Opinion ID: 4315021
Heading Depth: 2
Heading Rank: 1

Heading: Insurance and Reinsurance Generally

Text: This case involves several types of insurance with their own spheres of coverage; understanding them is essential to resolution of the case. Primary and excess insurers provide liability coverage. Primary insurance provides the first layer of coverage of an insured’s liability or loss. Ali v. Fed. Ins. Co., 719 F.3d 83, 90 (2d Cir. 2013); 1 Steven Plitt et al., Couch on Insurance § 1:4, at 12 (3d ed. 2009). Excess insurance provides the additional layer of coverage for an insured’s losses exceeding the primary insurance policy’s limits. Ali, 719 F.3d at 90. Umbrella policies blend primary and excess coverage by providing last‐resort excess coverage as well as gap‐filling primary coverage on claims not otherwise insured by primary policies. See, e.g., BASF AG v. Great Am. Assurance Co., 522 F.3d 813, 815 (7th Cir. 2008); Francis M. Gregory Jr. & Nicholas T. Christakos, Primary, Excess and Reinsurance Problems in Large Loss Cases, 59 Def. Counsel J. 540, 542 (1992). In this case, Utica Mutual Insurance Company provided both primary and umbrella policies to Goulds. Insurers have insurance, too. Reinsurance occurs when a carrier (the “reinsurer”) agrees to cover losses experienced by an insurer for certain covered 4 risks. Here, Clearwater Insurance Company1 insured Utica (the “cedent” or “reinsured”) against loss or liability arising from its policies with Goulds (the “insured”). See generally Unigard Sec. Ins. Co. v. N. River Ins. Co. (Unigard), 4 F.3d 1049, 1053 (2d Cir. 1993) (describing “the business of reinsurance”). These reinsurance contracts allow the reinsured to distribute its risk of loss among reinsurers. Id. There are two types of reinsurance contracts: facultative and treaty. A facultative reinsurer insures part or all of a single insurance policy, with underwriting occurring as to each reinsured policy. Id. at 1054; N. River Ins. Co. v. CIGNA Reins. Co. (CIGNA), 52 F.3d 1194, 1199 (3d Cir. 1995) (“[A] facultative reinsurer ‘retains the faculty, or option, to accept or reject any risk.’” (quoting William G. Clark, Facultative Reinsurance: Reinsuring Individual Policies, in Reinsurance 117, 121 (Robert W. Strain ed., 1980)). A treaty reinsurer insures specified classes of a ceding insurer’s policies. Unigard, 4 F.3d at 1054. All five of Clearwater’s reinsurance policies at issue here are facultative. Several types of clauses defining the resinsurer’s obligations in relation to the obligations of the reinsured commonly appear in facultative resinsurance contracts. Three types are relevant to this case. 1 Formerly Skandia America Reinsurance Corporation. 5 The standard follow‐the‐form or following‐form clause ensures that the reinsurance contract covers the same risks as those covered in the reinsured insurance policy. It provides that all the terms and conditions of the reinsured insurance policy are incorporated by reference into the reinsurance contract, except insofar as the reinsurance and insurance contracts conflict. CIGNA, 52 F.3d at 1199; Graydon S. Staring & Dean Hansell, Law of Reinsurance § 12:5, 258–63 (2017) (explaining that differences in premiums, limits, and period are the most common exceptions to congruence). Some reinsurance contracts also contain what is called a follow‐the‐ settlements, following‐settlements, or loss‐settlement clause.2 When a reinsurance contract contains a follow‐the‐settlements clause, the reinsurer must indemnify the reinsured for losses settled reasonably and in good faith, even if the reinsured was not actually liable for those losses under the reinsured insurance policy. See Travelers, 419 F.3d at 189; U.S. Fid. & Guar. Co., 20 N.Y.3d at 418–20. If the contract 2 A “[f]ollow‐the‐settlements [obligation] . . . is [a] follow‐the‐fortunes [obligation] in the settlement context.” Travelers Cas. & Sur. Co. v. Gerling Glob. Reins. Corp. of Am. (Travelers), 419 F.3d 181, 186 n.4 (2d Cir. 2005) (citation omitted). We use the term “follow the settlements” in this opinion in keeping with the context of Clearwater’s alleged obligation to follow Utica’s settlement with Goulds and the terminology used recently by New York courts. See, e.g., U.S. Fid. & Guar. Co. v. Am. Re‐Ins. Co., 20 N.Y.3d 407, 418 (2013). 6 does not contain a follow‐the‐settlements provision, the reinsurer must indemnify the reinsured only for the reinsured’s proven liability under the reinsurance policy. That is, under a contract without a follow‐the‐settlements provision, “the reinsurer . . . is entitled to insist on proof”—meaning, ordinarily, a judgment—“of the reinsured’s liability for loss paid.” William Hoffman, Facultative Reinsurance Contract Formation, Documentation, and Integration, 38 Tort Trial & Ins. Prac. L.J. 763, 820–21 (2003). Claims‐cooperation clauses are variants of follow‐the‐settlement clauses. A claims‐cooperation clause provides that the reinsurer must indemnify the reinsured for a claim settlement, but only if the reinsurer approved the settlement. See Ins. Co. of Afr. v. SCOR (UK) Reins. Co. [1985] 1 Lloyd’s Rep. 312 (CA) 334 (Eng.).