Texas Farmers Insurance Company (“Texas Farmers”) issued claims-made insurance policies (transformed into occurrence-based policies through endorsement) to Kaiser Permanente, a medical facility, for the policy periods of 4/9/99-4/9/00, 4/9/00-4/9/01, and 4/9/01-4/9/02.  The first two policies had a $5 million limit of liability per claim.  For the policy commencing on 4/9/01, Texas Farmers reduced its coverage limit to $1 million per occurrence, and Kaiser obtained an excess policy from Ordway Indemnity Ltd. (“Ordway”) that attached above the $1  million limit of the Texas Farmers’ primary policy. The Ordway excess policy was facultatively reinsured by Lexington Insurance Company (“Lexington”).

In February 2007, the malpractice suit against Kaiser was settled for $3.2 million.  Texas Farmers and Ordway disputed their respective shares of the settlement payment, and agreed to litigate that issue after the settlement was funded.  Because Lexington reinsured 100% of the Ordway excess policy on a facultative basis, it agreed to step into Ordway’s shoes and litigate the contribution issue with Texas Farmers.

Texas Farmers ultimately brought an action against Lexington on the grounds that, as the reinsurer of Ordway, it was required to pay its share of the settlement above the $1 million limit of the 4/9/01-4/9/02 Texas Farmer’s primary policy.  The District Court rejected Texas Farmers’ argument, finding that the underlying malpractice action involved claims that occurred before the 4/9/01-4/9/02 policy period, and thus did not trigger the Ordway excess policy (or Lexington’s reinsurance cover).  Texas Farmers appealed to the U.S. Court of Appeals for the Ninth Circuit, contending that its policy was triggered when it received written notice of the claim from the insured, which occurred after the 4/9/01 date.

The Ninth Circuit rejected Texas Farmers’ argument, noting that it had changed the nature of its policies from claims-made to occurrence. Because the loss occurred prior to 4/9/01, the Texas Farmers primary policy (and Ordway excess policy) that incepted after that date were not triggered by the settlement in the underlying action.  Thus, Lexington’s reinsurance coverage was not implicated, and the follow the settlements doctrine did not apply.

Click here to review a copy of the Ninth Circuit’s decision, captioned Texas Farmers Insurance Company v. Lexington Insurance Company, No. 08-55835, (9th Cir. 2010).