In this federal court litigation a facultative reinsurer denied a claim under a first party property policy based on an alleged oral settlement agreement reached in 2007, eleven years before the original claim was settled and only a short time after commencement of coverage litigation arose from the original claim.
There was no contemporaneous written confirmation of the alleged settlement and Cedant’s representative denied there had been an oral agreement. Therefore, there was simply no meeting of the minds as is needed under basic principles of contract law. In fact, at the first status conference before the SDNY, the judge expressed doubt that the reinsurer could prove the existence of the alleged settlement without documentation.
The lawsuit brought in the SDNY between two titans of the Industry, AIG and Nationwide, arose from a pipeline leak at a Brazilian petrochemical plant in Bahia State in northeast Brazil in May 1999. The Plant was insured under a first party cover by a Brazilian insurer and reinsured by IRB, a state owned insurer. IRB, in turn, purchased 99% reinsurance of the risk in London and the international market including AIG-UK, Swiss Re, and others. AIG-UK then reinsured 100% of the risk with Scottsdale (Nationwide) through a now defunct MGA in Texas.
After thorough investigation by experienced adjusters in Brazil, the risk was determined to have resulted from wear and tear; since corrosion was excluded under the Policy, the insurer denied the claim. Litigation then ensued in Bahia State where the Plant was located. The suit languished for many years until 2017 when an opportunity arose to settle the suit for a fraction of the potential damages, which would have included many years of interest, attorneys’ fees, and a currency conversion factor peculiar to Brazil. The suit was settled with the assent of the original insurer, IRB, and all the other reinsurers, which included AIG, Swiss Re, and other large international reinsurers. The settlement was approved by the Court in 2018 and paid by the reinsurers. AIG then billed Scottsdale for its share of the settlement in July 2019.
After several months of correspondence, Scottsdale denied the claim, and filed its answer with 25 affirmative defenses. Scottsdale later withdrew most of those defenses because they clearly lacked any merit. The primary remaining Scottsdale defense was that the claim, which had been noticed to Scottsdale in 2003, had been settled in 2007 at an in-person meeting of the parties for $25,000, when the coverage lawsuit in Brazil was in its infancy.
The alleged “settlement” however, was not documented in any way by the parties; releases were not exchanged as is the normal practice. There was no confirming email or written settlement agreement produced and Scottsdale claimed that its $25,000 settlement check sufficed to document a “full and final” settlement of the claim; it further alleged, implausibly, that releases were not typically exchanged in the London market at that time. But a copy of the cancelled check could not be found and all that Scottsdale produced was an internal check request with a short notation, “full and final”. AIG, of course, never received the internal Scottsdale check request and never acknowledged the alleged “settlement” in any way. The 2007 meeting of the parties was in fact documented in a memo sent to both parties by a broker representative which contained no reference to a “full and final settlement,” but only Scottsdale’s agreement to pay expense billings of just under $25,000. Scottsdale did not allege in writing that there was a settlement until years later, but prior to the underlying settlement, in response to an AIG expense billing, but was unable to produce any documentation of the “settlement”
Remarkably, the two party representatives who met in 2007 were both deposed early this year. The only evidence of the alleged settlement was the testimony of the Scottsdale representative which, as evidence of Scottsdale’s subjective intent, was of doubtful admissibility, and not at all probative of the existence of an agreement to settle.
Shortly after these depositions, a genuine and very favorable agreement for AIG was reached with the very able aid of a federal court magistrate judge. No doubt the magistrate understood the inherent lack of merit to Scottsdale’s position and impressed on Scottsdale the weakness of its position.
For further information, please contact Michael Goldstein.