FDCC REINSURANCE, EXCESS AND SURPLUS LINES SECTION JANUARY 2008 NEWSLETTER

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1 FDCC REINSURANCE, EXCESS AND SURPLUS LINES SECTION JANUARY 2008 NEWSLETTER Dear Section Members: Greetings from wintry Boston, where visions of Bahamian beaches are sustaining us through the snowiest December in memory. Winter Meeting Westin Our Lucaya, Grand Bahama Island, February 24 March 2, 2008 It s not to late to register for the Winter 2008 Barefoot in the Bahamas program in February. For more information about the winter meeting and to register, click on: On Saturday morning, our section is co-presenting a panel discussion on Arbitration and Mediation: A Global Viewpoint. Our panel of international counsel and claims executives (Betty Mullins of Swiss Re; Stephen Carter of Charles Russell; Scott Maidment of McMillan, Binch & Mendelsohn and Plunkett & Cooney s Steve Barney) will address legal, political and strategic issues impacting how arbitrations are conducted in the U.S., Bermuda and abroad. Bring your passport and your number two pencils. Legal Developments of Interest The Connecticut Supreme Court gift wrapped a timely Christmas present for The Hartford last month. In Hartford Accident & Indemnity Co. v. Ace American Reinsurance Co., SC17625 (Conn. December 25, 2007), the court ruled that a Superior Court judge had erred in granting summary judgment to Hartford s reinsurers on the basis that Hartford could not show that sums that it had paid to settle mass asbestos tort liabilities exceeded the per occurrence retention in the treaties. The Supreme Court found that there was ambiguity in the treaties common cause wordings that must be resolved through further fact finding with respect to the party s intent. This dispute involved yet another claim for reinsurance arising out of the Western McArthur, a policyholder that has also cost the St. Paul dearly in recent years. Hartford had issued CGL policies to Western McArthur between 1967 and Over the years, Western McArthur became a major target in asbestos litigation. By the 1990s, Hartford believed that it had exhausted the available limits of coverage. Nevertheless, Western McArthur sued it in California arguing that these claims fell outside the scope of the products hazard and therefore were individually subject to separate $500,000 limits. In December 2003, Hartford and Western McArthur agreed to settle their dispute in return for a payment of $1.15 billion. Following the settlement, Hartford sought reimbursement from various reinsurers that were parties to a series of multi-layered excess of loss reinsurance treaties including two upper layers of loss protection that had been in effect from 1967 to 1975 and a higher third layer from

2 1973 to The treaties provided that the reinsurers would be liable for losses above a specified threshold by reason of any one accident. The treaty defined any one accident as: Any one, or more than one, accident, happening or occurrence arising or resulting from one event, casualty or catastrophe upon which liability is predicated, under any one, or more than one, of the policies covered by this Agreement, and, as respects liability arising out of the product manufactured, made, handled, distributed or sold by an assured, liability arising out of property damage or out of malpractice, said term shall also be deemed and construed to mean any one, or more than one, accident, happening or occurrence which the available evidence shows to be the probable common cause or causes of more than one claim under a policy, or policies, or renewals thereof, irrespective of the time of the presentation of such claims to the assured or the Hartford. In February 2004, Hartford billed its reinsurers for approximately 10% of the Western McArthur settlement. Various reinsurers refused to accept the cession, however, disputing Hartford s contention that the Western McArthur losses could be aggregated under the common cause language in the treaties. In the ensuing coverage litigation, a superior court judge in Connecticut granted summary judgment to the reinsurers holding that under the cause analysis adopted by the Connecticut Supreme Court in Metropolitan Life Ins. Co. v. Aetna Cas. & Sur. Co., 765 A.2d 891 (Conn. 2001), asbestos losses could only be aggregated if they were temporally and spatially related and that, as a result, where losses occurred in different times and places, they could not be aggregated under the treaty s common cause language. On appeal, Hartford argued that the language in its reinsurance treaties was distinguishable from the CGL wordings construed by the Supreme Court in Metropolitan Life and that, furthermore, extrinsic evidence with respect to the drafting of the subject treaties compelled the conclusion that a broader meaning was intended than the court had earlier adopted. The Supreme Court agreed. As a preliminary matter, the court distinguished its 2001 holding in Metropolitan Life as well as a similar analysis that the New York Court of Appeals had adopted in Travelers Cas. & Sur. Co. v. Certain Underwriters at Lloyd s, 760 N.E.2d 319 (N.Y. 2001). As regards the Metropolitan Life decision, the court observed that the any one accident language was unique to this treaty and had never been construed by any court. As none of the cases that the court had cited in Metropolitan Life specifically provided for the accumulation of liability arising from a common cause, the court declared that, The concern that a finding of multiple occurrences would render the defendants insurance policies meaningless, simply was not present. The Connecticut Supreme Court also distinguished the Travelers opinion on the basis that, although it did concern a reinsurance treaty with common origin language, the New York Court of Appeals analysis had focused on language allowing aggregation of loss resulting from a series of accidents, occurrences and/or causative incidents having a common origin and/or

