Federal Court Holds Underlying Policies Exhausted by Settlement; Grants Summary Judgment to Insurer on Excess Policy Reinsurance Claim

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U.S. District Court for the Southern District of New York, October 19, 2020

An insurer and its reinsurer were involved in a dispute over the reinsurer’s liability to reimburse a portion of a settlement that the insured had allocated to an excess liability policy subject to a contract of reinsurance. The insurer had issued three excess liability insurance policies to Asarco Inc., as part of a “coverage tower,” sequential layers of insurance Asarco purchased as part of its annual insurance program. The reinsurer reinsured the third policy, which provided excess coverage over the insured’s first two policies, under a contract that covered a 15 percent share of the risk assumed by that third policy.

In 2011, the insurer settled asbestos exposure coverage claims with the Asarco Asbestos Personal Injury Settlement Trust. It had assumed Asarco’s liabilities and insurance rights following Asarco’s 2005 bankruptcy―for less than the coverage limits of the first two policies―and allocated a portion of the settlement to the third policy under its exposure analysis. The insurer then submitted a claim for reinsurance. The reinsurer denied the claim, arguing the third excess policy covered by the reinsurance agreement contained exhaustion provisions and was triggered only when the first two policies were exhausted by payment. Therefore, the insurer’s allocation was not reasonable because it allocated a portion of the settlement to the third excess policy before exhaustion of the first two. The insured argued in turn that the first two excess policies were exhausted by settlement.

Exhaustion by settlement is permissible unless an excess policy unambiguously provides that exhaustion requires payment of the full limits. The court held that because the third policy contained exhaustion provisions that did not define exhaustion. Therefore, the meaning of exhaustion was ambiguous, and in the absence of unambiguous language requiring exhaustion by full payment, settlement with an underlying insurer constitutes exhaustion of an underlying policy. The underlying policies were exhausted when they were settled and discharged, and the third policy covered by the reinsurance agreement was triggered. 

The reinsurance agreement contained a follow-the-settlements provision. Since the exhaustion provisions were held to be satisfied, the settlement was reasonably within the terms of the third policy as the reinsurer did not argue it was otherwise unreasonable or in bad faith. As a result, the court held that the follow-the-fortunes doctrine applied, and the reinsurer was bound to accept the insurer’s settlement and allocation. Summary judgment was granted to the insured and the reinsurer will be required to pay a judgment for its share of the liability incurred by the insured.