Reinsurance and Insurance Arbitrator and Umpire Ronald S. Gass
ARIAS-U.S. Certified Arbitrator and Umpire
AAA Roster of Neutrals
Reinsurance and Insurance Dispute Resolution Services Consultant

Facultative Reinsurer Not Bound to Follow Cedent’s $257 Million Non-Products Asbestos Single Occurrence Settlement Allocation

In a significant follow-the-settlements decision, a Connecticut federal district court held that a facultative reinsurer was not bound to follow its cedent’s $257 million nonproducts asbestos claims allocation based on a single occurrence, as opposed to a multiple occurrence, theory.

This dispute arose from the cedent’s 1995 $257 million settlement of certain Owens Corning Fiberglas (“OCF”) asbestos nonproducts exposure claims arising under various excess policies that were allegedly reinsured and allocated to facultative reinsurance certificates issued between 1975 and 1977. Unlike the $25 million excess policies’ asbestos products coverage, which included both occurrence and aggregate limits, the nonproducts coverage carried only occurrence limits (the Wellington Agreement’s imputed nonproducts aggregate limit was inapplicable to these policies because they incepted after August 1975).

The reinsurer’s fac certs provided that the liability of the reinsurer “shall follow that of [the cedent] and shall be subject in all respects to all the terms and conditions of [the cedent’s] policy” and that “[a]ll loss settlements made by [the cedent], provided they are within the terms and conditions of the original polic(ies) and within the terms and conditions of this Certificate of Reinsurance, shall be binding on [the reinsurer].”

After commencing an arbitration with OCF over its nonproducts asbestos liabilities and following extensive settlement negotiations, the cedent agreed to settle its liability for roughly the net present value of one additional set of occurrence limits plus defense costs. The settlement agreement, however, was silent on the parties’ allocation formula and explicitly disclaimed any particular coverage theory. The cedent ultimately allocated the “vast majority” of its cash payments to OCF as a single occurrence of nonproducts asbestos claims using each policy’s occurrence limit as the applicable indemnity limit and further allocating some of the initial case payments as defense costs. It then spread the settlement payments evenly among the policy years on a single-occurrence basis, allegedly without regard for potential reinsurance recoveries.

The reinsurer objected to the cedent’s single-occurrence allocation theory, primarily on the basis that the OCF nonproducts asbestos claims were attributable to OCF asbestos jobs spread over 700 job sites across the U.S. between 1953 and ending predominately in the 1970s. Moreover, each job entailed work by different sets of workers, job conditions, buildings, and possibly different products. Hence, the definition of “occurrence” in the excess policies, according to the reinsurer, dictated the conclusion that losses arising from each of these 700 sites must be treated as a separate and distinct occurrence, and when so allocated, the cedent’s settlement payments never pierced OCF’s excess policies reinsured under the certificates. The cedent countered that the follow-the-fortunes/follow-the-settlements doctrine required its reinsurers to follow its single occurrence settlement and subsequent allocation because they were reasonable under the circumstances and not executed in bad faith.

Granting the reinsurer’s summary judgment motion, the federal district court concluded that, under the facts of this case, the reinsurer was not bound by the cedent’s single occurrence settlement allocation because it was founded on a position the cedent had abandoned earlier to achieve an expedient, bottom-line driven settlement with OCF. In the context of both the arbitration and the subsequent settlement negotiations with OCF, the cedent had contended that only a single set of occurrence limits was available under its primary and excess policies and that that those limits were applicable to both OCF’s asbestos products and nonproducts exposures. OCF consistently argued that there were multiple occurrences of nonproducts asbestos exposures, which would have resulted in virtually unlimited insurer liability.

The district court found it significant that the cedent’s executives had testified that they were willing to compromise the OCF nonproducts asbestos claims on the basis of roughly one additional set of occurrence limits, meaning one set of occurrence limits for asbestos products exposure (which it had previously paid OCF) and another one for the nonproducts exposure. The court construed this “two occurrence” position as an abandonment of the cedent’s original one-occurrence theory and movement toward OCF’s, and now the reinsurer’s, multiple-occurrence theory. Thus, the court saw none of the evils the follow-the-settlements doctrine was intended to avoid – deterring cedents from or otherwise punishing them for good faith settlements when the principal underlying the settlement, its single-occurrence theory, was ultimately abandoned to achieve what it perceived to be a cost-effective settlement regardless of the applicable theory.

Travelers Casualty & Surety Co. v. Gerling Global Reinsurance Corp. of America, No. 3:01cv872 (JBA), 2003 U.S. Dist. LEXIS 17407 (D. Conn. Sept. 30, 2003)

THE GASS COMPANY, INC.
76 HOPEWELL WOODS ROAD
REDDING, CONNECTICUT 06896-1728

TELEPHONE: (203) 227-9431
FAX: (212) 208-3003
rgass@gassco.com

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