New York trial court orders reinsurers to pay USF&G $246 million plus interest

Insurance attorneys talk about reinsurance cases in the same manner that divorce attorneys talk about probate court: it's a world unto itself, with its own language, rules and folkways, and not a place where one necessarily wants to wander without a guide.

Reinsurance is insurer's insurance. An insurer purchases reinsurance to protect itself from unusually high losses. For example, an insurer providing property coverage to many insureds in an area devastated by a hurricane might turn to its reinsurer to cover aggregate losses over a certain amount.

This week a major reinsurance decision was issued by a New York trial court. Although Massachusetts law is not discussed, I am writing about it here because the case illustrates issues that often come up in long-tail loss cases, including lost policies, business successions, allocation and trigger disputes, and cost-benefit analyses by insurers about when to stop fighting and start settling. And because anyone interested in the insurance world should be aware of a case in which a court orders this much money to change hands from one insurer to another.

Between 1948 and 1960 insurer USF&G issued a number of liability policies to Western Asbestos, which sold products containing asbestos.

In the mid-1960's, Western MacArthur purchased most of the assets of Western Asbestos and took over its business.

In the late-1970's, individuals injured by asbestos began suing Western MacArthur in its own right and as successor to Western Asbestos.

In 1993 Western MacArthur inititated in California a coverage action against USF&G and two other insurers, seeking coverage for the asbestos cases.

USF&G argued that Western MacArthur did not have standing to assert coverage under policies issued to Western Asbestos. To defeat that argument, Western MacArthur found a former officer of Western Asbestos and persuaded him to sign an assignment of insurance rights to Western MacArthur. Western MacArthur also convinced a California court to "revive" the long-defunct Western Asbestos to ratify the agreement. Western Asbestos intervened in the coverage litigation as plaintiff. The court ruled that USF&G lacked standing to challenge the purported assignment of insurance rights to Western MacArthur.

Neither Western MacArthur nor USF&G could locate the policies at issue. The plaintiffs presented "secondary evidence" that USF&G's lost policies provided products coverage without aggregate limits.

As a side note, Michael Aylward of Morrison Mahoney LLP circulated this fascinating, quirky article on how the plaintiffs proved coverage under lost policies.

At that point USF&G decided to engage in global settlement discussions.

In June, 2002 the parties reached a settlement agreement under which USF&G agreed to pay $975 million plus interest.

USF&G then sought coverage from its reinsurers, American Re and ECRA. That brings us to state court in New York, in the case of United States Fid. & Guar. Co. v. Am. Re-Ins. Co..

This week the court denied summary judgment to the reinsurers and granted summary judgment to USF&G, and ordered the reinsurers to pay USF&G $246 million plus 60 percent interest.

Although I'm not going to discuss the court's reasoning, I would be happy to forward a copy of the decision to anyone who wants it (thanks again to Mike Aylward who forwarded it to me and the rest of the people on the Massachusetts Reinsurance Bar Association email list).

Save the date: Massachusetts Reinsurance Bar Association Symposium

I mentioned here the formation of the Massachusetts Reinsurance Bar Association. MReba has now scheduled its first symposium for October 1, 2009 at the Harvard Club Back Bay on Commonwealth Avenue in Boston.

Welcome to the Massachusetts Reinsurance Bar Association

A group of prominent reinsurance attorneys has recently formed the Massachusetts Reinsurance Bar Association. (Reinsurance is purchased by insurers against the risk that they have to pay more than a chosen amount on policies they issue.) President Bill Erickson of Robins Kaplan Miller & Ciresi invited me to their meeting this week. The meeting included a very interesting discussion led by Jim Harrington, also of Robins Kaplan Miller & Ciresi, about the unique issues faced by reinsurance litigants in the arbitration process, and the pros and cons of early mediation.

MReba is planning a symposium in the fall. Stay tuned.