Plaintiff, Propak Loigistics, insured workers' compensation risks with Clarendon National Insurance Company, which reinsured the risks with Defendant, Foundation Insurance Company. Foundation entered into a risk sharing agreement directly with Propak, which was essentially an experience rating agreement. Foundation was placed in liquidation. Clarendon filed a timely claim in the liquidation estate, but Propak did not. The liquidation court entered an order distributing the remaining assets of Foundation to Clarendon. Because Propak failed to file notice of its claims under the Liquidation Order, the court held that it was barred from obtaining relief, noting that under South Carolina law, “the failure of a potential creditor to submit a claim in the liquidation estate, or have an ancillary estate opened in a reciprocal state, is conclusive as to that creditor’s rights.” Propak Logistics v. Foundation Ins. Co., No. 04-2178 (W.D.Ark., August 8, 2007).
Reinsurance Claims
MASSACHUSETTS HIGH COURT HOLDS THAT CLAIMS UNDER FOLLOWING FORM EXCESS POLICIES ARE NOT COVERED BY FOLLOW-THE-FORTUNES
Massachusett's Supreme Judicial Court recently held, in a case of first impression, that a following form excess insurer is not bound by claims payment decisions made by a primary insurer, in an analysis that is akin to the reinsurance follow-the-fortunes doctrine. The Court held that although such an excess policy borrows language from the underlying primary policy, it is a separate insurance policy, and that the excess insurer retains the right to make its own claims decisions absent a provision in its policy to the contrary. This is similar to opinions holding that courts will not imply the follow-the-fortunes doctrine into a reinsurance agreement if it is not explicitly a part of the reinsurance agreement's written terms. Allmerica Financial Corp. v. Certain Underwriters at Lloyd's, London, No. SJC-09834 (Aug. 6, 2007).
INSURED’S “FOLLOW-THE-FORTUNES” ARGUMENT FALLS SHORT
This breach of contract case arose out of a dispute between insurer-plaintiff National Union Fire Insurance Company of Pittsburg (“NU”) and its reinsurer-defendant, Clearwater Insurance Company (“Clearwater”). NU alleged that Clearwater breached its reinsurance agreement by failing to fully indemnify it for losses incurred from the settlement of an underlying dispute. While Clearwater paid for roughly ¼ of the $1.9 million dollars sought by NU, Clearwater claimed it was not responsible for the remaining amount since some portion of the settlement payment was to settle consequential damages claims not covered by the reinsurance certificates. In response, NU asserted the “follow-the-fortunes” doctrine and moved for summary judgment. Clearwater moved to compel additional discovery.
The Court denied NU’s motion for summary judgment, reasoning that “a genuine issue of material fact exists as to whether the settlement did indeed involve payment in some substantial amount of the consequential damages claims. . ..” The Court appear to accept that if it could be proven that a portion of the payment was for losses not covered by the reinsurance agreement, that the follow-the-fortunes doctrine would not apply to those amounts. The Court granted in part and denied in part Clearwater’s request for additional discovery. National Union Fire Ins. Co. v. Clearwater Ins. Co., Case No. 04-CV-5032 (S.D.N.Y., July 19, 2007).
DISTRICT COURT AFFIRMS BANKRUPTCY COURT ORDER DENYING IMPOSITION OF CONSTRUCTIVE TRUST
This matter came before the Northern District of New York on appeal from a Bankruptcy Court Order, awarding Richard Breeden, Chapter 11 trustee (the “Trustee”) of The Bennett Funding Group, judgment on the pleadings and dismissing the Ades and Berg Groups’ (the “Ades Investors”) counterclaims for imposition of a constructive trust upon the proceeds of a reinsurance policy allegedly covering the Ades Investors’ losses. The proceeds of the reinsurance policy were to be paid to the Trustee pursuant to the terms of a settlement agreement with Sphere Drake.
In a de novo review, the Court affirmed the Bankruptcy Court’s Order, concluding that the Ades Investors’ claim failed to satisfy all four elements applicable under New York law for the imposition of a constructive trust. Specifically, the Court concluded that while three of the four elements were satisfied, the fourth element, requiring a showing that the Trustee was unjustly enriched when he retained the settlement proceeds from Sphere Drake, was not met. In re: The Bennett Funding Group, Case No. 97-70049 (N.D.N.Y. July 10, 2007).
COURT OF APPEALS FINDS TERMS OF ALLEGED SETTLEMENT OF CLAIM NOT SUBJECT TO SUMMARY JUDGMENT
Baylor Health Care System (“Baylor”) was insured by Church University Insurance Company, a captive insurer, which was reinsured by Employers Reinsurance Corporation (“ERC”). Following the mediation of a malpractice claim involving serious brain damage, Baylor and ERC agreed to jointly fund a settlement of the claim. A dispute arose as to whether this agreement was merely an interim funding of the settlement, subject to later apportionment between Baylor and ERC, or a final settlement of insurance obligations. Baylor filed an action for breach of contract, and seeking a declaratory judgment against ERC, and the district court entered summary judgment in favor of ERC, finding that a series of post mediation e-mails between counsel for Baylor and counsel for ERC amounted to a full settlement of all disputes between them. The Fifth Circuit reversed, finding that there were disputed issues of material fact as to whether the argreement was a complete settlement or merely an agreement to fund a settlement with the claimant, envisioning a later allocation of the settlement amount through arbitration or a mock trial. Baylor Health Care System v. Employers Reinsurance Corporation, Case No. 06-10582 (5th Cir. July 5, 2007).