(Article from Insurance Law Alert, February 2016)
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A New York federal district court ruled that a reinsurer is bound by a ceding insurer’s settlements pursuant to the follow-the-fortunes doctrine. Utica Mut. Ins. Co. v. Clearwater Ins. Co., 2016 WL 254770 (N.D.N.Y. Jan. 20, 2016).
Utica insured Goulds, a pump manufacturer, under primary and umbrella policies. Clearwater issued reinsurance certificates for the umbrella policies, which required Clearwater to “follow [Utica’s] liability in accordance with the terms and conditions of the policy reinsured hereunder.” Goulds was sued in several suits alleging asbestos-related injuries and, pursuant to a settlement agreement between Goulds and Utica, Utica provided defense and indemnity coverage to Goulds. Utica sought reimbursement from Clearwater pursuant to the reinsurance certificates. Clearwater made some, but not all payments, and Utica brought suit alleging breach of contract. The court granted Utica’s summary judgment motion.
The court ruled that Clearwater was bound by Utica’s underlying settlement with Goulds under the follow-the-fortunes doctrine, which requires a reinsurer to accept a cedent’s reasonable, good faith settlement decisions. The court rejected Clearwater’s assertion that Utica settled in bad faith because Utica purportedly shifted liability from its primary policies to its umbrella policies, which purportedly had more reinsurance and which Clearwater reinsured. In so ruling, the court noted that “a cedent has no obligation to strictly align its interests with the reinsurer” and that knowledge of a settlement’s impact on reinsurance recovery, standing alone, does not amount to gross negligence or recklessness. Additionally, the court concluded that Utica’s settlement was reasonable under the circumstances presented.
Finally, the court held that Clearwater was obligated to cover various billings, including defense costs, declaratory judgment expenses, and orphan share payments. The court ruled that all such payments were within the scope of “loss expenses,” defined as “all expenses incurred in the investigation, adjustment, settlement or litigation of claims, awards or judgments.” The court reasoned that Utica’s declaratory judgment expenses constituted “loss expenses” because the factual record established that those costs were incurred to resolve the underlying coverage dispute. In so ruling, the court noted that Clearwater’s own claims handlers testified that they understood declaratory judgment expenses to be “loss expenses.” With respect to defense costs, the court rejected Clearwater’s assertion that Utica, as an umbrella insurer, had no obligation to fund the underlying policyholder’s defense. The court ruled that Utica’s position that it was obligated to defend the policyholder based on purported exhaustion of primary policies was reasonable. Therefore, under the follow-the-fortunes “at least arguably within the scope of insurance coverage” standard, Clearwater was obligated to cover those costs. The case has been appealed to the Second Circuit. We will keep you posted on developments in this matter.