Reinsurers must pay their share of legal settlements reached byinsurers who cede business to them if they are reached in goodfaith, a federal appeals court has ruled.

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Reversing a lower court's decision, the 2nd U.S. Circuit Courtof Appeals in New York determined that a reinsurer must abide by asettlement allocation plan established by the primary insurer todeal with a policyholder's claim and cannot dispute a good faithfunding arrangement.

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The case at issue involved a dispute between reinsurer GerlingGlobal and Travelers over the funding of a settlement thatTravelers reached with Owens-Corning Fiberglass over the insurer'sliability for asbestos claims against Owens-Corning.

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In that dispute, Owens-Corning and Travelers argued over whetherthe numerous claims against Owens-Corning for asbestos exposureshould be considered as having arisen from one occurrence ormultiple occurrences. The two companies reached a settlementagreement, which explicitly declined to resolve the occurrenceissue.

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During its dispute with Owens-Corning, Travelers held theposition that the asbestos claims should be considered as a singleoccurrence, a position it maintained as it sought to recoverreinsurance.

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Gerling, however, argued that in accepting the settlement,Travelers had effectively relinquished the single occurrenceargument and should allocate its settlement funding as a multipleoccurrence.

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"Gerling objected to Travelers' allocating the settlement on thebasis of a position that Travelers, in Gerling's view, hadnecessarily relinquished in the process of settling," the courtnoted in its ruling.

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Instead, Gerling argued that Travelers should have allocated thesettlement according to the multiple-occurrence position thatGerling believed Travelers had implicitly accepted in order tosettle with OCF, even though the settlement itself expresslydisclaimed resolution of the occurrence issue.

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A lower court agreed with Gerling, but the appellate court ruledthat, providing the settlement was reasonable, a reinsurer wouldhave to abide by the "follow the fortune" principle.

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"In short, we decline to authorize an inquiry into the proprietyof a cedent's method of allocating a settlement if the settlementitself was in good faith, reasonable, and within the terms of thepolicies," the court said.

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