ARTICULACIÓN INTERINSTITUCIONAL

It may be argued that where a reinsured has paid for the assured’s defence costs in an amount which, together with the amount of the assured’s liability, exceeds the original policy limits, the reinsurers are liable to indemnify the reinsured for the defence costs even though they are in excess of the reinsurers’ own limit of liability. The assertion is based on the argument that such liability arises because the scope of reinsurance cover is identical to the cover provided by the original policy. In Aetna Cas. and Sur. Co. v. Home Ins.

Co.⁵⁶⁹ Aetna put forward this contention even though the ultimate net loss clause in Aetna’s outwards excess policies expressly excluded⁵⁷⁰ liability for the costs of defending claims against the assured. The policy provided a standard follow the form clause. The court also recognised that the follow the fortunes doctrine was to be implied into all reinsurance contracts including the present contract. It was held that concurrency of coverage between the original policy and the policy of reinsurance was provided by the follow the form clause and, according to the follow the settlements doctrine the reinsurer was under a contractual obligation to indemnify the reinsured for payments it made pursuant to a loss settlement under its own policy, provided that such settlement was not fraudulent, collusive or otherwise made in bad faith, and provided further that the

settlement was not ex gratia. The reinsurer was held to be not liable for the defence costs incurred by the assured because such costs were outside the original insurance cover and therefore not covered by the reinsurance policy⁵⁷¹.

In Aetna Cas. & Sur. Co. v. Philadelphia Reinsurance Corp.⁵⁷² the first clause of the reinsurance policy stated “[Phil Re] [d]oes hereby reinsure Aetna … subject to the terms, conditions and amount of liability set forth herein, as follows.” The amount of Phil Re’s liability was stated to be $7.5 million. The reinsurance policy provided a follow the form clause and a follow the fortunes clause whereby the reinsurer’s loss payment was to bear to the reinsured’s gross loss payment its proportion of expenses, other than reinsured

569 882 F Supp 1328, SDNY, 1995.

570 In Aetna v Home the court provided for definitions that “A policy that includes no duty to defend the insured and no provision for the payment of defense costs by the insurer is referred to as ‘cost-exclusive’ ”;

the insured must bear the costs for investigating and defending against such claims. “A policy that provides for a duty to defend subject to an overall limit of liability is ‘cost-inclusive’ ”; the maximum liability of the insurer to its insured is capped by the limit of liability expressed in the policy. “Where the policy places in the insurer a duty to defend the insured but does not by its terms include those costs within the limit of liability such a policy may be termed ‘cost-supplemental’ ”.

571 Home provided reinsurance cover from 1970 through 1976 and the reinsurer was held to be liable for claims under 1970 policy year only because in 1970 policy year, unlike other years that were covered, defence costs were unambiguously included within insurance company’s definition of ultimate net loss.

572 1995 WL 217631 ED Pa (applying Pennsylvania law).

salaries and office expenses, incurred by the reinsured in the investigation and settlement of claims or suits. Applying Bellefonte⁵⁷³ the District court judge held that the reinsurer’s entire obligation was quantitatively limited by the dollar amount the reinsurers agreed to reinsure. Once the reinsurers had paid up to the certificate limits, they had no additional liability to Aetna for defence expenses or settlement contributions. Any other construction of the reinsurance certificates would negate the first clause stated above⁵⁷⁴.

Regardless of whether the policies are cost-inclusive or not, it is accepted that a reinsured’s declaratory judgment expenses are not a “risk” that is reinsured by the reinsurer. In British Intern. Ins. Co. Ltd. v. Seguros La Republica, S.A.⁵⁷⁵ the reinsurance policy provided: “...subject to the same risks, valuations, conditions, endorsements (except changes of location), assignments and adjustments as are or may be assumed, made or adopted by the reinsured, and loss, if any, hereunder is payable pro rata with the reinsured and at the same time and place...”. BIIC, the reinsured, argued that the then-prevailing custom in the industry required the reinsurer to pay a pro rata share of the reinsured’s expenses in resisting coverage; and that such payment was compelled by the reinsurance doctrine requiring the reinsurer to follow the fortunes of the reinsured. The Second Circuit rejected this argument for the reason that the follow the fortunes doctrine simply required payment where the reinsured’s good-faith payment to its insured was at least arguably within the scope of the insurance coverage that was reinsured. According to the court BIIC’s contention required proof that its own declaratory judgment expenses in litigating against its policyholders were potentially within the coverage of the underlying policies.

However the court was of the view that this could not be done because the policyholders obtained no benefit from the mounting of coverage litigation against their own claims;

such an initiative could be conceived as any part of the policyholders’ coverage; on the whole, any policyholder would prefer the insurer to forgo the contest. The reinsurers did

573 903 F 2d 910 CA2 (NY), 1990.

