Follow the Fortunes Doctrine

Munich Reinsurance America, Inc. and Utica Mutual Insurance are headed to a bench trial in the United States District Court for the Northern District of New York in a case regarding two facultative reinsurance certificates issued by Munich to Utica in 1973 and 1977, and the court has ruled on certain motions in limine filed by both parties.

In an earlier ruling on cross motions for summary judgment, the court noted that neither the 1973 nor the 1977 certificates contained a follow the fortunes or follow the settlements provision and declined to find this such a clause was implied in the contracts based on the record before it. Munich filed a motion in limine asking the court to preclude Utica from presenting evidence in support of the existence of a follow the fortunes/settlements provision. The court denied this motion, however, holding that Utica would be allowed to present evidence that “the doctrines of follow the fortunes or follow the settlements 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.” In doing so, however, the court emphasized that it would be Utica’s burden to show that such custom and practice was “fixed and invariable,” and not merely generally understood within the (re)insurance industry during the relevant time period.

The court also considered Munich’s motion to preclude certain testimony by Utica’s expert witnesses regarding trade usage and custom and practice in the reinsurance industry. The court declined to exclude such testimony, doing so largely on the basis that such decisions could better be made in the context of trial and that such exclusions are less necessary in a bench trial “[w]here the gatekeeper and the factfinder are one in the same—that is, the judge . . . .” However, the court granted Munich’s motion to preclude testimony on withdrawn claims and defenses as well as its motion to preclude evidence of decisions from certain other matters, which the court held was hearsay.

Utica was similarly unsuccessful in most of its motions in limine. The court rejected Utica’s request that Munich not be allowed to make certain arguments about the meaning of the 1973 and 1977 certificates on the basis of collateral estoppel. The court found that this interpretation was an issue of law, and “collateral estoppel does not operate to bar relitigation of pure issues of law.” However, the court granted Utica’s motion to preclude the use of a privilege log it produced in the litigation, which Munich argued was admissible to show when Utica considered certain issues, finding that there was no relevant, nonspeculative inference that could be drawn from that log.

Utica Mutual Insurance Company v. Munich Reinsurance America, Inc., 6:13-cv-00196(BKS/ATB) (N.D.N.Y. June 27, 2018)

This post written by Jason Brost.

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In a lengthy February 24, 2017 opinion, a New York federal court denied cross motions for summary judgment on the Follow the Settlements Doctrine, filed by Utica Mutual Insurance Company and Utica’s reinsurer, Fireman’s Fund Insurance Company. Utica sought to enforce certain reinsurance contracts against FFIC with respect to $35,000,000 Utica spent in settling a dispute with its insured, Goulds, regarding coverage for thousands of asbestos claims filed against Goulds in the 1990s. It is undisputed that, in settling the case, Utica and Goulds agreed that there were aggregate limits in Utica’s primary policies, which would allow penetration of the umbrella policy (this was a central issue in the underlying case, as the primary policies, dated 1966-1972, had been lost) and that the $325,000,000 settlement would come from Utica’s umbrella policy, thereby triggering the reinsurance policies.

Under the Follow the Settlements Doctrine, “as long as the cedent settles in good faith, reasonably, and within the applicable policies, the reinsurer is bound by the settlement and cannot relitigate the underlying coverage issues.” A cedent’s motive to reach reinsurance, while singularly unimportant, may, however, invalidate the follow the settlement protection if it causes the cedent to make an unreasonable settlement allocation.

Utica argued that the undisputed facts established a reasonable basis for the settlement, while FFIC argued that they established Utica’s bad faith. The court disagreed with them both, finding that, while the central facts were undisputed, reasonable inferences could lead to either conclusion and, as such, summary judgment was inappropriate. Utica Mutual Insurance Co. v. Fireman’s Fund Insurance Co., Case No. 6:09-cv-00853 (USDC N.D.N.Y. Feb. 24, 2017).

This post written by Brooke L. French.

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On December 9, 2014 and August 20, 2015, we reported on the reinsurance dispute between Utica Mutual Insurance Company and Clearwater Insurance Company. In a recent ruling, the court rejected Clearwater’s argument that the follow the fortunes doctrine did not apply and that Clearwater was relieved of its obligations under the subject reinsurance contract. Clearwater contended that Utica unreasonably and in bad faith shifted all of its liabilities to its umbrella policies to maximize reinsurance recovery. As an alternative basis to avoid liability, Clearwater also argued that Utica billed it for items for which it was not entitled to recover.

In rejecting Clearwater’s arguments, the court explained that while the follow the fortunes doctrine requires the cedent to align its interests with its reinsurer, in order to show bad faith, Clearwater was required to establish an “extraordinary showing of a disingenuous or dishonest failure” and that the cedent acted with gross negligence or recklessness. The court found that Clearwater could not make such a showing. The Court noted that Utica did not have any fiduciary duty to place Clearwater’s interests above its own nor minimize its reinsurance recovery in order to avoid bad faith. And the Court summarily dismissed Clearwater’s argument that some of the billings were not covered by the reinsurance, ruling that if the payment was arguably within the scope of the insurance policy, then it was within the reinsurance. Utica Mutual Insurance Co. v. Clearwater Insurance Co., Case No. 6:13-cv-01178 (USDC N.D.N.Y. Jan. 20, 2016).

This post written by Barry Weissman.

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In a short, unanimous opinion, the New York Appellate Division, First Department, affirmed a trial court’s ruling that genuine issues of fact precluded it from granting summary judgment to a reinsurer or the plaintiff-cedents in a long-running dispute between them. The case involves Everest Reinsurance Company’s obligation to reimburse various cedents for a settlement entered into under certain facultatively reinsured policies. Everest Re asserted various defenses, including whether the loss is covered by the certificate at issue and whether the settlement entered into was reasonable and made in good faith. The cedents argued that Everest Re is bound to honor the billings under the follow the settlements doctrine. The Appellate Division held that the record before it presented “numerous issues of fact” regarding the settlement entered into by the cedents, and, specifically, the issue of good faith, “none of which are susceptible to resolution on summary judgment.” National Union of Fire Insurance Co. of Pittsburgh v. Everest Reinsurance Co., Index No. 602485/06 (N.Y. App Div., 1st Dep’t, Nov. 5, 2015).

This post written by Rob DiUbaldo.

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