‘FOLLOW THE SETTLEMENTS’ DOCTRINE DOES NOT SPARE AIG’S CLAIMS AGAINST ITS REINSURERS
Various AIG entities filed an action against their reinsurers seeking a declaration of coverage for portions of a settlement AIG made in a coverage dispute with its insured, Monsanto Corporation. Monsanto faced extensive litigation in underlying chemical pollution cases against it, which it ultimately settled for approximately $600 million. AIG sought reinsurance coverage for portions of its payments to Monsanto. The reinsurers denied AIG’s claims on the basis that AIG’s payments to Monsanto were “ex gratia” and not covered under AIG’s policies, citing the pollution exclusion, exclusions for punitive damages, and allocation issues with other underlying insurers. In defending against the reinsurers’ motions for summary judgment, AIG raised the “follow the settlements” doctrine, which binds a reinsurer to a settlement agreed to by the ceding company if the underlying risk is “reasonably within the terms of the original policy” even if not technically covered. The court granted the reinsurers’ motions and dismissed AIG’s case. It found that, even affording AIG the greater leeway of the “follow the settlements” doctrine, the claims were not reasonably within the coverage of AIG’s underyling policies, and AIG, in entering into the settlement with Monsanto, failed to conduct a reasonable investigation of the Monsanto claims by glossing over critical coverage issues, unnecessarily exposing its reinsurers to non-covered claims. American Home Assurance Co. v. American Re-Insurance Co., No. 602485/06 (N.Y. Sup. Ct. May 27, 2010).
This post written by John Pitblado.
