North River Insurance v. Cigna Reinsurance Co.

Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit

4-13-1995

North River v Cigna Reinsurance Co.
Precedential or Non-Precedential:

Docket 93-5743

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 UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

________________

Nos. 93-5743 & 93-5764
________________

NORTH RIVER INSURANCE COMPANY

v.

CIGNA REINSURANCE COMPANY, individually
and as successor to INA REINSURANCE COMPANY

North River Insurance Company,
Appellant in No. 93-5743

CIGNA Reinsurance Company,
Appellant in No. 93-5764

_______________________________________________

On Appeal from the United States District Court
for the District of New Jersey
(D.C. Civil Action No. 91-cv-01323)
___________________

Argued July 21, 1994

Before: SCIRICA, LEWIS and SEITZ, Circuit Judges

(Filed April 13, 1995)

BARRY R. OSTRAGER, ESQUIRE (ARGUED)
MARY K. VYSKOCIL, ESQUIRE
JOSEPH F. WAYLAND, ESQUIRE
Simpson, Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017

Attorneys for Appellant/Cross-Appellee,
North River Insurance Company
THOMAS A. ALLEN, ESQUIRE (ARGUED)
ELLEN K. BURROWS, ESQUIRE
WILLIAM E. COX, ESQUIRE
MARION R. HUBING, ESQUIRE
White & Williams
One Liberty Place
1650 Market Street, Suite 1800
Philadelphia, Pennsylvania 19103

Attorneys for Appellee/Cross-Appellant,
CIGNA Reinsurance Company, individually
and as successor to INA Reinsurance Company

MITCHELL F. DOLIN, ESQUIRE
Covington & Burling
1201 Pennsylvania Avenue, N.W.
P.O. Box 7566
Washington, D.C. 20044

Attorney for Amicus Curiae Appellants,
Armstrong World Industries, Inc.,
Asbestos Claims Management Corporation,
CertainTeed Corporation, C.E. Thurston & Sons, Inc.,
Dana Corporation, Ferodo America, Inc., Flexitallic, Inc.,
GAF Corporation, National Service Industries, Inc.,
Pfizer Inc., Shook & Fletcher Insulation Company,
T&N PLC and United States Gypsum Company

DAVID M. RAIM, ESQUIRE
Chadbourne & Parke
1101 Vermont Avenue, N.W.
Suite 900
Washington, D.C. 20005

Attorney for Amicus Curiae Appellant/Cross-Appellee,
The Aetna Casualty & Surety Company

MARK D. LEBOW, ESQUIRE
Coudert Brothers
1114 Avenue of the Americas
New York, New York 10036

Attorney for Amicus Curiae Appellants/Cross-Appellees,
The Continental Insurance Company,
Royal Insurance Company and
The Travelers Insurance Company
WILLIAM J. BOWMAN, ESQUIRE
Hogan & Hartson
555 13th Street, N.W.
Washington, D.C. 20004-1109

Attorney for Amicus Curiae Appellant/Cross-Appellee,
ITT Hartford Insurance Group

JOSEPH J. SCHIAVONE, ESQUIRE
Budd, Larner, Gross, Rosenbaum, Greenberg & Sade
150 John F. Kennedy Parkway
CN 1000
Short Hills, New Jersey 07078-0999

Attorney for Amicus Curiae Appellee/Cross-Appellant
Reinsurance Association of America

__________________

OPINION OF THE COURT
__________________

SCIRICA, Circuit Judge.

This is a dispute between an excess insurer and a

reinsurer over who should pay for defense litigation costs

arising out of asbestos injury claims against the underlying

insured. Under procedures established by the Wellington

Agreement, a comprehensive agreement between asbestos producers

and insurers designed to resolve disputes over coverage,1 an

1
. The Wellington Agreement represented an innovative effort by
asbestos producers and their insurers to solve the asbestos
litigation crisis. The Agreement established a non-profit claims
handling center that coordinated claim payments on behalf of
producers. It also contained provisions that aimed to avoid
coverage disputes between producers and their insurers and
established arbitration procedures to adjudicate claims the
participants could not settle. For a detailed discussion of the
Wellington Agreement, see discussion infra at part II.
arbitrator ruled that North River Insurance Company was obligated

to pay defense costs, in excess of policy limits, to its insured,

Owens-Corning Fiberglas Corporation, an asbestos manufacturer.

North River then sought indemnification from its reinsurer, CIGNA

Reinsurance Company, for the defense costs it paid to Owens-

Corning.2

In these cross appeals we must decide whether four

facultative reinsurance certificates issued by CIGNA Re to North

River obligate CIGNA Re to indemnify North River for defense

costs. We also must decide whether actions taken by North River

in connection with its participation in the Wellington Agreement

violated its duty of good faith, and whether the district court

erred by refusing to reconsider its judgment to include, as an

alternative basis for summary judgment, that a reinsurance

certificate's indemnity limit caps the amount a reinsurer is

obligated to pay under the policy.

The district court granted summary judgment to CIGNA

Re, holding defense costs were not covered under the reinsurance

certificates and North River violated its duty of good faith.

North River Ins. Co. v. Philadelphia Reinsurance Corp., 831 F.

Supp. 1132, 1153 (D.N.J. 1993). The district court denied

summary judgment to North River finding factual disputes

2
. CIGNA Re has paid more than $30 million in indemnity payments
under the several reinsurance certificates it issued to North
River. On the four facultative reinsurance certificates at issue
here, North River contends CIGNA Re owes approximately $13
million plus interest in defense costs. North River Ins. Co. v.
Philadelphia Reinsurance Corp., 831 F. Supp. 1132, 1136-37
(D.N.J. 1993).
involving North River's rejection of a settlement with Owens-

Corning and North River's notice to CIGNA Re about the

arbitration proceeding. Id. at 1147-48, 1153.

