Travelers Wins $420M in Long-Running Asbestos Case

A group of reinsurers, including Munich Re America Corp. Group, still owe Travelers Insurance $420.4 million after a New York appellate court affirmed a lower court ruling in a long-running asbestos case.

The reinsurers had appealed the 2010 New York Supreme Court's ruling that the reinsurers must pay $262.3 million, plus significant interest, to pay their share of nearly $1 billion in an asbestos settlement that a subsidiary of Travelers Insurance paid in 2002.

The first department of the appellate division of New York Supreme Court ruled 4-1 to uphold the decision on Jan. 24, according to court papers. The case is United States Fidelity & Guaranty Company v. American Re-Insurance Co.

"We are very pleased that this decision affirms the previous judgment that the reinsurers are required to pay Travelers the full amount of their obligation, plus interest," said Shane Boyd, Travelers spokesman, in an email.

In 2010, the lower court ruled in favor of United States Fidelity & Guaranty Co., which was acquired by St. Paul Cos. in 1998 and is now part of Travelers following Travelers' acquisition of St. Paul Cos. in 2004. The case involves policies USF&G wrote from 1948 to 1960 to cover Western Asbestos Co., a California-based company that sold and distributed insulation that contained asbestos manufactured by Johns-Manville Co., according to the court ruling (Best's News Service, Aug. 27, 2010.)

The lower court had ordered American Re, now part of Munich Re America Corp. Group, to pay $202.5 million and interest, which could actually be another $369.4 million, the court said at that time. In addition, the court ordered a group of reinsurers who did business as the Excess Casualty Reinsurance Association — Ace Property & Casualty Co., Century Indemnity Co., OneBeacon American Insurance Co. and Excess Treaty Management Corp. — to pay $59.8 million in damages, plus as much as $109 million in interest.

Western Asbestos ran into financial trouble in the 1960s and was acquired by MacArthur Co., which sold and installed asbestos products. Western Asbestos was dissolved as a company, leaving those injured by asbestos years later to sue Western MacArthur in the late 1970s both for its own work with asbestos, and as a successor to Western Asbestos.

In 1993, Western MacArthur sued USF&G seeking damages and asking USF&G pay for Western MacArthur's defense in asbestos cases. While USF&G initially fought the case for several reasons — one argument was that it had insured Western Asbestos not Western MacArthur — neither company could locate the insurance policies in issue. Some of the policies dated back to the 1950s.

"It is one thing to deem the successor corporation liable for the predecessor's torts; it is quite another to deem the successor corporation a party to insurance contracts it never signed, and for which it never paid a premium, and to deem the insurer to be in a contractual relationship with a stranger," the New York appellate division quoted a California court as saying in 1997.

In an unusual legal twist following that decision, Western MacArthur presented a former Western Asbestos officer who signed over the insurance rights of Western Asbestos to Western MacArthur. The court "revived" the then-defunct Western Asbestos company to ratify this action, clearing the way for Western MacArthur to pursue its case against USF&G.

Western MacArthur began presenting secondary evidence that the lost policies provided products coverage without aggregate limits. "At this point, USF&G determined that its downside exposure potential was enormous, and it engaged in settlement discussions," court papers said.

In 2002, after almost 10 years of litigation, USF&G reached a settlement with Western MacArthur. USF&G agreed to pay $975 million, plus interest, $940 million of which went into a bankruptcy trust for current and future claims and $87.3 million towards legal fees and the administration of the trust fund.

Then, USF&G filed a claim for reinsurance with American Re based on a treaty from 1956 to 1962, and also filed a claim for reinsurance under a second treaty with the Excess Casualty Reinsurance Association, an unincorporated group of reinsurers. American Re argued the underlying policy had individual claims limits, and USF&G must retain the first $100,000 paid to each individual claimant and USF&G's policy would only cover a maximum of $200,000 per individual.

Because some claimants received more than $200,000 from the trust, American Re argued it wasn't liable. Also, the USF&G policy issued to Western Asbestos expired in 1960, but under USF&G's settlement agreement, some of its trust funds were paid to claimants who could not have been exposed to asbestos by 1960 (some had not been born by 1960). American Re said USF&G must prove that each claimant seeking reimbursement was exposed to asbestos before 1960.

Also, American Re said the legal fees, trust administration fees and any bad claims paid by USF&G were not covered by the reinsurance treaty.

However, the court ruled both reinsurance treaties included "follow the settlement" clauses, which requires reinsurers to indemnify the reinsured for payments made that are reasonable within the terms of the original policy. "The purpose of the 'follow the fortunes' or 'follow the settlements' doctrine in reinsurance law is to prevent the reinsurer from 'second guessing' the settlement decisions of the ceding company," the lower New York court said in the ruling.

The New York appellate court agreed.

"The requirement that a reinsurer 'follow the fortunes' of the reinsured is as old as the business of reinsurance itself," the appellate court said in its decision.

Associate Justice Sheila Abdus-Salaam of the appellate division wrote a dissenting opinion, saying there remains a genuine issue of whether a portion of the $987.3 million settlement reached by USF&G included bad faith claims, which would not have been covered by the reinsurance treaties issued.

Travelers Group, Munich Re America Corp. Group's subsidiaries, and Ace American Pool all currently have Best's Financial Strength Ratings of A+ (Superior). OneBeacon Insurance Group, a member of White Mountains Insurance Group, has a rating of A (Excellent).

Century Indemnity currently houses the majority of Ace Ltd.'s A&E reserves, which principally arose from liabilities acquired as part of the company's acquisition of Cigna's property/casualty business, according to BestLink. The company focuses on claims run-off management and reinsurance collections services, with particular focus and expertise directed toward asbestos and environmental exposures.

Travelers Insurance (NYSE: TRV) was trading at $58.49 midday on Jan. 25, up 0.84% from the previous close.

(By Meg Green, senior associate editor, BestWeek: Meg.Green@ambest.com)