Utica Mutual Ins. Co. v. Century Indem. Co.

Issue Discussed: Allocation

Submitted by Michael R. Kuehn

Date Promulgated: May 11, 2015

Court:  Northern District of New York

Issues Decided: Whether a reinsurer may assert a cause of action for “reverse bad faith” against a ceding company under New York law.

In an opinion dated May 11, 2015, the Northern District of New York held that reinsurer Century Indemnity Company (“Century”) had sufficiently alleged a cause of action for claim of “reverse bad faith” against its cedent – Utica Mutual Insurance Company (“Utica”) – by claiming that Utica had manipulated its records to recover more under the reinsurance contracts at issue than it was otherwise contractually entitled to recover.  While not explicitly endorsing the cause of action, the Court held that Century’s allegations had cleared the relatively low bar necessary to assert the defense in an amended pleading.

Utica Mutual Insurance Company (“Utica”) issued two umbrella excess policies to Gould Pumps.  Utica paid money on Gould’s behalf to resolve asbestos claims brought against Gould.  Utica subsequently brought an action against Century alleging that Century failed to property reimburse Utica pursuant to contracts that reinsured portions of the umbrella excess policies.

Century moved for leave to file an amended answer and counterclaims against Utica.  The proposed amended pleading alleged that Utica manipulated its records in an effort to extract millions of dollars from Century beyond what Century was otherwise contractually obligated to pay under the reinsurance agreements. The parties characterized Century’s legal theory as a counterclaim for “reverse bad faith.”

The Magistrate Judge granted Century leave to file to assert the claim and the District Court affirmed. The District Court reviewed the Magistrate Judge’s decision under the deferential “clear error” standard, meaning that the decision would only be overturned if it was contrary to settled law.

The District Court reasoned that Century’s assertion of a claim for “reverse bad faith” was not contrary to clearly established law.  The Court equated Century’s proposed counterclaim with a breach of the duty of “utmost good faith” that New York courts have long recognized as existing in reinsurance contracts.  Citing to recent New York case law, the Court held that Century was entitled to challenge the Utica’s “allocation decisions, and to argue that the economic consequence of that allocation violates or disregards provisions in the reinsurance contract.”   Ultimately, the Court reasoned that the substance of the proposed claim, whether labeled as “reverse bad faith” or something else was at least plausible under New York law.