We believe the coverage of defense costs was reasonably

within the terms of the North River-Owens-Corning insurance

policies as reinsured. We also believe the district court erred

in holding that North River breached its duty of good faith to

its reinsurer. We find, as a matter of law, that CIGNA Re cannot

show that North River's decision to enter the Wellington

Agreement violated its duty of good faith. But we find disputed

issues of material fact exist on the questions of North River's

good faith in failing to schedule its policies under Wellington

and its rejection of the settlement proposal.

Accordingly, we will reverse the district court's grant

of summary judgment to CIGNA Re and reverse the denial of summary

judgment to North River on all points except the question of bad

faith relating to North River's failure to schedule and its

rejection of the settlement proposal. On remand, consideration

of the question of bad faith shall be limited to asking (1)

whether CIGNA Re has established that North River breached its

duty of good faith in failing to schedule its policies, and (2)

if the disputed evidence relating to North River's rejection of

the settlement proposal manifests a breach of North River's duty

of good faith to its reinsurer. We also hold the district court

properly denied the motion for reconsideration because CIGNA Re

failed to raise the indemnity cap defense in the course of the

proceedings below and because Unigard Security Insurance Co. v.
North River Insurance Co., 4 F.3d 1049 (2d Cir. 1993) ("Unigard

III"),3 did not change existing law.

I.

Before we discuss the parties' contentions, some

background is useful. Primary insurers, excess insurers, and

reinsurers play different roles in the insurance industry. Both

primary and excess insurers provide coverage directly to the

insured policy holder. Primary insurance policies describe what

kinds of liability will be covered and specify dollar limits.

Excess insurers typically track the coverage offered by the

primary insurer and also specify dollar limits, but the excess

insurer's liability is not triggered until the primary insurer's

limit is exhausted. Reinsurers do not provide coverage directly

to the insured but issue certificates of reinsurance to the

excess or primary insurer, also specifying dollar limits.

3
. The district court referred to the Second Circuit's opinion
as "Unigard II." We will call it "Unigard III," however, because
it is the third published opinion concerning the same matter.
Initially, Unigard, the reinsurer, brought an action in the
District Court for the Southern District of New York, seeking a
declaratory judgment relieving it of any obligation to indemnify
the reinsured excess insurer, North River. Unigard Sec. Ins. Co.
v. North River Ins. Co., 762 F. Supp. 566 (S.D.N.Y. 1991)
("Unigard I"), aff'd in part, rev'd in part, 4 F.3d 1049 (2d Cir.
1993). After judgment for North River, Unigard appealed to the
Court of Appeals for the Second Circuit. That court certified a
question to the Court of Appeals of New York, which held that a
reinsurer must demonstrate prejudice and may not rely on a
presumption of prejudice to prevail on a late loss notice
defense. Unigard Sec. Ins. Co. v. North River Ins. Co., 594
N.E.2d 571, 575 (N.Y. 1992) ("Unigard II"). The Second Circuit
affirmed in part and reversed in part the decision of the
district court. Unigard Sec. Ins. Co. v. North River Ins. Co., 4
F.3d 1049, 1071 (2d Cir. 1993) ("Unigard III").
 Reinsurance is purchased by insurance companies to

insure their liability under policies written to their insureds.

See Henry T. Kramer, The Nature of Reinsurance, in Reinsurance 1,

5 (R.W. Strain ed., 1980). Typically, an insurer who has

provided coverage against a large loss will cede all or part of

that risk to other insurance companies along with a portion of

the premiums. Ceding risk increases the insurer's capacity to

insure other customers and decreases the likelihood that insurer

insolvency will result from any large claim.4

There are two types of reinsurance contract: treaty and

facultative. Under a reinsurance treaty, the reinsurer agrees to

accept an entire block of business from the reinsured. William

G. Clark, Facultative Reinsurance: Reinsuring Individual

Policies, in Reinsurance, supra, at 117, 121. Once a treaty is

written, a reinsurer is bound to accept all of the policies under

the block of business, including those as yet unwritten. Because

a treaty reinsurer accepts an entire block of business, it does

not assess the individual risks being reinsured; rather, it

evaluates the overall risk pool. Id.

4
. Reinsured risk is spread in layers with premium dollars
allocated in greater amounts to those who have taken larger
risks. For example, an excess insurer who writes a $100 million
policy might retain a certain portion of the risk, e.g., the
first $10 million of excess liability, and reinsure the balance
with other insurance companies. If no claim exceeds the $10
million retained liability, the original insurer will pay the
entire excess claim. If, on the other hand, a claim is made that
exceeds $10 million, that portion of the claim exceeding $10
million will fall on the reinsurer who has accepted the next
layer of liability. As layers of coverage are exhausted, the
loss falls on successive reinsurers until the claim is satisfied.
 Facultative reinsurance entails the ceding of a

particular risk or policy. Unlike a treaty reinsurer who must

accept all covered business, the facultative reinsurer assesses

the unique characteristics of each policy to determine whether to

reinsure the risk, and at what price. Thus, a facultative

reinsurer "retains the faculty, or option, to accept or reject

any risk." Id.; see also Francis M. Gregory, Jr. & Nicholas T.

Christakos, Primary, Excess and Reinsurance Problems in Large

Loss Cases, 59 Def. Couns. J. 540, 543 (1992) ("[T]he

distinguishing characteristic is always the reinsurer's right of

individual risk rejection.").

The reinsurance relationship depends on the reinsurer

and the reinsured observing high levels of good faith. See

Unigard III, 4 F.3d at 1069. The reinsured must keep its

interests aligned with those of the reinsurer, see id., and the

reinsurer must "follow the fortunes" of the reinsured, see

Kramer, supra, at 12-13.

Reinsurance certificates usually employ standard forms.

