Reinsurance Attaches only after Reinsured Expends Underlying Limit
Where the losses in question did not exceed the limits stated for bodily injury in the Schedules, the reinsurer, Fireman’s Fund, claimed it had no obligation under the reinsurance contracts to pay for those losses. The United States Court of Appeal for the Second Circuit was asked, in Utica Mutual Ins. Co. v. Fireman’s Fund Inc. Co., No. 18-828, USCA, 2ND Circuit (2020) to reverse the decision of the trial court.
Appellant Fireman’s Fund Insurance Company appealed from a judgment of the United States District Court for the Northern District of New York (David N. Hurd, Judge), awarding $64 million to Appellee Utica Mutual Insurance Company following a jury trial. The jury found that Fireman’s Fund breached its obligations under reinsurance contracts issued to Utica. On appeal, Fireman’s Fund argued that the reinsurance contracts, by their terms, demonstrate as a matter of law that Fireman’s Fund did not owe to Utica the obligations allegedly breached.
The contractual claim arose from seven reinsurance contracts that Fireman’s Fund issued to Utica, each reinsuring umbrella policies that Utica issued to Goulds Pump, Inc. (“Goulds”), a pump machinery company. Each of the seven reinsurance contracts contains a “reinsurance certificate,” which provides that Fireman’s Fund’s liability follows from Utica’s liability consistent with the terms of the umbrella policies. The umbrella policies, in turn, provide that “[Utica] shall be liable only for the ultimate net loss resulting from any one occurrence in excess of . . . the amounts of the applicable limits of liability of the underlying insurance as stated in the Schedule of Underlying Insurance Policies.” The “underlying insurance” for the seven umbrella policies were seven primary insurance policies that Utica also had issued to Goulds.
Utica and Goulds settled in 2007 and agreed that Goulds’ umbrella policies, purchased as excess coverage, would cover losses that exceeded the agreed primary policies’ aggregate limit for bodily injury claims. In 2008, Utica sought recovery from Fireman’s Fund under the reinsurance policies it had issued to Utica. Utica argued, among other things, that language in the reinsurance policies bound Fireman’s Fund to the terms of the settlement between Utica and Goulds. The case proceeded to a jury trial at which Utica prevailed and was awarded damages.
Utica issued to Goulds seven umbrella policies as excess coverage, each with a $10 million coverage limit. Umbrella insurance policies provide excess insurance; in other words, they provide an additional layer of coverage after a predetermined amount of primary coverage has been exhausted.
Unlike the missing primary policies, the umbrella policies are not missing and provide that “[Utica] shall be liable only for the ultimate net loss resulting from any one occurrence in excess of . . . the amounts of the applicable limits of liability of the underlying insurance as stated in the Schedule of Underlying Insurance Policies.”
A per person limit represents the maximum amount an insurer will pay per person for a covered occurrence. An aggregate limit refers to the maximum amount an insurer will pay, regardless of the number of occurrences for which the insured is considered liable.
Under the reinsurance contracts, Fireman’s Fund agreed to reinsure the upper $ 5 million out of each $10 million umbrella policy that Utica issued to Goulds. Utica purchased reinsurance from another carrier for the lower portion of the umbrella policies. The reinsurance contracts also contain a “follow-the-settlements” clause, which provides that “[a]ll claims involving this reinsurance, when settled by [Utica], shall be binding on [Fireman’s Fund].” When a reinsurance contract contains a follow-the-settlements clause, the reinsurer (Fireman’s Fund) must indemnify the reinsured (Utica) for the settled claim(s), as long as the settlement decision is in good faith, reasonable, and within the terms of the applicable policies.
The primary and umbrella insurance policies became the subject of scrutiny when Goulds began facing thousands of claims alleging bodily injury from its products containing asbestos. Pursuant to its primary policies with Goulds, Utica defended and indemnified Goulds against those claims beginning in the 1980s. However, Goulds and Utica eventually came to dispute Utica’s coverage obligations, which Utica contended had been exhausted by the payments it already had made in connection with asbestos-related claims.
