Fireman's Fund Insurance Company v. OneBeacon Insurance Company

Background

Fireman’s Fund issued three excess liability insurance policies to Asarco, Inc. Policy 3 provided $20 million in coverage above $75 million in underlying coverage. General Accident Insurance Company reinsured 15% of Policy 3 under a facultative reinsurance certificate; OneBeacon was General Accident’s successor-in-interest.

Asarco later asserted asbestos-related coverage claims against Fireman’s and other insurers. Fireman’s and the Asarco Asbestos Personal Injury Settlement Trust settled those claims for $35 million. Fireman’s allocated $8,103,919 of the settlement to Policy 3 and sought $1,744,250.08 from OneBeacon, including OneBeacon’s 15% share of the Policy 3 allocation and related expenses. OneBeacon denied the claim.

The Parties’ Arguments

The reinsurance certificate stated that OneBeacon’s liability would follow Fireman’s liability and that claims settled by Fireman’s would be binding on OneBeacon. Fireman’s argued that this “follow-the-settlements” provision required OneBeacon to accept Fireman’s good-faith settlement and allocation.

OneBeacon argued that Fireman’s had not satisfied the underlying policies’ exhaustion requirement. In OneBeacon’s view, Policies 1 and 2 had to be fully paid up to their limits before Policy 3 could apply. OneBeacon also argued that the reinsurance certificate incorporated Policy 3’s limits and therefore did not cover the allocated settlement.

Court’s Analysis

The court applied New York law. It explained that the follow-the-settlements doctrine generally prevents a reinsurer from second-guessing a cedent’s good-faith settlement decisions, including post-settlement allocation decisions. The doctrine does not change the reinsurance contract, however; the settlement must still be reasonably within the coverage of the reinsured policy.

The court focused on the meaning of “exhaustion” in Policy 3. The policy said that its coverage applied only after all underlying insurance had been exhausted, but it did not define exhaustion. A separate limit-of-liability provision referred to reduction or exhaustion caused by “losses paid,” but the court concluded that this language explained what happened after losses were paid and did not require actual payment of the underlying policy limits as a condition for exhaustion.

The court found Policy 3 ambiguous on whether exhaustion required payment by the underlying insurers or could occur through settlement. Because the policy did not clearly require payment of the underlying limits, the court applied the rule from Zeig that settlement and discharge can exhaust underlying coverage. The court also concluded that Ali did not control because that case involved materially clearer language requiring payment of losses and did not involve the same type of out-of-pocket loss from a below-limit settlement.

The court rejected OneBeacon’s reliance on deposition testimony from Fireman’s representative Gary Ibello. The testimony identified provisions where one might look for exhaustion requirements but did not establish that the policy defined exhaustion unambiguously. The court also found that the cases cited by OneBeacon involved policies expressly requiring “payment of loss” or “actual payment.”

The court distinguished North River because that case involved a settlement agreement that expressly required a particular allocation method and specified the amount of loss. North River did not address the meaning of “exhaustion” under the policy at issue here.

The court noted that OneBeacon did not argue that Fireman’s acted in bad faith, that the $35 million settlement was unreasonable, or that the settlement was outside the policy’s coverage for another reason. The court therefore held that the follow-the-fortunes doctrine applied and that OneBeacon was bound by Fireman’s settlement and allocation.

Disposition

Judge Paul G. Gardephe granted Fireman’s motion for summary judgment and denied OneBeacon’s motion for summary judgment. The court directed Fireman’s to submit a proposed judgment and supporting calculation affidavit by October 26, 2020, and allowed OneBeacon to file objections by November 2, 2020.