In American Home Assurance Co. v. American Re-Insurance Co., No. 602485/06 (N.Y. Sup. Ct. May 27, 2010), the plaintiffs, several ceding companies, brought a declaratory judgment action against certain reinsurers (collectively, the “Reinsurers”) seeking reimbursement for portions of a settlement plaintiffs made with their insured, Monsanto Corporation.  The Reinsurers provided coverage for a number of excess general liability policies that plaintiffs issued to Monsanto.  Monsanto manufactures chemical and agricultural products, including polychlorinated biphenyls (“PCBs”).

Monsanto had been sued by the U.S. Environmental Protection Agency and others for environmental contamination at the various sites where it manufactured PCBs.  Monsanto ultimately settled with all parties for approximately $600 million and filed a declaratory judgment action against plaintiffs and a number of other insurers seeking insurance coverage for environmental damages caused by its PCBs operations throughout the U.S.

In 1993, Monsanto and plaintiffs entered into a settlement in which plaintiffs agreed to pay $7.3 million for Monsanto’s government-ordered costs to remediate certain contaminated sites.  For third-party claims, plaintiffs and Monsanto agreed that, after exhaustion of an $80 million per site “deductible,” plaintiffs would pay 50% of Monsanto’s expenses and liabilities up to a $150 million cap.  The 1993 agreement defined “third-party claims” as “[e]nvironmental or pollution related claims asserted by a non-governmental entity as a result of activities attributed to Monsanto at any alleged waste site or Monsanto owned site.”

Nearly ten years later, Monsanto informed plaintiffs that it had exhausted the deductible by paying claims arising out of Monsanto’s PCBs manufacturing operations.  Monsanto also paid $550 million to settle two other related lawsuits and sought reimbursement of $150 million from plaintiffs under its 1993 agreement.  Initially, plaintiffs disputed whether these most recent payments were made as the result of “third-party claims” within the meaning of the 1993 agreement.  After mediation, however, plaintiffs and Monsanto entered into a 2004 agreement in which plaintiffs agreed to pay Monsanto approximately $140 million.

Plaintiffs then billed the Reinsurers for a portion of its payment to Monsanto.  The Reinsurers denied coverage on the basis that plaintiffs’ payment was ex gratia because it covered claims that were outside the scope of the reinsured policies.  The Reinsurers also argued that they had no obligation to indemnify plaintiffs for the settlement payment because plaintiffs had failed to conduct a reasonable and businesslike investigation of certain claims billed by Monsanto before entering into that settlement (and failed to assert potential coverage defenses under the policies).  Ultimately, the Reinsurers moved for summary judgment on both of these issues.

The Supreme Court, New York County (Ramos, J.), granted the Reinsurers’ motions, finding that plaintiffs’ claims were not reasonably within the scope of or arguably covered by its underlying policies with Monsanto.  As such, the Reinsurers were not bound to follow the settlement.  The court also found that in entering into the settlement with Monsanto, plaintiffs glossed over critical coverage issues, unnecessarily exposing the Reinsurers to non-covered claims.  Specifically, the court noted that plaintiffs’ policies contained certain exclusions that appeared to provide a valid defense to at least some of the claims covered by the settlement with Monsanto.  Thus, the court further held that the Reinsurers did not have to follow the fortunes, because plaintiffs failed to conduct a reasonable, businesslike investigation of the underlying claims before making its settlement payment to Monsanto.

We are monitoring this case for a possible appeal.  For a complete copy of the court’s decision, click here.