Utica Mut. Ins. Co. v. Fireman's Fund Ins. Co., No. 6:09-CV-853 (DNH/ TWD), 2017 U.S. Dist. LEXIS 25946 (N.D.N.Y. Feb. 24, 2017).

In a wide-ranging opinion that ruled on multiple motions, a New York federal court dismissed two counts of a cedent's claim seeking to enforce reinsurance contracts, but allowed the case to proceed to trial on one count while denying several competing motions for summary judgment.

The cedent issued primary insurance policies to its insured from 1966 through 1972. The primary policy documents have not been located, and a material fact in dispute was whether the policies contained aggregate limits for bodily injury. The cedent also issued umbrella policies to the insured providing for US$10 million of coverage. The cedent obtained facultative reinsurance of US$5 million for each of the umbrella policies with the reinsurer.

Beginning in 1997, the insured became the subject of thousands of asbestos-related personal injury claims. The cedent and the insured settled the outstanding asbestos claims for US$325 million, with a stipulation that all of the primary policies had aggregate limits for bodily injury of US$300,000 and that all such limits had been exhausted. Under the stipulation, the US$325 million settlement was allocated to the umbrella policies. Thus, the cedent billed the reinsurer for US$35 million under the facultative certificates. The reinsurer rejected the billing.

The cedent argued that, under the follow-the-fortunes doctrine, the reinsurer must accept the cedent's good faith decisions on all things concerning the underlying insured, as well as settlements and settlement allocation. The reinsurer argued that (i) the primary policies did not contain aggregate limits, and (ii) the stipulation that the primary policies had aggregate limits was improper because it intentionally shifted liability to the umbrella policies with reinsurance.

The parties filed cross-motions for summary judgment regarding the follow-the-fortunes doctrine. The reinsurer argued that the settlement between the cedent and the insured was unreasonable and improper. The cedent argued that the settlement with the insured was not in bad faith and that, because the cedent was unaware of its reinsurance with the reinsurer in this case, the settlement would have occurred in the absence of reinsurance.

In denying the motions, the court found that the facts as presented by cedent (e.g., the settlement allowed the cedent to cap its liability under the primary policies; the cedent believed that the primary policies in fact contained aggregate limits; and the settlement allowed the cedent to avoid fights with its other reinsurers) raised the possibility that the settlement was reasonable, in good faith and justified by legitimate business reasons. The court also found the facts as presented by the reinsurer (namely, the stipulations in the settlement agreement were objectively unreasonable and not necessary) could lead a rational trier of fact to conclude that the cedent included the stipulations in the settlement agreement solely to ensure access to its reinsurance.

In a separate motion, the reinsurer sought partial summary judgment on the basis that the reinsurer had no obligation to provide reinsurance coverage because the facultative certificates issued under the corresponding umbrella policies lacked aggregate limits. The reinsurer noted that the certificates provided that the reinsurer's liability was subject to the terms and conditions of the underlying policies and the reinsurer agreed to provide reinsurance only in accordance with the terms and conditions of the umbrella policies. Aggregate limits for bodily injury were not listed on the declaration pages of each certificate. The cedent argued that the absence of aggregate limits in the declarations did not equate to a lack of aggregate limits in the missing primary policies.

The court denied the reinsurer's motion on the basis that (i) the certificates were not integrated agreements because they relied on the umbrella and primary policies and (ii) the umbrella policies were incomplete because the reinsurer only submitted the declarations pages. As such, a determination as a matter of law could not be made at this stage in the proceeding.

One of the counts in cedent's complaint alleges a breach of the duty of good faith by the reinsurer for failing to pay the reinsurance claims in a timely manner. The reinsurer filed a motion for summary judgment against this count, arguing that its actions fall substantially short of the standard required to show bad faith. The court granted the reinsurer's motion, finding that the reinsurer had legitimate grounds for investigating the cedent's claims and the missing primary policies, and the cedent was responsible for greater delay in the process than the reinsurer.