Environmental Injury Claims From Numerous Sites Cannot Be Aggregated as a Single "Disaster and/or Casualty" Under Reinsurance Treaties
February, 2002
The New York Court of Appeals, addressing consolidated appeals, has held that losses from environmental injury claims involving decades of commercial activities and numerous sites cannot be aggregated as a single “disaster and/or casualty” for purposes of recovery under certain reinsurance treaties. Travelers Cas. & Surety Co. v. Certain Underwriters at Lloyds of London, 734 N.Y.S.2d 531 (N.Y.). The high court further found that the “follow the fortunes” clauses within the reinsurance treaties could not be used to override the definition of a covered “loss” within the treaties themselves.
Facts
This decision involved consolidated appeals and common issues of reinsurance contract interpretation. For over twenty years, Travelers provided liability coverage to the Koppers Company and to E.I. DuPont de Nemours & Company. Travelers purchased various types of reinsurance in connection with the policies it issued to Koppers and DuPont. Following extended litigation with both Koppers and DuPont as to various environmental claims throughout the country, Travelers eventually settled the two actions for $140 million and $72.5 million respectively. These settlements were apportioned among the underlying insurance policies, treating each site as a separate occurrence. Subsequently, Travelers ceded portions of its settlements to its reinsurers. A dispute arose as to whether each of the two settlements fell within the terms of certain reinsurance treaties issued to Travelers. In both cases, Travelers calculated the amount it ceded to its reinsurers by treating the environmental contamination at all applicable sites as a single loss.
In both the Koppers and DuPont cases, the reinsurance treaties at issue were catastrophic excess of loss reinsurance treaties and contained identical terms. The reinsurers agreed to pay Travelers for “each and every loss” incurred by Travelers which exceeded the retentions established under the treaties. The treaties defined the phrase “each and every loss” as follows:
All loss arising out of any one disaster and/or casualty under coverage of any or all insureds of the Companies, or all loss under the products liability coverage of any one insured, or all loss arising out of the occupational disease hazard under Workman’s Compensation and Employers’ Liability coverage of any one insured. (emphasis added)
In turn, the phrase “disaster and/or casualty” was defined as follows:
Each and every accident, occurrence and/or causative incident, it being further understood that all loss resulting from a series of accidents, occurrences and/or causative incidents having a common origin and/or being traceable to the same act, omission, error and/or mistake shall be considered as having resulted from a single accident, occurrence and/or causative incident.
The treaties also contained a so-called “follow the fortunes” clause, which indicated that “any and all payments made by [Travelers] in settlement of loss or losses under [its] policies, . . . shall be unconditionally binding upon the [reinsurers] and amounts falling to the share of the [reinsurers] shall be immediately payable to [Travelers] . . . upon reasonable evidence of the amount paid by [Travelers] being presented.”
Analysis
The parties’ dispute centered upon whether Travelers’ single allocation of its losses to its reinsurers was proper in the Koppers and DuPont cases. Travelers argued that a single allocation applied, since the pollution at the various sites had a “common origin” or was “traceable to the same act, omission, error and/or mistake,” namely Koppers’ deficient corporate environmental policy and DuPont’s failure to implement and enforce its environmental policy. The Court disagreed.
In the treaties at issue, the terms “common origin” and “traceable to” were modified by the phrase “series of” in the definition of “disaster and/or casualty.” The Court interpreted the treaties to incorporate an “inherent spacial or temporal boundary” within the phrase “series of.” Thus, under the “disaster and/or casualty” provisions, a reinsured could properly aggregate its claims if those “accidents, occurrences and/or causative incidents” had a spacial or temporal relationship to one another and a “common origin.” Such a construction further comports with the broad definition of “each and every loss” within the treaties. The Court reasoned that the parties did not intend for the reinsured to simply group together all other losses as a single “disaster and/or casualty,” but sought to allow aggregation only where losses are linked spacially or temporally and share a “common origin.” Based upon this construction, the Court concluded that Travelers’ single allocation of its settlements with Koppers and DuPont did not fall within the ambit of “disaster and/or casualty” in the subject reinsurance treaties.
Travelers also argued that the “follow the fortunes” clauses within its reinsurance treaties mandated that the reinsurers reimburse Travelers for the losses it allocated to them reasonably and in good faith. A “follow the fortunes clause” requires a reinsurer to indemnify for payments reasonably within the terms of the original policy, even if technically not covered by it. This maximizes coverage and settlement, streamlines the reimbursement process and reduces litigation. However, the Court held that a “follow the fortunes clause” does not alter the remaining terms or override the language of the reinsurance policies themselves. To hold that a “follow the fortunes clause” supplants the definition of “disaster and/or casualty” in these reinsurance treaties would have effectively negated the phrase. Hence, the Court held that Travelers was not permitted to allocate its environmental losses to the treaties.
Learning Point:
The Court’s decision is based upon the precise language within the excess of loss reinsurance treaties at issue. When faced with the same or even similar language, an insurer cannot aggregate losses from environmental injury claims over an extended period of time and at numerous sites as a single “disaster and/or casualty” for reinsurance purposes. Further, a “follow the fortunes clause” cannot be used to override other terms within reinsurance treaties themselves.
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