New York High Court Says Trial Must Decide Travelers Asbestos Award

New York state’s highest court on Thursday said a trial must determine whether Travelers Cos deliberately structured a nearly $1 billion asbestos settlement to force its reinsurers to pay more than their fair share.

The ruling, the latest development in one of the longest-running asbestos-related cases in U.S. history, throws into question a $420.4 million award Travelers won at an earlier stage in the case.

The litigation pits a Travelers unit against various reinsurers, who have argued they should not be obligated to help cover nearly $1 billion that Travelers paid to cover asbestos claims against the company Western MacArthur.

The reinsurers include American Re-Insurance Company, the U.S. unit of industry leader Munich Re, and units of the insurance and reinsurance company ACE Ltd.

A New York trial court awarded Travelers $420.4 million in 2010, a decision that was upheld by a mid-level appeals court last year.

But the Court of Appeals, the state’s top court, said on Thursday that a trial is needed to determine whether Travelers had improperly designed the Western MacArthur settlement to maximize the amount of money it could recoup from reinsurers.

Nevertheless, the ruling affirmed that the reinsurers must help Travelers cover at least some portion of the settlement.

A spokesman for Travelers declined to comment. Representatives for Munich Re and ACE did not have an immediate comment on the ruling.

Calls to the lawyers representing all three companies were not immediately returned.

The court said it was unclear whether Travelers had inflated the value of claims for certain asbestos victims while lowering those of others to increase its reinsurance coverage.

In addition, the court ruled, the deal with Western MacArthur allocated all of the settlement to claims within Travelers’ policy limits and nothing to “bad faith claims” stemming from Travelers’ initial refusal to cover the asbestos damage. That decision came despite evidence that both sides recognized Travelers could face bad faith liability before the settlement was reached.

The allocation worked to Travelers’ advantage, since the claims within policy limits were covered by reinsurance.

“In short, we find it impossible to conclude, as a matter of law, that parties bargaining at arm’s length, in a situation where reinsurance was absent, could reasonably have given no value to the bad faith claims,” Judge Robert Smith wrote for the unanimous five-member court.

However, the court made it clear that it was not persuaded by the reinsurers’ arguments that they have no obligation whatsoever to cover any of Travelers’ expenses.

The case stems from 1948, when the Travelers unit, United States Fidelity & Guaranty, wrote a liability insurance policy for Western Asbestos Co. Three decades later, people harmed by asbestos had begun to sue Western Asbestos’ successor company, Western MacArthur.

Western MacArthur sued USF&G and two other insurers in 1993 seeking indemnification. In 2002, the two sides settled the lawsuit, pushing Western MacArthur into bankruptcy.

USF&G then sought indemnification from its reinsurers, leading to the current dispute.

The Court of Appeals decision does not mean that a trial is assured, as the two sides can still try to settle the case.

The litigation is noteworthy not only for its duration but for the law firms involved, which include the high-profile firms Simpson Thacher & Bartlett for Travelers; Wachtell, Lipton, Rosen & Katz for Munich Re; Boies, Schiller & Flexner for ACE; and Quinn Emanuel Urquhart & Sullivan for other reinsurers.

The case is United States Fidelity & Guaranty Company vs. American Re-Insurance Co, New York Court of Appeals, No. 1.