Employers Reinsurance Company, now known as Westport Insurance Corporation (“Westport”), provided reinsurance coverage for insurance policies issued by Connecticut Specialty Insurance Company (the “Reinsurance Agreement”). Royal Surplus Lines Insurance Company, later known as Arrowood Surplus Lines Insurance Company (“Arrowood”), entered into an agreement by which it assumed Connecticut Specialty’s liabilities under certain policies, including a general liability policy issued to Equity Residential (the “Policy”).

A litigation arose between Arrowood and Equity concerning the Policy. Equity argued that the Policy had a three-year period and sought coverage for losses that occurred from December 15, 1999 to December 15, 2002. Arrowood, on the other hand, contended that the Policy only covered the first year of that period. Arrowood ultimately settled with Equity and sought reimbursement under the Reinsurance Agreement from Westport.

Westport agreed to indemnify Arrowood for losses occurring during the first year of the Policy, but asserted it had no liability for losses occurring thereafter on the grounds that such losses were not covered by the Reinsurance Agreement. Arrowood, however, claimed that its settlement payment and expenses were based, in part, on the risk that Equity might prevail in the litigation on its argument that the Policy had a three-year period. Thus, Arrowood contended that Westport was obligated to pay Arrowood in full under the follow the fortunes clause in the Reinsurance Agreement.

In granting Westport’s motion to dismiss on the pleadings, the court noted that the follow the fortunes doctrine only applies to losses that fall within the scope of the reinsurance contract. Specifically, the court noted that the Reinsurance Agreement contained language limiting its coverage to a year at a time, regardless of the length of the underlying insurance policy. In this case, Westport terminated the Reinsurance Agreement on August 18, 2000, and thus all losses incurred after the anniversary date the Policy (December 15, 2000) were not covered. For this reason, the court held that Westport was only obligated to indemnify Arrowood for any liability incurred before that date.

Click here to review a copy of the District Court’s decision, captioned Arrowood Surplus Lines Ins. Co. v. Westport Ins. Corp., No. 08-cv-1393 (D. Conn. 2010).