Ruling favors AIG over Equitas in reinsurance dispute

A federal appeals court on Friday affirmed a lower court ruling in an American International Group Inc. unit’s dispute with an English reinsurer whose origins are several decades old.

In the late 1960s, a subsidiary of Castle & Cooke Inc. purchased land in Carson, California, where Shell Oil Co. had formerly operated an oil and petroleum containment facility and developed a housing tract, according to Friday’s ruling by the 2nd U.S. Circuit Court of Appeals in New York in The Insurance Co. of the State of Pennsylvania v. Equitas Insurance Ltd.

In 2008, the California Dept. of Toxic Substances Control tested a site adjacent to the housing tract and found hazardous levels of petroleum hydrocarbons including benzene, a known carcinogen, in the soil and groundwater.

Soon after, Carson homeowners sued Dole Food Co., which had by then merged with Castle & Cooke, and Shell in California state court for personal injuries and property damage related to environmental contamination.

In 1968, AIG unit The Insurance Co. of the State of Pennsylvania had issued an umbrella insurance policy to Castle & Cooke that covered up to $20 million for a three-year period.

Dole and its insurers settled the homeowners’ and other related lawsuits, assigning $20 million to the ICSOP policy, even though it contained a three-year coverage period and the plaintiffs’ losses had accrued over four decades, the ruling said.

To cover part of its losses, ICSOP notified Equitas, its reinsurer, of Dole’s claim against the policy. In 1969, ICSOP had obtained facultative reinsurance from Lloyd’s of London underwriters to hedge some of the risks stemming from the policy, and Equitas later inherited those insurance obligations from Lloyd’s. Equitas Ltd. is the runoff reinsurer that took on Lloyd’s pre-1993 liabilities.

The reinsurance policy, which spanned the same three-year period as the policy, covers up to $7.2 million for each $20 million limit that ICSOP pays to Dole and included a follow-the-settlements clause.

Equitas refused to cover any portion of AIG’s part of the settlement and to pay the insurer’s claim. ICSOP filed suit in U.S. District Court in New York, which ruled in its favor. It was affirmed by a three-judge appeals court panel.

“Although the question is not without doubt, we conclude that under the better reading of English law, Equitas’ obligations under the reinsurance policy are co-extensive with ICSOP’s obligations under the ICSOP-Dole policy,” it said, in affirming the lower court.

Attorneys in the case had no comment or did not respond to a request for comment.



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