Utica Mut. Ins. Co. v. Munich Reinsurance Am., Inc., Nos. 6:12-cv00196, 6:13-cv00743 (BKS/ATB), 2019 U.S. Dist. LEXIS 53470 (N.D.N.Y. Mar. 29, 2019).

A New York federal court, after a 10-day trial, ruled on whether a facultative reinsurer was responsible for expenses supplemental to the certificate’s liability limits and also whether payments of expenses made by the facultative reinsurer to the cedent should be returned as improper billings. The underlying losses stem from asbestos settlements.

The cedent issued a series of primary and umbrella policies to the underlying insured. The primary policies were expense-supplemental. The cedent obtained facultative reinsurance for some of the umbrella policies. The dispute was whether a specific umbrella policy was modified by an endorsement so as to require the cedent to pay defense expenses in addition to the policy limits.

The opinion goes into the detail of the trial testimony. The court ultimately held that the reinsurer was not liable for any expenses in addition to the limit, but that the voluntary payment doctrine barred the reinsurer from recouping payments on expenses already made.

In making its findings, the court found that the facultative certificate did not contain a follow-the-settlements or follow-the fortunes provision. After taking testimony on whether the doctrine should be implied, the court concluded that the cedent failed to prove that the followthe-fortunes or settlements doctrines were “so fixed and invariable at the time the parties agreed” to the certificate that it is implied in their agreement. The court did note that the expert testimony showed that cedents and reinsurers, in general, endeavored to work together and that reinsurers, whenever possible, deferred to the reasonable determinations by the cedents in interpreting policies and settling claims. But the experts had to concede that not all reinsurers included following provisions in their facultative certificates. Thus, there was no basis to imply the doctrine to this certificate.

In finding that the cedent was not responsible under the umbrella policy for supplemental defense expenses upon exhaustion of the primary policy, the court held that the asbestos claims were covered under the primary policy and did not come within the endorsement’s umbrella drop-down coverage for occurrences not covered by the primary policy (which would have required coverage for expenses supplemental to the limit). 

Ultimately, the court concluded that the facultative certificate did not contain an independent requirement obligating the reinsurer to pay defense or declaratory judgment expenses in excess of the limit. The court also found that the definition of allocated loss adjustment expense was unambiguous and did not include declaratory judgment expenses. 

As to the expenses that the reinsurer already paid, the court found that the cedent proved, by a preponderance of the evidence, that the reinsurer made a voluntary payment. The court held that the reinsurer was fully aware that the cedent was billing on a costs-in-addition or expense-supplemental basis. Accordingly, the reinsurer’s claim for a refund was denied.