Top Case of the Week: Second Circuit Affirms Dismissal of Complaint Against Reinsurer

Top Case of the Week: Second Circuit Affirms Dismissal of Complaint Against Reinsurer

Arrowood Surplus Lines Ins. Co. v. Westport Ins. Corp., (2d Cir. (Conn.) October 8, 2010)

Plaintiff’s predecessor, Royal Surplus Lines Insurance Company (“Royal Surplus”) entered into an agreement pursuant to which it assumed the liabilities and acquired the related assets of Connecticut Specialty Insurance’s Company (“Connecticut Specialty”) covered business as of December 31, 2001.  From February 1, 1999 until May 16, 2000, Employers Reinsurance Company (“Employers Reinsurance”) reinsured a class of policies Connecticut Specialty issued, including one to Equity Residential (“Equity”) that went into effect on December 15, 1999 (“Equity Policy”).

Equity filed a complaint alleging claims for RICO, breach of fiduciary duty, fraud and conspiracy arising out of its purchase of insurance from Connecticut Specialty.  In an amended complaint, Equity asserted claims for declaratory judgment, breach of contract and reformation of contract against Royal Surplus for losses occurring between December 15, 2000 and December 15, 2002.  Plaintiff paid Equity the sum of $4,100,000 to settle those claims and incurred $2,609,325.55 in claim expense.  Plaintiff sought reimbursement from Employers Reinsurance’s successor, Westport Insurance Corporation (“Westport”) for the settlement payment to Equity and claim expense in connection with losses occurring between December 15, 2000 and December 15, 2002.

Westport moved to dismiss plaintiff’s complaint, arguing that it was only liable to indemnify plaintiff for losses occurring in the first year of the Equity Policy and has no liability for losses occurring after December 15, 2000. The United States District Court for the District of Connecticut granted Westport’s motion, holding that the scope of the reinsurance agreement was limited to policies becoming effective on or after the effective date of the reinsurance agreement as a result of occurrences taking place prior to the reinsurance agreement’s termination date.  The reinsurance agreement stated that a policy issued for more than one year was considered as “becoming effective” at each anniversary date of the policy, limiting the coverage period to a year at a time, regardless of the length of the underlying insurance contract.  Accordingly, Westport had no liability for losses occurring after the anniversary date of the Equity Policy, December 15, 2000. 

On October 8, 2010, the United States Court of Appeals for the Second Circuit affirmed.  The court held that the reinsurance agreement’s “follow the fortunes” provisions apply only to matters falling under the reinsurance agreement.  The additional periods of insurance coverage under the Equity Policy fall outside the reinsurance agreement’s time limitations and are not subject to the “follow the fortunes” provisions because such provisions cannot expand the express limits of coverage imposed by a reinsurance agreement.  The court held that the reinsurance agreement expressly limited Westport’s reinsurance liability for multiple-year insurance policies.  The court noted that Arrowood pointed to nothing indicating the parties intended that limitation not to apply to one-year policies which, through modifications by the reinsured, result in coverage for multiple years.

Download a copy of Arrowood Surplus Lines Ins. Co. v. Westport Ins. Corp.(2d Cir. (Conn.) October 8, 2010).

Toni Frain and Jeffrey Kingsley

http://www.goldbergsegalla.com/attorneys/Frain.html

http://www.goldbergsegalla.com/attorneys/Kingsley.html