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Follow the Fortunes Doctrine

‘FOLLOW THE SETTLEMENTS’ DOCTRINE DOES NOT SPARE AIG’S CLAIMS AGAINST ITS REINSURERS

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Various AIG entities filed an action against their reinsurers seeking a declaration of coverage for portions of a settlement AIG made in a coverage dispute with its insured, Monsanto Corporation. Monsanto faced extensive litigation in underlying chemical pollution cases against it, which it ultimately settled for approximately $600 million. AIG sought reinsurance coverage for portions of its payments to Monsanto. The reinsurers denied AIG’s claims on the basis that AIG’s payments to Monsanto were “ex gratia” and not covered under AIG’s policies, citing the pollution exclusion, exclusions for punitive damages, and allocation issues with other underlying insurers. In defending against the reinsurers’ motions for summary judgment, AIG raised the “follow the settlements” doctrine, which binds a reinsurer to a settlement agreed to by the ceding company if the underlying risk is “reasonably within the terms of the original policy” even if not technically covered. The court granted the reinsurers’ motions and dismissed AIG’s case. It found that, even affording AIG the greater leeway of the “follow the settlements” doctrine, the claims were not reasonably within the coverage of AIG’s underyling policies, and AIG, in entering into the settlement with Monsanto, failed to conduct a reasonable investigation of the Monsanto claims by glossing over critical coverage issues, unnecessarily exposing its reinsurers to non-covered claims. American Home Assurance Co. v. American Re-Insurance Co., No. 602485/06 (N.Y. Sup. Ct. May 27, 2010).

This post written by John Pitblado.

THIRD CIRCUIT AFFIRMS DECISIONS COMPELLING ARBITRATION AND CONFIRMING RESULT IN RETROCESSION DISPUTE

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Century Indemnity Company (“Century”) made claim under certain retrocession agreements between it and Certain Underwriters at Lloyd’s, London (“Lloyd’s”) for a portion of the payment Century made to its reinsured, Argonaut Insurance Company (“Argonaut”) in connection with underlying asbestos coverage litigation expenses. Lloyd’s denied the claim, asserting that Century’s payment to Argonaut was not warranted under the reinsurance treaties. Century sued to recover the approximately $2 million in dispute. Lloyd’s moved to compel arbitration. Although it was undisputed that the retrocession agreements did not contain an arbitration clause, the trial court agreed with Lloyd’s that the retrocession agreements incorporated the underlying reinsurance treaties by reference, which treaties did contain arbitration provisions, and therefore granted the motion to compel arbitration. The parties arbitrated, and the three-member panel found in Lloyd’s favor, finding the reinsurance treaties did not obligate Century to pay Argonaut, and therefore Lloyd’s was not obligated to pay Century any portion of the payment to Argonaut. Century moved to vacate the award, contending that the arbitral panel had manifestly disregarded the law and failed to admit evidence which should have been admitted. The district court denied the motion. Century appealed to the Third Circuit Court of Appeals, which affirmed both the decision to compel arbitration, and the decision denying the motion to vacate the award. Century Indemnity Company v. Certain Underwriters at Lloyd’s, London, No. 08-2924 (3d Cir. Oct. 15, 2009).

This post written by John Pitblado.

VARYING RULINGS WITH RESPECT TO ARBITRATION AWARDS

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Courts Confirm Awards Finding Sufficient Support In Record: New Jersey Reg'l Council of Carpenters v. Patock Constr. Co., Case No. 08-4952 (USDC D.N.J. Mar. 11, 2009) (sufficient basis to find that respondent improperly subcontracted with a non-signatory subcontractor and lost work opportunity damages were proper); Tlumacki v. CAN Ins. Cos., No. A-4024-05T5 (N.J. Super. Ct. App. Div. Mar. 31, 2009) (sufficient evidentiary basis for the award existed and no showing of impartiality).

Confirming Awards Based On Arbitrator’s Interpretation Of Agreement: Blair Commc'ns, Inc. v. Int'l Bhd. of Elec. Workers, Local Union No. 5, Case No. 07-162 (W.D. Pa. Mar. 26, 2009) (“work preservation” agreement in collective bargaining agreement did not violate public policy); Global Reinsurance Corp. of Am. v. Argonaut Ins. Co., Case No. 07-7514 (USDC S.D.N.Y. Mar. 23, 2009) (arbitrator employed a plausible construction of reinsurance treaties’ definition of “loss occurrence,” and properly applied “follow the fortunes” doctrine).

