North River Ins. v. Employers Reinsurance Corp., No. C-2-00-1221.

• Citation: 197 F.Supp.2d 972
• Decision Date: 11 March 2002
• Docket Number: No. C-2-00-1221.
• Parties: NORTH RIVER INSURANCE COMPANY, Plaintiff, v. EMPLOYERS REINSURANCE CORPORATION, Defendant.
• Court: United States District Courts. 6th Circuit. United States District Courts. 6th Circuit. Southern District of Ohio

197 F.Supp.2d 972

NORTH RIVER INSURANCE COMPANY, Plaintiff, v. EMPLOYERS REINSURANCE CORPORATION, Defendant.

No. C-2-00-1221.

United States District Court, S.D. Ohio, Eastern Division.

March 11, 2002.

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Alvin James McKenna, Porter, Wright, Morris & Arthur, Columbus, OH, for Plaintiff.

James Michael Wiles, Wiles, Boyle, Burkholder & Bringardner, Columbus, OH, Robert S. Soderstrom, Tressler, Soderstrom, Maloney, & Priess, Chicago, IL, for Defendant.

ORDER

GRAHAM, District Judge.

This is a diversity action for breach of contract filed by plaintiff North River Insurance Company against defendant Employers Reinsurance Corporation. Plaintiff alleges that it issued liability insurance policies to Owens-Corning Fiberglas Corporation ("Owens-Corning"), a company formerly engaged in the manufacture of insulation containing asbestos. Plaintiff then entered into a reinsurance agreement with the defendant under which defendant agreed to indemnify plaintiff for a percentage of plaintiff's liability in the event that plaintiff became obligated to satisfy claims submitted by Owens Corning under those policies. This facultative reinsurance certificate related solely to the liability policies issued by plaintiff to Owens-Corning, and the certificate was effective from June 18, 1974, to October 22, 1976.

Pursuant to this reinsurance certificate, defendant paid certain amounts to plaintiff following payments by plaintiff to Owens-Corning under its liability policies stemming from asbestos product liability claims against Owens-Corning. However, in 1998, Owens-Corning incurred additional liability for the payment of claims stemming from the installation of its asbestos products (the so-called non-product asbestos claims) and submitted these new claims to plaintiff under the liability policies. Plaintiff initially contested any obligation to satisfy these additional liability claims by filing an action in which plaintiff asserted various defenses to liability, but on May 17, 2000, plaintiff agreed to settle the claim submitted by Owens-Corning. Plaintiff then submitted a claim to defendant under the reinsurance certificate, which defendant refused to pay. Plaintiff now alleges that defendant is liable for breach of contract in the amount of $15,331,526.

On January 4, 2001, defendant filed an answer in which defendant asserted various defenses, including a denial that any additional amounts were owed under the reinsurance certificate and the assertion that plaintiff waived any entitlement to benefits by breaching its duty of good faith and fair dealing to defendant.

Defendant also filed a counterclaim for a declaratory judgment pursuant to 28 U.S.C. § 2201. Defendant requests a determination: (1) that there was no "occurrence" during the certificate period because installation of asbestos products ceased in 1973; (2) that plaintiff must prove that the non-product asbestos claims were covered under plaintiff's liability policies; (3) that plaintiff breached its duty of good faith to defendant by failing to fully investigate Owens Corning's claims, to assert available defenses to coverage, and to first exhaust underlying layers of insurance coverage; (4) that plaintiff failed to promptly notify defendant of the pendency of Owens-Corning's claims; (5) that defendant is not liable for defense costs in addition to the policy limits of the reinsurance certificate; (6) that plaintiff improperly allocated settlement among its various policies; (7) that defendant's maximum liability to plaintiff is five million dollars; and (8) that defendant is entitled to rescind the reinsurance agreement.

On January 29, 2001, plaintiff filed an answer to defendant's counterclaim, asserting various defenses, and filed a counterclaim for breach of contract, asserting that defendant is liable to reimburse plaintiff for the payment of defense costs in addition to the certificate limits in amount of $6,349,327.

The parties have filed cross motions for partial summary judgment on the issue of whether the "follow the settlements" doctrine should be read into the reinsurance certificate at issue here. Docket Nos. 21, 24. The procedure for granting summary judgment is found in Fed.R.Civ.P. 56(c), which provides:

The judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.

