(Article from Insurance Law Alert, October 2020)
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A New York district court ruled that a “follow the settlements” clause obligates a reinsurer to indemnify its cedent’s settlement payments, rejecting the reinsurer’s assertion that the underlying settlement was outside the scope of coverage under the cedent’s excess policy because the “exhaustion” requirement was not met. Fireman’s Fund Ins. Co. v. OneBeacon Ins. Co., 2020 WL 6135101 (S.D.N.Y. Oct. 19, 2020).
Fireman’s Fund issued excess liabilities to Asarco. The policies conditioned payment on exhaustion of underlying insurance, stating “[i]t is a condition that the insurance afforded under [the policy] shall apply only after all the underlying insurance has been exhausted.” One of the excess policies was reinsured by General Accident Insurance Company, with OneBeacon as General Accident’s successor-in-interest. The facultative certificate included a follow the settlements provision, which, under New York law, obligates OneBeacon to accept Fireman’s Fund’s good faith payment decisions that are arguably within the scope of coverage.
OneBeacon denied coverage, claiming that the follow the settlements provision does not “cure [Fireman’s Fund’s] failure to comply with the exhaustion requirements in the underlying Policies.” More specifically, OneBeacon argued that Fireman’s Fund violated the exhaustion requirement of its excess policies because it allocated a portion of its settlement payment to a policy without first paying the full policy limits of underlying excess policies.
The court deemed the undefined term “exhaustion” ambiguous because it did not expressly address whether the exhaustion requirement could be met by settlement payments or conversely, whether it required actual payments by underlying insurers. Having found ambiguity, the court adhered to New York precedent holding that ambiguous “exhaustion” provisions are not construed to require direct payment by underlying insurers as a condition precedent to recover excess insurance. As such, the court concluded that OneBeacon was bound by Fireman’s Fund’s settlement allocation.
The court distinguished decisions holding that, for purposes of triggering excess coverage, exhaustion requires actual payment by underlying insurers, noting that those cases involved different policy language or jurisdictional law. See Ali v. Fed. Ins. Co., 719 F.3d 83 (2d Cir. 2013) (see June 2013 Alert); Citigroup Inc. v. Federal Ins. Co., 649 F.3d 367 (5th Cir. 2011) (see September 2011 Alert); Forest Labs., Inc. v. Arch Ins. Co., 38 Misc. 3d 260 (N.Y. Sup. Ct. 2012), aff’d, 116 A.D.3d 628 (1st Dep’t 2014) (see October 2012 Alert). As discussed in previous Alerts, courts have issued mixed decisions in this context, driven largely by applicable “exhaustion” policy language. See April 2018 Alert, June 2016 Alert, November 2015 Alert, September 2014 Alert, May 2014 Alert, December 2013 Alert, June 2013 Alert, October 2012 Alert, April 2012 Alert, and October 2011 Alert.