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

Heading: Acme v. Travelers and Travelers v. INA

Text: In April 1996, Travelers acquired Aetna Casualty and Surety Company (Aetna CS). At the time, Acme was seeking coverage under insurance policies issued by Aetna CS in the 1970s and 1980s. Acme sought coverage primarily for two sets of claims being brought against it: (1) breast implant claims, relating to safety testing of silicone breast implants that Acme had performed for its parent, Acme Parent Corporation [4] (Acme Parent); and (2) chemical products claims, relating to chemical products manufactured by Acme, including the pesticide commonly known as DBCP. [5] The Aetna CS policies potentially implicated by the breast implant claims and the chemical products claims made up three distinct layers of coverageprimary policies (bearing the designator AL), buffer policies (bearing the designator XS), and excess policies (bearing the designator XN). [6] Because the distinct features of each layer's policies became central to the dispute between Travelers and INA that followed, it is worth describing those policies in some detail.
The AL policies were issued between April 1976 and April 1987 and provided coverage for all non-products claims brought against Acme, as well as products claims brought against it outside the United States. Each of the AL policies had a per-occurrence coverage limit, but only the policies issued between April 1985 and April 1987 had aggregate coverage limits. In addition, the AL policies had three features that became particularly significant to the reinsurance dispute that followed. First, the policies were subject to retrospective premiums from Acme. For any payment Travelers made on an AL policy, it was entitled to reimbursement from Acme up to that particular policy's loss limit. [7] The AL policies covering the period from April 1976 through April 1982 included a limit on the amount in retrospective premiums that could be collected, while the post-April 1982 AL policies included no such limit. Second, the AL policies were subject to captive reinsurance, that is, reinsurance provided by an Acme subsidiary. Each AL policy was reinsured for 95% of all losses above the loss limit, except the last policy, which was reinsured at 95.5% above the loss limit. [8] Finally, the AL policies included an obligation to cover defense expenses in addition to an obligation to indemnify Acme for liability it incurred. For the April 1976 through April 1982 AL policies only, defense costs did not count toward the policy limits, while, for all the AL policies, captive reinsurance could not be sought for defense costs unless Travelers also made indemnity payments to Acme. The XS policies covered the period between April 1976 and April 1982. They provided United States products liability coverage and were in excess of Acme's primary layer of products liability coverage, meaning that they were only available to Acme once its primary layer of products liability coverage (which was supplied by a Acme subsidiary) was exhausted. [9] The XS policies were also subject to captive reinsurance. The policies spanning from April 1976 to April 1978 were 100% reinsured for bodily injury claims, while the remaining XS policies were 95% reinsured for all claims. The XN policies provided the final layer of coverage. These policies covered both products and non-products claims, and were in excess of all Acme's insurance coverage (including its coverage under the AL and the XS policies). [10] While none of the XN policies was subject to either retrospective premiums or captive reinsurance, the XN layer was the one layer that did possess non-captive reinsurance, including reinsurance from INA. [11] INA assumed, through facultative reinsurance certificates, [12] a portion of nine of the XN policies. Each certificate issued by INA contained both a follow-the-form provision and a follow-the-fortunes provision.