A reinsurance certificate typically includes a "following forms"

provision that expressly limits the reinsurance to the terms and

conditions of the underlying policy and provides that the

reinsurance certificate will cover only the kinds of liability

covered in the original policy issued to the insured. The

reinsurance certificate often, as here, also includes a "follow

the fortunes" clause, which is somewhat broader than the

"following forms" clause and obligates the reinsurer to indemnify

the reinsured for any good faith payment of an insured loss.
 "Follow the fortunes" clauses prevent reinsurers from

second guessing good-faith settlements and obtaining de novo

review of judgments of the reinsured's liability to its insured.

See International Surplus Lines Ins. Co. v. Certain Underwriters

& Underwriting Syndicates at Lloyd's of London, 868 F. Supp. 917,

921 (S.D. Ohio 1994) ("Were the Court to conduct a de novo review

of [the reinsured's] decision-making process, the foundation of

the cedent-reinsurer relationship would be forever damaged.").

But while a "follow the fortunes" clause limits a reinsurer's

defenses, it does not make a reinsurer liable for risks beyond

what was agreed upon in the reinsurance certificate. See

Bellefonte Reinsurance Co. v. Aetna Casualty & Sur. Co., 903 F.2d

910, 914 (2d Cir. 1990); see also Kramer, supra, at 13 ("[T]he

concept of follow fortunes cannot create a reinsurance where none

exists."). In that regard, the reinsurer retains the right to

question whether the reinsured's liability stems from an

unreinsured loss. A loss would be unreinsured if it was not

contemplated by the original insurance policy or if it was

expressly excluded by terms of the certificate of reinsurance.
 A.

North River Insurance Company sells excess insurance.5

Between 1974 and 1978 it sold policies to Owens-Corning

Fiberglas, an asbestos manufacturer. The excess insurance

policies at issue here provided coverage for various amounts of

loss in excess of $26 million. Under those policies North River

insured Owens-Corning against "ultimate net loss," which

generally excluded "costs." Elsewhere, however, the policies

referred to North River's obligation to pay ultimate net loss and

costs and described various ways that costs incurred with the

written consent of North River would be apportioned. The

policies did not include a duty to defend clause, but gave North

River the option to participate in "the control, defense and/or

trial of any claims, suits or proceedings."

North River reinsured a portion of this risk with

various reinsurers including CIGNA Reinsurance, which issued

North River four facultative reinsurance certificates each

containing "following forms" language, a "follow the fortunes"

clause, and a consent clause requiring North River to obtain

CIGNA Re's prior approval for any changes made to the policies.
5
. North River is wholly owned by Crum & Forster Insurance
Companies, Inc., which uses North River and other subsidiaries as
issuing companies. "In 1983, Crum & Forster created a unit . . .
to coordinate and control, but not to manage, environmental and
asbestos claims for all of Crum & Forster's insurance
affiliates." Unigard III, 4 F.3d, at 1057. Accordingly,
although North River is the named party in this dispute, some of
the relevant acts attributed to North River actually were
undertaken by Crum & Forster. For example, it was Crum & Forster
that signed the Wellington Agreement. References in this opinion
to North River and to Crum & Forster refer to the same entity.
The reinsurance certificates did not expressly exclude coverage

for defense costs.

Like all asbestos producers, Owens-Corning incurred

high costs defending -- and paying out -- asbestos injury claims.

By March, 1987, it had exhausted its primary insurance and sought

coverage from its excess insurer, North River. But North River

claimed that under the terms of the policies issued to Owens-

Corning it was not obligated to cover defense costs. Because

North River and Owens-Corning had signed onto the Wellington

Agreement, a global settlement agreement providing for

arbitration of asbestos coverage disputes, the dispute went to

binding arbitration. The arbitrator found that under the terms

of the policy itself, and according to the provisions of the

Wellington Agreement, North River was obligated to cover Owens-

Corning's defense costs.6 After CIGNA Re refused to cover its

share of these defense costs, North River filed suit in federal

district court seeking to compel its reinsurer to "follow" North

River's fortunes. As we have noted, the district court granted

summary judgment to the reinsurer, CIGNA Re.

II.

The Wellington Agreement figures prominently in this

dispute and merits some discussion. By the early 1980s, tens of

thousands of asbestos injury claims had been filed against

asbestos producers who were represented by more than a thousand

6
. Under its policies North River has paid Owens-Corning more
than $300 million in liability coverage and more than $250
million in defense costs. North River, 831 F. Supp. at 1135.
law firms nationwide. See Lawrence Fitzpatrick, The Center for

Claims Resolution, 53 Law & Contemp. Probs. 13, 14 (1990). By

1985, manufacturers and their insurers had paid out an estimated

one billion dollars on asbestos injury claims -- with roughly

half going for costs alone. Unigard III, 4 F.3d at 1055.

Meanwhile, there was a growing backlog of unresolved claims. Id.

Asbestos producers, insurance carriers, and courts tried to craft

solutions to meet this crisis.

In 1985, several insurers and asbestos producers

entered into the Agreement Concerning Asbestos Related Claims.

Known as the Wellington Agreement because of the mediation of

then-Yale Law School Dean Harry Wellington, the Agreement

established the Asbestos Claims Facility, a non-profit claims

handling center that coordinated claim payments on behalf of the

asbestos producers. The signatories to the Agreement sought to

reduce asbestos litigation awards while lowering the associated

costs. The Agreement encouraged settlements in place of costly

litigation and established arbitration procedures to adjudicate

claims that producers and their insurers could not settle. North

River's parent, Crum & Forster, and Owens-Corning signed on.

CIGNA Re, North River's reinsurer, did not.7

Wellington did not rewrite existing policies between

producers and their insurers. Rather, the Agreement aimed to

avoid coverage disputes by applying insurance arrangements "in a

7
. In 1985, CIGNA Re was INA Reinsurance. See infra note 27.
INA Re's corporate parent, INA, was a signatory.
consistent manner." Wellington Agreement at 1. In several

places, the Agreement established default coverage provisions to

cover disputes but with the caveat "unless [the policy] expressly

provides otherwise." See id. § XI, ¶¶ 1, 3, § XV, ¶ 5, and §

XVIII, ¶ 1. Similarly, in Appendix D, Wellington required the

signatory insurers and policy holders to "schedule" their

policies to clarify particular features of coverage. Appendix D

did not require insurers to provide coverage for defense costs;

in fact, parties could agree to schedule their policies expressly

to exclude defense costs. In the absence of any designation,

however, Wellington set up a presumption that defense costs would

be covered.

