Canadian Underwriter

Dispute over $25-million reinsurance claim, arising from defective product lawsuit, could reach Supreme Court of Canada

July 12, 2016   by Canadian Underwriter

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A dispute between a forest product firm’s captive reinsurer and Swiss Reinsurance Company, arising from a US$70-million settlement, could reach the Supreme Court of Canada.

Vancouver-based MacMillan Bloedel Ltd. purchased commercial general liability policies from American International Group Inc. during the 1990s, before MacMillan Bloedel was acquired by Weyerhaeuser Company Ltd. In 1993, MacMillan Bloedel had acquired roofing tile manufacturer American Cemwood Inc.

MacMillan Bloedel was served with several lawsuits alleging that defects in Cemwood tiles were causing damage in felt layers underneath those tiles on roofs.

In July 2003, AIG agreed to pay $70 million to settle some of those lawsuits. Court records indicate that AIG was 50% reinsured first by Camarin Limited, a captive reinsurance company and an indirect subsidiary of MacMillan Bloedel, and then by Swiss Re. Aon Reed Stenhouse Inc. had placed the reinsurance policies.

Swiss Re sought rescission of its reinsurance policies in a B.C. court, claiming material misrepresentation.

Court records indicate that MacMillan Bloedel received a report, commissioned to Anistics, which “quantified the warranty exposure at a possible $22 million representing 8,100 of some 20,000 possible warranty claims.” That report was disclosed to Swiss Re when MacMillan Bloedel applied for its 1997 policy. That report “did not purport to describe resulting damage claims,” but between 1994 and 1997, homeowners had filed lawsuits alleging resulting damage.

“Camarin counterclaimed for judgment on the policies and sued Aon in the alternative for negligence in placing the reinsurance policies without a ‘follow the settlements’ clause,” wrote the three judges for the B.C. Court of Appeal hearing the case.

In 2012, Mr. Justice Grant Burnyeat of the Supreme Court of B.C. “dismissed Swiss Re’s claim for rescission and held that Camarin had proven what was required to establish Swiss Re’s liability on each of the policies,” The Court of Appeal judges wrote.

Justice Burnyeat awarded Camarin the full amount of its claim – nearly $25.1 million – and “gave ‘conditional’ judgment to Camarin on the third party claim on account of Aon’s negligent failure to include or follow the settlement clause.”

Justice Burnyeat “found Aon negligent but entered judgment conditionally as there was no underlying basis for the third party claim once the counterclaim against Swiss Re was allowed.” In the event of a successful appeal by Swiss Re on the counterclaim, the third party judgment could be entered.

In a ruling released Nov. 13, 2015, the B.C. Court of Appeal allowed Swiss Re’s appeal – of the dismissal of its claim for rescission with respect to the 1993, and 1995 to 1998 policy years – and ordered a new trial.

In a unanimous ruling, they also allowed Aon’s appeal of the conditional judgement against it, ordering a new trial.

On April 21, 2016, Camarin applied for leave to appeal to the Supreme Court of Canada, which announced June 30 that as of June 27, all materials on application for leave had been submitted to the judges.

The appeal in B.C. was heard by Madam Justice Nicole Garson, Mr. Justice Peter Willcock and Mr. Justice Richard Goepel of the province’s appeal court. They noted that a “follow the settlements” clause, which “relieves the reinsured of the responsibility of proving that there has been a loss,” may appear in a reinsurance contract.

Citing case history, the appeal court noted that a reinsured party “must prove its loss in the same manner as the original insured; and, in the absence of a follow the settlements clause, there must be a judicial determination on liability under the policy.”

Therefore, in order for Camarin to “prove its loss in the same manner” as MacMillan Bloedel, “Camarin would need to demonstrate that MB/Cemwood was subject to a ‘liability imposed by law’ that fell legally within the coverage of the policy.”

Therefore, the court found, “Camarin would need to show that” MacMillan Bloedel “would have been liable” in the lawsuits in the United States, or damages insured under its policy.

“The fact that a settlement may be reasonable to a primary insurer cannot be determinative because the primary insurer may well settle for reasons that are extraneous to the merits of claim – for instance (as was the case here) to avoid exposure to a bad faith claim.”

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