Reinsurer Loses Collateral Estoppel Argument But Wins Anyway

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Insurance companies and their reinsurers continue to battle over whether the cost of defending underlying asbestos claims is covered by reinsurance. Obviously, this depends on the wording of the reinsured policies and the reinsurance contracts. Some insurance companies have battled with their reinsurers for years and reinsurers have turned to issue preclusion (collateral estoppel) as a means of dismissing the insurance company’s complaint. In a recent New York case, this effort failed, but the reinsurer prevailed on the main claim in any event.

In Utica Mutual Insurance Co. v. American Re-Insurance Co., No. 867 CA 21-00932 (N.Y. App. Div. 4th Dep’t, Dec. 23, 2022), the cedent sued the reinsurer for breach of contract when the reinsurer refused to indemnify the ceded for defense costs for underlying asbestos lawsuits. The reinsurer issued reinsurance contracts covering the cedent’s umbrella policies and those policies were charged with defense costs after its primary policies were exhausted.

Because there was prior litigation between the parties on the same subject (but different contracts), the reinsurer moved for summary judgment based on collateral estoppel. The motion court granted the motion, but the intermediate appellate court modified the motion court’s decision. The case is noteworthy for its short but sweet explanation of when collateral estoppel applies under New York law.

In agreeing with the cedent that collateral estoppel was not appropriate, the court explained that the interpretation of an insurance policy is a pure question of law, and the doctrine of collateral estoppel does not prevent that issue of law from being relitigated even if there is a prior adverse federal court decision. The more important point, however, was that collateral estoppel does not apply unless the previously litigated issue was “identical to that in the subsequent action and decided after a full and fair opportunity to litigate.” (citations omitted). Because the contract language at issue here differed in certain respects from that in the documents that were the subject of the prior litigation, the reinsurer failed to meet its burden as the proponent of collateral estoppel to show the identity of the issues.

But that did not end the matter. The court, nevertheless, granted summary judgment to the reinsurer dismissing the complaint on the defense costs issue, concluding that the reinsurer established that its interpretation of the umbrella policies—i.e., that those policies did not cover defense costs in the underlying actions inasmuch as those costs were covered by the primary insurance policies—is the only fair construction of those policies.

The umbrella policies here provided that, “[w]ith respect to any occurrence not covered by the policies listed in the schedule of underlying insurance or any other insurance collectible by the insured, but covered by the terms and conditions of this policy (including damages wholly or partly within the amount of the retained limit), the company shall: (a) defend any suit against the insured” (emphasis added). We conclude that “the unambiguous terms of the umbrella policies establish that defendant[was] not required to reimburse plaintiff under the reinsurance contracts for the disputed defense costs related to the underlying actions.” (citations omitted)

So even though the reinsurer lost its motion for summary judgment based on collateral estoppel on appeal, it won summary judgment on the defense costs issue based on the umbrella policy language. Contract language matters people.