United States Fidelity & Guaranty Company, et al., Respondents,
American Re-Insurance Company, et al., Appellants, et al., Defendants.
Kathleen M. Sullivan, for appellants Excess Casualty Reinsurance Association et al.
Herbert M. Wachtell, for appellant American Re- Insurance Company.
Mary Kay Vyskocil, for respondents.
Reinsurance Association of America; James J. Wrynn; United Policyholders, amici curiae.
Smith, Chief Judge
An insurance company, United States Fidelity & Guaranty Company (USF & G), having settled asbestos claims for nearly a billion dollars, seeks to recover a share of its settlement payment from its reinsurers. The courts below granted summary judgment for USF & G. We modify the Appellate Division's order to deny summary judgment on two issues, and otherwise affirm.
We conclude, as did the dissenting Justice in the Appellate Division,
that there is an issue of fact as to whether USF & G, in allocating the
settlement amount, reasonably attributed nothing to the so called "bad faith"
claims made against it. We also find a factual issue as to whether certain
claims were given unreasonable values for settlement purposes. However, we hold
that the courts below correctly rejected the reinsurers' other defenses.
From 1948 or earlier until mid-1960, USF & G was one of the liability insurers of Western Asbestos Company, a distributor of asbestos products. The business of Western Asbestos was taken over in the 1960s by Western MacArthur Company, a subsidiary of Mac Arthur Corporation. (The difference between the subsidiary and the parent is unimportant here, and we will refer to both as "MacArthur.") It was eventually decided that MacArthur was liable for personal injury claims arising out of exposure to the products that Western Asbestos had sold (Kaminski v Western MacArthur Co., 175
Cal.App.3d 445, 220 Cal.Rptr 825 ). By 1991, such claims had apparently exhausted MacArthur's own insurance coverage, and MacArthur demanded a defense from Western Asbestos's insurers, including USF & G. USF & G refused the demand, and in 1993 MacArthur brought suit in a California state court against USF & G and others to establish the existence of coverage.
USF & G relied principally on two grounds in defense of the coverage litigation. First, in the decades that passed between the issuance of the USF & G policies and the claims made under them, the policies themselves had been lost; USF & G took the position that MacArthur, lacking copies of the policies, could not prove that they had ever been issued. Secondly, USF & G argued that it had, at most, insured only Western Asbestos, not MacArthur, and had no obligation to defend the latter company.
USF & G's first line of defense did not fare well. Although the policies themselves had disappeared, other documents, including the form of policy used by USF & G at the time, and documents showing that Western Asbestos was among its insureds, sufficed to prove both the existence of the policies and their terms. In 2001, more than seven years after the litigation began, USF & G acknowledged that it had had an insurance relationship with Western Asbestos during the years in question. But USF & G initially prevailed on its second argument. A California Court of Appeal held in 1997 that MacArthur, though it was liable on claims made against Western Asbestos, did not succeed by operation of law to Western Asbestos's liability insurance (General Accident Ins. Co. v Superior Court of Cal., Alameda Cty., 55 Cal.App.4th 1444, 64 Cal.Rptr.2d 781 ). This victory proved hollow, however, because MacArthur obtained an assignment of Western Asbestos's rights, and in 2001 the trial court in the coverage litigation held that USF & G lacked standing to challenge the assignment.
While the coverage litigation wore on, MacArthur's underlying liability to the asbestos claimants grew. After Western Asbestos's insurers refused to defend MacArthur, MacArthur agreed not to oppose the entry of default judgments against it in favor of the asbestos claimants; in exchange the asbestos claimants, hoping for a favorable outcome of the coverage litigation, agreed to refrain from executing against MacArthur on the judgments. According to figures used in settlement negotiations, there were by 2002 more than a thousand such default judgments, totaling $1.4 billion without interest. MacArthur faced additional risks from pending and possible future claims.
USF & G had not insured the full amount of MacArthur's liability. The policies it issued to Western Asbestos contained "per person" and "per accident" limits in varying amounts; the highest per person limit was $200, 000. But the policies contained no aggregate limit; USF & G could be liable under the policies for any number of separate claims. In addition, MacArthur alleged in the coverage litigation that USF & G had, by refusing to defend the asbestos claimants' lawsuits, breached its implied covenant of good faith and fair dealing. These "bad faith" claims, if successful, could have led to a judgment against USF & G for whatever liability of MacArthur was found to be attributable to USF & G's failure to defend — without regard for policy limits.
The coverage suit went to trial in 2002, and was settled in June of that year, while the trial was in progress. The settlement required USF & G to pay a total of $975 million to resolve the asbestos claims, plus $12.3 million in fees to counsel for the asbestos claimants. As part of the settlement, MacArthur was to file for bankruptcy, and a trust was to be created, as authorized by the Bankruptcy Code, to assume MacArthur's asbestos-related liabilities (see 11 USC § 524 [g] ,  [B] [i] [I]).
Having settled the coverage case, USF & G turned to its reinsurers, defendants in this case, with whom it had entered into a "treaty" of reinsurance applicable to the years 1956 through 1962. The reinsurance was of the type known as "excess of loss": the reinsurers agreed to pay to USF & G the amount over $100, 000 of any loss occurring during the period covered by the treaty. Since USF & G's loss in the asbestos litigation could not, under its policies, exceed $200, 000 per claimant, the reinsurers' liability was in effect capped at $100, 000 per loss. But the reinsurance treaty, like the underlying policies, had no aggregate limit — the reinsurers could be liable for any number of losses, up to $100, 000 each.
USF & G calculated the reinsurers' obligation to it at approximately $391 million, a calculation determined by USF & G's allocation of the settlement payment, which was based on assumptions we will describe below. The reinsurers refused to pay, and this action followed. Some reinsurers have settled with USF & G, but approximately $262 million (not including interest) remains in dispute.
Supreme Court granted summary judgment to USF & G. The Appellate Division affirmed, with one Justice dissenting on the ground that "[t]here is a genuine triable issue of fact as to whether a portion of the... settlement... was for bad faith claims" (United States Fid. & Guar. Co. v Am. Re-Ins. Co., 93 A.D.3d 14, 27 [1st Dept 2012] [Abdus-Salaam, J., dissenting]). The Appellate Division granted the reinsurers leave to appeal, and we now modify the Appellate Division's order.
The reinsurers' main arguments are challenges to USF & G's allocation of the settlement payment — i.e., the amounts that USF & G attributed to each of the claims made against it, and to each of the policies under which the claims were made, when it billed the reinsurers. The reinsurers say that USF & G's allocation minimizes the burden on itself and maximizes the cost to the reinsurers, and that the reinsurers are not bound by it. To analyze the issues the reinsurers raise, we must first identify some rules of law that govern the allocation of settlement payments for reinsurance purposes.
The reinsurance treaty at issue here contained, as contracts of reinsurance commonly do, what is often referred to as a "follow the fortunes" or "follow the settlements" clause (see generally Staring, Law of Reinsurance [hereafter Staring], chapter 18 at 407-468 ). We will use the latter term. The follow the settlements clause says:
"All claims in which this reinsurance is involved, when allowed by the Company [USF & G], shall be binding upon the Reinsurers, which shall be bound to pay or allow, as the case may be, their proportion of such loss. It is understood, however, that when so requested, the Company will afford the Reinsurers an opportunity to be associated with the Company, at the expense of the Reinsurers, in the defense of any claim or suit or proceeding involving this reinsurance, and the Company and the Reinsurers shall cooperate in every respect in the defense or control of such claim or suit or proceeding, provided that the Company shall have the right to ...