American Home Assurance issued insurance covering environmental pollution at multiple sites, and contended throughout its dispute with its insured that the insured had suffered multiple occurrences at multiple sites, in order to maximize the number of deductibles that would apply. After settling with its insured, American Home filed reinsurance claims based upon the theory that there had been only one occurrence per year at each site, in order to minimize the deductibles on its own reinsurance. Although it prevailed against its reinsurers on that theory at the trial court level, an appellate panel has held that such inconsistent conduct, which it termed “manifest manipulation,” resulted in the follow-the-fortunes provision of the reinsurance agreements not applying, apparently resulting in the complete loss of reinsurance coverage since the losses, as allocated consistently with the position taken with the insureds, were all within the deductibles of the reinsurance agreements. Allstate Insurance Co. v. American Home Assurance Co., No. 602594/03 (NY Sup. Ct. App. Div. June 12, 2007).
Follow the Fortunes Doctrine
Court Rejects Implication of Follow the Settlements Provision into Facultative Reinsurance Certificate
American Re-Insurance provided a facultative reinsurance certificate to Specialty National Insurance (now known as American Motorists Insurance Co.), which had reinsured the Montana Municipal Insurance Authority, a municipal insurance pool that provides insurance to its member entities, including the city of Great Falls, Montana. A dispute arose under the facultative reinsurance when a claim was paid and American Re disagreed as to the interpretation of some of the coverage underlying its reinsurance. Although the facultative certificate did not contain a typical “follow the settlements” provision, American Motorists contended that language in the certificate had the same effect. Interpreting the facultative certificate, the district court disagreed, finding that there was no follow the settlements provision in the certificate. The court therefore granted summary judgment to American Re with respect to a declaratory judgment claim that sought a declaration that American Re was obligated to indemnify American Motorists under the certificate pursuant to the follow the settlements doctrine. American Motorists ins. Co. v. American Re-Insurance Co., Case No. 05-5202 (USDC N.D. Cal. May 29, 2007).
UK COURT DECLINES TO FIND REINSURANCE COVERAGE DESPITE FOLLOW THE FORTUNES PROVISION SINCE DAMAGES OUTSIDE POLICY PERIOD
This case involves a situation in which a U.S. court found that an insurance policy covered a portion of damages incurred prior to and after a policy period based upon a manifestation coverage trigger. The insured then entered into a settlement agreement, and sought coverage from its reinsurers for the amount of the settlement. The resulting reinsurance dispute was litigated in a UK court. The UK court found that even though it was apparent that the insured had acted in good faith and prudently in negotiating the settlement to minimize its loss, the reinsurance did not cover damage that occurred outside the time period of the coverage of the reinsurance agreement. This decision illustrates an important area of risk for companies which may have their insurance and reinsurance governed by different applicable law, whether the laws of different U.S. states, which may have different coverage trigger or damage allocation theories, or the laws of a U.S. state and the UK. Care should be taken in establishing reinsurance programs to attempt to avoid such a scenario. Wasa International Ins. Co. v. Lexington Ins. Co., [2007] EWHC 896 (Queen’s Bench Commercial Court April 25, 2007).
Court refuses to imply follow the fortunes doctrine into reinsurance agreements
In a matter involving the reinsurance of asbestos-related risks, a District Court has followed what it considered to be both the majority rule, and the better reasoned path, declining to imply the follow the fortunes doctrine into reinsurance agreements, where the facultative reinsurance agreements did not contain such a provision. The Court then denied summary judgment to the reinsured, finding that there were disputed issues of material fact as to whether certain excess insurance had been exhausted, a requirement for the applicability of the reinsurance, and whether an exclusion applied. The American Ins. Co. v. American Re-Ins. Co., Case No. 05-01218 (USDC N.D. Cal. Nov. 27, 2006). Shortly after this opinion was entered, the parties notified the Court that they had reached a settlement of their disputes.
Court applies the follow the settlements doctrine to business interruption claim
The follow the settlements doctrine has been applied to business interruption and property damage claims filed by the owner of Universal Studios theme park in Florida, arising out of Hurricane Floyd. The Court granted summary judgment to the reinsured, finding that the reinsurer had not proven that the claims were paid in bad faith or that the claims were not reasonably within the terms of the underlying policy. Houston Casualty Co. v. Lexington Insurance Co., Case No. 05-1804 (USDC SD Tex. June 15, 2006). Two facts were of particular interest: (1) the hurricane changed course, and did not actually hit the park, making actual physical damage attributable to the storm fairly minimal; and (2) although the park was only closed for a single day, the business interruption claim extended over several more days.