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Case Note: Massachusetts Superior Court Rules That, Absent Bad Faith Or Fraud, Reinsurer May Not Challenge Cedentís Allocation Methodology Simply Because It Is Inconsistent With The Cedentís Pre-Settlement Analysis

by ~ Susan A. Hartnett (Email) (Web Site)

Lexington Ins. Co. v. Clearwater Ins. Co.
No. 09-0234C (Mass. Super. Jul. 26, 2011) (Sanders, J.)

In what appears to be the first ruling on the subject by a Massachusetts state court in over a decade, a judge in the Business Litigation Session of the Massachusetts Superior Court has recently addressed the meaning and scope of the ďfollow the fortunesĀ doctrine and the extent to which a reinsurer can challenge how its cedent allocated its share of loss among its policies. Noting the absence of any appellate decision on point in Massachusetts, the trial court followed federal precedent and declared that, absent evidence of bad faith or gross negligence, a cedentís allocation decisions cannot be challenged by a reinsurer, even where they are inconsistent with the cedentís pre-settlement analyses.

The dispute in this case was between Lexington Insurance Company, one of the AIG companies providing coverage to Dresser Industries for asbestos personal liability claims, and Lexingtonís reinsurer, Clearwater Insurance Company, who, as Skandia, reinsured two policies issued by Lexington to Dresser under two facultative certificates. After being named as a defendant in hundreds of thousands of complaints alleging personal injury or death from asbestos or silica, Dresser brought coverage litigation against all of its insurers, including the AIG insurers. In connection with that coverage litigation, AIG concluded that Dresserís liabilities exposed the full limits of coverage of the policies issued by the AIG companies, including Lexington. AIG then joined with a number of other insurers and negotiated a global settlement with Dresser.

The court found that, as part of the settlement process, a joint defense group of insurers, including AIG, retained the services of a consultant, NERA Economics, to aid negotiations among the different insurers over their respective contributions to a joint settlement with Dresser. NERA prepared various spreadsheets that attributed dollar amounts to specific insurers and policies, including the two Lexington policies at issue. AIG settled with Dresser and then proceeded to allocate the settlement among its various companiesĀ policies, not as analyzed by NERA but by using a ďbathtub methodology.Ā Under that methodology, Lexingtonís two policies were fully exhausted. Lexington sought recovery from Clearwater on that basis. Clearwater contended, however, that AIG should have allocated the loss according to the spreadsheets prepared by NERA and that if that were done, the Lexington Policies would not have been exhausted.

In addressing the partiesĀ cross-motions for summary judgment, the Superior Court found a number of federal decisions instructive on the application of the follow the fortunes doctrine to a cedentís allocation decisions, including Judge Gertnerís decision in Commercial Union v. Seven Provinces Ins. Co., 9 F. Supp. 2d 49 (D. Mass. 1998), Travelers Cas. & Sur. Co. v. Gerling Global Reinsurance Corp. of N. Am, 419 F.3d 181 (2d Cir. 2005) and, especially, North River Ins. Co. v. ACE Am. Reinsurance Co., 361 F.3d 134 (2d Cir. 2004).

Noting the factual similarities between this case and North River, the court granted summary judgment to Lexington, holding that a cedentís allocation decisions in its reinsurance presentation are controlling so long as there is no evidence to suggest gross negligence or bad faith in the allocation. A mere inconsistency between a pre-settlement analysis and the cedentís post-settlement allocation is simply not enough to meet either standard. This is because, as the Second Circuit observed in North River, ďrequiring post-settlement allocation to match pre-settlement analysis would permit a reinsurer, and require the courts, to intensely scrutinize the specific factual information informing settlement negotiations and would undermine the certainty that the general application of the [follow the settlement] doctrine to settlement decisions creates.Whatever the style you want, our trendy louis vuitton bags,cartier replica,replica patek philippe watches and patek philippe replica watches variety will supply it.Ā

Susan A. Hartnett may be reached at hartnett@srbc.com.
Ā 2011 Sugarman, Rogers, Barshak & Cohen, P.C. All rights reserved.

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