State Court Applies “Follow-the-Fortunes” Doctrine in Reinsurance/Asbestos Dispute

USF&G v. American Reinsurance

(New York Supreme Court, New York CountyAugust 20, 2010)

In USF&G v. American Reinsurance, a New York trial court analyzed the "follow the settlement" doctrine and determined that American Reinsurance was required to reimbursed the cedent, USF&G, for $262,000 plus interest.

USF&G insured Western Asbestos from 1948 to 1960. At some point, Western Asbestos became insolvent and was purchased by MacArthur Company, which formed Western MacArthur as a result. In the late 1970's, Western MacArthur was sued by numerous claimants for asbestos-related injuries and sought coverage under its predecessor's policies. USF&G resisted coverage for the asbestos claims, both on the basis that it did not insure Western MacArthur and that its policies had been lost and had not been demonstrated to have products liability insurance. After 10 years in litigation and after it was essentially determined that USF&G would loose its coverage case, it settled the coverage action. As part of the settlement, it funded a trust to pay future claims, the amount of which was based upon estimates for certain injuries. It sought to collect the reinsured portions of the settlements from its reinsurers.

American Reinsurance resisted, asserting: (1) that it did not owe for losses less than $100,000; (2) that it did not owe for exposures after 1960; and (3) that since USF&G's underlying policies limited losses to $200,000 per occurrence, it did not owe more than $100,000 per claim ($200,000 limit – $100,000 retention).

The court held that the reinsurer was required to "follow the settlement," unless the settlement was undertaken in bad faith or with no legal obligation to pay. The reinsurer did not allege bad faith or assert that USF&G had no obligation to pay. Rather, it sought court review of each and every payment to each and every claimant to determine if its reinsurance obligations were triggered.

Noting that the purpose of the "follow the fortunes" doctrine was to avoid relitigating settlement of underlying claims, the court held that "where the cedent's good faith payment is at least arguably within the scope of the policy," the reinsurer was obligated to reimburse the cedent. Since the reinsurer sought to re-examine covered claims, the court granted summary judgment against it and ordered it to reimburse its cedent according to the terms of the reinsurance treaty.

For a copy of the decision click here

Sarah Delaney and Tom Segalla