The Insurance Company of the State of Pennsylvania v. Equitas Insurance Limited

Background

The Insurance Company of the State of Pennsylvania (ICSOP) issued an umbrella liability policy to Castle & Cook, Inc., now Dole Food Company, covering certain losses exceeding the limits of an underlying policy. The policy covered property damage occurring during a stated period from October 1, 1968, to October 1, 1971, and had a $20 million limit. The policy was governed by Hawaii law and did not contain a pollution exclusion.

AIG obtained facultative reinsurance from Lloyd’s underwriters for the ICSOP-Dole policy. In 2009, Equitas Insurance Limited (EIL) assumed the Lloyd’s underwriters’ reinsurance obligations. The reinsurance policies covered the same three-year period, used a standard Lloyd’s form, stated that the reinsured risks were covered “as original,” and contained a follow-the-settlements provision requiring EIL to indemnify ICSOP for covered settlements paid under the underlying policy.

Dole faced claims by homeowners alleging environmental pollution at a housing tract in Carson, California. The pollution had progressed from 1966 until its discovery in 2008. In 2016, Dole and its insurers settled the claims for $30 million, and AIG agreed to pay the full $20 million limit of the ICSOP-Dole policy based on Hawaii’s “all sums” doctrine. ICSOP then billed EIL for the reinsured portion, totaling more than $7.2 million. EIL refused to indemnify ICSOP.

Summary Judgment on Indemnification

The parties agreed that English law governed the reinsurance policies. The court found no genuine dispute about the underlying property damage, the settlement, or ICSOP’s allocation of the loss to EIL. The central issue was whether the reinsurance policies required EIL to indemnify ICSOP for the $20 million settlement even though the pollution continued beyond the reinsurance policies’ three-year stated period.

Under English law, a follow-the-settlements provision generally requires a reinsurer to indemnify a settlement when the reinsured actually paid it and the settled claim arguably falls within the underlying insurance coverage. English law also strongly presumes that proportional facultative reinsurance provides “back-to-back” coverage, meaning coverage co-extensive with the underlying insurance policy.

The court distinguished Wasa International Insurance Co. Ltd. v. Lexington Insurance Co. In that case, the underlying policy lacked a choice-of-law provision, so the parties could not have identified the law that would govern the underlying insurance when they entered the contracts. Here, by contrast, ICSOP and EIL knew that Hawaii law governed the ICSOP-Dole policy. The court concluded that the parties therefore accepted the risk of later developments in Hawaii law, including Hawaii’s adoption of the all-sums doctrine.

The court held that the reinsurance policies were intended to provide back-to-back coverage with the ICSOP-Dole policy. Because the underlying policy covered the settlement under Hawaii law, and because the settlement fell within the follow-the-settlements provision, EIL was obligated to indemnify ICSOP for its reinsured share. The three-year terms of the reinsurance policies did not overcome the presumption of matching coverage.

Late-Notice Defense

EIL argued that ICSOP gave notice of the Carson Claims nearly six years after learning of an occurrence likely to result in a reinsurance claim. EIL sought partial summary judgment on whether it could avoid or repudiate the reinsurance policies based on the allegedly late notice, while proposing to prove at trial that ICSOP’s conduct was dishonest and seriously prejudiced EIL.

The court did not decide whether English law made that remedy legally available. Even assuming that it did, the court held that EIL had not produced evidence from which a factfinder could infer the extreme dishonesty and serious prejudice required under English law. The court also found that EIL had not shown bad faith under New York law. Because no genuine dispute of material fact supported the defense, a trial on those issues was unwarranted.

Disposition

Judge Laura Taylor Swain granted ICSOP’s motion for summary judgment in its entirety and denied EIL’s motion for summary judgment in its entirety. The court ordered that ICSOP recover $7,234,125 plus prejudgment interest from the date payment was due. ICSOP was directed to submit a proposed judgment and supporting materials concerning the interest period and rate.