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''Follow the Fortunes'' Still Means That Reinsurers Must Follow the Fortunes - At Least in New York

by ~ Andrew Ian Douglass (Email) (Web Site)

Longstanding readers of reinsurance case reports are no doubt aware of the famous final decision handed down by the House of Lords, Lexington Insurance v. Wasa, 2009 UKHL 40, in which the Law Lords decided that the reinsurer did not have to follow the fortunes of a cedent who was stuck with a large environmental clean-up tab involving an Alcoa plant in Washington State, where the underlying case was brought. A fair reading of the case poses the possibility that the Law Lords may have been less than in awe of the depth of knowledge of Pennsylvania law displayed by the Supreme Court of Washington (the policy had a Pennsylvania governing law clause).

There does not yet appear to be any true consensus about the full implications of that decision, but it may become the �Hostile Judge￁ exception to the UK common-law doctrine. If so, as a choice of governing law for reinsurance contracts, New York would in the future appear to be a better jurisdiction for cedents, unless a Lexington/Wasa clone appears on the New York judicial scene. Whether that is likely then becomes the question.

In the two opinions discussed below, the New York State Supreme Court, Appellate Division, First Department has answered that question in the negative, at least for now. It remains to be seen whether the parties will appeal either decision to the New York Court of Appeals.


In U.S. Fidelity & Guaranty Company v. American Reinsurance Co., 2012 NY Slip Op. 00421 (Jan. 24, 2012), the First Department had to deal with a vexing decision from California. Western MacArthur had taken over some of the assets of a defunct company known as Western Asbestos, and had sued USF&G, demanding that the policy USF&G issued to the defunct company respond to a plethora of claims. USF&G responded by pointing out that Western MacArthur was not the insured, Western Asbestos was; and, besides, the USF&G policies were not among the assets which Western MacArthur acquired from Western Asbestos before the latter�s dissolution.

Western MacArthur�s lawyers then did something truly �creative:￁ they found a former officer of Western Asbestos and got him to execute an assignment of Western Asbestos�s rights under the USF&G policies to Western MacArthur. They then went into another California court and got an order to revive Western Asbestos so that it could ratify the assignment of the policies by this former officer of Western Asbestos (notwithstanding that the stockholders of Western Asbestos at the time of the dissolution might have expected that, with the passage of time, the corporate dissolution would vest ownership of the policies in them, since the policies hadn�t been part of the sale to Western MacArthur). Western MacArthur then sued USF&G again, adding its brand new co-plaintiff, Western Asbestos, and won. USF&G and the other insurers in the case ultimately settled for about $975 million (presumably, Western Asbestos was again consigned to the paupers￁ grave of dead corporations).

At this point, USF&G brought suit in New York against its reinsurers. The New York trial court granted a summary judgment ruling in favor of USF&G and against the reinsurers; and, in the above-cited opinion, the Appellate Division affirmed.

Looked in that light, this decision lends considerable force to the notion that, in New York, reinsurers still live with their primary insurer�s fortunes and misfortunes, absent the age-old exceptions of either (1) fraudulent, collusive or bad faith settlements (which neither New York court found applicable in this case), or (2) ex gratia payments by the cedent.


One of those two exceptions was used as the rationale for the decision in American Home Assurance Co. v. Everest Reinsurance Co., 2011 NY Slip Op. 09537 (Dec. 27, 2011).

National Union and its affiliates (including American Home) had settled a huge coverage claim with its insured, resulting from the manufacture of polychlorinated biphenyl (PCBs), in 1993. Later that same year, the Delaware Superior Court, in a declaratory judgement action involving the same parties, ruled that the �sudden and accidental￁ pollution exclusions did in fact bar coverage.

Some years later, the insured was sued for yet another PCB claim from a plant in Alabama, and settled the underlying litigation for $600 million. The insured then presented a claim to National Union for $150 million, which the insurers paid. The insurers, in turn, presented the claim to their reinsurers in 2004. The reinsurers moved for summary judgment and dismissal of National Union�s complaint, which was granted by the New York State Supreme Court.

The Appellate Division reversed, noting the 1993 Delaware opinion, which in their mind should have governed the outcome of the coverage claims by the insured�s Alabama plant, and thus raised a question of fact as to whether National Union had settled the underlying claim in good faith ￁ a question it remanded to the trial court for determination. The appellate court also said that another question was whether there was a waiver and estoppel issue, since the Everest Re claim representative had stated in an affidavit that he had read the 1993 settlement agreement. In the end, the Appellate Division let National Union have another bite at the apple.

Thus, this decision does not in and of itself create any new exception to New York�s �follow the fortunes￁ doctrine; it merely underscores the existence of the age-old exceptions to the doctrine. It also reminds us that old judicial opinions are not �dead and gone,￁ as dissolved corporations usually are, and they may be pertinent to new claims which come in over the transom of the insurer.

Andrew Ian Douglass may be reached at

￁ 2012 Morrison Mahoney LLP. All rights reserved. The editors note that Mr. Douglass, a member of the New York bar since 1975, is a former general counsel of The St. Paul Companies, Inc., into which USF&G Corporation was merged shortly after Mr. Douglass joined Morrison Mahoney LLP.
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