On August 18, 2005, the Firm achieved a complete victory for Travelers Casualty and Surety Company (Travelers) when the U.S. Court of Appeals for the Second Circuit reversed summary judgment against Travelers and remanded to the district court with instructions to enter summary judgment in favor of Travelers. (Although Travelers had not moved for summary judgment before the district court, it sought summary judgment from the Second Circuit.) The case, argued by Mary Kay Vyskocil on November 10, 2004, concerned an issue of fundamental significance to the reinsurance industry: whether a reinsurer is required by the follow-the-fortunes doctrine to reimburse its reinsured (cedent) for payment of settled claims. The follow-the-fortunes doctrine is designed to foster settlement of insurance disputes by preventing second-guessing (and costly de novo review) by a reinsurer of a cedent’s determination to make and allocate such settlement payments, and to compromise disputed coverage issues and/or waive arguable defenses to a coverage claim.
The case arose out of Travelers’ settlement with its policyholder, Owens Corning Fiberglas (OCF), with respect to asbestos bodily injury claims, and Travelers’ subsequent reinsurance claim against Gerling. Gerling moved for summary judgment that it owed no reinsurance coverage. While acknowledging that Travelers’ settlement with OCF was a good one, Gerling tried to resurrect in the context of a reinsurance claim the specific “number of occurrences” issue that underlay the litigation between Travelers and its policyholder – an issue that was resolved, and necessarily compromised through settlement. Gerling also argued that Travelers acted in bad faith by allocating the settlement to maximize its reinsurance recovery. The District Court (Judge Arterton) entered summary judgment for Gerling, ruling that the follow-the-fortunes doctrine did not bind a reinsurer to a settlement where a cedent abandons as part of a settlement its previous litigation position.
The Second Circuit reversed and held that as a matter of law follow-the-fortunes applies to Travelers’ allocation of its settlement with OCF, and that Gerling could not establish any material issue of fact precluding summary judgment in Travelers’ favor. In a 34-page opinion, Chief Judge Walker ruled that “we decline to authorize an inquiry into the propriety of a cedent’s method of allocating a settlement if the settlement itself was in good faith, reasonable, and within the terms of the policies.” In rejecting Gerling’s bad faith argument, the Second Circuit held: “Reinsurers raising such claims will generally face a very heavy burden; a cedent choosing among several reasonable allocation possibilities is surely not required to choose the allocation that minimizes its reinsurance recovery to avoid a finding of bad faith.”
The extremely favorable resolution of this case has further significance in light of several other pending claims where Travelers tendered defense and indemnity of settled OCF claims to other reinsurers who thus far have refused to honor their reinsurance obligations; many of those claims were tolled or withdrawn pending the outcome of this appeal.
The Simpson Thacher team includes Mary Kay Vyskocil, Elisa Alcabes, Linda Martin, Sheila Brodbeck, Barbara Seniawski, former associates Kevin Lewis and Emily Morton (litigation) and Cyrena Terricone (paralegal).