In the latest twist arising out of one of the most protracted asbestos litigation matters in U.S. history, the New York Court of Appeals recently cast serious doubt over the validity of an insurance company’s allocation to its reinsurers of a portion of the nearly $1 billion settlement it reached in the underlying coverage action. The unanimous decision, United States Fidelity & Guaranty v. American Re-Insurance,1 examines the contours of the so-called "follow the settlements" doctrine and suggests an enhanced willingness by state and federal courts alike to scrutinize the allocation of settlement payments for reinsurance purposes.

Settlement Backdrop

The origins of the case date back to the mid-20th century when insurer United States Fidelity & Guaranty Co. (USF&G)2 began underwriting liability policies for California-based Western Asbestos Company, which distributed asbestos-containing products. In the mid-1960s, having suffered significant and ongoing financial setbacks, the business of Western Asbestos was taken over by Western MacArthur Company. During the ensuing decades and extending to the early 1990s, MacArthur was inundated with lawsuits filed by individuals asserting personal injury claims based on their exposure to Western Asbestos products.3 Although MacArthur initially challenged whether it was the corporate successor of Western Asbestos, California courts eventually decided that MacArthur was, in fact, liable for such asbestos-related personal injury claims.4

Underlying Coverage Suit

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