Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

You are here: Home / Archives for Arbitration / Court Decisions / Follow the Fortunes Doctrine

Follow the Fortunes Doctrine

Trial Court Denies Post-Trial Motions in Asbestos Reinsurance Saga Involving Claims That Reinsurer Failed to “Follow the Fortunes” and Adopt Cedent’s Allocations of Losses

by

We previously posted about the yearslong reinsurance dispute between Utica Mutual Insurance Co. (the cedent) and Century Indemnity Co. (the reinsurer), involving Utica’s claims that Century breached two reinsurance certificates covering the years 1973 and 1975 in connection with asbestos liability exposure, and Century’s counterclaim that Utica had, in bad faith, maintained a separate record-keeping system for reinsurance allocation purposes to allegedly over-bill Century for its losses. Last fall, after a trial, the jury agreed that Utica’s allocation decisions were reasonable and made in good faith. The court entered judgment in favor of Utica in the amount of $6,257,889.02.

The court has now denied Century’s motion to reduce the prejudgment interest awarded to Utica and has denied Century’s motions for judgment as a matter of law or for a new trial. Regarding the award of prejudgment interest, Century argued that the court erroneously calculated interest from the date Utica sent its first billing to Century, instead of calculating interest incrementally from each ensuing date that Utica submitted billings to Century. The court equivocated on the merits of Century’s argument, but ultimately rejected Century’s argument because it was never made to the jury, and because the jury had made the contrary finding that the two reinsurance claims at issue accrued on the initial dates that Utica submitted the claims to Century.

Regarding the motions for judgment as a matter of law or for a new trial, Century argued that Utica’s allocation of losses pre- and post-settlement with its underlying insured were inconsistent and therefore objectively unreasonable as a matter of law. The court, however, rejected that argument, ruling that evidence supported the jury’s finding that Utica’s allocations were consistent pre- and post-settlement with the underlying insured, and that even if they were not, the law does not deem inconsistent allocations per se unreasonable as a matter of law. Century also argued that evidence did not support the jury’s award of damages for Utica’s recovery of reinsurance claims that included defense costs. Century contended that there was never a formal endorsement of the reinsurance agreement permitting that recovery. The court was not persuaded, however, finding that evidence supported the jury’s finding on this issue, including testimony that showed that “certain reinsurance principles … including the follow-the-fortunes provision, made formal modification [of the agreement] unnecessary under [the] circumstances.”

Utica Mutual Insurance Co. v. Century Indemnity Co., No. 6:13-cv-00995 (N.D.N.Y. Dec. 3, 2020).

Northern District of New York Declines to Imply a Follow-the-Fortunes or Follow-the-Settlements Obligation in Reinsurance Certificate

by

After a ten-day bench trial involving ten fact witnesses and five expert witnesses, the Northern District of New York found that certain facultative certificates did not implicitly contain follow-the-settlements or follow-the-fortunes provisions. Utica Mutual Insurance Co. was permitted to present evidence at trial as to whether the doctrines were, at the time the parties agreed to the certificates, so “fixed and invariable in the reinsurance industry as to be part of the Certificates.” We previously wrote about the court’s decision to permit such evidence here.

Utica presented three expert witnesses who testified that follow-the-settlements and follow-the-fortunes doctrines were “industry-wide concepts that did not need to be stated in reinsurance certificates to apply” but “acknowledged that not all reinsurers included these provisions” in their certificates — as was the case here. The court determined that Utica “failed to prove that follow the fortunes or follow the settlements were so ‘fixed and invariable’ in the facultative reinsurance industry as to warrant importing them into” the subject certificate.

As a result, Utica had to prove that the loss was specifically caused by a risk covered in the reinsurance contract. The court concluded that Utica did not meet that burden, and Munich Reinsurance America Inc. was not obligated to pay loss expenses incurred in investigating, adjusting, and litigating claims supplemental to the liability limits.

Munich Reinsurance Am., Inc. v. Utica Mut. Ins. Co., No. 6:13-cv-00743 (N.D.N.Y. Mar. 29, 2019)

Years-Long Asbestos Reinsurance Battle Continues for Utica and Century, Including Whether Century Must Follow the Fortunes of Utica’s Allocation of Losses

by

In 2013, Utica Mutual Insurance Company (the cedent) filed a complaint alleging that Century Indemnity Company (the reinsurer) (1) breached two reinsurance certificates executed between the parties covering the years 1973 and 1975 in connection with asbestos liability exposure; (2) owed the unpaid balance of prior billings under the two certificates; (3) violated the duty of utmost good faith and fair dealing; and (4) is obligated to pay certain future billings. Century answered, refusing to acknowledge the existence of a valid 1975 reinsurance certificate, and asserted various affirmative defenses. After two years of discovery, Century amended its answer to assert bad-faith counterclaims against Utica alleging that Utica had been maintaining two sets of record-keeping systems to track asbestos settlements made on behalf of the underlying insured, allegedly part of a larger effort by Utica to conceal the fact it had been over-billing reinsurers, including Century, for these claims.

