United States Fid. & Guar. Co. v. American Re-Ins. Co.

• Citation: 93 A.D.3d 14,939 N.Y.S.2d 307,2012 N.Y. Slip Op. 00421
• Court: New York Supreme Court Appellate Division
• Decision Date: 24 January 2012
• Parties: UNITED STATES FIDELITY & GUARANTY COMPANY, et al., Plaintiffs–Respondents, v. AMERICAN RE–INSURANCE COMPANY, et al., Defendants–Appellants,Excess and Treaty Management Corporation, et al., Defendants.Reinsurance Association of America, Complex Insurance Claims Litigation Association and Chartis Inc., Amici Curiae.

2012 N.Y. Slip Op. 00421
93 A.D.3d 14
939 N.Y.S.2d 307

UNITED STATES FIDELITY & GUARANTY COMPANY, et al., Plaintiffs–Respondents,
v.
AMERICAN RE–INSURANCE COMPANY, et al., Defendants–Appellants,Excess and Treaty Management Corporation, et al., Defendants.Reinsurance Association of America, Complex Insurance Claims Litigation Association and Chartis Inc., Amici Curiae.

Supreme Court, Appellate Division, First Department, New York.

Jan. 24, 2012.

[939 N.Y.S.2d 308]

Wachtell, Lipton, Rosen & Katz, New York (Herbert M. Wachtell and Ben M. Germana of counsel), for American Re–Insurance Company, appellant.

Quinn Emanuel Urquhart & Sullivan, LLP, New York (Kathleen M. Sullivan, Michael B. Carlinsky, Jane M. Byrne and Sanford I. Weisburst of counsel), for Excess Casualty Reinsurance Association and OneBeacon America Insurance Company, appellants.

Boies, Schiller & Flexner, LLP, Albany (George F. Carpinello and

[939 N.Y.S.2d 309]

Benjamin I. Battles of counsel), for ACE Property & Casualty Company and Century Indemnity Company, appellants.Simpson Thacher & Bartlett LLP, New York (Mary Kay Vyskocil, Chet A. Kronenberg and Seth A. Ribner of counsel), for respondents.Freeborn & Peters LLP, Chicago, Illinois (Kerry E. Slade, Joseph T. McCullogh IV, and Robin E. Dusek of counsel), for Reinsurance Association of America, amicus curiae.Chaffetz Lindsey LLP, New York (Peter R. Chaffetz and Andreas A. Frischknecht of counsel), for Complex Insurance Claims Litigation Association and Chartis Inc., amici curiae.

Peter Tom, J.P., David B. Saxe, Rolando T. Acosta, Helen E. Freedman, Sheila Abdus–Salaam, JJ.

ACOSTA, J.

[93 A.D.3d 17] This case presents us with a reinsurance coverage dispute arising out of asbestos litigation which has spanned several decades and involved the state and federal courts of several jurisdictions.¹ For the sake of brevity, we presume familiarity with the case, and provide a general overview of the facts directly relevant to this appeal.

The underlying asbestos claims

In the 1950s and 1960s, Western Asbestos was a company that sold, distributed and installed asbestos-containing products. In 1967, Western Asbestos dissolved. Its business was taken over by Western MacArthur Company (MacArthur). Beginning in the 1970s, individuals with asbestos-related health injuries began suing MacArthur based on their exposure to Western–Asbestos related products. In 1993, MacArthur sued plaintiff herein, United States Fidelity & Guaranty Co. (USF & G), and another insurance company in California state court seeking coverage under policies allegedly issued to Western Asbestos. USF & G initially declined coverage. USF & G argued several defenses to the action, including that it had insured Western Asbestos, not MacArthur; that MacArthur was not a successor in interest to the policies; that it could not locate the policies; that even if it had the policies, the policies did not provide products liability coverage; and that even if the policies did provide liability coverage the claims would have exceeded the policies' aggregate limits. Significantly, in 1997, the California Court of Appeal held that MacArthur was not entitled to coverage under Western Asbestos's insurance policies ( General Acc. Ins. Co. v. Superior Ct., 55 Cal.App.4th at 1445, 1451, 64 Cal.Rptr.2d 781 [In holding for the insurance companies, including USF & G, the Court commented, “It is one thing to deem the successor corporation liable for the predecessor's torts; it is quite another to deem the successor corporation a party to insurance contracts it never signed, and for which it never paid a premium, and to deem the insurer to be in a contractual relationship with a stranger”] ).

MacArthur countered the California appellate decision by resurrecting the then-defunct Western Asbestos in 1997 for the [93 A.D.3d 18] purpose of assigning its insurance rights to MacArthur. MacArthur had a former Western Asbestos officer sign an assignment of insurance rights to MacArthur,

[939 N.Y.S.2d 310]

and then successfully persuaded a California court to “revive” Western Asbestos to ratify the assignment. Western Asbestos intervened in the MacArthur action as a co-plaintiff. The action proceeded to trial in 2002. USF & G argued that the assignment and ratification were unenforceable. The court rejected the claim.

