Summary Judgment against Reinsurer Affirmed where Exhaustion and Attachment Point Provisions were Ambiguous

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U.S. Court of Appeals for the Second Circuit, September 15, 2022

Fireman’s Fund Ins. Co. v. Onebeacon Ins. Co., 2022 U.S. App. LEXIS 25863

            Fireman’s Fund Insurance Company (“Fireman’s Fund”) issued three excess insurance policies to ASARCO, Inc., in 1983 and 1984, which functioned as layers of a coverage tower assembled for ASARCO. Two of the Fireman’s Fund policies provided $20 million in coverage for losses in excess of $30 million, one in 1983 (“policy 1”) and the other in 1984 (“policy 2”). The third Fireman’s Fund policy (“policy 3”) provided $20 million in coverage for losses in excess of $75 million for 1984. Each of the policies provided coverage only after the exhaustion of the underlying policy or policies and self-insured retention in the coverage tower.

            Fireman’s Fund obtained a reinsurance policy from General Accident Insurance Company, a predecessor of OneBeacon Insurance Company (“OneBeacon”). The reinsurance policy, or “facultative certificate,” issued by OneBeacon’s predecessor covered a 15% share of policy 3. The reinsurance contract contained “follow-form” and “follow the settlements” clauses, which provided that liability under the reinsurance contract would follow the covered policy and that claims settled by Fireman’s Fund under policy 3 would bind OneBeacon’s predecessor to pay a portion of those settlements.

            ASARCO, a mining, smelting, and refining company had subsidiaries involved in asbestos related industry, and by the early 2000s faced hundreds of millions of dollars in potential liability resulting from asbestos-related personal injury claims. ASARCO filed suit seeking coverage from Fireman’s Fund and other insurers, and while that suit was pending entered bankruptcy and was reorganized, including the establishment of a settlement trust for asbestos claims (the “Asbestos Trust”). After extended litigation and a series of decisions unfavorable to Fireman’s Fund in the coverage suit, Fireman’s Fund conducted an exposure analysis and concluded that its likely exposure had a present value in excess of $50 million. This analysis prompted Fireman’s Fund to agree to a negotiated settlement of ASARCO’s claims under all three Fireman’s Fund policies for a total of $35 million paid to the Asbestos Trust. Fireman’s Fund allocated the payment under its three policies on the basis of its exposure analysis, and allocated $8.1 million to policy 3. Fireman’s Fund submitted an invoice for 15% of the $8.1 million allocated to policy 3, plus costs, to OneBeacon, and OneBeacon denied the claim on the basis that the $35 million was improperly allocated by Fireman’s Fund and should have been paid by policies 1 and 2.

            Fireman’s Fund filed suit for breach of contract, and the Southern District of New York granted summary judgment for Fireman’s Fund on the basis that OneBeacon was bound by Fireman’s Fund’s allocation by the “follow the settlements” provision and that the exhaustion requirement was ambiguous and could be satisfied by a below-limits settlement of the underlying policies. OneBeacon appealed.

            The Court of Appeals affirmed the judgment of the district court. The Second Circuit, in accord with longstanding precedent, held that an excess insurance policy is ambiguous as to the meaning of exhaustion because it does not define exhaustion or otherwise specify the meaning of exhaustion or include a requirement of actual payment of the full limits of the underlying policy or policies, settlement of the underlying policy or policies below limits may exhaust those policies. The court, finding that Fireman’s Fund had shown that its settlement of the ASARCO claims was arguably within the scope of the reinsurance coverage, held that OneBeacon was bound by the follow the settlements clause, and additionally that the reinsurance policy’s attachment point, like the exhaustion requirement, did not require full payment of losses in excess of the attachment point, only that ASARCO had incurred losses in excess of the attachment point. The Second Circuit rejected arguments by OneBeacon that the limits of liability provision in the reinsurance policy required actual payment by the underlying insurer and that Fireman’s Fund should be estopped from arguing ambiguity in the exhaustion provision because it had argued in other actions that it was not obligated to “drop down” to cover gaps in coverage below the attachment point of excess policies issued by Fireman’s Fund.

Read the full decision here