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The Appellate Division, First Department, of the Supreme Court of the State of New York has been dealing with the most common controversy between primary or ceding insurers and their reinsurers. Certainly it is the most worrisome issue to them both: Whether and how much the primary carriers paid to settle bad faith claims against themselves -- which are not covered by their reinsurance policies -- in the process of settling underlying claims against their own insureds.
In the case of United States Fidelity & Guaranty Co. v. American Reinsurance Co., 2015 WL 6510898, *1 2015 N.Y. Slip Op. 07924 (N.Y. App. Div., 1st Dep't October 29, 2015), the appellate panel unanimously affirmed the trial court's denial of the primary carrier's "motion for a ruling that the reasonableness of [its] allocation of all settlement dollars to asbestos-insurance claims is properly the subject of evidence at trial".
I found it shocking when I first read this holding. Bad faith is always a question of fact. Questions of fact are resolved with evidence and never more so than when the fact issues arise from questions of bad faith. That's practically Insurance Bad Faith 101 everywhere including in New York. So why, I wondered, did the trial court and the appellate court together unanimously deny a motion to admit evidence on fact questions of bad faith?
However, as I read on in this brief opinion, I learned that this is at least the second appellate appearance of this case. In an earlier appellate appearance, which was ultimately decided in New York's highest court, the Court of Appeals, the high court held that there were indeed issues of fact in the case whether …
"USF & G, in allocating the settlement amount, reasonably attributed nothing to the so called ‘bad faith’ claims made against it,” and whether “certain claims were given unreasonable values for settlement purposes”.
United States Fidelity & Guaranty Co. v. American Reinsurance Co., 2015 WL 6510898, *1 2015 N.Y. Slip Op. 07924 (N.Y. App. Div., 1st Dep't October 29, 2015), quoting the earlier ruling of the New York Court of Appeals.
Bad faith claims are not ordinarily covered by reinsurance, and so it is in this case. The New York Appellate Division panel recognized that the Court of Appeals has already determined that the primary carrier could have inflated the value of certain claims "to include value that should have been attributed to bad faith claims," i.e., that should have been attributed to claims which are not covered by reinsurance.
In this case, those certain claims included claims of lung cancer and asbestosis, the settlement value of which -- with and without bad faith values included -- it will be up to a jury to decide. United States Fidelity & Guaranty Co. v. American Reinsurance Co., 2015 WL 6510898, *1 2015 N.Y. Slip Op. 07924 (N.Y. App. Div., 1st Dep't October 29, 2015).
And in this case, New York's highest court has already spoken, in effect, on what evidence would be allowed on the issue of the reasonableness of the primary carrier's underlying settlement allocations. New York's high court has already limited that evidence to two issues, both set out in the above quote: whether the primary carrier, in allocating the settlement amount, reasonably attributed nothing at all -- as it said -- to the so called "bad faith" claims pending against it, and whether the above-enumerated claims were nonetheless given unreasonable values to include bad faith values for settlement purposes.
Accordingly, motion denied by the trial court, and order of denial affirmed by the appellate court.
Parenthetically, the Appellate Division panel was most definitely not ducking any issues here. This was a rare case of an appellate court entertaining an interlocutory appeal or what is called in some other jurisdictions an appeal from a non-final order, because here "the trial court did not merely determine the admissibility of evidence but also limited the issues to be tried". United States Fidelity & Guaranty Co. v. American Reinsurance Co., 2015 WL 6510898, *1 2015 N.Y. Slip Op. 07924 (N.Y. App. Div., 1st Dep't October 29, 2015). The Appellate Division did not have to take this appeal.
But they did.
And in so doing they reiterated the bad faith issues of fact which a jury will determine in this case.
Please Read The Disclaimer. ©2015 by Dennis J. Wall, author of Litigation and Prevention of Insurer Bad Faith (3d ed. Thomson Reuters West in 2 Volumes, with 2015 Supplements). All rights reserved.
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