THIRD CIRCUIT AFFIRMS REINSURANCE ALLOCATION

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Travelers Casualty and Surety Co. v. Insurance Co. of North America

(3rd Cir. [PA] June 9, 2010)

In a dispute of reinsurance coverage, an insurer reached a $ 137 million settlement with its insured for two sets of claims being brought against it: (1) breast implant claims, relating to safety testing of silicone breast implants; and (2) chemical products claims, relating to chemical products it manufactured including a pesticide commonly known as DBCP.  The insurer then proceeded to allocate those $ 137 million dollars among three tiers of insurance coverage, only the highest of which included policies reinsured by the defendants in this action.  When the insurer billed the reinsurer $ 13,762,395 based on its allocation, the reinsurer refused to pay, and the insurer sued to recover in the Eastern District of Pennsylvania.

The insurer’s policies were issued between 1976 and 1987 and provided coverage for all non-products claims brought against the insured, as well as products claims brought against it outside the United States. Each of the policies had a per-occurrence coverage limit, but only the policies issued between 1985 and 1987 had aggregate coverage limits.

In the underlying settlement, the insurer agreed on a figure of $ 137 million and decided that, of that $ 137 million, $ 80 million would be dedicated to the breast implant claims, $ 20 million would be dedicated to the chemical products claims, and the remaining $ 37 million would go to claims that were not at issue in this case.  In addition, the parties agreed that the breast implant claims would be treated  as non-products, single occurrence claims, while the chemical products claims would be treated as products claims.

Once the settlement agreement was  finalized, the insurer proceeded to allocate the settlement among the different policies.  The insurer characterized the $ 80 million dedicated to the breast implant claims entirely as indemnity, not defense coverage.  In allocating that $ 80 million, the insurer used the “fill the bathtub” method to assign to the three layers of coverage.  In doing so, the insurer treated their per-occurrence limits as applying separately to each policy year.  Ultimately, six of the nine reinsured policies had settlement dollars allocated to them.  Pursuant to its allocation, the insurer billed the reinsurer $ 11,604,328 for the breast implant claims and $ 2,158,067 for the chemical products claims.  The decision to annualize the per-occurrence limits alone resulted in an increase of $ 5,535,578 to the amount of loss assigned to the reinsurer.

At issue before the District Court was whether the insurer manipulated its post-settlement allocation so as to maximize the amount allocated to the reinsured policies, thus excusing the reinsurer from its normal duty to "follow" all coverage decisions made by its reinsured.  The District Court held two bench trials, each addressing a different aspect of the insurer’s allocation.  In the Phase I trial, District Court heard testimony from both parties' experts, as well as the insurer’s employees who worked on the settlement with the insured, including the post-settlement allocation  and the reinsurance billing, all of whom denied that reinsurance recovery considerations motivated any of their decisions.  The Court ruled that the insurer had not manipulated its allocation of the settlement dollars so as to allow it to reach the excess layer of coverage and thus tap into its reinsurance. 

In the Phase II trial, the Court concluded that, under Michigan law (which governed the insurance policies issued by the insurer), the policies at issue clearly and unambiguously have a single per-occurrence limit for the entire policy period.  The Court therefore held that the insurer’s interpretation of the those policies' per-occurrence limits was not binding on the reinsurer.  The Court then (in an order summing up both its Phase I and its Phase II rulings) entered judgment in favor of the insurer in the amount of $ 8,226,817, a figure derived by subtracting from the initial billing of $ 13,762,395 the $ 5,535,578 attributable to its decision to annualize the per-occurrence limits of the policies.

The reinsurer challenged the Court’s ruling on the grounds that several of the specific allocation decisions made by the insurer are inexplicable except as part of a scheme to maximize the insurer’s reinsurance recovery and the Court ignored evidence that the insurer improperly considered reinsurance implications in performing the allocation.

In affirming both decisions and the District Court’s award, the Third Circuit held that the insurer’s allocation decisions were reasonable in light of both the net nature of the deal with the insured and the specific characteristics of the policies and, accordingly, those decisions are not evidence of bad-faith maximization on the insurer’s part.  In addition, the Court held that “there is nothing in the relevant policy language to suggest any ambiguity with respect to whether the policies' per-occurrence limits are intended to apply separately to each policy year.  On the contrary, the language indicates that the per-occurrence limits–unlike the aggregate limits–are meant to cover the entire policy period…Thus, the District Court's conclusion that ‘under Michigan law the…policies clearly and unambiguously have a single per-occurrence limit for the entire policy period’ is well founded.”

For a copy of the decision click here

 

Bryan Richmond and Jeffrey Kingsley

 

https://www.goldbergsegalla.com/attorneys/Richmond.html

https://www.goldbergsegalla.com/attorneys/Kingsley.html