Travelers on trial over asbestos deal
US insurer, Travelers faces proceedings in New York’s Court of Appeal following a decision by the court that its structuring of a $1 billion settlement over asbestos may have forced reinsurers to pay more.
ACE and Munich Re are among the plaintiffs in the case, which involves asbestos claims made against Western Macarthur dating back to 1948. The court is looking to ascertain whether Travelers manipulated the value of claims in order to increase its reinsurance coverage. The plaintiffs, for their part, are seeking to establish that they had no obligation to cover Travelers expenses, although the court has indicated that they have not been convinced by the reinsurers’ arguments.
Bermuda Re spoke with a senior Bermuda lawyer specialising in re/insurance litigation about the implications of the case.
The New York trial court originally found in Travelers favour. What do you think is behind the Court of Appeals desire to re-examine the case? Follow the fortunes clauses prevent a reinsurer from challenging a cedant's decision to settle with an insured for a particular amount; a good sense rule based on the assumption that the interests of a cedant and reinsurer will be aligned—with both wanting the cheapest settlement possible. In contrast, the application of this rule to allocation decisions in settlement of claims raises problems because the interests of cedant and reinsurer will often conflict. Strict application of the rule to allocation decisions would mean that an insurer could insulate its allocation from challenge by simply getting its - essentially indifferent - insured to agree to it. The problem was recognised in the lower courts, which expressed their reluctance in supporting the rule in such circumstances, but still considered themselves bound to do so. The Court of Appeal went further, recognising that far from being ‘indifferent’, claimants often enthusiastically support an insurers' efforts to fund a settlement at reinsurers' expense because insurers, like everyone else, are usually more generous with other people's money than their own. In those circumstances New York's highest court considered it proper to intervene, setting down boundaries for the application of the rule in relation to allocation decisions.
What are implications of the case for re/insurance contracts and their wording? Notwithstanding the additional protection afforded by this decision - it still sets a relatively low bar for a cedant seeking to rely on a follow the fortunes clause in respect of allocation decisions. Where there is potential for an allocation problem to arise under the follow the fortunes clause, it should be addressed directly in contract. As the Court of Appeal pointed out in this case, if reinsurers think that they are not adequately protected by the language in the follow the fortunes clause, their remedy is to negotiate better terms.
Is this a hang-up from an earlier period, or can such issues arise in current contracts? This decision will have future implications for any cedant relying on a ‘follow the fortunes’ clause, which does not otherwise contemplate allocation of underlying claims. In particular, in the underlying claims settlement process, a cedant will need to consider whether the proposed allocations constitute a ‘reasonable’ allocation that will be binding on the reinsurer. For the reinsured's allocation to be reasonable, it must be one that the parties to the settlement of the underlying insurance claims might reasonably have arrived at in arm's length negotiations if the reinsurance did not exist. Of course, cedants are not the fiduciaries of reinsurers and are not required to put the interests of reinsurers ahead of their own. Where multiple reasonable allocations are available, the law still permits a cedant to choose the one it considers most favourable.