The evidence must be viewed in the light most favorable to the nonmoving party. Adickes v. S.H. Kress & Co., 398 U.S. 144, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970). Summary judgment will not lie if the dispute about a material fact is genuine, "that is, if the evidence is such that a reasonable [trier of fact] could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). However, summary judgment is appropriate if the opposing party fails to make a showing sufficient to establish the existence of an element essential to that party's case and on which that party will bear the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). See also Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986).

The Sixth Circuit Court of Appeals has recognized that Liberty Lobby, Celotex and Matsushita effected "a decided change in summary judgment practice," ushering in a "new era" in summary judgments. Street v. J.C. Bradford & Co., 886 F.2d 1472, 1476 (6th Cir.1989). The court in Street identified a number of important principles applicable in new era summary judgment practice. For example, complex cases and cases involving state of mind issues are not necessarily inappropriate for summary judgment. Id. at 1479. In addition, in responding to a summary judgment motion, the nonmoving party "cannot rely on the hope that the trier of fact will disbelieve the movant's denial of a disputed fact, but must `present affirmative evidence in order to defeat a properly supported motion for summary judgment.'" Id. (quoting Liberty Lobby, 477 U.S. at 257, 106 S.Ct. 2505). The nonmoving party must adduce more than a scintilla of evidence to overcome the summary judgment motion. Id. It is not sufficient for the nonmoving party to merely "`show that there is some metaphysical doubt as to the material facts.'" Id. (quoting Matsushita, 475 U.S. at 586, 106 S.Ct. 1348).

The "follow the settlements" doctrine imposes on the reinsurer a contractual obligation to indemnify the reinsured or ceding company for payments the reinsured makes pursuant to a loss settlement under its own policy, provided that such settlement is not fraudulent, collusive or otherwise made in bad faith, or an ex gratia payment, such as one made to avoid the costs of litigation even though there is no legal obligation to pay. Aetna Cas. and Sur. Co. v. Home Ins. Co., 882 F.Supp. 1328, 1346 (S.D.N.Y.1995).

The purpose of this doctrine is to prevent the reinsurer from second-guessing the settlement decisions of the reinsured, thereby promoting good faith settlements by the reinsured. Id. Where this doctrine applies, the insurer cannot avoid liability by raising policy defenses and objections that were available to the reinsured unless the reinsured pays a settlement that is clearly or manifestly outside the scope of the reinsured's policy coverage or pays a settlement that is fraudulent, collusive or in bad faith. Id. at 1347.¹ See also Mentor Insurance Co. (U.K.) Ltd. v. Brannkasse, 996 F.2d 506, 517 (2d Cir.1993)(principle does not change reinsurance contract, but requires payment where insured's good faith payment is at least arguably within scope of insurance coverage that was reinsured); Christiania General Ins. Corp. v. Great Am. Ins. Co., 979 F.2d 268, 280 (2d Cir.1992)(although reinsurer is not obligated to indemnify for payments clearly beyond scope of original policy, reinsurers must reimburse reinsured for payment of settled claims so long as payments were made in good faith and were reasonably within terms of original policy, even if not technically covered by it, and may not second guess good faith liability determinations made by insured or insured's good faith decision to waive defenses); Unigard Security Ins. Co. v. North River Ins. Co., 762 F.Supp. 566, 581 (S.D.N.Y.1991)(under doctrine, reinsurer is required to indemnify for payments reasonably within the terms of the original policy, even if not technically covered by it).

Plaintiff points to language in the reinsurance certificate which plaintiff contends is sufficient to impose a "follow the settlements" obligation. Plaintiff further argues that, even in the absence of a specific provision, the concept of "follow the settlements" is implicit in every reinsurance contract as a matter of law by reason of custom or practice in the reinsurance industry. Plaintiff further argues that the intent to include the concept of "follow the settlements" in the agreement may be implied by evidence of custom or practice in the reinsurance industry. Defendant contends that the certificate contains no language which can reasonably be construed as a "follow the settlements" clause, and that, in the absence of an explicit clause to that effect, the certificate is not governed by this principle.

Both parties have submitted evidence, including expert affidavits, on the issue of whether it was the custom or practice in the reinsurance industry at the time the reinsurance certificate in this case was issued for the parties to assume that a "follow the settlements" obligation was inherent in the certificate even in the absence of a specific provision to that effect.

The existence of a custom or usage to ...