Opinion ID: 148187
Heading Depth: 1
Heading Rank: 5

Heading: The Bypassing of the Post-April 1982 AL Policies in Allocating the Breast Implant Claims Settlement

Text: In allocating the $80 million of the settlement dedicated to the breast implant claims, Travelers allocated $24 million to the pre-April 1982 AL policies and nothing to the post-April 1982 AL policies. The District Court held that this decision was not evidence of bad-faith maximization because it followed from the net nature of the settlement Travelers reached with Acme. [25] (J.A. at 50.) While we disagree with some of the details of the District Court's analysis, we end up at the same place i.e., concluding that bypassing the post-April 1982 AL policies was reasonable in light of the net nature of the settlement. The District Court's specific reasoning was that, because the post-April 1982 AL policies were subject to both retrospective premiums and captive reinsurance, there was no real risk transfer under those policies, and thus any allocation to [them] would have contravened the `net' deal with Acme. (J.A. at 50.) Strictly speaking, however, it is not true that the net nature of the settlement prevented Travelers from allocating to these policies. As INA notes, the only thing Travelers was required to do on account of the net settlement was not bill Acme for either retrospective premiums or captive reinsurance. Indeed, the pre-April 1982 AL policies were also subject to retrospective premiums and captive reinsurance. Yet that did not prevent Travelers from doing, with respect to those policies, what INA contends it was required to do with respect to the post-April 1982 AL policiesallocate to them up to their per-occurrence limits (minus the amount Acme would have owed it in retrospective premiums), and then simply not ask for any captive reinsurance back. The District Court concluded that Travelers was justified in treating the pre-and-post April 1982 AL policies differently for allocation purposes because the latter, but not the former, had unlimited retrospective premiums available to them. But, as both Miley (who was largely responsible for the post-settlement allocation) and Travelers' expert, Robert Hall, conceded at trial, this difference would not have come into play under a single-occurrence allocation. That is because, under a single-occurrence allocation, the per-occurrence limits would have been exhausted long before the retrospective premiums available under the pre-April 1982 AL policies were exhausted. Indeed, the position advanced at trial by Miley and Hall was that Travelers should have bypassed all the AL policies, not (as the District Court held) that Travelers was correct to bypass some, but not all, of those policies. Nonetheless, we do not agree with INA that, because Travelers was not required to bypass the post-April 1982 AL policies, it was a breach of good faith for it to do so. Because Travelers was under no duty to minimize its reinsurance recovery, the mere fact that it could have, consistent with its agreement with Acme, allocated to all the AL policies does not mean that it was required to do so. The question we think more apt is whether the net nature of the settlement made bypassing the AL policies a reasonable option (even if it was one that, for reasons that are unclear, Travelers only took halfway). See Gerling, 419 F.3d at 193 (explaining that the follow-the-fortunes doctrine only requires that an allocation be reasonable, not that it be the one allocation among several reasonable allocation possibilities that minimizes the burden on the reinsurer). The position advanced by Travelers' experts at trial was that, because the AL policies did not provide for any significant risk transfer (at least not on a single-occurrence, indemnity-only, allocation), those policies were essentially exhausted by stipulation once the parties agreed to a net deal, thus authorizing Travelers to move on to the next layer of coverage. INA's experts took the opposite position namely, that the net deal simply waived Travelers' right to collect captive reinsurance, but did not alter the basic fact that an insurance policy is only exhausted when money is allocated to it up to the applicable coverage limit. Fortunately for us, we need not wade into this quasi-metaphysical debate over what exhausting an insurance policy really requires. In this context, it is enough to note that INA has not shown that Travelers' position is unreasonable. The theory put forward by Travelersthat the net nature of the deal authorized it to allocate the settlement as if there were a prior step in which, for the policies subject to captive reinsurance, Travelers made payments to Acme and then received that money backstrikes us as plausible. Travelers' experts, whom the District Court found credible, testified that what Travelers did was consistent with industry practice. Given the very limited nature of the review authorized by the follow-the-fortunes doctrine, that is sufficient, even though there was contrary testimony by INA's experts. In sum, we agree with the basic direction of the District Court's analysis, if not all of its details. The decision to bypass the post-April 1982 AL policies was reasonable in light of both the net nature of the deal with Acme and the specific characteristics of those policies. Accordingly, we cannot say that the decision is evidence of bad-faith maximization on Travelers' part.