Reinsurer Can Challenge Cedent’s Post-Settlement Reinsurance Aggregation

Reinsurance disputes arise when an insurer treats claims as multiple occurrences to force the insured to pay multiple retentions, but that same insurer treats the same claims as a single aggregated occurrence for purposes of reinsurance. In the past, reinsurers have found success when challenging aggregation by citing language in the reinsurance contract. However, in a recent New York case, the reinsurer was successful in challenging a cedent’s aggregation even without specific aggregation language in the reinsurance contract. The reinsurer was not required to follow its cedent’s fortunes.

The dispute in Allstate v. American Home, (N.Y. App. June 12, 2007) arose from underlying environmental litigation. In that underlying litigation, the District Court ruled that the environmental site at issue consisted of seven different occurrences because there were seven distinct areas of contamination. This ruling favored the insurer because it required the insured to pay seven deductibles. While a motion for a new trial was pending, this underlying insurance coverage dispute settled.

With additional environmental sites also in dispute between the insured and insurer, the insurer again took the position that each site presented multiple occurrences, and would require the insured to satisfy multiple retentions. Coverage for those additional sites was also settled.

Although the insurer, American Home, had repeatedly argued each site presented multiple occurrences under its policy language, American home ceded the claims to its reinsurer as a single occurrence at each site. By treating each site as a single occurrence, American Home argued it was able to satisfy its $1 million per occurrence reinsurance deductible. If, on the other hand, American Home had treated the sites as multiple occurrences (as the District Court had indicated), then the reinsurance retention would not be satisfied and there would be no reinsurance recovery. The Reinsurance certificates at issued followed form to direct policies and did not contain any separate aggregation provision.

The appellate court ruled that the reinsurer need not follow the fortunes of American Home with respect to the aggregation issue, and that the reinsurance retention could not be satisfied. Specifically, the court stated that:

• “The follow-the-fortunes doctrine was intended to foster consistency . . . not to allow an insurer to use a different set of rules at each level. We soundly reject the notion that the follow-the-fortunes doctrine requires that courts turn a blind eye to such manifest manipulation of the allocation process in total disregard of the reinsured’s obligation to act in good faith.”
• “Travelers and North River do not require a reinsurer, under the follow-the-fortunes doctrine, to accept the reinsured’s post-settlement loss allocation even if that allocation is contrary to the reinsured’s pre-allocation position and treatment of the loss allocation issue with its own insured.”
• “A reinsurer is not bound by the follow-the-fortunes doctrine where the reinsured’s settlement allocation, at odds with its allocation of the loss with its insured, designed to minimize the loss, reflects an effort to maximize unreasonably the amount of collectible reinsurance.”

For more information, questions or comments regarding issues of reinsurance aggregation and allocation, please contact Bates & Carey partners, Adam H. Fleischer, Robert J. Bates, Jr. or Mark G. Sheridan at any time.