Appendix D set out nine "schedules" or generic

categories of coverage: A through I. The insurer and the

insured were supposed to agree on which category applied to their

policy. For our purposes, the significant differences lie among

categories "G," paying defense costs or "allocated expenses"

beyond policy limits, "H," paying allocated expenses within the

policy limits, and "I," not paying allocated expenses at all.

But Appendix D also provided for a sanction if the insurer did

not schedule the policy. By failing to schedule, the insurer was

deemed to have assented to the policy-holder's designation.

A.

Crum & Forster and Owens-Corning signed the Wellington

Agreement on June 19, 1985. In accordance with the requirements

of Appendix D, each party was to execute a scheduling form for

every policy subject to the Agreement. Owens-Corning submitted
the required form, scheduling its policies with North River as

"G," which provided coverage for allocated expenses in addition

to policy limits. North River did not agree to Owens-Corning's

scheduling, but did not register its disagreement on the

scheduling form. Instead of executing the required forms, North

River, through Crum & Forster, wrote letters to Owens-Corning

detailing what it did and did not agree to cover. North River

contended that its correspondence constituted a proper challenge

to Owens-Corning's scheduling because a separate provision of the

Wellington Agreement, Appendix B, permitted subscribing insurers

to reserve the right to raise defenses of exclusions of defense

obligations or payments.

On March 13, 1987, the Asbestos Claims Facility

notified North River that insured claims had exhausted the

coverage on Owens-Corning's primary insurers' policies. Shortly

thereafter, North River began receiving bills from Owens-Corning

seeking indemnification for liability and reimbursement of

defense costs. North River paid the liability claims but denied

coverage for defense costs.

In accordance with Wellington's procedures, Owens-

Corning and North River submitted their dispute to arbitration.

They went first to non-binding arbitration, where Owens-Corning

argued: (1) North River waived its rights to contest the policy

scheduling, (2) North River acted in bad faith by failing to pay

defense costs, and (3) the policies, as amended by Wellington,

required North River to pay defense costs. The arbitrator

believed that, if litigated, North River could prevail against
Owens-Corning's waiver and bad faith claims, but would have

difficulty with the argument that the policy required payment of

defense costs. Therefore, he proposed a settlement under which

the policies would be rescheduled as "H" -- "the insurance policy

pays allocated expenses and such expenses apply against aggregate

limits."

When Owens-Corning and North River rejected the

proposed settlement, the matter went to binding arbitration. On

July 26, 1989, after a six-day proceeding, the arbitrator,

retired United States District Court Judge H. David

Hermansdorfer, ruled that North River was liable for Owens-

Corning's defense costs. The arbitrator first examined North

River's failure to comply with the scheduling requirement. He

found that, under Wellington, insurers could properly challenge a

policy holder's proposed schedule, but the challenge had to

follow Wellington procedures, particularly the Appendix D

scheduling requirement. Judge Hermansdorfer held that the letter

response failed to satisfy Wellington's scheduling requirements.

Because of its failure to use Wellington's Appendix D schedule to

assert its challenge, North River was deemed to have assented to

Owens-Corning's "G" designation. The arbitrator also relied on

Wellington's presumption that, unless expressly excluded, all

policies provided coverage for allocated costs.

But the arbitrator also examined the policy language,

and found North River liable for defense costs on that basis as

well. He noted that the policy language did not expressly

exclude payment of defense costs and found the policy provided
for payment of costs upon consent of the insurer. Relying on

case law and expert testimony about industry custom, the

arbitrator found that policy language conditioning an insurer's

duty to pay defense costs on receipt of its prior consent

actually meant such consent could not be withheld unreasonably.

According to the arbitrator, the policy relieved North River of

the obligation to pay unreasonable expenses only. The arbitrator

rejected North River's arguments that policy provisions relieving

North River of the duty to assume charge of the settlement or

defense of any claims against Owens-Corning relieved the insurer

of the obligation to pay defense costs. He held North River

responsible for Owens-Corning's defense costs because it had not

met its burden of showing that those costs were excluded from the

policy coverage.8

In September and in December, 1988, North River

solicited "any views its reinsurers may have with respect to" the

pending arbitration. App. at 1268-69, 1402-03. CIGNA Re did not

respond to these requests. The arbitrator issued his opinion

July 26, 1989, and North River, through Crum & Forster, promptly

notified its reinsurers of the unfavorable arbitration decision.

North River initially appealed the arbitrator's ruling but later

dropped the appeal.

B.

8
. See infra part III.B. for discussion of the arbitrator's
reasoning.
 CIGNA Re indemnified North River for liability under

the policies but denied coverage for defense costs. North River

then filed this suit seeking reimbursement for defense costs and

a declaratory judgment that CIGNA Re must reimburse North River

for future costs.

After discovery, the parties made cross-motions for

summary judgment. North River claimed the reinsurance

certificates obligated CIGNA Re to indemnify it for defense

costs, while CIGNA Re maintained defense costs were an

unreinsured risk. In a comprehensive opinion, the district court

granted summary judgment to CIGNA Re on two bases. First, the

court found that defense costs were not a type of risk that CIGNA

Re had reinsured. Second, the court found that North River had

violated its duty of good faith.9 Accordingly, the court held

that CIGNA Re was not bound to "follow the fortunes" of North

River and relieved the reinsurer of liability for defense costs

paid to Owens-Corning.

