On January 24, 2012, the New York Appellate Division, First Department invoked the follow-the-fortunes doctrine to affirm an insurer's $420 million judgment against its reinsurers. The decision in United States Fidelity & Guaranty Co. v. American Re-Insurance Co.¹ confirms that New York courts apply the follow-the-fortunes doctrine to require reinsurers to cover an insurer's claim settlement that "is at least arguably within the scope of the insurance coverage that was reinsured."

The Background

In 2002, United States Fidelity & Guaranty Company ("USF & G") and other insurers paid $987.3 million to satisfy all asbestos-related claims against their insured. After USF & G and the insured settled, they decided to allocate all losses to the 1959 policy year, which had the highest per-person limits. When USF & G ceded a portion of the loss to its treaty reinsurers, it likewise allocated each injury as a separate accident in 1959. The reinsurers declined USF & G's claim because, among other reasons, they believed that the settlement included uncovered amounts paid by USF & G for the insured's bad faith claims against it.

Litigation ensued in New York. On cross-motions for summary judgment, the lower court granted USF & G's motion and denied the reinsurers'. The reinsurers appealed. The issue of law on appeal "concern[ed] what [the reinsurers] believe was the [motion] court's erroneous application of the 'follow the fortunes' doctrine."

The Majority Opinion

The Appellate Division affirmed summary judgment for USF & G. The majority held that "the follow-the-fortunes doctrine required [the reinsurers] to accept the reinsurance presentation made by USF & G." The court found that follow-the-fortunes precluded it from reviewing the reinsurers' "efforts to second guess USF & G's decisions concerning allocation of the loss," including whether it properly valued the underlying claims, whether it could allocate all losses to one year, and whether the settlement included bad faith claims against USF & G.

The majority added that it would reach the same result "even if [it] were to consider [the reinsurers'] arguments on the merits" because (i) "the settlement agreement that resolved the coverage action does not allocate any of the settlement funds to compensating [the insured] for USF & G's alleged bad faith," and (ii) "USF & G has made it clear that 1959 was selected in order to provide a maximum benefit to the actual injured persons and because 1959 was the only policy year that covered every potential claimant."

Finally, the majority distinguished this decision from its 2007 ruling in Allstate Insurance Co. v. American Home Assurance Co.² In Allstate, an insurer sought to maximize its reinsurance coverage by ceding a loss as a single occurrence despite its earlier multiple occurrence position and a court's ruling that there had been multiple occurrences. Here, the court reasoned that USF & G had consistently treated each injury as a single occurrence - a separate 1959 accident - both for its insurance and reinsurance allocations.

The Dissent

The dissenting opinion advocated reversing summary judgment in favor of USF & G on the grounds that "[t]here is a genuine triable issue of fact as to whether a portion of the $987.3 million settlement that [USF & G] reached with [its insured] was for bad faith claims, which are not covered by the reinsurance treaty."

Judge Abdus-Salaam found that under the treaty, "bad faith damages cannot reasonably be considered to be a loss arising out of an accident," and that "a 'follow the fortunes' clause does not serve to create coverage where there is none." Therefore, the dissent stated that the majority incorrectly applied the follow-the-fortunes doctrine to preclude the reinsurers from questioning coverage.

What This Ruling Means

This decision stands consistent with most New York state and federal caselaw applying the follow-the-fortunes doctrine. For cedents, the opinion emphasizes the importance of treating policyholders and reinsurers consistently in settlement allocation decisions. For reinsurers, the case highlights the limited options currently available under New York law to challenge a cedent's allocation decision.