In light of Utica’s and Goulds’ agreement that the primary policies were exhausted and the “follow-the-settlements” clauses in the reinsurance contracts, Utica sought reimbursement from Fireman’s Fund under its reinsurance contracts for the years 1966 through 1972. Utica — which sent its first reimbursement bill to Fireman’s Fund in September 2008— sought $5 million for each year, for a total of $35 million.
Whether the umbrella policies specified aggregate limits for bodily injury is at the heart of this litigation. Many of the bodily injury claims Utica paid out were small and did not exceed the per person limits or the per accident/occurrence limits listed in the umbrella policies. If the umbrella policies contained aggregate limits for bodily injury, however, then Utica could total all the claims in a policy year, and, if their total surpassed the aggregate limits, trigger the umbrella coverage and potentially the reinsurance policies.
A twelve-day jury trial ensued, the jury returned a verdict for Utica and judgment was entered in favor of Utica, awarding $35,000,000 in contract damages plus $29,092,191.78 in pre-judgment interest.
A contract that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms. Moreover, in construing the contract, the court is to give full meaning and effect to the material provisions of the contract, and a reading of the contract should not render any portion meaningless. If the contract is reasonably susceptible of only one meaning, a court is not free to alter the contract.
The contracts at issue here—the reinsurance certificates and the umbrella insurance policies—must be construed as a court would construe any ordinary contract.
Fireman’s Fund’s liability is subject to the terms and conditions of Utica’s umbrella policies. Consequently, whether the losses that Utica and Goulds allocated to the umbrella policies in their settlement were within the terms of those policies.
It is undisputed that aggregate limits are listed for property damage claims. the umbrella policy language straightforwardly led the court to the conclusion that Fireman’s Fund is liable only if the losses in question exceed limits “as stated in the Schedule[s]” accompanying the umbrella policies. Bodily injuries due to asbestos exposure from Goulds’ products are covered occurrences. The “applicable limits of liability” for these claims are those limits “as stated in the Schedule[s]” for bodily injury.
To give full meaning and effect to the phrase “applicable limits of liability,” the phrase must refer to aggregate limits as well. That Utica repeatedly included on its Schedules aggregate limits for property damage but not for bodily injury claims lends further support to this conclusion.
Follow-the-settlements clauses, among other things, aid in streamlining the reimbursement process and reducing litigation by preventing a reinsurer from continually challenging the propriety of a reinsured’s settlement decision.
Utica’s reading would essentially render the follow form clause in the reinsurance contract and the umbrella policy language defining Utica’s loss meaningless and “would be contrary to the parties’ express agreement and to the settled law of contract interpretation.
The follow-the-settlements doctrine does not bind a reinsurer to make payments outside the scope of its contractual obligations. The follow-the-settlements principle does not change the reinsurance contract; it simply requires payment where the cedent’s good-faith payment is at least arguably within the scope of the insurance coverage that was reinsured.
The Second Circuit concluded that the umbrella policies unambiguously defined their attachment point by reference to the underlying limits of liability as stated in the Schedules. Where the losses in question did not exceed the limits stated for bodily injury in the Schedules, Fireman’s Fund had no obligation under the reinsurance contracts to pay for those losses.
The judgment of the District Court was reversed, and the case remanded for further proceedings consistent with the opinion.
The Second Circuit applied the basic rule of law: RTFP (read the full policy) and applied the limits for each loss, as the policy required. Since some of the claims were paid or settled for less than the scheduled limit, Fireman’s Fund had no obligation to pay a share of a loss it did not agree to take. On Remand, if Utica can prove payment above the scheduled limit it can recover proportionately from Fireman’s Fund. The $64 million was taken away before a dollar could be spent. The two insurers, if wise, will reach a settlement.
© 2020 – Barry Zalma
This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and firstname.lastname@example.org.
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Over the last 52 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.
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