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April 2020 – On Tuesday, April 28^th, the United States Court of Appeals for the Second Circuit unanimously held in favor of Fireman’s Fund Insurance Company, reversing a jury verdict that awarded Utica Mutual Insurance Company $64 million.  Chaffetz Lindsey represented Fireman’s Fund in the appeal.

The core issue in the case was whether Fireman’s Fund could rely on the plain language of the umbrella policies it reinsured – as incorporated into the reinsurance contracts by the following form provision — to show that the claims at issue were not covered.  The Second Circuit agreed with Fireman’s Fund that it could.

In dispute were seven facultative reinsurance contracts that Fireman’s Fund issued to Utica between 1966-72.  Each of those contracts reinsured an umbrella insurance policy that Utica issued to Goulds Pumps, Inc.  Importantly, the umbrella policies stated that they applied only to losses in excess of the underlying limits stated on a Schedule of Underlying Insurance.  Those Schedules to the umbrella policies, however, listed an underlying per person limit for bodily injury claims, but not an aggregate limit.  The underlying primary policies – which were also issued by Utica – were lost.

Goulds faced thousands of bodily injury claims arising out of asbestos in its products, which Utica covered.  Ultimately, Utica settled its coverage obligations.  Utica’s settlement agreement with Goulds stipulated that the missing primary policies included aggregate limits for bodily injury claims, and that those aggregate limits were exhausted.  Based on that stipulation, Utica allocated the settlement to its umbrella policies.  It then billed a share of those losses to Fireman’s Fund.

Utica’s position was that, under the follow-the-settlements provisions of the reinsurance contracts, Fireman’s Fund was bound by this allocation to the umbrella policies.  For its part, Fireman’s Fund argued that, based on the Schedule of Underlying Insurance, the umbrella policies did not attach in excess of an aggregate limit for bodily injury.  For that reason, the umbrella policies simply did not cover the relatively small individual asbestos claims comprising the bulk of the settlement.  And, because the reinsurance contracts incorporated the terms of the umbrella policies through the following form provision, the reinsurance contracts did not cover those claims either.

The Second Circuit agreed with Fireman’s Fund.  In a unanimous decision, the Court reversed the jury verdict, holding that, like any other contract, the reinsurance contracts must be interpreted by their plain terms. “Given the unambiguous language in the umbrella policies, Fireman’s Fund had no obligation to pay for bodily injury claims that did not exceed bodily injury limits identified in the Schedules.”

The Second Circuit rejected Utica’s argument that the “follow the settlements” clause prevented Fireman’s Fund from questioning Utica’s interpretation of the umbrella policies.  While a follow-the-settlements clause prevents a reinsurer from challenging a reinsured’s settlement decision, it does not override the language of the reinsurance contract.  The court found that “Utica’s theory directly contradicts the relevant language in the reinsurance contracts and umbrella policies.”

“This is an important ruling that demonstrates the respect the Second Circuit gives to clear contract language,” said Peter Chaffetz.  He added, “this case should not have gone to a jury, and we are gratified that the appellate court agreed with us.”

The Chaffetz Lindsey team was led by Peter Chaffetz and Steven Schwartz, and included Erin Valentine and David Berman.

Read the decision here.

Read Law360, New York Law Journal, Business Insurance, and HarrisMartin’s coverage of the case.