The Travelers Indemn. Co. v. Excalibur Reinsurance Corp., No. 3:-CV-1209 (CHS), 2013 U.S. Dist. LEXIS 50134 (D. Conn. Apr. 8, 2013).
We all know that reinsurance may not be the most exciting subject to read about. Certainly many judges feel that way. But once in a while, a judge may take the somewhat dry subject of reinsurance and jazz it up within an opinion. Here, a Connecticut federal court was asked by a reinsurer to compel discovery against a cedent. In reaching its decision, the court decided to turn the case into a stage drama. What makes the drama more interesting (at least to us) is that the court took pains to use the New York Court of Appeals’ recent decision in U.S. Fidelity & Guaranty Co. v. Am. Re-Insurance Co., 20 N.Y.3d 407 (2013) as its touchstone for deciding the scope of discovery needed by the reinsurer where a follow-the-settlements argument was being made by the cedent.
We will let you read the decision for yourself for the court’s drama class. We will focus instead on the reinsurance issues. Here, the reinsurance contract was governed by New York law. The court made it clear that the decisions of the New York Court of Appeals bound the court in construing the contract and not the decisions of the 2d Circuit. That is where the U.S. F&G case comes in.
The reinsurance contracts had a following clause that obligated the reinsurer to pay losses paid on the underlying policies and “will follow the settlements of the Company, subject always to the terms and the conditions of this Agreement.” Like U.S. F&G, this case was a dispute about the post-settlement reinsurance allocation. The reinsurer, on this motion, sought to compel the cedent to produce discovery to aid it in its defense that the cedent’s allocation was unreasonable or that the underlying claims were not covered under the reinsurance contract. In this case, the cedent allocated the settlement to the second of four years, when the reinsurer was a treaty participant, and not to the first year, when the reinsurer was not a treaty participant.
In interpreting New York law on follow-the-settlements, the court enumerated four rules: (1) a follow-the-settlements clause requires deference to the cedent’s post-settlement allocation; but (2) a cedent’s allocation decisions are not immune from scrutiny, which includes; (3) whether the allocation is reasonable as one that the parties to the settlement might reasonably arrive at without consideration of reinsurance; and in any event (4) an allocation that violates or disregards reinsurance contract provisions is void.
After reviewing the competing arguments of counsel, the court found that the reinsurer was entitled to challenge the reasonableness of the post-settlement allocation and to argue that the allocation violated the reinsurance contract. Based on this finding, the court allowed the reinsurer’s motion to compel discovery.
It will be interesting to see whether the courts will continue this trend of allowing reinsurers to challenge post-settlement allocation decisions and whether discovery in these disputes will broaden.