CIGNA Re later filed a motion for reconsideration under

Federal Rule of Civil Procedure 59(e), requesting the court to

find, as an alternative basis for summary judgment, that the

indemnity limits constituted an absolute cap on CIGNA Re's

9
. The district court concluded that CIGNA Re had demonstrated
two instances of bad faith sufficient to warrant the grant of
summary judgment. The court also found CIGNA Re had raised
disputed issues of fact with respect to other alleged
manifestations of bad faith and denied summary judgment to North
River.
reinsurance liability.10 The district court denied CIGNA Re's

motion on the ground that it had not met its burden of proving

there had been an intervening change in controlling law that

warranted reconsideration of judgment.

C.

The parties now appeal. The district court had

diversity jurisdiction under 28 U.S.C. § 1332(a)(1) (1988).11 We

have jurisdiction of North River's appeal of the grant of summary

judgment to CIGNA Re under 28 U.S.C. § 1291 (1988). We also have

jurisdiction to review the denial of summary judgment to North

River because the district court granted CIGNA Re's cross-motion

for summary judgment. See First Nat'l Bank v. Lincoln Nat'l Life

Ins. Co., 824 F.2d 277, 281 (3d Cir. 1987) (citation omitted)

("[A]n appellate court may remand with directions to enter

summary judgment on appellant's unsuccessful cross-motion for

summary judgment where there is no dispute as to the facts which

would justify judgment for the appellant."). We will apply

plenary review of the indemnification and duty of good faith

issues. Dickler v. CIGNA Property & Casualty Co., 957 F.2d 1088,

1094 (3d Cir. 1992) (district court's conclusion about the legal

operation of an insurance policy is subject to plenary review);

10
. CIGNA Re had disavowed this defense during discovery, but
pressed it upon learning another insurer had successfully used it
against North River in Unigard III, 4 F.3d at 1057. See
discussion infra part VI.
11
. North River is a New Jersey corporation with its principal
place of business in New Jersey. CIGNA Re is a Delaware
Corporation with its principal place of business in Pennsylvania.
Ram Constr. Co. v. American States Ins. Co. 749 F.2d 1049, 1053

(3d Cir. 1984) (construction of legal effect of a contract

involving no factual issues requires a determination of law and

our standard of review is plenary).

Generally, the denial of a motion for reconsideration

is reviewed for an abuse of discretion. Koshatka v. Philadelphia

Newspapers, Inc., 762 F.2d 329, 333 (3d Cir. 1985). Where a

district court's denial of a motion to reconsider is based upon

the interpretation of legal precepts, however, our review of the

lower court's decision is plenary. McAlister v. Sentry Ins. Co.,

958 F.2d 550, 552-53 (3d Cir. 1992). But, to the extent that the

district court's order was based on a factual conclusion, we

review under a "clearly erroneous" standard. Ram Constr., 749

F.2d at 1053. Accordingly, we apply a "clearly erroneous"

standard of review to the court's finding that CIGNA Re failed to

raise the limits defense before the summary judgment order was

filed. But our review of the court's finding that Unigard III is

not an intervening change in controlling law is plenary because

that denial was based upon the interpretation and application of

a legal precept.

III.

In its appeal, North River contends the district court

misinterpreted the reinsurance certificates. Specifically, it

claims the court misapplied the "follow the fortunes" clause,

improperly conducted de novo review of the arbitrator's

resolution of its coverage dispute with Owens-Corning, and

wrongly concluded that defense costs were not covered under the
original policy as reinsured.12 CIGNA Re argues that defense

costs were not covered under the North River-Owens-Corning policy

and that the district court properly relieved CIGNA Re of its

obligation to "follow the fortunes" because North River's

liability for costs stemmed from its decision to enter the

Wellington Agreement and its failure to abide by Wellington

procedures. Under New York law,13 proper application of "follow

the fortunes" requires us to analyze North River's coverage under

the original policy to determine whether defense costs were

outside the scope of the policy's coverage as reinsured. We also

must determine whether the Wellington Agreement provided coverage

where there had been none.

North River contends such analysis is an impermissible

de novo review of the arbitration. We disagree. "Follow the

fortunes" forecloses relitigation of coverage disputes because

when an insurer disclaims coverage its interests are generally

aligned with those of its reinsurer. Permitting reinsurers to

revisit coverage issues would place insurers in an untenable

position. Inevitably, defenses insurers advanced in coverage

contests would be used against them by reinsurers seeking to deny

coverage. Accordingly, a reinsurer challenging coverage may

12
. North River also maintains the district court erred in its
conclusions about the insurer's breach of the duty of good faith.
We discuss the good faith issues infra at part IV.
13
. In accordance with the parties' stipulation, we will apply
New York law to interpret the reinsurance contract and Ohio law
to interpret the underlying insurance contract.
obtain only deferential review of a determination of the

insurer's liability to the insured:
[W]hat follow the fortunes does is to
eliminate the possibility of the reinsurer's
asking a court or an arbitration panel for a
de novo determination of whether the settled
claim was or was not within the scope of the
cedent's policy. . . .
Follow the fortunes imposes a very
different standard of review. A reinsurer is
bound to follow its cedent's fortunes in
settling claims unless the reinsurer can show
that the cedent did not act in good faith or
after conducting a reasonable investigation.
Thus, a court or panel, faced with a
reinsurer's denial of liability, would ask
not whether the underlying claim was covered
by the cedent's policy, but whether there is
any reasonable basis to conclude there was
such coverage. Only if the ceding company
pays a claim that is clearly outside the
scope of its policy, would the reinsurer's
challenge be sustained.

Clifford H. Schoenberg, L'Histoire Ancienne De "Follow the

Fortunes", Mealey's Litigation Reports (Reinsurance), May 28,

1992, at 17, 20.

We do not believe that asking whether the risk was

unreinsured is tantamount to de novo review. Although the

arbitrator found that the original policy did not exclude

coverage for defense costs, he acknowledged that the arbitration

proceeding was "unique in that both the language of the policy

and the language of the Wellington Agreement [were] material to

the interpretation to be made." Arb. Op. at 17. Accordingly, we

will consider whether the arbitrator could have reached the same

result without the intervening Wellington Agreement. Because

"follow the fortunes" doctrine does not require the reinsurer to
cover risks undertaken after the certificate of reinsurance is

issued, CIGNA Re is not liable for coverage occasioned only

because of the Wellington Agreement.

