Transcript EVOLVING CONTOURS OF THE FOLLOW THE FORTUNES…

EVOLVING CONTOURS OF
THE FOLLOW THE
FORTUNES/SETTLEMENTS
DOCTRINE
JOHN T. HARDING, JR.
MORRISON MAHONEY LLP
WM. GERALD MCELROY, JR.
ZELLE HOFMANN VOELBEL
& MASON LLP
CYNTHIA KOEHLER
LIBERTY MUTUAL GROUP
U.S. Case Law Regarding The Evolving
Contours Of The Follow The Fortunes
Doctrine As Applied To PostSettlement Allocations
Wm. Gerald McElroy, Jr.
Zelle Hofmann Voelbel & Mason LLP
[email protected]
Issues Influencing Post-Settlement
Allocations
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Trigger of coverage
Allocation methodology
Annualization of policy limits
Per occurrence policy limits
Number of occurrences
Allocation to particular hazardous waste
sites
The Follow The Fortunes Doctrine
And Its Rationale
Sample Clause
All loss settlements made by the Reinsured,
including compromise settlements, shall be
binding upon the reinsurer, provided that the
loss underlying the settlement is within the
terms of the original policy and is within the
terms of the Reinsurance.
Fundamentals Of Doctrine
• Reinsurer obligated to indemnify reinsured
for any good faith payment
• No second-guessing of good faith liability
determinations
Rationale For Follow The Fortunes
Doctrine
• Forecloses relitigation of coverage
disputes
• Mutuality of interest between insurers and
reinsurers
• Furthers goals of “maximizing coverage
and settlements”
Limitations on the Doctrine
• Reinsurer not liable for risks beyond what
was covered by the underlying policy. No
requirement to reimburse cedent for ex
gratia payments.
• Reinsurer not liable for risks which are not
covered by the reinsurance certificate
• Does not apply to settlements made by the
cedent which are fraudulent, collusive, or
made in bad faith
Does The Doctrine Apply To PostSettlement Allocations As Well as
Coverage Decisions?
Decisions Construing The Follow
The Fortunes Doctrine Broadly To
Post-Settlement Allocations
Seven Provinces
Doctrine applies to good faith and
reasonable allocation of settlement dollars
North River Insurance Co. v. ACE
American Reinsurance Co.
• Doctrine applied to cedent’s post-settlement allocation
based on “rising bathtub” methodology
• Inconsistency between cedent’s post-settlement
allocation and its own pre-settlement analysis of risk
• Main rationale for follow the fortunes doctrine is to foster
the goals of “maximum coverage and settlement” and
avoid undermining the foundation of the cedent-reinsurer
relationship
Travelers v. Gerling
• Post-settlement allocation subject to follow the
fortunes doctrine regardless of whether
allocation is inconsistent with cedent’s presettlement risk analysis or the settlement with
the underlying insured
• Not easy to establish bad faith in the context of
post-settlement allocations
Cases Construing the Doctrine More
Narrowly To Post-Settlement
Allocations
Allstate Ins. v. American Home
Assurance
• Cedent’s post-settlement allocation
unreasonable as a matter of law where it was
inconsistent with position taken by cedent and
insured and with court ruling in underlying
litigation
• Attempt to distinguish North River and Gerling
• Cedent cannot play by two sets of rules
American Employers Ins. v. Swiss
Reinsurance America
• Not “presently prepared to adopt” the cedent’s
argument that the follow the settlements clause
required acceptance of the cedent’s unilateral
post-settlement decision as to allocation among
reinsurance policies “regardless of what the
settlement embodies.”
• Description of remand on good faith issue
Practical Observations Based on
U.S. Case Law
The English Revolution:
“Follow the Fortunes” after Lexington
v. Wasa and AGF
John T. Harding
Morrison Mahoney LLP
[email protected]
Your Host for the Revolution
The Revolution is On!
A Tale of Two Cedents
ICA v. SCOR
• Fraudulent Claim (Maybe? Probably?)
• Honestly settled by direct company after
liability determined
• Reinsurer bound to follow settlement even
if claim was not within the scope of the
insurance because claim was fraudulent
Lexington v. Wasa
• Direct company liable per Washington
Supreme Court
• Liability estimated to be greater than $180
million
• Settled for $103 million
The Cedent’s Position
• Written as “back-to-back” reinsurance—
same terms and conditions as direct
insurance
• “Full Reinsurance Clause”
• Reinsurer agreed to “follow the
settlements” of the direct company
Let’s Hear from the Reinsurer
You want me to follow what???