Acme initially sought coverage for the tens of thousands of breast implant claims brought against it under the AL policies, and sought coverage for the chemical products claims under both the XS policies and the XN policies. [13] At first, Aetna CS declined coverage, and then, starting in February 1996, made a series of settlement offers to Acme, each of which was rejected. Upon its acquisition of Aetna CS, Travelers restarted settlement negotiations from scratch. Negotiations were handled, from Travelers' end, by Timothy Yessman, who was Senior Vice President of Travelers' Special Liability Group, and Susan Stonehill-Clafin, who was General Counsel for Travelers' Environmental Litigation Group. Yessman acted as lead negotiator, while Stonehill-Clafin provided legal advice. Up to that point, Acme had not yet settled, or received an adverse judgment on, any of the claims against it, but had incurred substantial defense costs. Accordingly, the parties focused initially on reaching a coverage-in-place deal. Under such an arrangement, Travelers would agree to pay a fixed sum to cover Acme's past losses, and, for Acme's future losses, the parties would work out a formula for matching the specific claims against Acme to the specific insurance policies. Travelers would then make payments pursuant to that formulasubject to a finite capas Acme's ultimate liability developed. In its negotiations with Acme about how to characterize the claims for which coverage was being sought, Travelers was adamant about two pointsthat the breast implant claims were products claims, and thus were not covered by the AL policies, [14] and that they arose out of a single occurrence (namely, a single act of negligent testing on Acme's part). According to testimony Yessman later provided, it was the number of occurrences issue that was viewed as the most critical. Because the AL policies possessed per-occurrence limits, but were not (for the most part) subject to aggregate limits, Travelers' greatest concern was that the breast implant claims would be characterized as non-products claims arising out of multiple occurrences. Under such a scenario, it was possible that Travelers' exposure under the AL policies would be exponentially greater, at least if the liability for each occurrence was below the per-occurrence limit. [15] While the negotiations with Acme were ongoing, Yessman had Mark Wigmore, a Vice-President and Associate General Counsel in Travelers' reinsurance department, produce a memo (the Wigmore Memo) that became central to the litigation that followed. [16] The Wigmore Memo explored the reinsurance implications of different coverage scenarios for the breast implant claims. The Memo noted a number of issues of potential concern, only two of which are particularly germane to this appeal. First, the Memo suggested that, because Travelers could not collect captive reinsurance on payments made to cover defense costs unless it also paid out in indemnity, it was possible that Acme [would] litigate each and every case to the fullest extent, without making any settlements, in order to avoid its . . . reinsurance obligations. (J.A. at 615.) Second, the Memo mentioned that, if the breast implant claims were determined to be non-products claims arising out of multiple occurrences, Acme might never get out of the AL layer of coverage and into the reinsured XN layer, since, if the liability for each occurrence was low enough, it was possible that it would never exhaust the per-occurrence limits of the AL policies not subject to aggregate limits. The Memo also speculated that, if Travelers were to bill its reinsurers based on a single occurrence characterization, [c]ollection [from them would] likely . . . be more difficult, but that, if Acme agreed to that characterization in any settlement, Travelers would have a strong position in litigation or arbitration with its reinsurers. (J.A. at 616.) The final settlement meeting between Travelers and Acme took place on July 7, 1998, at which point both parties changed their approach. Acme proposed moving to an all-cash net settlement. That meant that, rather than (as with a coverage-in-place deal) coming up with a formula for how to treat Acme's future losses, Travelers would simply pay Acme a lump sum forgoing both retrospective premiums and captive reinsurancein exchange for Acme releasing all of its future claims under the policies. [17] Travelers accepted the proposal and, with the new framework in place, the parties quickly agreed on a figure of $137 million. They then decided that, of that $137 million, $80 million would be dedicated to the breast implant claims, $20 million would be dedicated to the chemical products claims, and the remaining $37 million would go to claims that are not at issue in this case. In addition, the parties agreed that the breast implant claims would be treated as non-products, single occurrence claims, while the chemical products claims would be treated as products claims. Beyond that, they did not come to any agreement about how to allocate the settlement to the specific policies potentially implicated.
