On June 12, 2007, a New York appellate court reversed a lower court's decision and held that a reinsurer was not required to follow the fortunes of a cedent's loss allocation on a single occurrence "per site" basis, finding that such allocation, which allowed the cedent to exceed the facultative reinsurance contract's $1 million per-occurrence deductible with respect to certain sites, was unreasonable. See Allstate Ins. Co. v. American Home Assurance Co., No. 9335, (App. Div, 1st Dept.).
The underlying claims between American Home and its insured, United Technologies Corp. ("UTC"), involved pollution losses occurring at various locations in Florida, Connecticut and California owned by UTC. UTC sued American Home in federal court seeking indemnification for these losses. During the litigation, both American Home and UTC agreed that there were multiple occurrences at each site. However, the parties disagreed over the number of occurrences at certain locations, an issue that affected the application of the $200,000 per-occurrence deductible contained in American Home's policies. In 1998, a jury found that UTC had shown loss at the subject sites insured by American Home and allocated a certain amount to each of the sites. The district court then ruled on the number of occurrences issue with respect to certain sites. After moving for a new trial, American Home and UTC eventually settled. During settlement negotiations, American Home and UTC continued to disagree over the number of occurrences at the sites in issue, with American Home alleging a total of 95 separate occurrences at all 16 sites.
After the settlement, American Home presented the losses to its reinsurer, Allstate, treating each site as a single occurrence, and billed Allstate on a one-occurrence, per site - per-year basis, thus triggering Allstate's obligations under the facultative certificates at issue. Allstate denied the claims, citing to the inconsistencies between American Home's pre-settlement and post-settlement allocation positions. Litigation commenced and the trial court ruled in favor of American Home, holding that its loss allocation was not unreasonable under the follow the fortunes doctrine.
In reversing the trial court, the Appellate Division noted that under well-established law in the Second Circuit, a reinsurer is only obliged to follow a cedent's loss allocation if "the allocation meets the typical follow-the-settlements requirements, i.e., is in good faith, reasonable, and within the applicable policies." The court found that American Home’s post-settlement allocation was unreasonable because the "one-occurrence-per-site allocation" with regard to certain contaminated sites "directly contradicts" both the district court's ruling as to the number of occurrences at certain sites and the "multiple occurrences" position advanced by both American Home and UTC in the underlying litigation and settlement negotiations.
A copy of the decision can be accessed here.