ARROWOOD SURPLUS LINES INS. CO. V. WESTPORT INS. CORP.
(CIVIL ACTION NO. 08-CV-01393, JANUARY 5, 2010)

Plaintiff’s predecessor, Royal Surplus Lines Insurance Company ("Royal Surplus") entered into an agreement that it assumed the liabilities and acquired the related assets of Connecticut Specialty Insurance Company’s ("Connecticut Specialty") covered business as of December 31, 2001. From February 1, 1999 until May 16, 2000, Employers Reinsurance Company ("Employers Reinsurance") reinsured a class of policies Connecticut Specialty issued, including one to Equity Residential ("Equity") that went into effect on December 15, 1999 ("Equity Policy").

Equity filed a complaint alleging claims for RICO, breach of fiduciary duty, fraud and conspiracy arising out of its purchase of insurance from Connecticut Specialty. In an amended complaint, Equity asserted claims for declaratory judgment, breach of contract and reformation of the contract against Royal Surplus for losses occurring between December 15, 2000 and December 15, 2002. Plaintiff paid Equity the sum of $4,100,000 to settle those claims and incurred $2,609,325.55 in claim expenses. Plaintiff sought reimbursement from Employers Reinsurance’s successor, Westport Insurance Corporation ("Westport") for the settlement payment to Equity and claim expenses in connection with losses that occurred between December 15, 2000 and December 15, 2002. Specifically, plaintiff argued that the "follow-the-fortune" doctrine altered the scope of coverage in the reinsurance agreement to cover all three policies.

Westport moved to dismiss plaintiff’s complaint, arguing that it was only liable to indemnify plaintiff for losses that occurred in the first year of the Equity Policy and has no liability for losses that occurred after December 15, 2000.

The court granted Westport’s motion, holding that the scope of the reinsurance agreement was limited to the policies becoming effective on or after the effective date of the reinsurance agreement. The reinsurance agreement stated that a policy issued for more than one year was considered as "becoming effective" at each anniversary date of the policy, limiting the coverage period to a year at a time, regardless of the length of the underlying insurance contract. Accordingly, Westport had no liability for losses that occurred after the anniversary date of the Equity Policy, December 15, 2000. As it relates to the follow-the-fortune argument, the court was equally unimpressed. The follow-the-fortune doctrine "does not require indemnification for losses not covered by the underlying policies."

IMPACT (REINSURANCE): The follow-the-fortune doctrine is seen as a way to prevent a reinsurer from questioning the reinsured’s decision in an underlying claim provided that there was no fraud or bad faith. As the Second Circuit declared in North River v. CIGNA Reinsurance, the follow-the-fortune doctrine, however, does not expand a reinsurer’s obligations. Such was the case here. Westport was only obligated to the scope of risk as it was outlined in the reinsurance agreement and the follow-the-fortune doctrine does not expand its risk.

For a copy of this decision, click here: http://insurancecoverage.typepad.com/insurance_and_reinsurance/2010/01/cases-for-reinsurance-review-february-2010-edition-.html