A.

The reinsurance certificates employed

standard language, providing, "[T]he

liability of [CIGNA Re] . . . shall follow

that of [North River] and except as otherwise

specifically provided herein, shall be

subject in all respects to all the terms and

conditions of [North River's] policy except

such as may purport to create a direct

obligation of [CIGNA Re] to [Owens-Corning]."

Reinsuring Agreement ¶ A. The certificate

continued: All claims involving this

reinsurance, when settled by [North River],

shall be binding on [CIGNA Re], which, shall

be bound to pay its proportion of such

settlements, and in addition thereto, . . .

its proportion of expenses . . . incurred by

[North River] in the investigation and

settlement of claims or suits and, with the

prior consent of the Reinsurer to trial court

proceedings, its proportion of court costs

and interest on any judgment or award.
Id. ¶ C. North River maintains the district court's failure to

credit this language constituted a basic flaw in its analysis

denying indemnification.

The district court characterized the first part of the

quoted provisions as a "following forms" clause, suggesting that

a "following forms" clause provides somewhat narrower coverage

than a "follow the fortunes" clause, only obligating the

reinsurer to cover risks insured under the original policy.

North River, 831 F. Supp. at 1143. The district court recognized

that "follow the fortunes" doctrine goes further and requires

indemnification for all payments made in good faith that are

reasonably within the scope of the policy's coverage. Id. The

CIGNA Re reinsurance certificate contained both "following forms"

and "follow the fortunes" clauses. But the district court

discounted the import of the "follow the fortunes" language,

erroneously limiting that doctrine to settlements.

The district court called the phrase "follow the

fortunes" a misnomer, believing "[t]he British term, `follow the

settlements,' more accurately characterize[d] the effect of such

a clause." Id. The court went on to note, "The clause itself

states that `all claims involving this reinsurance, when settled

by [North River], shall be binding on [CIGNA Re] . . . .'

(emphasis added.) It does not state that CIGNA Re shall follow

in the fortune, good or bad, of any litigation involving the

underlying policy." Id. We believe the district court erred
when it limited "follow the fortunes" doctrine to settlements.14

Despite the explicit reference to "settlements" in the typical

"follow the fortunes" clause, it is well settled that the

principle applies generally to all outcomes of coverage disputes,

whether in the form of settlements or judgments.15 See 13A John

A. Appleman & Jean Appleman, Insurance Law and Practice § 7698

(1976) (and cases cited therein) (reinsurer is generally bound by

the judgment against the reinsured).16 Thus, we find the clause

applies both to settlements and to judgments.17

14
. We note, however, that despite stating that "follow the
fortunes" clauses should be limited to settlements, the district
court nevertheless went on to analyze this case under "follow the
fortunes" doctrine.
15
. We see no difference between the effects of court judgments
and arbitration decisions for "follow the fortunes" purposes. To
find otherwise would thwart "the announced policy of [the State
of New York which] favors and encourages arbitration as a means
of conserving the time and resources of the courts and the
contracting parties." Nationwide Gen. Ins. Co. v. Investors Ins.
Co. of America, 332 N.E.2d 333, 335 (N.Y. 1975).
16
. This principle is so well settled that there is a virtual
absence of contemporary case law on the issue. See Charles W.
Havens, III, Recent Developments on the "Follow the Fortunes"
Clause, in Reinsurance Litigation 1994: Current Issues and
Strategies at 27, 35-36 (PLI Com. Law and Practice Course
Handbook Series No. 695, 1994) ("Where a judgment has been
entered against the reinsured, and the judgment is for risks
covered under the reinsurance agreement, there is little room for
the reinsurer to deny indemnification of the reinsured up to the
stated policy limits, absent a lack of good faith in defending
the action. As such, most litigation involves the reinsured's
settlement of a claim for which it then seeks indemnification
from the reinsurer.")
Older cases involving reinsurance applied to judgments
the doctrine described by an early treatise writer, Franciscus
Roccus (d. 1676): iste secundus assecurator tenetur ad solvendum
omne totum quod primus assecurator solverit. We translate
Roccus's doctrine as, "the reinsurer is held in full to the
result that the primary insurer obtained," and equate it with
 1.

"Follow the fortunes" doctrine protects the risk

transfer mechanism by providing that covered losses pass

uninterrupted along the risk transfer chain. The same legal

determinations that define the insurers' obligations must apply

to reinsurers as well. See 13A Appleman & Appleman, supra, §

7698 (and cases cited therein) ("The reinsurer is generally bound

by the judgment against the reinsured . . . ."). Generally, when

an insurer loses -- or settles -- an underlying coverage dispute,

"follow the fortunes" makes the payment to the insured binding on

the reinsurer. See Mentor Ins. Co. (U.K.) v. Brannkasse, 996

F.2d 506, 517 (2d Cir. 1993) ("The follow-the-fortunes principle

. . . simply requires payment where the [insurer's] good-faith

payment is at least arguably within the scope of the insurance

(..continued)
"follow the fortunes." See Hastie v. De Peyster, 3 Cai. R. 190,
194-95 (N.Y. 1805) (insurer litigated and lost a coverage dispute
with insured; reinsurer liable for judgment and for costs
charged to the insurer); c.f. New York State Marine Ins. Co. v.
Protection Ins. Co., 18 F. Cas. 160, 160-161 (C.C. Mass. 1841)
(applying New York law, found reinsurer bound to pay judgment and
costs awarded against insurer in coverage suit with insured so
long as suit conducted in good faith).
17
. We observe that the arbitration outcome between Owens-
Corning and North River may be a hybrid, possessing qualities of
both a decision and a settlement. The Wellington Agreement has
been accurately described as "a global settlement." See, e.g.,
Kenneth S. Abraham, Cleaning Up The Environmental Liability
Insurance Mess, 27 Val. U. L. Rev. 601, 607 (1993). Accordingly,
resolutions of coverage disputes under the terms of Wellington
arguably may be settlements, rather than judgments. The parties
to this dispute, however, have characterized the arbitrator's
decision as a judgment. Because we find that "follow the
fortunes" doctrine applies to judgments as well as to
settlements, we need not refine the distinction here.
coverage that was reinsured."); Christiania Gen. Ins. Corp. v.

