United States Fidelity & Guaranty Co. v. American Re-Insurance , 939 N.Y.S.2d 307 ( 2012 )

Abdus-Salaam, J.

(dissenting). I respectfully dissent. There is a genuine triable issue of fact as to whether a portion of the $987.3 million settlement that United States Fidelity & Guaranty Company (USF&G) reached with Western MacArthur was for bad faith claims, which are not covered by the reinsurance treaty issued by defendants. Accordingly, I would deny plaintiffs’ motion for summary judgment and vacate the judgment.

As an initial matter, while plaintiffs argue here that the treaty covers extra-contractual liabilities such as bad faith liability, the plain language of the treaty indicates otherwise. The treaty provides reinsurance for “any loss in connection with each policy,” with certain exceptions, such as burglary and theft, health insurance and workers’ compensation. A “loss” arises out of an “accident,” and an “accident” is defined as an accident or occurrence arising out of products personal injury liability and products property damage liability, personal injury liability (other than automobile and products) and property damage liability (other than automobile and products); Bad faith damages incurred as a result of the reinsured’s refusal to provide coverage to its insured do not fall within the ambit of a loss arising out of an accident as defined in the treaty (see Consolidated Edison Co. of N.Y. v Allstate Ins. Co., 98 NY2d 208, 220 [2002] [“the requirement of a fortuitous loss is a necessary element of insurance policies based on either an ‘accident’ or ‘occurrence’ ”]).

The exceptions to coverage that are listed could all arguably be considered losses arising out of an accident, and they are specifically excluded. Because bad faith damages cannot reasonably be considered to be a loss arising out of an accident, the absence of their mention in the exclusions to the policy is not probative when determining the coverage provided.

Plaintiffs’ citation to Peerless Ins. Co. v Inland Mut. Ins. Co. (251 F2d 696, 704 [4th Cir 1958]) for the proposition that bad faith damages are a covered loss under the reinsurance treaty is unpersuasive. In Peerless, the court held that a reinsurer who acquiesced in the defense strategy not to settle a claim within the policy limits, and knew as much about the underlying case as the insurer, was bound to follow the liability of the insurer and was thus liable to the insurer for damages paid to settle a negligence action brought by the insured for failure to settle. There is no evidence here that defendants participated in the handling of Western MacArthur’s claim against USF&G, or acquiesced in plaintiffs’ strategy to deny that the underlying policies provided coverage to Western MacArthur. Even if defendants had participated, a “follow the fortunes” clause does not serve to create coverage where there is none (see Travelers Cas. & Sur. Co. v Certain Underwriters at Lloyd’s of London, 96 NY2d 583, 596 [2001] [a “follow the fortunes” clause “does not alter the terms or override the language of reinsurance policies”]; see also North Riv. Ins. Co. v CIGNA Reins. Co., 52 F3d 1194, 1206 [1995] [“(w)here the reinsured’s liability attaches from a settlement or binding judgment, the reinsurer is not accountable if the liability arises from uninsured activity”] [citation omitted]). Thus, the majority is incorrect when it concludes that all of defendants’ efforts to second guess plaintiffs’ decisions, including the settlement of bad faith claims which are not covered, are precluded by virtue of the “follow the fortunes” clause.

The motion court erred when it concluded that defendants had not presented evidence to raise a triable issue of fact as to whether a portion of the settlement was attributable to Western MacArthur’s bad faith claim against USF&G (2010 NY Slip Op 32441[U] [2010]). There is ample evidence, including the findings made by the bankruptcy court, and the record in the underlying coverage action brought by Western MacArthur against USF&G, to support defendants’ position that part of the settlement represented bad faith damages.

I disagree with the majority’s analysis that whether plaintiffs actually engaged in bad faith is of no moment “because the parties present at the settlement negotiations agreed that the settlement amount included no payment for settlement of bad faith claims.” In fact, it is evident from the bankruptcy court’s decision that the court would not have approved the bankruptcy plan if it believed that there had been no payment for bad faith claims. This matter was not merely addressed “tangentially” by the bankruptcy court, as found by the majority, but was an essential element of the court’s approval. .

In concluding that defendants had not raised any issue of fact, the motion court and the majority note that the bankruptcy court stated it was not determining the merit or potential value of any bad faith claim. However, the bankruptcy court made some determinations which clearly demonstrate the court concluded that bad faith damages had been part of the settlement and that contribution by Western MacArthur of their bad faith claims to the trust in order to pay asbestos claims against the debtors was integral to the court’s confirmation of the bankruptcy plan. Responding to the objecting insurers’ assertion that the debtors had not contributed enough to the trust, the court stated:

“This argument ignores the value of the Debtors’ bad faith claims against Settling Insurers . . . [T]he evidence presented at the confirmation hearing convinced the Court that the Debtors had colorable claims for bad faith against each of these two insurers. While the Court cannot allocate to these bad faith claims a specific percentage of the settlement amounts, even if the bad faith claims represent only ten percent of the settlement amount, this gives them a value of approximately $200 million” (In re Western Asbestos Co. et al., Bankr Ct, ND CA, case No. 02-46284 T, at 24-25 [Feb. 3, 2004, Tchaikovsky, J.]).

