In National Union Fire Ins. Co. of Pittsburgh, Pa. v. Clearwater Ins. Co., 04-CV-5023 (S.D.N.Y., July 21, 2007), the Southern District of New York denied a cedent’s motion for summary judgment based on the follow the fortunes doctrine, finding that a material issue of fact existed as to whether a portion of a settlement involved payment for consequential damages claims that would be excluded under the reinsurance certificate at issue. Clearwater reinsured National Union for a portion of National Union’s exposure under excess liability policies issued to 3M. 3M faced exposure for its manufacture and sale of breast implants and sought defense and indemnity coverage from its insurers, including National Union, eventually leading to coverage litigation. 3M alleged bad faith on the part of National Union, for which it claimed consequential damages.

National Union ultimately paid $197 million to 3M to settle the coverage litigation and to be released from liability for all breast implant claims. Thereafter, National Union billed Clearwater for its portion of the settlement, but Clearwater only made partial payment, resulting in National Union’s filing suit to recover the remaining amount due. Clearwater took the position that a portion of the 3M settlement was to settle consequential damages claims not covered by the reinsurance certificates, while National Union asserted that Clearwater was obligated to follow its fortunes with respect to the underlying settlement. In denying National Union’s motion for summary judgment, the court held that Clearwater provided sufficient evidence that a genuine issue of material fact existed as to whether the settlement involved payment in some substantial amount for the consequential damages claims, noting that this case demonstrates the inherent tension between the follow the fortunes doctrine and the limitations on the liability of reinsurers.

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