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a follow the settlement clause in a reinsurance treaty requires deference to the allocation of reinsurance proceeds by the insured, but does not render the allocation immune from scrutiny for reasonableness.

The Court of Appeals, in a full-fledged opinion by Judge Smith, determined there were questions of fact whether the insured’s, USF&G’s, allocation of reinsurance proceeds in this billion dollar asbestos case was reasonable in that, inter alia, it ignored “bad faith” claims not covered by the the reinsurance:

We conclude … that there is an issue of fact as to whether  USF&G [the insurance company, called a cedent in this context], in allocating the settlement amount, reasonably attributed nothing to the so called “bad faith” claims made against it. We also find a factual issue as to whether certain claims were given unreasonable values for settlement purposes. * * *

Having settled the coverage case, USF&G turned to its reinsurers, defendants in this case, with whom it had entered into a “treaty” of reinsurance applicable to the years 1956 through 1962. The reinsurance was of the type known as “excess of loss”: the reinsurers agreed to pay to USF&G the amount over $100,000 of any loss occurring during the period covered by the treaty. Since USF&G’s loss in the asbestos litigation could not, under its policies, exceed $200,000 per claimant, the reinsurers’ liability was in effect capped at $100,000 per loss. But the reinsurance treaty, like the underlying policies, had no aggregate limit—the reinsurers could be liable for any number of losses, up to $100,000 each. * * *

… [W]e find it impossible to conclude, as a matter of law, that parties bargaining at arm’s length, in a situation where reinsurance was absent, could reasonably have given no value to the bad faith claims. This issue must be decided at trial. …

Whether the values assigned to lung cancer, asbestosis, pleural thickening and other cancer claims could reasonably have been agreed on in arm’s length bargaining in the absence of reinsurance presents an issue of fact. United States Fid. & Guar. Co. v American Re-Ins. Co., 2013 NY Slip Op 00784 [20 NY3d 407], CtApp 2-7-13

 

 

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