Opinion ID: 148187
Heading Depth: 1
Heading Rank: 7

Heading: The Indemnity-Only Allocation

Text: Travelers allocated the $80 million dedicated to the breast implant claims exclusively as indemnity. It did this despite the fact that, at the time of the settlement, Acme had spent substantial sums defending itself from those claims ($112 million), but had not yet incurred any liability on them. INA asserts that this is unambiguous evidence of bad-faith maximization on Travelers' part, since allocating the settlement exclusively as indemnity increased Travelers' ability to get out of the AL layer of coverage and into the XN layer. We, however, are not convinced that the District Court erred in holding to the contrary. We note initially that, while Acme had yet to incur any liability on the breast implant claims when the settlement was reached, that does not mean that the only reasonable option was to allocate that portion of the settlement exclusively as defense costs. Travelers' settlement with Acme released all of Acme's past and future claims under the policies. It was thus not unreasonable for Travelers to view the settlement as covering Acme's yet-to-materialize liability. This is significant because the only scenario in which paying defense costs would have prevented Travelers from getting out of the AL layer at allat least on a single-occurrence allocationwas one in which it paid out nothing, or very little, in indemnity. [28] Still, the decision to allocate this portion of the settlement entirely as indemnity, as opposed to dedicating a portion to Acme's liability and a portion to Acme's defense costs, likely allowed Travelers to allocate more to the XN layer of coverage than it otherwise could have, as defense costs would not have counted toward the limits of the pre-April 1982 AL policies. Moreover, that decision appears to have been largely unilateral on Travelers' part, as there is no record of Acme and Travelers ever agreeing to a framework for handling the defense costs versus indemnity issue, nor was that issue addressed in the final settlement agreement. Yet we are not inclined to depart from the District Court's finding that the decision to allocate the $80 million exclusively as indemnity was sufficiently grounded in Travelers' prior interactions with Acme that it cannot be characterized as solely an attempt to maximize Travelers' reinsurance recovery. Yessman and Stonehill-Clafin both testified that, during their early negotiations with Acme, Travelers made a coverage-in-place offer that included $15 million for past defense costs, and $26 million for future defense costs and liability, only to be told that the $15 million for past defense costs was within ballpark, but the $26 million figure was too low. (Trial Tr. vol. 1, 438, Jan. 12, 2005.) From that, Yessman reportedly concluded that recouping past defense costs was not that important to Acme, a position that both Yessman and one of Travelers' experts, Jerold Oshinsky, testified was consistent with their experience with large policyholders, who tend to be more interested in achieving coverage certainty going forward than in recovering past losses. In addition, Travelers knew that Acme would be getting defense coverage from another carrier, the Fireman's Fund, and, as one of INA's own experts noted, it is typical for a policyholder in Acme's position to choose one insurer among several to cover defense costs. Given this context, we cannot say that the District Court's conclusion that [t]he sum for the breast implant claims was reasonably and in a businesslike manner paid as indemnity and not as defense costs was clearly erroneous. (J.A. at 44.)