Second Circuit Reverses $59 Million Reinsurance Coverage Decision

Second Circuit, April 28, 2020

An insurer and its reinsurer were engaged in a long-running dispute over whether the reinsurer was obligated to reimburse the insurer for amounts paid in settlement to Goulds Pump, Inc. The settlement between the insurer and Goulds related to thousands of personal injury claims made against Goulds due to exposure to asbestos contained in Goulds’ products.

When the insurer settled its liability under primary and umbrella policies it had issued to Goulds, the parties agreed that the primary policies—which had been lost and were not available—contained aggregate limits of liability. As a result, amounts the insurer paid in settlement beyond the agreed-upon aggregate limits would be allocated to the umbrella policies. The umbrella policies, in turn, were subject to reinsurance agreements. The insurer then made a claim with its reinsurer for partial reimbursement of the amounts paid to Goulds under the reinsured umbrella policies.

The reinsurer refused to pay. It argued that, by their terms, the umbrella policies were triggered only when the insurer was presented with a claim for damages above the limits specified in a Schedule of Underlying Insurance Policies attached to the umbrella policies. Because the Schedule did not indicate an aggregate limit for bodily injury for any of the underlying policies, the insurer’s settlement with Goulds did not trigger the umbrella policies, and therefore the reinsurance agreement did not obligate the reinsurer to cover any of the settlement.

The insurer argued that the reinsurance agreement contained a “follow the settlements” clause, which obligated the reinsurer to indemnify the insurer so long as the settlement decision was reasonable and in good faith. The insurer further argued that the umbrella policies only required per-occurrence limits to be listed in the Schedule and that other applicable limits could be supplied by agreement between the insurer and the policyholder. A jury at the district court level agreed with the insurer, granting a judgment against the reinsurer for a total of $59 million.

The Second Circuit disagreed and reversed. The court noted that “follow the settlements” provisions apply only when the settlement complies with the terms of the relevant policies. The insurer’s settlement with Goulds did not follow the terms of the umbrella policies, as those policies stated that they were triggered only by claims that exceeded the limits listed in the Schedule. In effect, this meant that the entire amount paid by the insurer in the settlement with Goulds was paid under the primary policies. As a result, the reinsurance agreements did not obligate the reinsurer to provide any indemnity to the insurer.

Utica Mut. Ins. Co. v. Fireman’s Fund Ins. Co., No. 18-828, — F.3d —-, 2020 WL 2047431

Read the decision here.