Travelers Cas. And Sur. Co. v. Ins. Co. Of North Am., 06-4100

• Decision Date: 09 June 2010
• Docket Number: 06-4101,08-1032.,07-4690,No. 06-4100,06-4100
• Citation: 609 F.3d 143
• Parties: TRAVELERS CASUALTY AND SURETY COMPANY, f/k/a The Aetna Casualty and Surety Company, Appellant/Cross-Appelleev. INSURANCE COMPANY OF NORTH AMERICA, Appellee/Cross-Appellant Per Court's Order of 10/7/08.
• Court: U.S. Court of Appeals — Third Circuit

609 F.3d 143

TRAVELERS CASUALTY AND SURETY COMPANY, f/k/a The Aetna Casualty and Surety Company, Appellant/Cross-Appelleev. ^* INSURANCE COMPANY OF NORTH AMERICA, Appellee/Cross-Appellant^* Per Court's Order of 10/7/08.

Nos. 06-4100, 06-4101, 07-4690, 08-1032.

United States Court of Appeals Third Circuit.

Argued May 12, 2009.

Opinion filed June 9, 2010.

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Vincent J. Proto, Esquire, Joseph J. Schiavone, Esquire, (Argued), Marc I. Bressman, Esquire, Donald P. Jacobs, Esquire, Budd, Larner, Gross, Rosenbaum, Greenberg & Sade, Short Hills, NJ, for Appellant/Cross Appellee Travelers Casualty and Surety Company.

James M. Dennis, Esquire, Wayne R. Glaubinger, Esquire, (Argued), Olga Sekulic, Esquire, Mound, Cotton, Wollan & Greengrass, New York, NY, Lawrence Nathanson, Esquire, Siegal & Park, Mt. Laurel, NJ, for Appellee/Cross Appellant Insurance Company of North America.

Before: AMBRO, ROTH and ALARCÓN ^*, Circuit Judges.

OPINION OF THE COURT

AMBRO, Circuit Judge.

This is a dispute over reinsurance coverage. In 1998, Travelers Casualty and Surety Co. (“Travelers”) reached a $137 million settlement with its insured, Acme Corporation (“Acme”).¹ Travelers then proceeded to allocate those $137 million dollars among three tiers of insurance coverage, only the highest of which-the so-called “excess” layer-included policies reinsured by Ace America Reinsurance Company and Insurance Company of North America (collectively, “INA”). When Travelers billed INA $13,762,395 based on its allocation, INA refused to pay, and Travelers sued to recover in the Eastern District of Pennsylvania.

At issue before the District Court was whether Travelers manipulated its post-settlement allocation so as to maximize the amount allocated to policies reinsured by INA, thus excusing INA from its normal duty as a reinsurer to “follow” all coverage decisions made by its reinsured. The District Court held two bench trials, each addressing a different aspect of Travelers' allocation, and ultimately reached what was, in effect, a split decision. The Court ruled, following the first bench trial, that Travelers had not manipulated its allocation of the settlement dollars so as to allow it to reach the excess layer of coverage (and thus tap into its reinsurance). But the Court also ruled after the second bench trial that, once Travelers reached the highest tier of coverage, it allocated more to certain policies reinsured by INA than was reasonably allowed by their policy limits. The result of those two verdicts was to leave INA responsible for only $8,226,817 of the loss initially allocated to it.

The Court then issued two consequential post-trial rulings. In the first, it held that prejudgment interest on Travelers' award should be calculated according to the Pennsylvania rate, even though the reinsurance contracts under which Travelers sued were governed by New York law. In the second, it held that post-judgment interest on the prejudgment interest did not begin to accrue until the District Court issued its order quantifying the amount of prejudgment interest due.

Both parties appealed.² We affirm both trial verdicts as well as the ruling concerning when post-judgment interest on the prejudgment interest began to accrue. However, because we believe that Travelers' award of prejudgment interest should be calculated according to the higher New York rate, we remand on that issue only so that the prejudgment interest can be recalculated.

I. BACKGROUND

A. The Follow-the-Fortunes Doctrine and the Reinsurance Relationship

Because the events that gave rise to this dispute occurred in the context of a relationship between an insurer (Travelers) and its reinsurer (INA), we begin with some background into the reinsurance relationship. Reinsurance is a mechanism “ ‘by which one insurer insures the risk of another insurer.’ ” N. River Ins. Co. v. Ace Am. Reins. Co., 361 F.3d 134, 137 (2d Cir.2004) ( quoting People ex rel. Cont'l Ins. Co. v. Miller, 177 N.Y. 515, 70 N.E. 10, 12 (1904)). The insurer pays the reinsurer a premium in exchange for which the reinsurer assumes “a portion of the [insurer's] potential financial exposure under certain direct insurance policies it has issued to its insured.” Id. Obtaining reinsurance allows an insurer to diversify its risk exposure, thus increasing its “capacity to insure other customers and decreas [ing] the likelihood that ... insolvency will result from any large claim.” N. River Ins. Co. v. CIGNA Reins. Co., 52 F.3d 1194, 1199 (3d Cir.1995).

