The New York Appellate Division, First Department, recently denied a reinsurer's motion for summary judgment, finding that an issue of fact existed as to whether a cedent's allocation of an underlying claim to a reinsured policy was made in bad faith and constituted an ex gratia payment. See Granite State Insurance Co., et al v. ACE American Reinsurance Co., 2007 N.Y. Slip Op. 10464 (App. Div., 1st Dept., Dec. 27, 2007).

Plaintiffs, various subsidiaries of the American International Group ("AIG"), issued excess umbrella liability policies to Castle & Cook, Inc. In the early 1990s, Castle & Cook faced thousands of claims for injuries suffered by field workers exposed to the pesticide dibromochloropropane ("DBCP") and sought coverage for those claims from its insurers, including AIG. ACE American Reinsurance Company ("ACE") reinsured one of the policies issued by an AIG subsidiary, Granite State Insurance Company, which was subject to the underlying coverage action with Castle & Cook.

AIG disclaimed coverage for the Granite State policy on the grounds that Castle & Cook's claims were barred by the DBCP exclusion in that policy. Ultimately, Castle & Cook entered into a future cost agreement ("FCA") with certain AIG companies setting forth which policies would provide defense and indemnity for the Castle & Cook claims on a going forward basis. Thereafter, however, AIG realized that it had paid more than the available limits with respect to certain policies that were not reinsured by ACE and entered into an agreement to allocate future payments to Castle & Cook to the Granite State policy. AIG then sought coverage from ACE for a claim arising under the Granite State policy.

After discovery was conducted on the Granite State claim, ACE moved for summary judgment, arguing that it was not obligated to follow AIG's fortunes on the grounds that AIG's allocation to that policy was made in bad faith and constituted an ex gratia payment. Specifically, ACE cited to the fact that AIG had initially denied coverage for the DBCP claim based on an exclusion in the Granite State policy, entered into an agreement with Castle & Cook that this claim was not covered, and only reversed its position when it determined that the other AIG-related policies had been exhausted. AIG asserted that summary judgment was not appropriate because an issue of fact existed as to whether the FCA could be amended to include other policies.

The Supreme Court, New York County, agreed with AIG's position and denied ACE's motion. On appeal, the Appellate Division, First Department, affirmed the lower court's ruling, finding that an issue of fact existed with respect to the applicability of both the bad faith and ex gratia payment exceptions to the follow the fortunes doctrine, requiring resolution by the trier of fact. Click here to review a copy of the court's decision.