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National Union Fire Insurance Co. of Pittsburgh v. American Re-Insurance Co.

July 28, 2006


The opinion of the court was delivered by: Denny Chin, D.J.


In this diversity action for breach of contract, an insurance company and a reinsurance company dispute the applicability of the "follow the fortunes" doctrine as it relates to the insurer's payment of certain claims made against it. Plaintiff National Union Fire Insurance Company of Pittsburgh, Pennsylvania ("National Union") moves for summary judgment against defendant American Re-Insurance Company ("American Re"). For the reasons that follow, the motion is granted.


I. The Facts

The underlying facts are fully described in a previous opinion by the Court on a motion for summary judgment filed by American Re. See Nat'l Union Fire Ins. Co. v. Am. Re-Insurance Co., 351 F. Supp. 2d 201 (S.D.N.Y. 2005) ("National Union I"). Familiarity with that opinion is assumed, and the facts will be only briefly summarized herein.

National Union issued an insurance policy (the "Milacron Policy") to Cincinnati Milacron, Inc. ("Milacron"), an Ohio machine-manufacturing company, for a one-year period commencing April 1, 1994. Nat'l Union I, 351 F. Supp. 2d at 203-04. The Milacron Policy provided Milacron with coverage up to $5 million after Milacron's $5 million self-insured aggregate retention was exhausted, and contained a broad pollution exclusion clause. Id. at 204. Thereafter, National Union sought reinsurance of the Milacron Policy with American Re. Id. American Re issued to National Union a reinsurance policy (the "Reinsurance Policy") that provided $4 million in coverage to National Union in excess of the first $1 million of National Union's coverage. Id. The Reinsurance Policy also contained a broad pollution exclusion clause. Id.

In 1996, employees (the "Bock plaintiffs") of General Motors Corporation ("GM") filed a lawsuit (the "Bock case") against GM and Milacron, alleging that they had contracted respiratory illnesses from exposure to certain metalworking fluids that Milacron had supplied to GM. Id. at 205. The Milacron Policy was one of several consecutive annual liability policies that National Union had issued to Milacron for each year from April 1, 1988, to April 1, 1995. (Friedman Aff. Ex. 2). In the 1988 and 1989 policy years, the limits of National Union's policies were $1 million per occurrence. (Id.). Beginning in 1990, the limit was increased to $5 million per occurrence. (Id.). The only one of these policies that was reinsured was the Milacron Policy. (Friedman Aff. Ex. 5). American Re provided reinsurance for up to $4 million in excess of $1 million. 351 F. Supp. 2d at 204. Thus, American Re would cover National Union for up to $4 million in payments stemming from claims of the Bock plaintiffs allocated to the Milacron Policy, but National Union did not have reinsurance and would not be covered for losses allocated to any other policy year.

National Union was involved in negotiations to settle the claims of the Bock plaintiffs. Susan Wilson, National Union's claims analyst for the Bock case, testified that the plaintiffs at one point made a demand of $125 million, that a case-evaluation panel recommended settling the claims for substantially less, and that National Union and Milacron ultimately decided to settle on the eve of trial:

Q: What steps did AIG take to assure the best possible negotiation of the settlement of the Bock claims?

A: When AIG first became aware that this account -- . . . I went to the meeting at Chris Bechhold's office.*fn1 We listened to what Cincinnati Milacron had to say on their position as to whether or not we should settle the claim at that point. We reviewed all the file materials. We reviewed all the other information. AIG made the determination that we didn't have the supporting documents to agree to the [amount recommended by the panel] at that time. What we decided to do . . . was we hired a special defense counsel that had expertise in this area to come in and help defend this case. Our intent was to take it to trial, to go through all the expert discovery which had not taken place yet, . . . to basically fight this for everything it's worth, because based on the information that we had early on, we didn't believe that to be an accurate portrayal of what this claim was worth. However, after all those actions were taken, sometime in late January it became apparent that this trial date could not be continued and that the experts did not say what we perhaps might have thought they would say and that for all -- all circumstances considered and discovery that had been considered in the case, that we should settle it for the amount we ultimately did. . . .

Q: In retrospect, could anything have been done better than it was actually done?

A: Between November and February? No. (Wilson Dep. at 185-86, Thompson Decl. Ex. D).

The Bock case ultimately was settled for less than what the arbitration panel had recommended. Milacron allocated the claims of the twenty-one Bock plaintiffs evenly between its 1993-94 policy and the Milacron Policy (which covered April 1, 1994, to April 1, 1995) using a "manifestation trigger," meaning that coverage under an insurance policy is based on when the alleged personal injury first becomes known. (Wilson Dep. at 167, Thompson Decl. Ex. D; Bechhold Dep. at 35-36, 64-65, Thompson Decl. F). National Union internally questioned whether the manifestation trigger was proper and consistent with Ohio law, but ultimately decided to honor the 93-94 policy and the Milacron Policy rather than engage in the risks inherent in litigation of the claims. (Friedman Aff. Ex. 2; Dingilian Dep. at 70, Thompson Decl. Ex. G; Wilson Dep. at 186, Thompson Decl. Ex. D).

The amount that Milacron allocated to the year covered by the Milacron Policy exceeded the policy maximum, and when National Union attempted to collect from American Re as reinsurer, American Re refused payment based on the pollution exclusion clause in the Reinsurance Policy. See National Union I, 351 F. Supp. 2d at 205-06. This lawsuit followed, and in National Union I the Court held that (a) Ohio law applied to the interpretation of the pollution exclusion clauses, (b) the pollution exclusion clause in the Reinsurance Policy was ambiguous and therefore, as a matter of law, did not bar recovery by National Union, (c) the underlying facts of the Milacron lawsuit giving rise to National Union's claim did not qualify as "environmental pollution," and (d) there was arguably coverage under the Milacron Policy and American Re was therefore required to "follow the fortunes" of National Union. See id. at 205-13. American Re, therefore, was "not permitted to avoid liability by raising policy defenses and objections that were available to the reinsured unless the reinsured pa[id] a settlement that [was] clearly or manifestly outside the scope of the reinsured's policy coverage or pa[id] a settlement that [was] fraudulent, collusive or in bad faith." Id. at 212.

At a conference after the National Union I decision was issued, the Court granted American Re six months during which to take discovery on whether the claims made against the Milacron Policy with respect to the Milacron settlement were manifestly outside the scope of the policy or whether National Union's decision to pay the claims was fraudulent, collusive, or in bad faith. National Union now moves for summary judgment, arguing that there is no ...

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