Factory Mutual Ins. Co. v. Excess Ins. Co., 1 N.Y.3d 577 (2004)
A “follow the settlements” clause in a reinsurance agreement does not obligate the reinsurer to pay loss adjustment expenses exceeding the policy’s stated indemnification limit.
Summary
Factory Mutual, an insurer, sought reinsurance from London reinsurers for a policy issued to Bull Data covering property in France. After a fire, Factory Mutual settled with Bull Data for nearly $100 million and incurred substantial litigation expenses. When the reinsurers refused to pay loss adjustment expenses beyond the $7 million policy limit, Factory Mutual sued. The New York Court of Appeals held that the “follow the settlements” clause did not require the reinsurers to pay loss adjustment expenses exceeding the $7 million limit. The court reasoned that allowing such payments would nullify the negotiated liability cap and subject reinsurers to limitless liability. This ruling affirms that reinsurance policy limits are intended to cap total risk exposure, including loss adjustment expenses.
Facts
Factory Mutual insured Bull Data against property loss with a $48 million limit. Factory Mutual then obtained facultative reinsurance from London reinsurers, capped at $7 million. The reinsurance policy included a “follow the settlements” clause. A fire destroyed Bull Data’s warehouse, leading to a claim. Factory Mutual initially refused to pay, suspecting arson. Bull Data sued in France, and Factory Mutual unsuccessfully sued Bull Data in the U.S. Factory Mutual eventually settled with Bull Data for nearly $100 million and incurred around $35 million in legal expenses.
Procedural History
Factory Mutual sought payment from the reinsurers, who refused and initiated an action in England challenging the reinsurance contract’s validity; this action was dismissed. Factory Mutual then filed declaratory judgment actions in U.S. District Courts, eventually leading to a dismissal and vacatur due to jurisdictional issues. The reinsurers then sued Factory Mutual in New York State Supreme Court seeking to annul the reinsurance agreement, or in the alternative, damages. Factory Mutual counterclaimed for the $7 million policy limit plus $5 million in loss adjustment expenses. The Supreme Court ruled the reinsurers’ obligation for expenses was not subject to the $7 million limit. The Appellate Division reversed, holding the limit applied. The New York Court of Appeals affirmed the Appellate Division.
Issue(s)
Whether a “follow the settlements” clause in a reinsurance policy subjects the reinsurer’s obligation to pay loss adjustment expenses to the policy’s stated indemnification limit.
Holding
No, because requiring reinsurers to pay loss adjustment expenses exceeding the negotiated policy limit would render the limit meaningless and expose reinsurers to potentially limitless liability.
Court’s Reasoning
The court emphasized that the intent of the parties controls the interpretation of reinsurance agreements. The court found that the $7 million limit applied to all obligations, including loss adjustment expenses. The “follow the settlements” clause, located in the “Conditions” section of the policy, did not override the policy limit. The court adopted the reasoning of Bellefonte Reins. Co. v Aetna Cas. & Sur. Co., 903 F.2d 910 (2d Cir. 1990) and Unigard Sec. Ins. Co., Inc. v North Riv. Ins. Co., 4 F.3d 1049 (1993), which held that similar “follow the fortunes” clauses do not eliminate the liability cap in reinsurance policies. The court stated, “to allow[ ] the ‘follow the fortunes’ clause to override the limitation on liability—would strip the limitation clause and other conditions of all meaning; the reinsurer would be obliged merely to reimburse the insurer for any and all funds paid.” The court rejected Factory Mutual’s argument that property insurance differs from liability insurance in this context, stating, “Whether [the reinsurers] reimburse [Factory Mutual] for claims for property losses or defense costs makes no difference to them…[T]he limit clauses define the reinsurers’ bargained-for maximum exposure to liability inclusive of all costs and expenses.” Factory Mutual could have negotiated a separate limit for loss adjustment expenses but did not. The court also noted that the “follow the settlements” clause gave the reinsurers no control over Factory Mutual’s litigation strategy or expenses, further justifying limiting their liability to the policy cap.