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At a time when insurance liability for catastrophic damages is very much in the forefront due to the Sept. 11 terrorist attacks, New York’s Court of Appeals on Tuesday rejected a reinsurance recovery theory that would have entitled Travelers Casualty and Surety Co. to lump together as a single loss the $212 million it paid to cover environmental contaminations at nearly 200 distinct sites. The court also held as a matter of law that a so-called “follow the fortunes” clause, which requires reinsurers to accept judgments or settlements against the client and to pay accordingly, cannot override the terms of the policy. Tuesday’s ruling in two matters, Travelers Casualty v. Certain Underwriters at Lloyds of London, 123 and 124, is a significant addition to what remains a scarce body of law on reinsurance treaties. In fact, the paucity of case law interpreting the aggregation of multiple occurrences traceable to the same act led Travelers to rely primarily upon an opinion from the British House of Lords. The threshold question was whether Travelers could aggregate as losses resulting from a single “disaster and/or casualty” environmental claims stemming from industrial activity over several decades at numerous sites. In a unanimous opinion by Judge Victoria A. Graffeo, the court answered that question in the negative — meaning that Travelers is entitled to just under $2.9 million from its reinsurers rather than the $13 million it had sought. Travelers v. Certain Underwritersstems from pollution-related claims that Travelers Casualty and Surety settled with two major clients: E.I. DuPont de Nemours & Co. and the Koppers Company. Both chemical companies submitted reimbursement claims after they were assessed substantial damages for polluting numerous sites over several decades. Eventually, Travelers settled with Koppers for $139.5 million for losses involving more than 160 sites. Travelers agreed to pay DuPont $72.5 million for claims arising from 25 sites. It then invoked its reinsurance contracts with Lloyd’s, claiming that the events giving rise to the damages constituted a single loss. Reinsurance is purchased by insurance companies to cover a portion of their exposure, with the objective of spreading its risk among one or more reinsurers. Reinsurance contracts are sold as either “facultative” policies, where all or some of the risk is indemnified in the event of a loss, or “treaty” policies, where the insurer seeks protection against losses to a class of customers or particular industry. Here, Travelers had treaties with Lloyds, which obligated the reinsurer to cover “each and every loss” exceeding a retention level. It sought reimbursement on the theory that the environmental contaminations were a single loss, which would have allowed recovery beyond the “excess of loss” or deductible provisions in the reinsurance contracts. Travelers rested mainly on Axa Reinsurance Plc v. Field, 5 Re LR 184, a 1996 decision from the House of Lords. Manhattan Supreme Court Justice Barry Cozier rejected Travelers’ theory in two opinions upheld unanimously by the Appellate Division, 1st Department, and now the Court of Appeals. Judge Graffeo and the court resolved the dispute primarily through parsing the contractual language, and through reliance on its precedential policy of giving “meaning to every sentence, clause and word of a contract of reinsurance.” The court said the reinsurance contacts simply do not allow incidents with no spacial or temporal relationship to be treated as a single loss. “In light of the fact that, as Travelers concedes, the treatment of each site as a separate ‘disaster and/or casualty’ fails to pierce any of the retention levels of the reinsurance treaties, summary judgment was properly granted in favor of the reinsurers in both actions,” Graffeo wrote. Further, the court followed the rationale of the 2nd U.S. Circuit Court of Appeals in Bellefonte Reinsurance Co. v. Aetna Casualty and Surety Co., 903 F2d 910 (1990), that a “follow the fortunes” clause cannot supersede the language of the policy. “The practical result of such an application [as advocated by Travelers] would be that a reinsurance contract interpreted under New York law that contains the ‘follow the fortunes’ clause would bind a reinsurer to indemnify a reinsured whenever it paid a claim, regardless of the contractual language defining loss,” Graffeo wrote. It was not immediately clear what impact, if any, Tuesday’s decision may have on claims that are expected to arise from the World Trade Center attack. Appearing were Mary Kay Vyskocil of Simpson Thacher & Bartlett in Manhattan for Travelers, and Herbert M. Wachtell of Wachtell, Lipton, Rosen & Katz in Manhattan for the reinsurers. A spokesman for Travelers, Keith Anderson, said the firm is studying the decision and declined further comment. The reinsurers were not available for comment.

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