Publications

(Article from Insurance Law Alert, April 2015)

For more information, please visit the Insurance Law Alert Resource Center.

 A New York appellate court ruled that questions of fact exist as to whether a reinsurance certificate provision constituted a "follow the settlements" clause, and if it did, whether it precluded a reinsurer from challenging the allocation of underlying settlement proceeds. New Hampshire Ins. Co. v. Clearwater Ins. Co., 2015 WL 1292579 (N.Y. App. Div. Mar. 24, 2015).

New Hampshire Insurance Company and several other AIG-affiliated insurers settled hundreds of millions of dollars of asbestos claims with Kaiser Aluminum. The settlement gave AIG the right to allocate the settlement amount at their sole discretion. AIG allocated 100% of the settlement to claims within the coverage of a New Hampshire excess policy reinsured by Clearwater. When Clearwater challenged the reasonableness of the allocation, New Hampshire argued that language in the reinsurance certificates stating that Clearwater’s "liability … shall follow [New Hampshire’s] liability in accordance with the terms and conditions of the policy reinsured hereunder" established a "follow the fortunes" requirement and that Clearwater was bound by AIG’s settlement allocation. A New York trial court ruled that (1) Clearwater was collaterally estopped from denying that the certificates imposed a duty to "follow the settlements" in light of a Massachusetts trial court decision interpreting similar language; and (2) notwithstanding the deference afforded to a ceding insurer’s coverage decisions pursuant to a "follow the settlements" clause, there were questions of fact as to the reasonableness of the allocation and whether Clearwater should be bound by it. The appellate court affirmed in part and reversed in part.

Reversing the collateral estoppel ruling, the appellate court held that Clearwater was not bound by a different state court’s construction of the relevant language because the dispute before the court concerned "a different certificate issued to a different cedent with respect to an underlying policy covering a different insured." The court further found that the language at issue constituted a "following form" requirement (for the purpose of achieving concurrency between the reinsured contract and the reinsurance policy), not a "follow the settlements" provision. The court then considered whether a "follow the settlements" duty is implied in reinsurance contracts even in the absence of a contractual provision. Noting conflicting decisions in this context, the court declined to resolve the question and instead held that even assuming that Clearwater was obligated to follow the settlements, there were questions of fact as to the reasonableness of AIG’s settlement allocation. In particular, the court noted that the allocation decision was made unilaterally by AIG and that none of the settlement payments were allocated to certain categories of claims, such as premises claims or defense costs. Because the record did not establish "whether or not it was reasonable to allocate no portion of the settlement to claims that were not asserted against New Hampshire or were not even covered by its policy," summary judgment was unwarranted. The appellate court also reversed the trial court’s summary judgment ruling on late notice, finding that Clearwater had raised triable issues of fact as to whether New Hampshire complied with the contractual notice provisions and as to whether any delay resulted in prejudice.