Opinion ID: 148187
Heading Depth: 2
Heading Rank: 1

Heading: The Phase I Ruling

Text: The Phase I trial concerned the bad faith exception to the reinsurer's duty to go along with the coverage provided by the insurer. More specifically, the Phase I trial addressed INA's allegation that Travelers manipulated its post-settlement allocation to allow it to reach the reinsured XN layer of coverage. The District Court ultimately rejected this challenge, holding that INA had failed to show bad faith on Travelers' part. We affirm.
The primary purpose of the follow-the-fortunes doctrine is to prevent the reinsurance relationship from interfering with coverage disputes between the insurer and its insured. See CIGNA, 52 F.3d at 1199 (explaining that the doctrine prevents reinsurers from second guessing good-faith settlements and obtaining de novo review of judgments of the [insurer's] liability to its insured). As such, there is some dispute over whether that doctrine should apply to post-settlement allocations, especially where, as here, the allocation decisions being challenged were not the product of active bargaining between the insurer and the insured. [24] See Employers Reins. Corp. v. Newcap Ins. Co., 209 F.Supp.2d 1184, 1191 (D.Kan.2002) (declining to apply the doctrine to an allocation decision that the insurer and insured left unresolved); Graydon S. Staring, Law of Reinsurance § 18.10 (4th ed.2007), at 18-56 (suggesting that the doctrine should only apply to a particular allocation decision if [it] was necessarily and genuinely part of the claims settlement process). Nonetheless, the majority view, which INA does not contest, is that the doctrine does apply to post-settlement allocations. See, e.g., Travelers Cas. & Sur. Co. v. Gerling Global Reins. Corp. of Am., 419 F.3d 181, 188-89 (2d Cir.2005); Ace, 361 F.3d at 140-41; Nat'l Union Fire Ins. Co. of Pittsburgh, Pa. v. Am. Re-Ins. Co., 441 F Supp.2d 646, 652-53 (S.D.N.Y.2006); Commercial Union, 9 F.Supp.2d at 67-68. We join those courts here. A contrary holding would risk doing precisely what the follow-the-fortunes doctrine aims to preventinterfering in settlement negotiations between insurers and their insureds by discouraging a particular type of settlement (here, an all-cash deal). However, applying the follow-the-[fortunes] doctrine to post-settlement allocation decisions does not leave a reinsurer without protection. Ace, 361 F.3d at 141. Those allocations must still have been in good faith to be binding on the reinsurer. Id. We have broadly characterized the insurer's duty of good faith to its reinsurer as a duty not to take advantage of the reinsurer's dependence on the decisions made by the insurer. See CIGNA, 52 F.3d at 1216 ([T]he duty of good faith requires the reinsured to align its interests with those of the reinsurer.). In the post-settlement allocation context, this means that an insurer breaches this duty when it makes allocation decisions primarily for the purpose of increasing its reinsurance recovery. See Allstate Ins. Co. v. Am. Home Assurance Co., 43 A.D.3d 113, 837 N.Y.S.2d 138, 144 (N.Y.App.Div.2007) (A reinsurer is not bound by the follow-thefortunes doctrine where the reinsured's settlement allocation . . . reflects an effort to maximize unreasonably the amount of collectible reinsurance.); see also Hartford Accident & Indem. Co. v. Columbia Cas. Co., 98 F.Supp.2d 251, 259 (D.Conn. 2000) (denying summary judgment to an insurer in light of the inferences of unreasonableness or self-service that can be drawn from the details of its post-settlement allocation). We make clear, however, that the insurer's negative duty not to make allocation decisions primarily in order to increase reinsurance recovery does not translate into a positive duty on the part of the insurer to minimize its reinsurance recovery. See Gerling, 419 F.3d at 193 ([An insurer] choosing among several reasonable allocation possibilities is surely not required to choose the allocation that minimizes its reinsurance recovery to avoid a finding of bad faith. (emphasis in original)). What this means for the reinsurer's burden of persuasion is that, to establish a breach of the duty of good faith, it is not sufficient simply to demonstrate that a particular allocation decision increased the insurer's access to reinsurance, at least not where the insurer is able to point to some legitimate ( i.e., non-reinsurance-related) reason for the challenged decision. See id. (An allocation that increases reinsurance recoverywhen made in the aftermath of a legitimate settlement and when chosen from multiple possible allocationswould rarely demonstrate bad faith in and of itself.). To prevail, the reinsurer must either provide direct evidence that the insurer was motivated primarily by reinsurance considerations, or show that the after-the-fact rationales offered by the insurer are not credible. INA attempted to do both in this case.
INA challenges the District Court's Phase I ruling essentially on three grounds. First, it asserts that three of the specific allocation decisions Travelers madeto bypass the post-April 1982 AL policies in allocating the breast implant claims settlement, to allocate the chemical products claims settlement without performing any independent analysis of how those claims matched up to its policies or without allocating any of the settlement amount to the XS policies, and to allocate the entire portion of the settlement dedicated to the breast implant claims as indemnityare inexplicable except as part of a scheme to maximize Travelers' reinsurance recovery. Second, INA argues that the Wigmore Memo is direct evidence that Travelers improperly considered reinsurance implications in performing the allocation. And, finally, INA claims that the District Court's ruling was based on evidence that should have been excluded namely, evidence that Travelers sought and received legal advice about how to handle its insurance coverage dispute with Acme.