7 F.4th 50
2d Cir.2021Background
- Utica Mutual issued a $25 million umbrella policy for 1973 (with related 1974 umbrella) and ceded one-fifth shares to Munich and to INA (succeeded by Century) via facultative certificates. 1973 umbrella provided excess (vertical) and drop-down (horizontal) coverage.
- A 1974 endorsement expressly made defense costs payable in addition to limits only "with respect to any occurrence not covered by the underlying policy(ies)" (i.e., drop-down risks).
- Goulds faced mass asbestos claims in the 1990s–2000s; Utica defended/indemnified, settled coverage issues with Goulds in 2007, and then sought reinsurance reimbursement. Munich and Century paid their undisputed $5M shares but refused to pay additional defense costs Utica billed.
- Utica sued Munich (bench trial) and Century (jury trial) in related actions; the trial courts reached conflicting results on whether reinsurers must pay defense costs in addition to policy limits.
- This panel held the 1973 facultative certificates follow the umbrella policy (i.e., defense costs erode limits), affirmed the judgment for Munich, reversed the favorable Century verdict on that point, and remanded parts of the Century case.
- The court also vacated and remanded for new trial issues regarding (a) whether Century is successor to the actual 1975 reinsurer (INA Re) on a 1975 certificate, and (b) Century’s bad-faith counterclaim (trial instruction error).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether 1973 facultative certificates require reinsurers to pay defense costs in addition to umbrella limits | 1974 endorsement made defense supplemental to limits for the umbrella generally; follow-the-settlements and certificate language require payment of "expenses incurred" separate from limits | The 1974 endorsement applies only to drop-down (non-underlying) occurrences; follow-form certificates limit reinsurers to the cedent’s contractual obligation under the umbrella (defense within limits) | Defense costs are payable within limits, not in addition; affirm Munich judgment and reverse the Century jury verdict on this point |
| Whether the 2007 Utica–Goulds settlement binds reinsurers to pay defense in addition to limits under follow-the-settlements | Settlement allocation fixed Utica’s billing and reinsurers must accept Utica’s allocation | The settlement expressly treated defense as eroding umbrella limits; Utica’s reallocation contradicts the settlement and underlying policy | Settlement does not require reinsurers to pay defense in addition to limits |
| Whether the certificates independently obligate reinsurers to reimburse "expenses incurred" regardless of the umbrella policy | Certificate wording ("expenses incurred") obligates reinsurers to reimburse investigation/defense costs regardless of cedent’s legal liability under the umbrella | "Incurred" is tied to amounts the cedent is legally obligated to pay under the reinsured policy; follow-form clauses limit reinsurer exposure to the original policy’s terms | Certificates obligate reinsurers only for expenses the cedent is legally liable to pay under the reinsured umbrella (i.e., within limits) |
| Whether Century is successor to the issuer of the 1975 certificate and whether Century’s evidentiary exclusion and jury instruction require retrial | Utica: Century is successor to INA (and post-sale materials plus an R&Q settlement support Century’s liability) | Century: the 1975 binder/letters point to INA Re as issuer and Century is not INA Re’s successor; exclusion of evidence on successorship was erroneous | Exclusion of Century’s evidence about non-successorship was an abuse of discretion affecting substantial rights; remand for a new trial on the 1975 certificate successor issue and related counterclaim (and a new trial on Century’s bad-faith counterclaim due to erroneous jury instruction) |
Key Cases Cited
- Utica Mut. Ins. Co. v. Fireman’s Fund Ins. Co., 957 F.3d 337 (2d Cir.) (follow-form/facultative reinsurance principles and limits on reinsurer obligations)
- Utica Mut. Ins. Co. v. Clearwater Ins. Co., 906 F.3d 12 (2d Cir.) (nature of umbrella policies combining vertical and drop-down coverage)
- Glob. Reinsurance Corp. of Am. v. Century Indem. Co., 30 N.Y.3d 508 (N.Y.) (interpretation of facultative certificates and standard form usage)
- Travelers Cas. & Sur. Co. v. Gerling Glob. Reinsurance Corp. of Am., 419 F.3d 181 (2d Cir.) (limits on reinsurer review of cedent settlements under follow-the-settlements)
- North River Ins. Co. v. Ace Am. Reinsurance Co., 361 F.3d 134 (2d Cir.) (standards for enforcing follow-the-settlements clauses)
- U.S. Fid. & Guar. Co. v. Am. Re-Ins. Co., 20 N.Y.3d 407 (N.Y.) (follow-the-fortunes/follow-the-settlements do not require indemnification beyond the underlying policy)