The Second Circuit Court of Appeals recently affirmed summary judgment in favor of an insurer and decided that a below-limits settlement properly exhausted lower-tier excess policies in a reinsurance dispute. Fireman’s Fund Ins. Co. v. OneBeacon Ins. Co., 2022 U.S. App. LEXIS 25863 *, __ F.4th __ (2d Cir. Sept. 15, 2022).
The named insured (ASARCO) was a mining, smelting, and refining company that was faced with potential liability of hundreds of millions of dollars for personal injury claims based on its subsidiaries’ involvement in the asbestos industry. ASARCO was insured under three excess policies issued by Fireman’s Fund in the early 1980s, and ASARCO sought coverage under these policies for its asbestos liability. Each of the policies had a limit of $20M, but they attached at different points. The first policy attached above $30M for the 1982-1983 time period; the second had the same attachment point for the following year, 1983-1984; and the third was excess of $75M in underlying insurance for the 1983-1984 policy period. Fireman’s Fund obtained reinsurance for $3M of the third policy from OneBeacon. The reinsurance policy included a follow-form clause under which OneBeachon agreed that its liability would follow that of Fireman’s Fund except as otherwise provided in the reinsurance agreement. The agreement also contained a “follow the settlement clause” which provided that “all claims involving this reinsurance, when settled by [Fireman’s Fund], shall be binding on the Reinsurer, who shall be bound to pay its portion of such settlements.”
Fireman’s Fund disputed coverage and ended up in coverage litigation with ASARCO. During the coverage litigation, ASARCO declared bankruptcy and, as part of an approved reorganization plan, established an asbestos personal injury settlement trust. ASARCO and Fireman’s fund continued to litigate their coverage dispute after the bankruptcy plan was approved—with ASARCO contending that Fireman’s Fund should pay the limits of all three policies because ASARCO’s exposure was as high as $2.1 billion. Fireman’s Fund suffered a series of adverse rulings in the coverage litigation which caused its attorneys, actuaries, and claims professionals to conclude that its likely exposure under the three policies was $50.3M. Fireman’s Fund and ASARCO then settled their dispute for $35M, which Fireman’s Fund allocated to all three policies in proportion to the amount of its most recent exposure analysis estimated that Fireman’s Fund would be required to pay under each policy had litigation proceeded. This resulted in an allocation of $8.3M to the third policy, and Fireman’s Fund submitted an invoice to OneBeacon for its portion of this allocation.
OneBeacon denied the claim, contending that the $35M settlement payment should have been allocation entirely to the first two policies. Fireman’s Fund sued OneBeacon, and the parties filed cross motions for summary judgment. The district court granted Fireman’s Fund’s motion and rejected OneBeacon’s argument that because the amount allocated to the second policy was less than its limit of $20M, that policy was not properly exhausted, and the third policy was therefore not triggered. The district court held that the third policy’s exhaustion requirement was ambiguous and could be satisfied by a below-limits settlement.
The Second Circuit affirmed the decision. The court first focused on the payment of loss provision, which provided that the third policy “shall apply only after all underlying insurance has been exhausted.” Relying on its prior decision in Zieg v. Mass. Bonding & Ins. Co., 23 F.2d 665 (2d Cir. 1928), the court held that because the word “exhausted” was not defined, the policy did not “unambiguously require actual payment up to the policy limits by the underlying insurers.” The court acknowledged that there may be good reason to require actual payment up to the underlying limit, but because this provision did not contain any such language, the court refused to require such payment.
OneBeacon also argued that a limit of liability provision in the third policy precluded its liability. This provision provided that:
The limit of the liability stated in the declarations as applicable to “each occurrence” shall be the total limit of [Fireman's Fund's] liability for all damages sustained as the result of any one occurrence, provided, however, in the event of reduction or exhaustion of the applicable aggregate limit or limits of liability under said underlying policy or policies solely by reason of losses paid thereunder on account of occurrences during this policy period, this policy shall in the event of reduction, apply as excess of the reduced limit of liability thereunder.
OneBeacon argued that the phrase “solely by reason of losses paid thereunder” required that the underlying policy limits be fully paid by the insurer before those policies could be exhausted. The Second Circuit rejected this argument and explained that “this provision delineates only what happens when the underlying aggregate limit of liability has been reduced or exhausted by previous per-occurrence claims, requiring the excess insurer to start providing coverage at a lower attachment point.” That was not the situation at issue because ASARCO sought coverage for losses that far exceeded the third policy’s attachment point. Accordingly, the court held that the limit of liability provision did not require actual payment of the underlying limits.
The court next rejected an argument that Fireman’s Fund was judicially estopped from raising these arguments based on a position taken in other cases because the court determined that Fireman’s Fund did not take a contrary position in the prior litigation. Instead, those cases involved the separate issue of whether an excess insurer is required to drop down to cover gaps in the underlying coverage.
Finally, the court determined that the provisions of the reinsurance agreement did not require actual payment of the underlying limits because they did not explicitly say so. Instead, the court held that the agreement was not contingent on payment by the underlying insurers.
