburse Utica under the facultative contracts for payments that Utica allocated to the umbrella policy, including the reimbursement of defense payments made in addition to the limits of the umbrella policy.  The reinsurers disagreed, arguing that the facultative contracts did not require reimbursement of the defense costs allocated to the umbrella policy that were in excess of the umbrella policy limit.

Utica sued Munich Re and Century in separate actions in the United States District Court for the Northern District of New York seeking to recover the $5 million in indemnity and the $2.7 in defense expenses it billed to the reinsurers.  The trials yielded different results – Utica won in a jury trial against Century and lost its case against Munich Re in a bench trial.  Both cases were appealed to the Second Circuit, who decided the conflicting decisions in a single opinion.

Utica argued that the reinsurers were liable for the full amount billed, including defense expenses.  Utica argued that: (1) the language in the umbrella policy that claims “not covered by” the primary policy triggered the umbrella policy’s coverage of the defense expenses because the primary policy was exhausted; (2) reinsurers were obligated to “follow the fortunes/settlements and therefore obligated to pay the defense expenses; and (3) there was an independent obligation on the reinsurers to pay defense expenses as they were incurred under the facultative contract language.

The Second Circuit ruled in favor of the reinsurers on all three issues: (1) the court rejected Utica’s contention that an occurrence is “not covered” under the primary policy once that policy limit is exhausted; (2) the court held that the allocation of defense costs to the umbrella policy was outside the scope of the policy, contradicted Utica’s own agreement with Goulds and that follow the settlements cannot be invoked to make a reinsurer liable for payments outside the scope of the terms of the reinsurance contract; and (3) the court held that the reinsurers obligations  “follow the form” of the umbrella policy and that there is no independent obligation to pay expenses under the language of the reinsurance contracts.