Although Travelers and Acme reached an agreement in principle during the July 7, 1998 meeting, the settlement was not finalized until September of that year. The primary issue in dispute was Travelers' proposed allocation of the agreed-upon sum among the different policies. According to Robert Miley, who, along with William Kingston, was primarily responsible for drafting the settlement agreement on behalf of Travelers, [18] it was not that Acme objected to Travelers' proposed allocation so much as that it wondered whether . . . it [ i.e., the allocation language] needed to be . . . in the settlement agreement. (Trial Tr. vol. 1, 216, Jan. 11, 2005.) In a draft dated July 27, Travelers included language indicating that, of the $20 million dedicated to the chemical products claims, $5 million would be allocated to the TIC policies, while the remaining $15 million would be allocated to the XN policies. That draft also included language providing that no amount could be allocated to the post-April 1982 AL policies. In a draft returned to Travelers on September 1, Acme crossed out most of the allocation language, put a question mark next to the line indicating that the post-April 1982 AL policies were not to be used, and added language stating that, with the exception of any allocations specifically set forth in the agreement, each party reserved the right to allocate the settlement as it pleased. In a draft returned on September 4, Acme continued to designate the allocation language IN DISPUTE, and specifically crossed out the section regarding allocation to the post-April 1982 AL policies. The settlement agreement became final in mid-September. It provided that Travelers' payments to Acme were net of any reinsurance obligations the Acme Insurance Subsidiaries have or may have to Travelers and net of any retrospective premium or other obligations Acme has or may have to Travelers. It also included the language indicating that the $20 million for the chemical products claims would be divided between the TIC policies ($5 million) and the XN policies ($15 million). In addition, the final version included a paragraph providing that [n]o payments. . . shall be allocated to any [AL] Primary Policies with a policy period commencing on or after April 1, 1982, or to any . . . XS Policies because the payments of the Settlement Amount are net payments and such Policies have been exhausted by virtue of the settlement. Lastly, the final version provided that [w]ith the exception of the agreements explicitly set forth in. . . this Agreement, Acme and Travelers each reserve to themselves the right to allocate any or all of the Settlement Amount to any Policy; Acme will not be deemed to concur in any such allocation by Travelers, and Travelers will not be deemed to concur in any such allocation by Acme. In the subsequent litigation with INA, Travelers conceded that the allocation language was included in the settlement agreement at its behest.
Once the settlement agreement was finalized, Miley and Kingston proceeded to allocate the settlement among the different policies. As agreed, of the $20 million dedicated to the chemical products claims, $5 million was allocated to the TIC policies and $15 million to the XN policies. Travelers characterized the $80 million dedicated to the breast implant claims entirely as indemnity, not defense coverage. In allocating that $80 million, Travelers began with the AL layer of policies, but, in accord with the agreement, confined itself to the pre-April 1982 AL policies. In allocating within that layer, it employed the so-called fill the bathtub method. [19] Starting with the earliest of the policies, Travelers allocated to each eligible AL policy up to its single-occurrence limit (minus the amount owed in retrospective premiums) before moving on to the next policy. [20] This resulted in a total of $24 million being allocated to the AL policies. The remaining $56 million of the $80 million dedicated to the breast implant claims was then allocated to the XN policies in accordance with the fill-the-bathtub method (starting with the XN policies with the lowest attachment points). Two of the XN policies implicated by Travelers' allocation of the breast implant claims settlement had three-year policy periods. In exhausting those three-year policies (each of which was reinsured by INA), Travelers treated their per-occurrence limits as applying separately to each policy year, a decision that tripled the amount that could be allocated to those policies. Ultimately, six of the nine XN policies reinsured by INA had settlement dollars allocated to them. Pursuant to its allocation, Travelers billed INA $11,604,328 for the breast implant claims and $2,158,067 for the chemical products claims. Travelers agrees that the following decisions likely increased the amount of its coverage it was able to allocate to INA(1) treating the breast implant claims as arising out of a single occurrence; (2) bypassing the post-April 1982 AL policies in allocating the $80 million dedicated to the breast implant claims; (3) bypassing the XS policies in allocating the $20 million dedicated to the chemical products claims; (4) not allocating the $80 million for the breast implant claims exclusively to defense costs (even though, at the time of the settlement, Acme had not yet incurred any liability on those claims); and (5) allocating to the three-year XN policies on the assumption that their per-occurrence limits applied separately to each policy year. [21] The decision to annualize the per-occurrence limits alone resulted in an increase of $5,535,578 to the amount of loss assigned to INA. At any rate, INA refused to pay any of the amount Travelers allocated to it.