The bankruptcy court also determined that the debtors are contributing “business loss claims” to the trust, which “include their potential bad faith claims against USF&G and Hartford as well as the remaining Objecting Insurers” (id. at 63).

“As discussed in connection with the USF&G and Hartford Settlement Agreements, there was substantial evidence to support the Debtor’s bad faith claims against USF&G and Hartford.40 Some portion of the over $2 billion being contributed to the Trust pursuant to the USF&G and Hartford Settlement Agreements must be attributed to those claims. These claims belong to the Debtors, not to the asbestos claimants. While the Court is not able to ascribe a specific value to these claims, the Court is persuaded that their value is in excess of the value of the Debtors’ net liquidation value: i.e., $17 million. The Court finds the contribution of the Debtors’ bad faith claims sufficient to justify the issuance of an 11 USC §§ 524 (g) injunction. “40As noted above, by finding that the Debtors’ bad faith claims were of sufficient value to justify the issuance of the injunctions, the Court is not actually deciding the merits or specific value of the Debtors’ potential bad faith claims against any insurer” (id. at 64 [emphasis supplied]).

Contrary to the majority’s position, these findings by the bankruptcy court are clearly more than just a recognition that evidence of bad faith allegations existed. While the majority acknowledges many of the bankruptcy court’s findings, it reaches the mystifying conclusion that there is no genuine issue as to whether the settlement included bad faith damages. The majority is apparently persuaded that because counsel involved in the settlement have stated that the settlement represented only compensatory damages, the bankruptcy court’s determination that some portion of the settlement was for bad faith claims is irrelevant. Although I concur that defendants are mistaken when they urge that collateral estoppel prevents us from considering the issue of bad faith, I do not agree with the majority that there are no issues of fact.

Significantly, examination of the record in the underlying coverage litigation between Western MacArthur and USF&G buttresses the bankruptcy court’s conclusion that there was substantial evidence to support the bad faith claims against USF&G, and that payment for these bad faith claims was a part of the settlement. The litigation in California state court between Western MacArthur and USF&G dragged on for nine years. While the majority emphasizes that plaintiffs had, for most of those years, a legitimate basis for declining coverage based on a defense that Western MacArthur was not its insured or a proper beneficiary of the policy, it is the other defenses, and the missing policies, that were the basis of the bad faith claims, as detailed below. USF&G took the position that its policies (which neither party could locate) did not provide products liability coverage, and that even if there were such coverage, the policies would have contained aggregate limits on such coverage. USF&G, the insurance company that maintained it did not possess copies of its own policies, was nonetheless certain that the policies did not cover the claims brought by individuals with health-related injuries due to exposure to asbestos.

During the course of the coverage litigation, it was discovered that USF&G had “donated” documents establishing the existence of coverage to the Baltimore Museum of Industry. And at trial, Western MacArthur presented secondary evidence that USF&G’s “lost” policies provided products coverage without the aggregate limits that USF&G had steadfastly insisted were in the policies. It was during this phase of the trial that the Western MacArthur action settled.

Additionally, a reading of the California trial court’s rulings on a motion by USF&G for summary adjudication of Western MacArthur’s bad faith claims and in limine motions is illuminating. The insurer’s motion for summary judgment was denied, the court finding triable issues of fact as to whether USF&G acted in bad faith by alleged conduct including destruction of insurance policies, falsely stating that it had no documents in its possession, “donation” of key documents to a museum without ever informing plaintiffs that it had done so, and interfering with a subpoena that Western MacArthur had obtained in order to review the documents that had been “donated” to the museum (Western MacArthur v USF&G, Super Ct of CA, Sept. 12, 2001, Kawaichi, J., case No. 721595-7).

A motion in limine by USF&G “to exclude evidence that USF&G donated documents to the Baltimore Museum of Industry and motion to exclude evidence regarding USF&G’s failure to produce documents from its ‘Claims Legal Collection’ ” was denied (Western MacArthur v USF&G, Super Ct of CA, Mar. 22, 2002, Sabraw, J., case No. 721595-7), as was another in limine motion by USF&G to exclude evidence or argument that USF&G had destroyed documents as part of a “1984 Document Destruction Program.” The court ruled:

“Plaintiffs may present evidence of the 1984 document Destruction Program; i.e., evidence inferring that the destruction of documents was done willfully due to USF&G’s concerns about a ‘litigation crisis’ and asbestos liability under old policies and that USF&G’s intent in destroying the documents was to make it more difficult for insureds to establish coverage and the terms and conditions of their policies” (id. at 4).

In sum, the record raises a genuine issue of fact as to whether the settlement of the underlying coverage action included payment of bad faith damages. Thus, summary judgment in favor of plaintiffs was not warranted.

Tom, J.P., Saxe and Freedman, JJ., concur with Acosta, J.; Abdus-Salaam, J., dissents in a separate opinion.

Judgment, Supreme Court, New York County, entered October 25, 2010, and bringing up for review an order, same court and Justice, entered August 20, 2010 and amended October 22, 2010, affirmed, without costs. Appeal from the aforesaid order dismissed, without costs, as subsumed in the appeal from the judgment.