North River Ins. Co. v. CIGNA Reinsurance Co.

CourtUnited States Courts of Appeals. United States Court of Appeals (3rd Circuit)
Citation52 F.3d 1194
Docket NumberNo. 93-5743,No. 93-5764,Nos. 93-5743,93-5743,93-5764,s. 93-5743
PartiesNORTH RIVER INSURANCE COMPANY, v. CIGNA REINSURANCE COMPANY, individually and as successor to INA Reinsurance Company North River Insurance Company, Appellant inCIGNA Reinsurance Company, Appellant in& 93-5764.
Decision Date13 April 1995

Barry R. Ostrager (argued), Mary K. Vyskocil, Joseph F. Wayland, Simpson, Thacher & Bartlett, New York City, for appellant/cross-appellee, North River Ins. Co.

Thomas A. Allen (argued), Ellen K. Burrows, William E. Cox, Marion R. Hubing, White & Williams, Philadelphia, PA, for appellee/cross-appellant, CIGNA Reinsurance Co., individually and as successor to INA Reinsurance Co.

Mitchell F. Dolin, Covington & Burling, Washington, DC, for amicus curiae appellants, Armstrong World Industries, Inc., Asbestos Claims Management Corp., CertainTeed Corp., C.E. Thurston & Sons, Inc., Dana Corp., Ferodo America, Inc., Flexitallic, Inc., GAF Corp., National Service Industries, Inc., Pfizer Inc., Shook & Fletcher Insulation Co., T & N PLC and U.S. Gypsum Co.

David M. Raim, Chadbourne & Parke, Washington, DC, for amicus curiae appellant/cross-appellee, The Aetna Cas. & Surety Co.

Mark D. Lebow, Coudert Bros., New York City, for amicus curiae appellants/cross-appellees, The Continental Ins. Co., Royal Ins. Co. and The Travelers Ins. Co.

William J. Bowman, Hogan & Hartson, Washington, DC, for amicus curiae appellant/cross-appellee, ITT Hartford Ins. Group.

Joseph J. Schiavone, Budd, Larner, Gross, Rosenbaum, Greenberg & Sade, Short Hills, NJ, for amicus curiae appellee/cross-appellant Reinsurance Ass'n of America.

Before: SCIRICA, LEWIS and SEITZ, Circuit Judges.


SCIRICA, Circuit Judge.

This is a dispute between an excess insurer and a reinsurer over who should pay for defense litigation costs arising out of asbestos injury claims against the underlying insured. Under procedures established by the Wellington Agreement, a comprehensive agreement between asbestos producers and insurers designed to resolve disputes over coverage, 1 an arbitrator ruled that North River Insurance Company was obligated to pay defense costs, in excess of policy limits, to its insured, Owens-Corning Fiberglas Corporation, an asbestos manufacturer. North River then sought indemnification from its reinsurer, CIGNA Reinsurance Company, for the defense costs it paid to Owens-Corning. 2

In these cross appeals we must decide whether four facultative reinsurance certificates issued by CIGNA Re to North River obligate CIGNA Re to indemnify North River for defense costs. We also must decide whether actions taken by North River in connection with its participation in the Wellington Agreement violated its duty of good faith, and whether the district court erred by refusing to reconsider its judgment to include, as an alternative basis for summary judgment, that a reinsurance certificate's indemnity limit caps the amount a reinsurer is obligated to pay under the policy.

The district court granted summary judgment to CIGNA Re, holding defense costs were not covered under the reinsurance certificates and North River violated its duty of good faith. North River Ins. Co. v. Philadelphia Reinsurance Corp., 831 F.Supp. 1132, 1153 (D.N.J.1993). The district court denied summary judgment to North River finding factual disputes involving North River's rejection of a settlement with Owens Corning and North River's notice to CIGNA Re about the arbitration proceeding. Id. at 1147-48, 1153.

We believe the coverage of defense costs was reasonably within the terms of the North River-Owens-Corning insurance policies as reinsured. We also believe the district court erred in holding that North River breached its duty of good faith to its reinsurer. We find, as a matter of law, that CIGNA Re cannot show that North River's decision to enter the Wellington Agreement violated its duty of good faith. But we find disputed issues of material fact exist on the questions of North River's good faith in failing to schedule its policies under Wellington and its rejection of the settlement proposal.