A crucial feature of the reinsurance relationship is that “[r]einsurance involves contracts of indemnity, not liability.” Unigard Sec. Ins. Co. v. N. River Ins. Co., 4 F.3d 1049, 1054 (2d Cir.1993). That is, in providing reinsurance, the reinsurer acquires no direct liability to the original policyholder; rather, the reinsurer assumes an obligation to indemnify the insurer for payments it makes under the reinsured policies. Id. Indeed, a reinsurance agreement typically contains two specific provisions designed to prevent the reinsurance relationship from encroaching on coverage disputes between the insurer and its insured: a “follow-the-form” provision, in which the reinsurer agrees to reinsure the policies as written, and a “follow-the-fortunes” provision, in which the reinsurer agrees to “follow” the coverage provided by the insurer. See CIGNA, 52 F.3d at 1199-1200.

Of these two provisions, the most crucial is the follow-the-fortunes provision. See Barry R. Ostrager & Mary Kay Vyskocil Modern Reinsurance Law & Practice § 2.03[d] (2d ed.2000), at 2-17 (noting that the “follow-the-fortunes” provision lies “at the heart of the reinsurance agreement”). The follow-the-fortunes doctrine significantly restricts a reinsurer's ability to challenge the coverage decisions that led to its liability to the insurer. This is so for a basic reason-“[i]f the [insurer] knew that its settlement decisions could be challenged by every reinsurer, there would be little incentive to settle with the insured. The costs and risks of litigation avoided by settling with the insured would only be revived at the reinsurance stage.” Commercial Union Ins. Co. v. Seven Provinces Ins. Co., 9 F.Supp.2d 49, 66 (D.Mass.1998); see also CIGNA, 52 F.3d at 1206 (“To permit the reinsurer to revisit coverage issues resolved between the insurer and its insured would place insurers in the untenable position of advancing defenses in coverage contests that would be used against them by reinsurers seeking to deny coverage.”).

Accordingly, the follow-the-fortunes doctrine “insulates a reinsured's liability determinations from challenge by a reinsurer unless they are ... in bad faith, or the payments are clearly beyond the scope of the original policy.” ³ACE, 361 F.3d at 140 (internal quotation marks and citation omitted). In other words, a reinsurer seeking to avoid payment must show either that the coverage decisions that led to the reinsurer's liability to the insurer were made in bad faith, or that the coverage provided clearly fell outside the scope of the policies the reinsurer agreed to reinsure. See Mentor Ins. Co. (U.K.) Ltd. v. Brannkasse, 996 F.2d 506, 517 (2d Cir.1993). Otherwise, the reinsurer must simply cover the losses allocated to it.

B. Acme v. Travelers and Travelers v. INA

In April 1996, Travelers acquired Aetna Casualty and Surety Company (“Aetna CS”). At the time, Acme was seeking coverage under insurance policies issued by Aetna CS in the 1970s and 1980s. Acme sought coverage primarily for two sets of claims being brought against it: (1) breast implant claims, relating to safety testing of silicone breast implants that Acme had performed for its parent, Acme Parent Corporation ⁴ (“Acme Parent”); and (2) chemical products claims, relating to chemical products manufactured by Acme, including the pesticide commonly known as “DBCP.” ⁵ The Aetna CS policies potentially implicated by the breast implant claims and the chemical products claims made up three distinct layers of coverage-primary policies (bearing the designator “AL”), buffer policies (bearing the designator “XS”), and excess policies (bearing the designator “XN”).⁶ Because the distinct features of each layer's policies became central to the dispute between Travelers and INA that followed, it is worth describing those policies in some detail.

1. The Insurance Policies

The AL policies were issued between April 1976 and April 1987 and provided coverage for all non-products claims brought against Acme, as well as products claims brought against it outside the United States. Each of the AL policies had a per-occurrence coverage limit, but only the policies issued between April 1985 and April 1987 had aggregate coverage limits.

In addition, the AL policies had three features that became particularly significant to the reinsurance dispute that followed. First, the policies were subject to retrospective premiums from Acme. For any payment Travelers made on an AL policy, it was entitled to reimbursement from Acme up to that particular policy's “loss limit.” ⁷ The AL policies covering the period from April 1976 through April 1982 included a limit on the amount in retrospective premiums that could be collected, while the post-April 1982 AL policies included no such limit. Second, the AL policies were subject to captive reinsurance, that is, reinsurance provided by an Acme subsidiary. Each AL policy was reinsured for 95% of all losses above the loss limit, except the last policy, which was reinsured at 95.5% above the loss limit.⁸ Finally, the AL policies included an obligation to cover defense expenses in addition to an obligation to indemnify Acme for liability it incurred. For the April 1976 through April 1982 AL policies only, defense costs did not count toward the policy limits, while, for all the AL policies, captive reinsurance could not be sought for defense costs unless...