respect to aggregate limits, there was no wording indicating that the occurrence limits were to apply annually. Thus, the Third Circuit refused to permit Travelers to allocate its payment on this basis, despite the follow- the-fortunes doctrine.


A second noteworthy decision concerning the reasonableness of a


cedant’s post-settlement allocation arose in United States Fidelity & Guaranty Co. v. American Re-insurance Co.


The insured in that case, Western MacArthur, had brought suit


seeking coverage for certain asbestos-injury claims under a number of liability policies issued by United States Fidelity and Guaranty Company (USF&G). The parties ultimately settled the coverage dispute for $987.4 million on the basis that Western MacArthur could recover under only a single policy year (1959).


Applying follow-the-fortunes principles to USF&G’s post-settlement


allocation, the court declined to review the actual disbursements made to each underlying claimant, finding that this was the type of ‘re-litigation’ and ‘intrusive behaviour’ the follow-the-fortunes doctrine was designed to prevent.


Fundamental to this aspect of the court’s decision was that American


Re had failed to present any tangible evidence illustrating that USF&G’s settlement was attributable to non-covered claims. On the contrary, the court noted that USF&G had alleged that it calculated its potential liability for settlement purposes based only on covered claimants and that American Re had not challenged that calculation. Therefore, the court held that American Re could not establish that USF&G’s settlement payments were not at least ‘arguably’ within the scope of the reinsured coverage.


As for ECRA, its summary judgment motion was based, among


“ Most notably, the court stated that a cedant choosing among several reasonable allocation methodologies is not required to select one that minimises its reinsurance recovery in order to avoid a finding of bad faith.”


USF&G then commenced an action to recover a portion of the


settlement from its reinsurers, which included American Re-insurance Company (American Re), the Excess Casualty Reinsurance Association and certain of the Association’s pool members (collectively, ECRA).


American Re moved for summary judgment, asserting three primary


bases for non-payment. The first was that there was no reinsurance coverage for payments of


less than $100,000 made by USF&G to the underlying claimants, since the treaty at issue required USF&G to retain that amount for any loss.


The second was that the underlying USF&G policies covered only


loss of up to $200,000 per claimant, and thus there was no reinsurance available for payments that exceeded that amount.


Third was that USF&G had paid claims for individuals who were


exposed to asbestos not sold or distributed by Western MacArthur, and any such payments were outside the scope of the reinsured policies and the treaty.


American Re argued further (as did ECRA) that USF&G bore the


burden to prove that each claimant for whom it sought reimbursement was exposed to the asbestos of its insured.


Robert W. DiUbaldo is a senior associate in the New York office of Edwards Wildman Palmer LLP. He can be contacted at: RDiUbaldo@eapdlaw.com


November 2011 | INTELLIGENT INSURER | 49


other things, on USF&G’s use of an ‘occurrence’ trigger when billing its reinsurers. That methodology, ECRA argued, was inconsistent with USF&G’s position in the underlying litigation that an ‘accident’ trigger should be applied to determine liability for each claimant under the various policies and was made solely to broaden the number of claims that fell within the ECRA treaty.


The court rejected ECRA’s position, finding that USF&G ultimately compromised on the trigger issue in order to achieve settlement. By so compromising, USF&G was able to avoid the payment of greater amounts under California’s so-called ‘all sums method,’ which obliges the insurer to pay ‘all sums’ up to the policy limit once a policy is triggered, including damages that occur outside of the policy period.


Moreover, the court noted that while USF&G could have settled the


underlying coverage action in a manner that would have had a lesser impact upon its reinsurers—such as allocating future claimants’ predicted recoveries over several policy periods—it was not required to choose the method that would have had the least impact upon reinsurers. Nor did that decision constitute bad faith sufficient for ECRA to avoid the follow the fortunes doctrine.


The reasoning set forth in the Travelers and USF&G cases supports the conclusion that courts will generally take a deferential approach when analysing a cedant’s loss allocation under the follow-the-fortunes doctrine.


However, that reasoning also recognises that courts will enforce the


limits of that doctrine where a cedant’s reinsurance billing (and related allocation) is inconsistent with, or not permitted by, the terms of the underlying policies or reinsurance contracts at issue, where there is substantial evidence of bad faith, or where the primary motivation behind a cedant’s actions is to maximise its reinsurance recoveries.


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