Great Am. Ins. Co., 979 F.2d 268, 280 (2d Cir. 1992) ("A

reinsurer cannot second guess the good faith liability

determinations made by its reinsured . . . ."); Insurance Co. of

New York v. Associated Mfrs.' Mut. Fire Ins. Co., 74 N.Y.S. 1038,

1039 (N.Y. App. Div. 1902), aff'd, 66 N.E. 1110 (N.Y. 1903) ("In

the absence, therefore, of fraud or bad faith on the part of the

[insurer], the [reinsurer], by the terms of its policy . . . is

in no position to object to the mode of adjustment as made by the

[insurer]."). Thus, "follow the fortunes" doctrine creates an

exception to the general rule that contract interpretation is

subject to de novo review. See, e.g., Schoenberg, supra, at 20

("Follow the fortunes imposes a very different standard of

review. . . . [A] court or panel, faced with a reinsurer's denial

of liability, would ask not whether the underlying claim was

covered by the cedent's policy, but whether there is any

reasonable basis to conclude there was such coverage.")

2.

There are compelling policy reasons that counsel

against de novo review under "follow the fortunes" doctrine.

Although the interests of a primary insurer and its insured may

often be adverse, "the interests of a reinsurer and the ceding

primary insurer with respect to a pending claim are generally

identical. . . . [T]he interests of both parties are furthered

through the primary insurer's efficient investigation and defense

of the claim and through the resolution of the claim on the best

terms possible." Unigard Sec. Ins. Co. v. North River Ins. Co.,
594 N.E.2d 571, 574 (N.Y. 1992) (citations omitted) ("Unigard

II"). To permit the reinsurer to revisit coverage issues

resolved between the insurer and its insured would place insurers

in the untenable position of advancing defenses in coverage

contests that would be used against them by reinsurers seeking to

deny coverage. Accordingly, "follow the fortunes" doctrine

generally forecloses relitigation of coverage disputes because:
Were the Court to conduct a de novo review of
[the insurer's] decision-making process, the
foundation of the cedent-reinsurer
relationship would be forever damaged. The
goals of maximum coverage and settlement that
have been long established would give way to
a proliferation of litigation. Cedents faced
with de novo review of their claims
determinations would ultimately litigate
every coverage issue before making any
attempt at settlement."

International Surplus Lines Ins. Co. v. Certain Underwriters &

Underwriting Syndicates at Lloyd's of London, 868 F. Supp. 917,

921 (S.D. Ohio 1994).

3.

But, "[w]hile the `follow the fortune' clause is
certainly a broad one, it is clear that the reinsurer is liable

only for `a loss of the kind reinsured.'" Insurance Co. of N.

Am. v. United States Fire Ins. Co., 322 N.Y.S.2d 520, 523 (N.Y.

Sup. Ct. 1971) (quoting Western Assurance Co. v. Poole, 1 K.B.

376) (1903)), aff'd, 348 N.Y.S.2d 122 (N.Y. App. Div. 1973). "It

would be an unwarranted and indeed tortured construction of that

clause to hold a reinsurer bound, for example, to pay if the

prime insurer paid monies to its insured on a claim completely
without the scope of the policy and not in good faith." Id.; see

also Gregory & Christakos, supra, at 544 & n.40 (and cases cited

therein) (reinsurer is only responsible for covered claims).

Where the reinsured's liability attaches from a settlement or

binding judgment, the reinsurer is not accountable if the

liability arises from uninsured activity. See 2 Klaus

Gerathewohl et al., Reinsurance Principles and Practice ch. 14,

at 51 (John C. La Bonte trans., 1980) ("Since the freedom of the

reinsurer to assume or refuse a risk is a typical element of

facultative reinsurance, it would be contrary to this type of

reinsurance if the reinsurer were obliged to follow subsequent --

factual or contractual -- changes in the underlying direct

insurance.").

This protection for the reinsurer is based on

principles of contractual intent: a reinsurer cannot be held

liable for a kind of loss that it did not agree to cover. This

distinction between reinsured and unreinsured risk is

particularly important in facultative reinsurance where the

reinsurer accepts only specific risks. Thus, for example, in

Insurance Co. of North America, 322 N.Y.S.2d at 524, the court

found a reinsurer was not liable to cover a payment for lost

cargo under a facultative certificate where the loss was due to a

"shore risk" that was not insured under the original policy

because "[t]he defendant never consented to reinsure this loss

not covered in the original insurance policy." In Bellefonte
Reinsurance Co. v. Aetna Casualty & Surety Co., 903 F.2d 910 (2d

Cir. 1990), Aetna had settled a coverage dispute with A.H.
Robins, manufacturer of the Dalkon Shield, agreeing to pay an

amount substantially in excess of the cap stated in the

reinsurance certificates. The court rejected the insurer's claim

that its reinsurer should cover these payments because "[s]uch a

reading would be contrary to the parties' express agreement and

to the settled law of contract interpretation." Id. at 913. And

in American Insurance Co. v. North American Co. for Property &

Casualty Insurance, 697 F.2d 79, 80-81 (2d Cir. 1982) ("NACPAC"),

the court held the reinsurer was not obligated to "follow the

fortunes" of the insurer in making a settlement that covered

punitive damages resulting from corporate misconduct because the

underlying policy and the reinsurance certificate did not cover

such misconduct.

4.