3 being traceable to the same act, omission, error and/or mistake noting that the word series did not appear in the Hartford treaties. As a result, the Supreme Court found the Travelers case to be of little guidance. The Supreme Court was apparently guided, however, by extrinsic evidence that Hartford had presented consisting of various memoranda and items of correspondence between Hartford and its reinsurance brokers during the 1960s and 1970s concerning the evolution of this language in its reinsurance treaties. At the time, the brokers had urged Hartford to adopt an aggregate extension clause that would have allowed claims subject to individual aggregates to be ceded as one loss. Hartford had refused to accept an aggregate extension clause, however, believing at the time that its common cause provision was preferable because, unlike an aggregate extension clause, it allowed aggregation of losses arising from multiple policies spanning two or more policy years. In one memorandum, a Hartford employee stated that, The common cause wording is so broad as to suggest that nothing should be introduced into the treaty which might lessen its impact. The Supreme Court agreed with the Hartford employee, noting that the common cause language was uniquely broad and that, as a result, Hartford s interpretation that the common cause of Western McArthur s asbestos liabilities was its fabrication and installation activities was plausible. Given this apparent ambiguity, the Supreme Court ruled that the superior court should not have granted summary judgment and that these issues must be remanded to the superior court for further factual findings. The Supreme Court also declined to affirm the Superior Court s ruling on the defendants alternative theory that Hartford had failed to show that the Western McArthur settlement payments were for claims arising out of products manufactured, made, handled, distributed or sold by an assured. As above, Hartford and Western McArthur had disputed whether the underlying claims fell within the products hazard in the Hartford policies. This dispute still existed at the time of the settlement. The reinsurers seized on this fact, contending that the settlement payment had not been made pursuant to the products hazard and was therefore not subject to the subject language in the reinsurance treaties. Hartford took the opposite view, arguing that the common cause language merely required that the claims involve the insured s products and made no reference to language contained in the CGL products hazard requiring that the injury occur away from the insured s premises or after the insured had relinquished possession or control of the products. The Court acknowledged the close linguistic similarity between the language of the treaties common cause provision and the products hazard language in the underlying CGL policies, declaring that the similarity suggested some correspondence in meaning between the two provisions. The court was also compelled to acknowledge, however, that the treaties lacked the physical possession language in the CGL products hazard language. The court concluded, therefore, that this arising out of products language was also ambiguous and required further fact finding.

4 Other Case Law Developments The New Jersey Supreme Court has ruled that thousands of asbestos claims and other long-tail liabilities that have been incurred but not yet reported do not qualify for inclusion in the distribution of the estate of an insolvent insurer as N.J.S.A. 17:30C-8(a)(1) provides that no contingent claim shall share in the distribution of the assets of an insurer except as such claims have become absolute against the insurer. In In The Matter of Liquidation of Integrity Ins. Co., No. A (N.J. December 13, 2007), the court rejected the Liquidator s argument that IBNR claims become absolute once their value is susceptible of being estimated. Instead, the majority declared that because the process by which the Liquidator proposes to estimate IBNR claims of necessity entails looking outside of each claim to other similar claims in respect of their very existence, nature and extent and cost, IBNR claims fail to satisfy that most basic element of requirements in order to be absolute : [that each] stand on its own and not by reference to any other claim. Two dissenting justices argues that the majority s analysis created an unreasonable Hobson s choice for the Liquidator, as it must either pay out the limited assets of the Estate now and leave future claimants without relief or delays payments indefinitely while the Estate meanwhile hemorrhages administrative costs. A federal district court has ruled in Doeff v. Transatlantic Reinsurance Co., No (E.D. Pa. December 13, 2007) that insofar as the Pennsylvania Supreme Court had ruled in Koken v. Legion Ins., 878 A.2d 51 (Pa. 2005) that policyholders could pursue direct claims against the reinsurers of Legion, the psychiatrist in this case was bound by the arbitration terms in the reinsurance treaty that Transatlantic Re had entered into with Legion. The court ruled that Doeff, as a third-party beneficiary, was bound by the arbitration provision and could not equitably estop this provision while simultaneously seeking to invoke the benefits of the agreement as a whole. The court rejected Doeff s contentions that his claim was based upon Legion s conduct rather than the terms of the policy, and therefore was not subject to the arbitration agreement. A federal jury in San Francisco has entered a verdict in the matter of American Motorists Ins. Co. v. American Re-Insurance Co., No. C declaring that American Re breached its duty of good faith and fair dealing in refusing to reimburse AMICO, as successor to Specialty National Insurance Company, for $4.5 million that SNIC paid in 2004 to settle a catastrophic personal injury case in Montana. Earlier in the case, Judge Wilken had ruled that American Re s facultative insurance obligations were not subject to the follow the fortunes doctrine, express or implied. Industry Developments After months of public opposition to a continued federal role in reinsurance for terrorist losses, President Bush this week signed into law a seven year extension of TRIA. Meanwhile, ISO has begun submitting new policy forms to state insurance regulators to reflect changes in the TRIA program..allstate announced this month that it is withdrawing from the property and casualty insurance association (PCIA), a trade group that was formed several years ago as the result of a merger of the National Association of Independent Insurers and the Alliance of American Insurers Tokio Marine has announced plans to purchaser Kiln Ltd. for $898 million.

5 That s all for now. See you in the Bahamas Michael F. Aylward Chair Morrison Mahoney LLP 250 Summer Street Boston, MA Tel: Fax: maylward@morrisonmahoney.com