What does that mean?
If rumors are to be believed (and there is no reason to think that they should not be), the long running dispute of United States Fidelity & Guaranty Co. v. American ReInsurance Co. (“USF&G v. Am Re”) settled with trial looming.
As many will remember, in February 2013, the New York Court of Appeals (the state’s highest court) issued an important decision that outlined the parameters under New York law for cedents to follow when allocating a settlement to reinsurers. In light of the settlement, the 2013 decision will remain the last and most important analysis of the issues involved in the case and will likely be cited by New York courts (and relied on as persuasive authority in others) where allocation issues intersect with “Follow the Settlements” principles.
Although the decision received attention in the industry press at the time, given its importance since then, it is worth reviewing the key points of the case. The unanimous decision established that reinsurers are only bound by a cedent’s reasonable, ‘“good faith’ decisions” in allocating a settlement to its reinsurance covers. Reinsurers had challenged three distinct decisions made by the cedent in allocating a settlement with its insureds that resolved asbestos claims made under general liability policies. The reinsurers challenged them on the basis that each improperly minimized the cedent’s net liability for the settlement by maximizing recoveries from the reinsurers. The trial court granted the cedent’s summary judgment motion based on the “Follow the Settlements” doctrine, precluding inquiry into whether the allocation to the reinsurers was reasonable or even done in bad faith. The reinsurers appealed the summary judgment, to the first level of appeal, which affirmed in a 2-1 decision, and then to the New York Court of Appeals.
In short, the Court of Appeals ruled that “Follow the Settlements” does not necessarily mean “Follow the Allocations.” The Court found that the “Follow the Settlements” doctrine generally precludes reinsurers from challenging cedents’ settlement decisions because the interests of cedents and reinsurers normally are aligned and, therefore, reinsurers should accept the amount the cedent agrees to pay its insured to settle a claim. However, the Court agreed with the reinsurers that the “Follow the Settlements” doctrine should not require a reinsurer to follow the allocation decision of its cedent where the interests of the reinsurer and the cedent conflict. The Court observed that the interests of cedents and reinsurers “will often conflict” when allocation decisions are made. The Court ruled that the “Follow the Settlements” doctrine operates to bind a reinsurer only to the ‘“good faith decisions” of a cedent. The Court stated that “objective reasonableness should ordinarily determine the validity of an allocation.” In addition, the Court ruled that a cedent’s allocation decision “must be one that the parties to the settlement of the underlying insurance claims might reasonably have arrived at in arm’s length negotiations if the reinsurance did not exist.”
Although the Court did note that a cedent is not required to disregard its own financial interests in arriving at its allocation methodology, the Court stated that the cedent’s “choice [among several allocations] must be a reasonable one.” If a reinsurer can show evidence of the unreasonableness of an allocation, it is entitled to a trial to determine whether the facts demonstrate the cedent’s allocation decision was “objectively reasonable.”
For the full article, refer to page 25 in the Fall 2017 issue. https://www.airroc.org/assets/docs/matters/AIRROC-Matters-Fall-2017-vol-13-No-2.pdf