906 F.3d 12
2d Cir.2018Background
- Utica insured Goulds (1970s–1980s) with primary and umbrella liability policies; some primary policies lacked aggregate limits, exposing Utica to large asbestos liabilities in the 1990s–2000s.
- Utica settled with Goulds in 2007 treating the primary policies as having aggregate limits; Utica sought reinsurance recovery from Clearwater under five facultative reinsurance instruments (1978–1981).
- Clearwater issued two near‑identical certificates (1978, 1979) and participated in a TPF&C‑managed pool for 1979–1981; Clearwater paid roughly $1 million then stopped, disputing further liability.
- Central contract language issues: (a) whether Clearwater’s stated liability limits are expense‑inclusive (cap defense/other expenses) or expense‑supplemental (expenses paid in addition to limits); (b) whether the reinsurance instruments include a follow‑the‑settlements obligation binding Clearwater to Utica’s voluntary settlement with Goulds.
- District court: granted partial summary judgment to Clearwater that certificates capped expenses; later granted Utica summary judgment that Clearwater was bound to Utica’s Goulds settlement. This appeal and cross‑appeal followed.
Issues
| Issue | Utica's Argument | Clearwater's Argument | Held |
|---|---|---|---|
| Whether Clearwater’s reinsurance certificates cap "loss expenses" within the stated liability limits (expense‑inclusive) or require payment of expenses in addition to those limits (expense‑supplemental) | Certificates are expense‑supplemental because they follow the underlying umbrella policies, which expressly state expenses are payable in addition to policy limits | Certificate liability limits are hard caps that include expenses | Court held certificates are expense‑supplemental (must follow the umbrella policies), so expenses are paid in addition to stated limits, but remanded to decide which expenses are encompassed by the umbrella policies |
| Whether Utica’s umbrella policies obligate Utica (and thus Clearwater via follow‑the‑form) to pay asbestos‑related expenses "not covered by" underlying insurance (i.e., interpretation of “not covered by”) | "Not covered by" means not collected/exhausted — umbrella expenses attach upon exhaustion; Utica’s interpretation should control for follow‑the‑form purposes | "Not covered by" means not within scope of coverage; primary insurance covering asbestos means umbrella not triggered | Court vacated earlier resolution and remanded: district court must determine meaning of "not covered by" and whether umbrella (and thus Clearwater) must pay the asbestos expenses |
| Whether Clearwater (via TPF&C memoranda) is bound to Utica’s Goulds settlement under a clause requiring settlements be authorized by TPF&C | Utica contends authorization was excused (impossibility/attributable to Clearwater) and settlement should bind reinsurers | Reinsurer liability was conditioned on TPF&C authorization; Utica failed to obtain authorization so condition precedent unmet | Court held Utica failed to satisfy the condition precedent and did not show authorization was impossible or excused; therefore TPF&C memoranda do not bind Clearwater to Utica’s settlement |
| Whether the Clearwater certificates themselves contain an express or implied follow‑the‑settlements obligation binding Clearwater to Utica’s voluntary settlement | The follow‑the‑liability language in the certificates implies a follow‑the‑settlements obligation | The language is a follow‑the‑form clause only; no follow‑the‑settlements term should be implied between sophisticated parties | Court held certificates contain only follow‑the‑form (not follow‑the‑settlements); New York law disfavors implying such a major term, so Clearwater is not bound to Utica’s settlement and must be indemnified according to Utica’s proven umbrella liability |
Key Cases Cited
- Global Reins. Corp. of Am. v. Century Indem. Co., 30 N.Y.3d 508 (N.Y. 2017) (New York Court of Appeals: no presumption that a liability limit caps defense/expense obligations; intent must be derived from contract language and circumstances)
- Unigard Sec. Ins. Co. v. N. River Ins. Co., 4 F.3d 1049 (2d Cir. 1993) (follow‑the‑form clauses make reinsurer’s obligations mirror cedent’s policy terms)
- North River Ins. Co. v. ACE Am. Reins. Co., 361 F.3d 134 (2d Cir. 2004) (reinsurer bound by cedent’s settlements where an express follow‑the‑settlements clause exists)
- Travelers Cas. & Sur. Co. v. Gerling Glob. Reins. Corp. of Am., 419 F.3d 181 (2d Cir. 2005) (discussing follow‑the‑settlements/follow‑the‑fortunes concepts)
- Bellefonte Reins. Co. v. Aetna Cas. & Sur. Co., 903 F.2d 910 (2d Cir. 1990) (example of reinsurance language construed as expense‑inclusive when certificate ties coverage “subject to” limits)