A Connecticut federal court decided some thorny discovery issues in a reinsurance dispute between Travelers and one of its reinsurers, Excalibur. The suit arose from underlying asbestos claims settled by Travelers, for which it looked to Excalibur and its other reinsurers for coverage.

Holding that New York law applied, the Court identified several operative principles. First, a “follow the settlements” clause in a reinsurance contract requires deference to a cedent’s decision on the allocation of settlement payments among reinsurers. Second, a cedent’s allocation decision, however, is not immune from scrutiny, and must be reasonable. That is, it must be one that the parties to the settlement of the underlying insurance claims might reasonably have arrived at but for the reinsurance. Third, an allocation that violates or disregards the reinsurance contract’s provisions is invalid.

Excalibur argued that as one of Travelers’ reinsurers, it was entitled to challenge Travelers’ allocation of its settlement among the reinsurers. It argued that Travelers’ allocation was unreasonable, and contrary to the reinsurance policies, and that it was therefore entitled to discovery of information pertaining to the allocation decision. Travelers responded that the “follow the settlements” clause meant Excalibur could not challenge, question, or inquire into Travelers’ settlement and allocation decisions. Holding that Excalibur’s position accorded better with New York law, the court allowed Excalibur’s requested discovery. Travelers Indemnity Co. v. Excalibur Reinsurance Corp., No. 3:11-CV-1209 (USDC D. Conn. April 8, 2013).