The Follow The Fortunes Doctrine Will Not Apply When Reinsured Manipulates The Allocation Process
August, 2007
A New York Appellate Court recently held that a reinsurer was not liable to a reinsured pursuant to facultative reinsurance certificates since the reinsured’s position during its post settlement allocation was directly opposed to the position it took during the underlying litigation. In Allstate Insurance Company v. American Home Assurance Company, 2007 N.Y. Slip Op 5170, 2007 N.Y. App. Div. LEXIS 7284 (1st Dept. 2007), the New York Appellate Division, First Department, held that a reinsurer was not bound by the follow-the-fortunes doctrine where the reinsured’s settlement allocation, at odds with its allocation of the loss with its insured, reflected an effort to unreasonably maximize the amount of collectible reinsurance.
American Home Assurance Company (“American Home”) issued commercial property insurance policies to United Technologies Corporation (“UTC”) for the period of 1975-1978 and 1978-1981. Under both policies, UTC had a self-insured retention of $200,000 for “any one occurrence.” For the 1975 UTC policy, American Home obtained reinsurance structured in two layers: a $1 million primary layer and a $5 million excess of $1 million layer. For the 1978 UTC policy, American Home obtained reinsurance structured in three layers: a $1 million primary layer, a $5 million excess of $1 million layer, and a $4 million excess of $6 million layer.
Allstate Insurance Company (“Allstate”) issued facultative reinsurance certificates to American Home for the first excess layers of the 1975 and 1978 UTC policies. Under these certificates, Allstate’s liability followed that of American Home and was subject to the same terms and conditions of the policies reinsured. Accordingly, Allstate’s liability under these certificates only attached after American Home’s payments to UTC exceeded the $1 million primary layer.
In April, 1992, UTC commenced a lawsuit against American Home for indemnification under the UTC policies for physical loss and damage allegedly sustained due to environmental pollution at 16 different sites. Throughout this litigation, American Home and UTC both took the position that there were multiple occurrences at each of these sites. However, the parties disagreed on the number of occurrences, and therefore the number of deductibles to apply at each site. American Home argued that there were a total of 95 occurrences at the 16 sites, while UTC maintained that there had only been 44 occurrences.
In March, 1998, a jury determined that there were 7 different occurrences at one of the 16 sites. American Home moved for a new trial and petitioned for an interlocutory appeal, arguing that the court applied the wrong standard for determining the number of occurrences. Shortly thereafter, American Home entered into a global settlement with UTC for all 16 sites, with neither party conceding its position as to the number of occurrences.
After the settlement, American Home utilized a four step analysis to bill its reinsurers on a one occurrence per site, per year basis. This analysis was a sharp departure from the multiple occurrence position taken by American Home during the underlying litigation.
When American Home sought payment from Allstate under the reinsurance certificates, Allstate did not honor the payment request. Allstate correctly determined that had American Home broken down the settlement on a multiple occurrence basis, no single occurrence would have exceeded the $1 million primary reinsurance layer. Therefore, Allstate claimed that its reinsurance obligations were not triggered and commenced a declaratory action against American Home.
After discovery was completed, Allstate moved for partial summary judgment seeking a declaration that it was not bound to the follow-the-fortunes doctrine because American Home’s reinsurance loss allocation was unreasonable. American Home then cross-moved for summary judgment, arguing that its allocation was reasonable. The motion court granted American Home’s cross-motion, holding that the follow-the-fortunes doctrine applied regardless of any inconsistency between the reinsured’s pre-settlement and post-settlement allocation positions.
Thereafter, the First Department overruled the motion court, holding that the follow-the-fortunes doctrine does not require courts to “turn a blind eye to such manifest manipulation of the allocation process in total disregard of the reinsured’s obligation to act in good faith.”
Under the follow-the-fortunes doctrine, a reinsurer is bound to accept a cedent’s good faith decision on all things concerning the underlying insurance terms and claims against the underlying insured, including coverage, tactics, lawsuits, compromise, resistance or capitulation. According to the seminal cases of Travelers Cas. & Sur. Co. v. Certain Underwriters at Lloyds of London, 96 N.Y.2d 583 (2001) and North River Ins. Co. v. ACE American Reinsurance Co.¸ 361 F.3d 134 (2d Cir. 2004), the follow-the-fortunes doctrine extends to a post-settlement allocation despite an inconsistency between that allocation and the reinsured’s pre-settlement assessments of the risk.
However, the doctrine does not give a reinsured “carte blanche” to impose whatever settlement decisions they make on their reinsurers. The follow-the-fortunes doctrine applies only “as long as the allocation meets the typical follow-the-settlements requirements, i.e., is in good faith, reasonable, and with the applicable policies.” North River, 361 F.3d at 141. Here, the Court found that the inconsistency was not between American Home’s post-settlement allocation and its pre-settlement assessments of the risk, but between its pre-settlement allocation of loss with UTC and its post-settlement allocation with Allstate.
The First Department held that American Home was “disingenuous” and failed to act in good faith in its post-settlement allocation of the loss, as American Home applied the occurrence deductible as often as possible to minimize its exposure to UTC, and later applied the occurrence deductible as sparingly as possible to maximize its recovery against Allstate. Accordingly, the Court overturned the motion court and granted Allstate’s motion for summary judgment, holding that Allstate was not liable to American Home under the 1975 and 1978 reinsurance certificates.
Learning Point:
A reinsurer is not bound by the follow-the-fortunes doctrine where the reinsured’s settlement allocation, at odds with its allocation of the loss with its insured, reflects an effort to unreasonably maximize the amount of collectible reinsurance.
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