(Article from Insurance Law Alert, June 2023)
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Holding
Affirming a New York district court decision, the Second Circuit ruled that a facultative reinsurer’s indemnity obligations were co-extensive with the obligations of the underlying policy. Ins. Co. of the State of Pa. v. Equitas Ins. Ltd., 2023 U.S. App. LEXIS 12461 (2d Cir. May 22, 2023).
Background
Homeowners in California sued Dole Food Company (“Dole”) for alleged pollution of soil and groundwater that spanned more than four decades. Dole and its insurer, the Insurance Company of the State of Pennsylvania (“ICSOP”), settled the claims and allocated $20 million of the settlement payment to a three-year ICSOP policy in effect from 1968-1971. In so allocating the settlement, Dole and ICSOP applied California’s “all sums” approach to allocation; under this approach, ICSOP was jointly and severally liable (up to applicable policy limits) for all property damages and personal injuries caused by a pollutant, without regard to ICSOP’s time on the risk compared to other Dole insurers. ICSOP then sought coverage from Equitas Insurance Limited ("Equitas") under a facultative reinsurance policy in effect during the same three-year period.
Equitas denied the claim on the ground that the law governing the parties’ reinsurance policy did not recognize “all sums” allocation. ICSOP sued, and the parties cross-moved for summary judgment. The district court granted ICSOP’s summary judgment motion and found Equitas liable to ICSOP for the full $20 million payment. The Second Circuit affirmed.
Decision
Equitas asked the court to distinguish between ICSOP’s liability to Dole (which Equitas conceded) and Equitas’s liability to ICSOP under the reinsurance agreement. Equitas argued that it had no liability to ICSOP because the parties’ reinsurance agreement was governed by English law and English law does not follow the “all sums” approach to allocation. Because ICSOP’s obligation to Dole arose from an “all sums” allocation, Equitas argued that no coverage applied under the reinsurance agreement. For its part, ICSOP argued that, under English law, the reinsurance agreement provided co-extensive coverage with ICSOP’s policy issued to Dole.
The Second Circuit favored ICSOP’s position. As the court framed the issue, “the question is whether, once ICSOP’s liability was properly allocated, as Equitas concedes that it was, English law would then interpret the reinsurance policy as providing co-extensive coverage.” Answering this question in the affirmative, the Second Circuit held that English law has a “strong presumption” that facultative reinsurance policies provide “back-to-back” coverage with the cedent’s underlying policy, “meaning that the liability of the insured is generally equivalent to the liability of the reinsured.” In so ruling, the court rejected Equitas’s assertion that English law would not apply that presumption where, as here, a foreign jurisdiction’s law results in coverage for damage beyond the policy’s coverage period.
The Second Circuit also rejected Equitas’s contention that, because California’s “all sums” rule did not come into existence until long after the parties had executed the umbrella and reinsurance policies at issue, English law would not impose an “all sums” approach in the present case. Although it acknowledged that the argument had “some merit,” the court ultimately concluded that when parties fail to define contract terms such as “all sums,” they necessarily “adopt the meaning a common law court will ascribe to it, and thereby bear the rewards and risks of the common law’s dynamic nature.” Thus, Equitas could not “confine its current obligations to what those obligations would have been had this dispute arisen fifty years ago.”
Comments
In decisions governed by the law of U.S. jurisdictions, the presence or absence of a follow-the-settlements clause can be outcome-determinative in terms of a reinsurer’s obligations to indemnify an underlying settlement that has been allocated to a reinsured policy. Here, while the reinsurance policy did include such a clause, the Second Circuit’s decision was driven largely by the presumption of co-extensive coverage for facultative reinsurance agreements under English precedent rather than the text of the particular contract provision.