574 One day after the court granted the summary judgment for the reinsurer, the Third Circuit decided North River v. CIGNA and Aetna applied for reconsideration of the Pennsylvania District Court decision in favour of the reinsurer for the reason that North River v CIGNA effected a change in the law mandating a denial of Phil Re’s motion. Aetna argued that it was held in North River that whether the underlying insurance policies are cost-inclusive or cost-supplemental is the dispositive factor in interpreting a follow the fortunes clause. The District Court stated that in Bellefonte the reinsurance policy was cost-inclusive. The court stated that the issue in North River was whether the certificates covered costs at all, ie whether they were cost-exclusive, not whether they were cost-inclusive or cost-supplemental. North River did not reach the issue decided here and in Bellefonte, it did not affect a change in the law warranting denial of Phil Re’s summary judgment motion. Aetna’s motion for reconsideration was denied.

575 342 F 3d 78 CA 2 (NY), 2003 (applying New York law).

not by their contract agree to cover the claims-handling expenses that an insurance company incurs in the conduct of its own operations.

The Second Circuit also noted that the trade usage must establish either that the party alleged to be bound was aware of the custom, or that the custom’s existence was “so notorious” that it should have been aware of it. Moreover the trade usage must have been

“so well settled, so uniformly acted upon, and so long continued as to raise a fair presumption that it was known to both contracting parties and that they contracted in reference thereto.” Thus, the reinsured must prove that the reinsurer either actually knew of the alleged custom, or that the practice of reinsurers’ paying declaratory judgment expenses was so notorious in the industry that the reinsurer must have been aware of it⁵⁷⁶.

In Penn Re v. Aetna⁵⁷⁷ the court refused to apply the follow the fortunes doctrine to claims for the assured’s defence costs that the reinsured had agreed to pay. However, in this case the reinsurer was held to be obliged to pay such a claim because of the wording of the settlement clause. Despite the reinsurer’s objection Aetna settled the claim with its assured, Robins, agreeing to pay an amount substantially in excess of its original policy limits. The reinsurance policy provided that “All claims involving this reinsurance, when settled by the Company, shall be binding on the Reinsurer, which shall be bound to pay its proportion of such settlements, ... the Reinsurer’s limit of liability bears to the Company’s gross limit of liability with respect to business accepted on a pro rata basis and, with the prior consent of the Reinsurer to trial court proceedings, its proportion of court costs and interest on any judgment or award.” This clause, according to the court, provided that as to all claims involving the reinsurance policies, when settled by Aetna, the settlement thereof was binding on the reinsurers and they were thereby bound to pay their proportion of such settlements. It addressed the reinsurers’ obligation for “costs” incurred in settling claims brought by a third person alleging to have been injured by an assureds’ product covered by the reinsurance certificate. The court held that this provision was not limited to Aetna’s liability for the risks which the underlying insurance policies covered, but requires that, in addition, Aetna was liable for its proportion of the expenses incurred by Penn Re. The court also noted that in settling with Robins, Aetna amended the limits of its excess policies upwards and the follow the fortunes doctrine could not make the reinsurers liable

576 According to the Second Circuit, the practice of one company would not be sufficient to establish a trade usage.

577 Not Reported in F Supp, WL 909519 EDNC, 1987.

for the newly increased limits unless the reinsurers had agreed to be so bound. The

reinsurers were held to be liable for the settlements including defence costs because of the abovementioned clause, not because the follow the fortunes doctrine.

Remarkably, in North River v. CIGNA the absence of an express exclusion of defence costs in the reinsurance contract was held to be based on a holding that the reinsurers were liable for such costs. In this case under procedures established by the Wellington

Agreement an arbitrator ruled that North River Insurance Company was obliged to pay defence costs, in excess of policy limits, to its insured. The reinsurer agreed to be bound by all settlements by North River and also accepted liability for its proportion of expenses incurred by North River in the investigation and settlement of claims or suits and, with its prior consent to trial court proceedings, its proportion of court costs and interest on any judgment or award. The reinsurers, however, argued that they were not liable for the defence costs because they were not covered by the original policy. In the original insurance policy while paragraph 13 excluded all “Costs”, paragraph 15 provided that costs incurred by Owens-Corning “with the written consent of [North River]” would be apportioned. The Second Circuit adopted the arbitrator’s interpretation that these apparent inconsistencies provided a limited exclusion for costs that excluded expenses incurred unreasonably. The Second Circuit also noted that reading the consent clause as meaning that North River could only be liable for defence costs associated with litigation or a settlement to which it had given its formal consent would be inconsistent with paragraph 11 of the policy, which provided that North River’s obligation to pay costs was not attach until the underlying limits had been paid. According to the Court, compliance with both paragraphs was in practice not feasible. Consequently it was held that the coverage of defence costs was within the terms of the North River-Owens-Corning insurance policies and the reinsurer was bound to follow the settlements in the absence of proof of fraud or bad faith of the reinsured. The Second Circuit also noted that the reinsurer could have avoided liability for defence costs if it had expressly excluded such coverage in the reinsurance certificates it issued to North River. On the contrary, the North River reinsurance certificates expressly referred to the reinsurer’s obligation to reimburse for

“court costs and interest on any judgment or award” arising out of consented-to litigation.