• Reinsurance certificate governed by
“purely English law”
• Reinsures the original “risk,” not the direct
company’s liability
• Period of cover fundamental; does not
cover damage outside the policy period
No Bloody English Court Would
Ever Rule That Way
The Envelope Please
• Settlement was reasonable and business-like
• Presumption that insurance is back to back
• BUT Reinsurer does not pay under “purely
English law” governing the reinsurance
certificate as no English court would ever reach
the same result as Washington Supreme Court
What Does It All Mean?
• London reinsurers rebelling from the
vagaries of the US civil system
• Contract clauses must be viewed through
“purely English law eyes”
• “Follow the settlements” is just one clause
Fundamental Principles
FULL REINSURANCE
CLAUSE NO. 1
(3 June 1943)
The Critical Wording
“Being a reinsurance of and warranted
same gross rate, terms and conditions as
and to follow the settlements of the
Company. . .”
Back-to-Back
• Language creates the presumption that the
insurance and the reinsurance are “back-toback”
• Written on same terms, conditions and
limitations and to have the same scope
• Terms of two contracts mean the same thing (but
just a presumption per Wasa)
INSURANCE COMPANY OF
AFRICA v. SCOR
(1985)
They Call Me Mr. Ali!
ICA v. Scor
• Warehouse fire at Africa Trading Co.
• ATC operated by a questionable dude,
Mr. Ali
• Building insured for $500K and contents for
$3 million
Was it Fraud?
• ICA suspected fraud, but couldn’t prove it
• ICA refused to pay
• ATC sues in Liberian court
• Judgment for $4 million
Who is the Cedent?
The Reinsurance Claim
• ICA tenders to Scor
• Scor defends on grounds that it was a
fraudulent claim and therefore not within
scope of the direct insurance nor of the
reinsurance
• If “back-to-back” and was never covered,
reinsurer should not have to pay
Don’t Score Another
One for Scor
• Scor loses at trial
• Absence of proof of fraud
• Seeks appeal claiming new evidence from
the mystery witnesses
Appeal Rejected
• “The reinsurer, when called upon to perform his
promise, is entitled to require the reassured first
to shew that a loss of the kind reinsured has in
fact happened; and, secondly, that the reassured
has taken all proper and businesslike steps to
have the amount of it fairly and carefully
ascertained. That is all. He must then pay.” --Poole’s case [1903]
The Touchstone:
Lord Justice Robert Goff
“In my judgment, the effect of a clause
binding reinsurers to follow settlements of
the insurers, is that the reinsurers agree to
indemnify insurers in the event that they
settle a claim by their assured. . .provided
that:
Proviso One
• “The claim so recognized by them falls
within the risks covered by the policy of
reinsurance as a matter of law”; and
Proviso Two
• “That in settling the claim the insurers
have acted honestly and have taken all
proper and businesslike steps in making
the settlement.”
The Conclusion
“If insurers have settled a claim, acting
honestly and in a proper and businesslike
manner, then the fact that reinsurers may
thereafter be able to prove that the claim
of the assured was fraudulent does not of
itself entitle reinsurers not to follow the
settlement of the insurers. In my
judgment they must follow the
settlement, as they have contracted to
do.”
Post-Scor Developments
• Hill v. General Reinsurance
• CU v. NRG
• Generali v. CGU
• Aegis v. Continental Casualty
All Reaffirm Basic Principles of Scor
Out of Africa
And Now a Word from Our Sponsor. . .
A Series of Unfortunate Events
The Lexington Policy
• Lexington DIC Policy: 1 July ’77 to ’80
• “Gap” coverage / Difference in Conditions
• $20 million per occurrence
• All risks of direct physical loss as well as
business interruption, etc.
Alcoa’s Claim
• Indemnification for environmental
contamination
• 75 sites / 2 cases
• 150 policies
• Contamination from 1940’s to 1980’s
The Trial Court Rulings
• Pennsylvania law applies (Alcoa HQ)
• Suit limitation period bars coverage
• More than one occurrence at each site
• Jury determines damage occurred over long period of
time
• Trial judge rules that damage from continuous process of
injury can be apportioned
Washington Supreme Court
• Mass. law applies to Lexington policy
(no enforceable suit limitation provision)
• J.H. France = “All Sums” / No Allocation
• As long as “some” property damage
occurred during policy period the insurer is
on the hook for everything
The Fun Begins
• Lexington calculates liability > $180M
• Lexington settles for $103M
• Lexington tenders to Wasa and AGF (2.5%
of the reinsurance slip)
• They way “No thanks, indeed.”