Accordingly, we will reverse the district court's grant of summary judgment to CIGNA Re and reverse the denial of summary judgment to North River on all points except the question of bad faith relating to North River's failure to schedule and its rejection of the settlement proposal. On remand, consideration of the question of bad faith shall be limited to asking (1) whether CIGNA Re has established that North River breached its duty of good faith in failing to schedule its policies, and (2) if the disputed evidence relating to North River's rejection of the settlement proposal manifests a breach of North River's duty of good faith to its reinsurer. We also hold the district court properly denied the motion for reconsideration because CIGNA Re failed to raise the indemnity cap defense in the course of the proceedings below and because Unigard Security Insurance Co. v. North River Insurance Co., 4 F.3d 1049 (2d Cir.1993) ("Unigard III "), 3 did not change existing law.


Before we discuss the parties' contentions, some background is useful. Primary insurers, excess insurers, and reinsurers play different roles in the insurance industry. Both primary and excess insurers provide coverage directly to the insured policy holder. Primary insurance policies describe what kinds of liability will be covered and specify dollar limits. Excess insurers typically track the coverage offered by the primary insurer and also specify dollar limits, but the excess insurer's liability is not triggered until the primary insurer's limit is exhausted. Reinsurers do not provide coverage directly to the insured but issue certificates of reinsurance to the excess or primary insurer, also specifying dollar limits.

Reinsurance is purchased by insurance companies to insure their liability under policies written to their insureds. See Henry T. Kramer, The Nature of Reinsurance, in Reinsurance 1, 5 (R.W. Strain ed., 1980). Typically, an insurer who has provided coverage against a large loss will cede all or part of that risk to other insurance companies along with a portion of the premiums. Ceding risk increases the insurer's capacity to insure other customers and decreases the likelihood that insurer insolvency will result from any large claim. 4

There are two types of reinsurance contract: treaty and facultative. Under a reinsurance treaty, the reinsurer agrees to accept an entire block of business from the reinsured. William G. Clark, Facultative Reinsurance: Reinsuring Individual Policies, in Reinsurance, supra, at 117, 121. Once a treaty is written, a reinsurer is bound to accept all of the policies under the block of business, including those as yet unwritten. Because a treaty reinsurer accepts an entire block of business, it does not assess the individual risks being reinsured; rather, it evaluates the overall risk pool. Id.

Facultative reinsurance entails the ceding of a particular risk or policy. Unlike a treaty reinsurer who must accept all covered business, the facultative reinsurer assesses the unique characteristics of each policy to determine whether to reinsure the risk, and at what price. Thus, a facultative reinsurer "retains the faculty, or option, to accept or reject any risk." Id.; see also Francis M. Gregory, Jr. & Nicholas T. Christakos, Primary, Excess and Reinsurance Problems in Large Loss Cases, 59 Def.Couns.J. 540, 543 (1992) ("[T]he distinguishing characteristic is always the reinsurer's right of individual risk rejection.").

The reinsurance relationship depends on the reinsurer and the reinsured observing high levels of good faith. See Unigard III, 4 F.3d at 1069. The reinsured must keep its interests aligned with those of the reinsurer, see id., and the reinsurer must "follow the fortunes" of the reinsured, see Kramer, supra, at 12-13.

Reinsurance certificates usually employ standard forms. A reinsurance certificate typically includes a "following forms" provision that expressly limits the reinsurance to the terms and conditions of the underlying policy and provides that the reinsurance certificate will cover only the kinds of liability covered in the original policy issued to the insured. The reinsurance certificate often, as here, also includes a "follow the fortunes" clause, which is somewhat broader than the "following forms" clause and obligates the reinsurer to indemnify the reinsured for any good faith payment of an insured loss.

"Follow the fortunes" clauses prevent reinsurers from second guessing good-faith settlements and obtaining de novo review of judgments of the reinsured's liability to its insured. See International Surplus Lines Ins. Co. v. Certain Underwriters & Underwriting Syndicates at Lloyd's of London, 868 F.Supp. 917, 921 (S.D. Ohio 1994) ("Were the Court to conduct a de novo review of [the reinsured's] decision-making process, the foundation of the cedent-reinsurer relationship would be forever damaged."). But while a "follow the fortunes" clause limits a reinsurer's defenses, it does not make a reinsurer liable for risks beyond what was agreed upon in the reinsurance certificate. See Bellefonte Reinsurance Co. v. Aetna Casualty & Sur. Co., 903 F.2d 910, 914 (2d Cir.1990); see also Kramer, supra, at 13 ("[T]he concept of follow fortunes cannot create a reinsurance where none exists."). In that regard, the reinsurer retains the right to question whether the reinsured's liability stems from an unreinsured loss. A loss would be unreinsured if it was not contemplated by the original insurance policy or if it was expressly excluded by terms of the certificate of reinsurance.


North River Insurance Company sells excess insurance. 5 Between 1974 and 1978 it sold policies to Owens-Corning Fiberglas, an asbestos manufacturer. The excess insurance policies at issue here...

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