Exhaustion Found Ambiguous Causing Reinsurer to Follow the Settlement

Photo by Andrea Piacquadio on Pexels.com

In a recent facultative reinsurance dispute over the payment of an asbestos settlement, a New York federal court found the term “exhaustion” ambiguous and granted summary judgment to the cedent requiring the reinsurer to pay its share of an asbestos settlement.

In Fireman’s Fund Insurance Co. v. OneBeacon Insurance Co., No. 14 Civ. 4718 (PGG) (S.D.N.Y. Oct. 19, 2020), the cedent had issued several excess insurance policies over three years to a company that was hit with multiple asbestos claims. The reinsurer had issued a certificate of facultative reinsurance for 15% the third excess policy ($20 million xs $75 million xs $3 million SIR). The cedent settled the asbestos claims and allocated the settlement proportionally to each of the excess policies. The cedent then billed the reinsurer for its share of the loss under the third excess policy. The reinsurer refused to pay arguing that the underlying policies had not been exhausted and, therefore, the excess policy was not triggered and the claim against the fac cert was improper.

The cedent sued and ultimately, the parties moved for summary judgment. In a 29-page decision, the court granted summary judgment to the cedent and directed the reinsurer to pay its share of the settlement. The decision has several nice moments explaining different facets of reinsurance and excess insurance law. The case came down to what the term “exhaustion” meant in the excess policy and whether the reinsurer was required to follow the cedent’s settlement allocation.

The policy stated that “[i]t is a condition of [the policy] that the insurance afforded under [the policy] shall apply only after all the underlying insurance has been exhausted.” In an amendatory endorsement concerning the limit of liability, the policy also provided that

[t]he limit of the liability stated in the declarations as applicable to “each occurrence” shall be the total limit of the Company’s liability for all damages sustained as the result of any one occurrence, provided, however, in the event of reduction or exhaustion of the applicable aggregate limit or limits of liability under said underlying policy or policies solely by reason of losses paid thereunder on account of occurrences during this policy period, this policy shall in the event of reduction, apply as excess of the reduced limit of liability thereunder.

In finding for the cedent, the court held that the term “exhaustion” used in the excess policy was ambiguous and that nothing in the policy, including the amendatory endorsement, clearly established that exhaustion required an actual payment up to the underlying policy’s limit of liability. The court concluded that the cedent’s interpretation of of the term “exhaustion” was reasonable.

The fac cert provided that

“[t]he liability of [the reinsurer] . . . shall follow that of [the cedent] and except as otherwise specifically provided herein, shall be subject in all respects to all the terms and conditions of [the cedent’s] policy. . . ” and that “[a]ll claims involving this reinsurance, when settled by [the cedent], shall be binding on [the reinsurer].”

The court agreed with the reinsurer that the follow-the-settlements doctrine cannot override the language of the underlying policy or the reinsurance contract, but because the excess contract was ambiguous as to the meaning of “exhaustion” that principle was irrelevant to the court’s decision. The court applied the follow-the-settlements doctrine and held that the reinsurer was bound to accept the cedent’s settlement and allocation.

One thought on “Exhaustion Found Ambiguous Causing Reinsurer to Follow the Settlement

Leave a ReplyCancel reply