Reinsurers must pay their share of legal settlements reached by insurers who cede business to them if they are reached in good faith, a federal appeals court has ruled.
Reversing a lower court's decision, the 2nd U.S. Circuit Court of Appeals in New York determined that a reinsurer must abide by a settlement allocation plan established by the primary insurer to deal with a policyholder's claim and cannot dispute a good faith funding arrangement.
The case at issue involved a dispute between reinsurer Gerling Global and Travelers over the funding of a settlement that Travelers reached with Owens-Corning Fiberglass over the insurer's liability for asbestos claims against Owens-Corning.
In that dispute, Owens-Corning and Travelers argued over whether the numerous claims against Owens-Corning for asbestos exposure should be considered as having arisen from one occurrence or multiple occurrences. The two companies reached a settlement agreement, which explicitly declined to resolve the occurrence issue.
During its dispute with Owens-Corning, Travelers held the position that the asbestos claims should be considered as a single occurrence, a position it maintained as it sought to recover reinsurance.
Gerling, however, argued that in accepting the settlement, Travelers had effectively relinquished the single occurrence argument and should allocate its settlement funding as a multiple occurrence.
"Gerling objected to Travelers' allocating the settlement on the basis of a position that Travelers, in Gerling's view, had necessarily relinquished in the process of settling," the court noted in its ruling.
Instead, Gerling argued that Travelers should have allocated the settlement according to the multiple-occurrence position that Gerling believed Travelers had implicitly accepted in order to settle with OCF, even though the settlement itself expressly disclaimed resolution of the occurrence issue.
A lower court agreed with Gerling, but the appellate court ruled that, providing the settlement was reasonable, a reinsurer would have to abide by the "follow the fortune" principle.
"In short, we decline to authorize an inquiry into the propriety of a cedent's method of allocating a settlement if the settlement itself was in good faith, reasonable, and within the terms of the policies," the court said.
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