USF & G ultimately settled the insurance coverage action with MacArthur in 2002. USF & G and the other insurers agreed to pay approximately $975 million in satisfaction of all asbestos injury-related claims. Pursuant to the settlement agreement, MacArthur was required to file for bankruptcy protection. As part of the bankruptcy proceeding, MacArthur was to seek, pursuant to 11 USC § 524(g), an injunction to supplement the injunctive effect of the bankruptcy discharge. Essentially, in exchange for the creation of a trust fund by USF & G and the other insurers, which was to receive the $975 million payment for the compensation of existing and future asbestos claimants, MacArthur was to seek an injunction that would bar future claims against the insurance companies. Prior to the issuance of the injunction, the bankruptcy court was required to find that Western MacArthur had contributed something of value to the trust (11 USC § 524[g][4][B][ii] ).

The bankruptcy petition was filed in and approved by the United States Bankruptcy Court for the Northern District of California. In its lengthy decision and order confirming the reorganization plan of MacArthur, including the settlement of the asbestos-injury claims and the creation of the trust, the court found first that the value of MacArthur itself was insufficient to support creation of the trust. The bankruptcy court did find, though, that MacArthur was contributing value to the trust in the form of its business loss claims. These “business loss claims” included “potential bad faith claims” against USF & G for its longstanding refusal to either indemnify, defend, or settle or otherwise pay the asbestos-injury claims. The court noted that while the bad faith claims were of “sufficient value” to justify the issuance of the injunctions, it was not deciding the merits or the specific value of the bad faith claims despite what it termed the “substantial evidence” to support them. Rather, the bankruptcy court merely stated that “some portion” of the $2 billion being contributed to the trust must be attributed to those bad faith claims, and that the value of the bad faith claims was at least in excess of MacArthur's $17 million net liquidation value.

[93 A.D.3d 19] The Reinsurance Treaties

Beginning in 1945, USF & G entered into a series of reinsurance treaties with defendants American Re–Insurance (American Re) and the Excess Casualty Reinsurance Association (ECRA), each of which provided 50% of the coverage under the terms of the reinsurance treaties. ECRA was a pool of reinsurers, each of which was responsible for a portion of ECRA's 50% of the treaty. The pool members were ACE Property and Casualty Company, Century Indemnity Company, OneBeacon America Insurance Company, and American Re.²

The treaty is an excess-of-loss contract, which requires the reinsurers to reimburse a portion of each covered loss over and above the amount of loss to be retained by USF & G (the retention). The first treaty, covering the period from 1945 to 1951, required USF & G to retain, for its own

[939 N.Y.S.2d 311]

account, the first $50,000 arising from each covered loss. For the treaties running from 1951 to 1956 and 1956 to 1962, USF & G's retention increased to $100,000. For the treaties covering the years 1962 to 1975, USF & G's retention increased to $500,000, and for the treaties covering the years 1975 to 1980, USF & G's retention was $1,000,000. For the reinsurance treaty years 1957 to 1962, in dispute here, the maximum amount of loss payable by the reinsurers, after the $100,000 retention, was $4,900,000 for any one loss, subject to a limit of $3,000,000 for personal injury liability or property damage liability.

Following the settlement, in or about November 2002, USFG submitted its reinsurance billing under the treaties for the reinsurer's share of the loss. In the settlement, the parties stipulated that USF & G issued thirteen comprehensive general liability policies to Western Asbestos, the first of which incepted in 1948 and the last of which incepted on July 1, 1959. Following the execution of the settlement agreement, USF & G, in consultation with MacArthur and claimant's counsel, determined to allocate the losses to the policy covering the period July 1, 1959 through July 1, 1960. The 1959 policy year was one of the policy years with the highest per person limits of $200,000, allowing a higher payout to injured claimants. In addition, USF & G determined that the 1959 policy was the only policy year that covered all potential claims for anyone exposed to asbestos during the settlement period. In accordance with its [93 A.D.3d 20] decision to allocate all the settlement claims to the 1959 insurance contract year, USF & G allocated all of its reinsurance claims to 1959 as well.

USF & G states that in preparing the reinsurance cession, it treated each injury as a separate accident, applying the $100,000 retention to each claimant's injury. For past claims, the judgment amount attributable to USF & G was capped at the $200,000 policy limit, and only the portion exceeding the retention was ceded to the reinsurers. For future claims, only two types of asbestos injuries were valued above the $100,000 retention: lung cancer, valued at $200,000, and mesothelioma, valued at $500,000. USF & G's overall liability was calculated by multiplying the expected number of claimants in each category by $200,000. Half of that amount was then ceded to the reinsurers.

American Re and ECRA, however, refused to pay USF & G's reinsurance claim because, among other reasons, they believed that the retention under the 1956 to 1962 treaty had been...