There Will Always Be An England
Common Ground
• “This was an honest and business-like
settlement”
• Contract contains Full Reinsurance Clause
No. 1 “. . .and to follow the settlements of
the Company”
• English law governs the reinsurance
Lexington’s Position
• Scope of direct insurance determined by
court of competent jurisdiction
• Presumed intent is that same meaning
and effect given to reinsurance
• Otherwise what is point of “back-to-back”
The Reinsurers’ Position
• We insured three years, not 50
• Period of cover fundamental
• “Follow the settlements” does not mean that
agreed to indemnify for any “liability” Lexington
might incur
• Not within the reinsurance as a matter of law
The Court of Appeal
Frames the Issue
Q:
“It is no doubt true that the stated
period of time is fundamental; the
question is, however, whether that
fundamental provision is, if it is the
same in both the contracts, to receive
the same interpretation or a different
interpretation.”
The Court of Appeal
Answers the Inquiry
• No evidence that the parties intended the
contracts to operate other than according to the
usual presumption
• Same or equivalent wordings should be given
the same meaning in the reinsurance and the
direct insurance (See Vesta and Catatumbo)
• Imagined “intent” of underwriters in 1977 not a
basis to depart from these rules
The Modern Commercial Reality
• “The need for the fiction that the
reinsurance covered the primary risk and
not the insurer’s own potential liability is
thus long spent. The practice and
vocabulary of reinsurance law have for a
long time now reflected the reality that
what is reinsured is the insurer’s own
liability”
An Epistle from
Lord Justice Longmore
• “No one can pretend that the decisions of
the United States courts in relation to
asbestosis and pollution claims are
remotely satisfactory from the point of view
of insurers let alone reinsurers.. . .
The Lord Justice Speaks
• “Reinsurers’ arguments in the present
case had a whiff of an assertion (although
they were careful not to say so expressly)
that Lexington were an American
Corporation and therefore had to take
unsatisfactory American decisions on the
chin, while reinsurers were English.. . and
could not be expected to do so. That of
course, will not do.”
The Revolution is Over
• “The appellant’s very name is apt to
remind one of the opening shots of the
War of Independence but that conflict has
long since receded into history and must
remain there”
Reaction to the Court of
Appeal’s Decision
Was Swift
The Queen Was Not Amused
“You Say You Want a
Revolution”
These are so not the Fab Four
The Decision: Warts and All
Rule Brittania
• When the chips are down, English law
controls
• “ ‘Physical loss or damage’ under a policy
providing cover for three years simply
cannot be construed under English law to
include pre-existing damage”—Lord
Justice Brown
Whatever Happened to
“Back-to-Back”
• No dispute that insurance and reinsurance
were “back-to-back”
• Presumption that terms mean the same
thing
• But, overcome in this case by. . .
When English Law Eyes
are Smiling
• Reinsurance is a separate contract
• Reinsurance is not an insurance against
liability
• Rejects idea that reinsuring the original
risk (rather than liability) is “long spent”
Consider the Scope
• Scor—claim so recognized falls within risk
covered by the reinsurance
• Construing period of cover according to English
law principles cannot possibly have the meaning
given to it by the Washington Supreme Court
• “Follow the settlements” does not change the
scope
But Lexington Didn’t Think it was
Covered Either
• “The consideration that Lexington probably
did not reckon on the liability which it was
held to have in America is not by itself a
conclusive reason for passing that liability
to reinsurers who were, on the face of it,
also entitled to be confident that no such
liability could arise under the clear and
basic terms of the English law contract into
which they entered.”
Lord Justice Collins
• “At the beginning and end of these
appeals remains the question whether the
provision for the policy period in the
reinsurance is to be given the effect it has
under English law, or whether the parties
must be taken to have meant that the
reinsurance was to respond to all claims
irrespective of when the damage occurred
and irrespective of the period to which the
losses related. . .
And so it goes. . .
• “There is, in my judgment, no principled
basis for a conclusion in the latter sense.”
Wake Me Up When the
Revolution is Over
Thoughts and
Recommendations:
• How broadly will it be applied?
• What arguments will reinsurers craft?
• Drafting considerations—choice of law?
• Involvement of Reinsurers?
Questions:
• How About a Shave?