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New York Court Finds the Term “Exhaustion” in Excess Policy Was Ambiguous, Rules That Full Limits of Underlying Insurance Need Not Be Paid for Excess Policy to Attach

January 13, 2021 by Alex Silverman

Fireman’s Fund Insurance Co. sued OneBeacon Insurance Co. for breach of a facultative reinsurance certificate. Fireman’s Fund settled claims with its insured and allocated a portion of the settlement to a Fireman’s Fund excess policy reinsured by OneBeacon. OneBeacon denied Fireman’s Fund’s claim, arguing that its reinsurance obligations did not attach until all insurance underlying the Fireman’s Fund policy were exhausted in payment of the full limits of the underlying policies. The Fireman’s Fund policy stated that it applies “only after all underlying insurance has been exhausted,” but did not define “exhaustion.” The reinsurance certificate provided that OneBeacon’s liability shall follow Fireman’s Fund’s, that the terms of the certificate shall be subject “in all respects” to the Fireman’s Fund policy, except as stated in the certificate, and that “all claims involving this reinsurance, when settled by [Fireman’s Fund], shall be binding on [OneBeacon].”

On cross-motions for summary judgment, the court agreed with Fireman’s Fund that the term “exhaustion” was ambiguous as used in the Fireman’s Fund policy, as the policy did not specify whether the full limits of underlying insurance must actually be paid before the Fireman’s Fund policy attaches. Applying Second Circuit precedent established in Zeig v. Massachusetts Bonding Co., 23 F.2d 665 (2d Cir. 1928), the court held that once the underlying insurer settled and discharged the claims against the insured, Fireman’s Fund was within its right to treat the underlying limits as “exhausted,” even though the underlying insurer did not actually pay the full limits of its policy. In addition, based on the follow-the-fortunes and follow-the-settlements doctrines, the court found it was barred from second-guessing Fireman’s Fund’s post-settlement allocation decisions. The court therefore granted Fireman’s Fund’s motion for summary judgment and denied OneBeacon’s cross-motion.

Fireman’s Fund Insurance Co. v. OneBeacon Insurance Co., No. 1:14-cv-04718 (S.D.N.Y. Oct. 19, 2020).

SDNY Grants Motion to Compel Arbitration, Directs Arbitrability Issue to Arbitrators

June 11, 2020 by Alex Silverman

PB Life and Annuity Co. Ltd. sought a judgment that its dispute with Universal Life Insurance Co. was subject to litigation, not arbitration. In response, Universal Life moved to compel arbitration, and PB Life sought a permanent injunction. The motions required interpreting two related agreements – a coinsurance reinsurance agreement, and a trust agreement created pursuant to the reinsurance agreement. An arbitration clause in the reinsurance agreement applied to “all disputes … arising under or relating” to the reinsurance agreement. The trust agreement contained a forum-selection clause requiring the parties to litigate disputes in New York City. PB Life claimed that the underlying dispute was governed solely by the trust agreement and its forum-selection clause.

The court first addressed whether a valid arbitration agreement existed in the first instance and concluded there was. In doing so, it rejected PB Life’s contention that the trust agreement superseded the reinsurance agreement and its arbitration clause because, among other reasons, the very operation of the trust agreement depended on the continued existence of the reinsurance agreement. Any contrary interpretation, the court ruled, would produce a result that is “absurd, commercially unreasonable, or contrary to the reasonable expectation of the parties.” In addition, while the substance of the parties’ dispute was contemplated by both the reinsurance agreement and the trust agreement, the court found that the question of “arbitrability” – whether the dispute was governed by the arbitration clause or the forum-selection clause – was for the arbitrators to decide based on the relevant contract language. Accordingly, the court granted Universal Life’s motion to compel, denied PB Life’s motion for a permanent injunction, and stayed the action pursuant to section 3 of the Federal Arbitration Act.

PB Life & Annuity Co. Ltd. v. Universal Life Ins. Co., No. 1:20-cv-02284 (S.D.N.Y. May 12, 2020).

Puerto Rico Addresses Impact of the NRRA

September 27, 2018 by John Pitblado

The Nonadmitted and Reinsurance Reform Act of 2010 (“NRRA”) provisions are applicable in Puerto Rico. The Office of the Commissioner of Insurance issued a circular letter setting forth the standards for the placement of surplus lines insurance for exempt commercial purchasers (as established by the NRRA). The definition of an exempt commercial customer is set forth in the letter.

Additionally, the letter states that “in order for a nonadmitted insurer domiciled in the United States to be considered an insurer that is eligible to write surplus lines insurance in Puerto Rico, such insurer must be admitted in the insurer’s home state to enter into insurance contracts for the class or classes of insurers which it proposes to contract as surplus lines insurance and shall maintain a minimum capital and surplus in the amount of $15 million.”

Government of Puerto Rico Office of the Commissioner of Insurance Circular Letter CC-2018-1936-D, August 16, 2018.

This post written by Nora A. Valenza-Frost.

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