When It Rains Pollution, Grab Your Umbrella
July 22, 2020

Last week, a federal court in New York held that Hawaii’s “all sums” rule and “follow-the-settlement” provisions in reinsurance contracts obligated a reinsurer to reimburse a cedent where the underlying reinsured umbrella contract had a three-year term and the underlying insured settled an environmental claim for contamination spanning more than 44 years.

In Insurance Company of the State of Pennsylvania (ICSOP) v. Equitas Insurance Limited (EIL), No. 17-CV-6850-LTS-SLC, filed in the United States District Court for the Southern District of New York, ICSOP issued an umbrella liability insurance policy to Castle & Cook, Inc. (Dole).  The umbrella policy had a stated coverage period of October 1, 1968, to October 1, 1971 with $20 million limit of liability and did not contain an environmental exclusion.

ICSOP’s parent company, American International Group (AIG), obtained facultative reinsurance for the umbrella policy in two layers that provided reinsurance of $7.2 million per each $20 million per occurrence limit.  The reinsurance policies stated that the “[p]erils and interests reinsured hereunder” would be “[a]s original”.  They also contained a “follow-the settlement” provision.  In 2009, EIL assumed the reinsurance obligations under the reinsurance policies.

In 1966, a Dole subsidiary acquired and developed a housing tract in California.  In 2008, the state discovered pollution on the site, and by 2009, homeowners sued Dole to recover for damages caused by the alleged 44 years of continuous environmental pollution.  In 2010, AIG advised Dole that all primary policies contained environmental pollution exclusions and that the 1968-1971 umbrella policy was the only policy that did not.  In 2015, AIG provided notice of the matter to EIL.

In September 2016, Dole settled the environmental litigation and AIG agreed to pay the full $20 million limit of the umbrella policy towards the settlement.  ICSOP then billed EIL for the reinsured portion of the loss, but EIL refused to indemnify ICSOP.

In the ensuing litigation, ICSOP and EIL agreed that English law governed the reinsurance policies.  The court observed that English law applies a strong presumption in favor of “back-to-back” coverage, which means that “liability under a proportional facultative reinsurance [policy] is co-extensive with the [underlying] insurance [policy.]”  The court also observed that, where there is a mismatch of the law governing identical provisions in both the underlying insurance policy and the reinsurance policy, the English case law relied on by ICSOP notes “that the parties under the reinsurance policy are to be understood to have intended the reinsurance coverage to be coterminous, i.e., ‘back-to-back’ with that of the reinsured policy.”

ICSOP argued that the parties intended the reinsurance policies to provide co-extensive coverage, and that the “follow-the-settlements” provision obligated EIL to pay any settlement that falls within the terms of the umbrella policy.  ICSOP also argued that Hawaii’s adoption of the “all sums” principle meant that EIL was now obligated to indemnify ICSOP for its $20 million settlement payment as regards to the alleged 44 years of continuous environmental pollution, notwithstanding the three-year stated term of the reinsurance policies.

EIL, on the other hand, argued that temporal terms in contracts are fundamental under English law.  Therefore, EIL argued that, given the three-year temporal limitation of the reinsurance policies, holding EIL liable on an “all sums” basis for a settlement of claims that involved 44 years of alleged continuous environmental pollution would be an improper expansion of the coverage provided by the three-year terms of the reinsurance policies.  EIL relied on an English case, Wasa, with “strikingly similar” facts to the case before the court, but the court distinguished Wasa because it hinged on the reinsurers’ inability to predict what law would govern the underlying insurance contract in the absence of a choice-of-law provision.  In Wasa, the court gave effect to the temporal provision in the reinsurance policy because English law does not recognize or permit recovery under the “all sums” doctrine.

In the case before the NY federal court, however, the court declined to apply Wasa’s exception to the “strong presumption in favor of back-to-back coverage under English law” because ICSOP and EIL accepted the risk of new developments under Hawaii law, including Hawaii’s later adoption of the “all sums” doctrine.  This meant that ICSOP could be held liable under the umbrella policy on an “all sums” basis for continuous injury occurring outside of the policy period, and that EIL would therefore have to indemnify ICSOP for any settlement under the reinsurance policies’ “follow-the-settlements” provisions.

This case is worth noting as is provides an example of how US courts will look to English law, and the presumptions therein, to determine the risks that reinsurers and their cedents accept at the time of contracting that US law may change.

From EIL’s perspective under the facultative reinsurance umbrella policies, “when it rains, it pours”.

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