Requests To Vacate: McQueen-Starling v. UnitedHealth Group, Inc., Case No. 08-4885 (USDC S.D.N.Y. Mar. 20, 2009) (remanding to arbitrator for clarification of unaddressed “retaliation claim” in discrimination case); Int'l Longshoremen’s Ass'n (Local 1575) v. Horizon Lines, Inc., Case. No. 08-1530 (USDC D.P.R. Mar. 16, 2008) (award “does not suffer from inanition or manifest errors of law”); Jones v. PPG Indus. Inc., Case No. 07-1537 (USDC W.D. Pa. Mar. 13, 2009) (no manifest disregard of law); Williams v. Mexican Rest. Inc., Case No. 05-841 (USDC E.D.Tex. Mar. 18, 2009) (confirming award since errors of fact did not justify vacating awards; see March 25, 2009 post); Kesterson v. NCO Portfolio Mgmt. Inc., Case No. 08-182 (USDC N.D. Ind. Mar. 27, 2009) (adopting Report and Recommendation that petition to vacate award be granted following entry of default judgment for defendant’s failure to appear).

Miscellaneous: A. Bauer Mech. Inc. v. Joint Arbitration Bd. of the Plumbing Contractors’ Ass'n, No. 06-3936 (7th Cir. Mar. 25, 2009) (affirming default judgment for failure to respond to counterclaim to enforce arbitration board’s ruling; Caraballo v. City of Chicago, Case No. 07-2807 (USDC N.D. Ill. Mar. 18, 2009) (requiring plaintiffs to arbitrate consolidated FLSA claims); Laundry, Dry Cleaning Workers & Allied Indus. Health Fund v. Jung Sun Laundry Group Corp Case, No. 08-2771 (USDC E.D.N.Y. Mar. 16, 2007) (adopting Report and Recommendation that award be confirmed; respondent failed to appear at arbitration and confirmation proceedings and no manifest disregard of law).

This post written by Brian Perryman.

UPDATE: COURT SHOOTS DOWN ERC TWICE MORE

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On September 2, 2008, we reported that the District Court for the Western District of Missouri granted summary judgment against Employers Reinsurance Corporation, finding that their contract with Mass Mutual did, in fact, contain a clear “follow the fortunes” clause. ERC subsequently moved for the court to reconsider its ruling, or in the alternative, to certify the “follow the fortunes” issue for immediate interlocutory appeal pursuant to 28 U.S.C. § 1292(b).

The court ruled that ERC’s motion for reconsideration amounted to little more than a reassertion of its arguments on summary judgment. The court interpreted ERC’s motion as arguing that the court committed a manifest error of law simply because the court disagreed with ERC’s arguments. Noting that Fed. R. Civ. P. 60(b) did not list “manifest error of law” as a reason sufficient for reconsideration, the court denied ERC’s motion.

The court additionally denied ERC’s motion to certify the “follow the fortunes” issue for immediate interlocutory appeal, finding that it was an issue of interpretation of the contract, and not a pure question of law, which was required for an interlocutory appeal certification. Employers Reinsurance Corporation v. Massachusetts Mutual Life Insurance Co., Case No. 06-0188 (USDC W.D. Mo. Oct 23, 2008).

This post written by John Black.

INSURER HAS NO STANDING TO SEEK A DECLARATORY JUDGMENT ON HYPOTHETICAL CLAIMS

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Tall Tree insured Hewlett Packard, and was reinsured by Munich Reinsurance for amounts Tall Tree was required to pay to Hewlett Packard. Hewlett Packard was involved in litigation under which liabilities arose. Rather than first indemnifying Hewlett Packard, Tall Tree sued Munich Reinsurance in federal district court, seeking a declaratory judgment that Tall Tree was obligated to pay Hewlett Packard and that, in turn, Munich Reinsurance was obligated to pay Tall Tree. The court would not entertain the case: Tall Tree lacked standing to assert its claims. As to the question of whether Tall Tree was obligated to pay Hewlett Packard, the court noted that there was no live controversy before it; Tall Tree “can simply pay HP.” There was also no live controversy on the question of whether Munich Reinsurance was obligated to pay Tall Tree. The “follow the fortunes” doctrine did not apply because Tall Tree had not yet paid Hewlett Packard; there was essentially no “fortune” yet to follow, and the request for declaratory relief hence was premature. The case was dismissed. The Tall Tree Insurance Co. v. Munich Reinsurance America, Inc., Case No. C-08-1060 (USDC N.D. Cal. July 29, 2008).

This post written by Brian Perryman.