Utica sought partial summary judgment on various aspects of the litigation, including that (1) Utica’s allocation decisions related to the coverage and handling of the asbestos claims against the underlying insured were reasonable and made in good faith, such that the “follow the fortunes” doctrine applied; (2) the 1975 reinsurance certificate is valid and binding on Century; and (3) Century had no right to claw back any sums previously paid to Utica. Century responded with its own dispositive motions. The court denied the parties’ motions with respect to most issues, including whether Utica’s loss allocation decisions were reasonable and made in good faith. Utica Mut. Ins. Co. v. Century Indem. Co., Case No. 6:13-cv-00995 (USDC N.D.N.Y. Sept. 26, 2018).

This post written by Gail Jankowski.

See our disclaimer.

Second Circuit partially vacates summary judgment ruling in asbestos risk reinsurance case

by

The Second Circuit has partially vacated summary judgment rulings in a case involving the reinsurance of asbestos-related risks. The case involves Utica Mutual Insurance Company and it reinsurer Clearwater Insurance Company, regarding Clearwater’s reinsurance obligations arising from claims of Utica’s insured, Goulds Pumps, Inc. Utica had issued various primary and umbrella liability insurance policies to Goulds from the 1950s to the 1990s.  In the 1990s, Goulds faced many thousands of asbestos-related person injury claims, for which it turned to Utica for coverage.  Clearwater had reinsured the 1978 and 1979 umbrella policies under two reinsurance certificates (the “Clearwater Certificates”) and the 1979-1981 umbrella policies under three reinsurance contacts as part of a pool of reinsurers managed by Towers, Perrin, Forster & Crosby, Inc. (the “TPF&C Memoranda”). When Utica sought coverage from Clearwater, Clearwater objected on three grounds: (1) Utica had no liability for the asbestos-related claims under the umbrella policies reinsured by Clearwater; (2) Clearwater’s liability under the Clearwater Certificates was capped at $5 million and $2 million for 1978 and 1979, inclusive of expenses; and (3) Clearwater was not obligated to pay amounts Utica had voluntarily paid Goulds through settlements.

The Second Circuit found that Clearwater’s first objection turned on language in the Utica umbrella policies stating that Utica would cover expenses “not covered by” the primary policies. Clearwater argued this meant that the umbrella policies did not cover asbestos-related claims because such claims were covered by the primary polices, but Utica said it meant the umbrella policies had to cover amounts that Utica did not pay under the primary policies because it interpreted those policies to have aggregate limits of liability that were exceeded. The trial court, which had granted Clearwater summary judgment on other grounds, had not decided what “not covered” meant in this context, and the Second Circuit remanded the matter so the trial court could rule on this issue.

The Second Circuit rejected Clearwater’s second objection, because the Clearwater Certificates contained “follow the form” clauses, the umbrella policies specifically stated that Utica would “reimburse the insured for all reasonable expenses . . . in addition to the applicable limit of liability of this policy,” and the Clearwater Certificates contained nothing inconsistent with an obligation to cover expenses in addition to the limits of liability contained in those Certificates.

Finally, the Second Circuit agreed with Clearwater’s third objection, finding that Clearwater was not obligated to reimburse Utica for its voluntary settlements with Goulds because the Clearwater Certificates did not contain an express follow-the-settlements clause and no such obligation was implied under New York Law. Further, it found that the TPF&C Memoranda only required Clearwater to reimburse Utica for settlements that were authorized by TPF&C, which authorization had never been requested or given.  Utica objected that this condition was excused because it was impossible, as TPF&C had stopped managing the reinsurance pools decades ago, but the court found that, regardless of impossibility, such prior approval was still a condition precedent to Clearwater’s obligation to reimburse Utica for the settlements.

Utica Mutual Insurance Company v. Clearwater Insurance Company, Nos. 16-2535 (L), 16-2824 (XAP) (2d Cir. Sep. 25, 2018).

This post written by Jason Brost.
See our disclaimer.

Special Focus: Follow the Fortunes Doctrine

by

The follow the fortunes (or follow the settlements) doctrine has been an important part of many reinsurance relationships. This Special Focus article focuses on divergent case law as to whether the doctrine is purely a matter of contract, or whether it should be implied into every reinsurance contract, whether or not the contract refers to the doctrine.

This post written by Rollie Goss.
See our disclaimer.