The arbitrator held North River liable to pay Owens-

Corning's defense costs. Both parties contend the basis of that

holding forms the heart of this dispute and their arguments raise

competing principles. On the one hand, in order to preserve

"follow the fortunes" doctrine, courts may not conduct de novo

review of a judgment imposing liability on the insurer. On the

other, to protect the contractual intent of the parties, courts

must reexamine the judgment to determine whether the liability

represents a risk not contemplated by the terms of the underlying

policy as reinsured. But "follow the fortunes" doctrine requires

a court to find reinsurance coverage unless the reinsurer

demonstrates the liability to the insured was the result of fraud

and collusion or not reasonably within the scope of the original
policy.18 We conduct plenary review of the district court's

interpretation of the reinsurance certificates and its

application of controlling legal principles. See New Castle

County v. Hartford Accident & Indem. Co., 933 F.2d 1162, 1183 (3d

Cir. 1991) (standard of review of district court's interpretation

of insurance polices and its application of controlling legal

principles is plenary). In applying the doctrine of "follow the

fortunes," the district court properly required CIGNA Re to show

that the underlying policy language "as a matter of Ohio law,

unambiguously provides that the policies do not pay defense

costs." North River, 831 F. Supp. at 1144 (citing NACPAC, 697

F.2d at 80-81). But we believe the district court misapplied

this standard and came to the wrong conclusion. CIGNA Re has not

made the required showing.

B.

CIGNA Re claims defense costs were not reinsured

because they were not covered under the original insurance

policy. Accordingly, "[t]o determine what type of loss was

reinsured, we must turn to the original insurance contract."

Insurance Co. of N. Am., 322 N.Y.S.2d at 523. North River

insured Owens-Corning against "ultimate net loss," North River-

Owens-Corning Insuring Agreement ("Insuring Agreement") ¶ 1,

which was defined as "the sums paid in settlement of losses for

18
. We will address the reinsurer's allegations of bad faith
later in the opinion. Here we will limit our discussion to CIGNA
Re's contention that the payments made were outside the scope of
the policy as reinsured.
which the Insured is liable . . . and shall exclude all `Costs.'"

Id. ¶ 13. The policy defined "costs" as "interest on judgments,

investigation, adjustment and legal expenses." Id. ¶ 14.19 The

policy, however, also provided that costs incurred by Owens-

Corning "with the written consent of [North River]" would be

apportioned. Id. ¶ 15. Elsewhere the policy referred to North

River's "obligation to pay any ultimate net loss and costs" when

underlying limits have been paid. Id. ¶ 11.

The policy did not include a duty to defend clause.

Instead, the policy included a provision holding Owens-Corning

"solely responsible for the investigation, settlement, defense

and final disposition of any claim made or suit brought or

proceeding instituted against the Insured . . . ." Id. ¶ 9.

Another provision stated:
At no time shall [North River] be called upon
to assume charge of the settlement or defense
of any claims made or suits brought or
proceedings instituted against [Owens-
Corning], but [North River] shall have the
right and shall be given the opportunity to
associate with [Owens-Corning] or its
underlying insurer or insurers, or both, in
the control, defense and/or trial of any
claims, suits or proceedings which, in the
opinion of [North River], involves or appears
reasonably likely to involve [North River].

Id. ¶ 8.

19
. The policy excluded from "costs" expenses and regular fees
for "counsel on general retainer" and "office expenses of the
Insured." Neither of the parties to this dispute has addressed
the significance of this "exclusion within an exclusion." See
infra note 20 for a discussion of the Sixth Circuit's treatment
of an identical provision.
 The parties have stipulated that Ohio law governs the

interpretation of the underlying insurance policy. Accordingly,

we must turn to Ohio case law to interpret the provisions

relating to the exclusion for costs.

1.

Ohio law places the burden of proving an exclusion from

coverage on the insurer. "An exclusion must be stated clearly in

explicit wording setting forth with specificity exactly what is

to be excluded." River Servs. Co. v. Hartford Accident & Indem.

Co., 449 F. Supp. 622, 626 (N.D. Ohio 1977) (citing numerous

cases); see also Moorman v. Prudential Ins. Co., 445 N.E.2d

1122, 1124-25 (Ohio 1983) (citation omitted) ("[T]hat which is

not clearly excluded from the operation of such contract is

included in the operation thereof. . . . If it were intended

that the exclusion should apply in this circumstance, then

language so extending application of the exclusion could have

been incorporated into the policy.").

The arbitrator, too, placed the burden of proving an

exclusion from coverage on the insurer, believing North River

needed to prove that the policy language relieved it of the duty

to pay defense costs. Under the terms of the original policy,

the arbitrator found the exclusion for costs was qualified by the

consent provision. The arbitrator stated, "The condition of

consent does not constitute an exclusion of the obligation of the

insurer to pay costs," and concluded that North River had not

carried its burden of proving the exclusion for costs applied.

Arb. Op. at 20, 22-23.
 It is well established under Ohio law that:
The meaning of a contract is to be
gathered from a consideration of all its
parts, and no provision is to be wholly
disregarded as inconsistent with other
provisions unless no other reasonable
construction is possible.
A special provision will be held to
override a general provision only where the
two cannot stand together. If reasonable
effect can be given to both, each is to be
retained.

Karabin v. State Auto. Mut. Ins. Co., 462 N.E.2d 403, 406-07

(Ohio 1984) (quoting German Fire Ins. Co. v. Roost, 45 N.E. 1097,

1097-98 (Ohio 1897) (paragraphs 1 and 2 of syllabus). Although

the treatment of defense costs under the Owens-Corning-North

River policy is inconsistent, the arbitrator's interpretation

gives reasonable effect to the various parts. For example,

although at paragraph one of the policy North River agreed to

indemnify Owens-Corning against "ultimate net loss," which was

defined to exclude "costs," paragraph eleven referred to North

River's obligation to pay both ultimate net loss and costs. The

arbitrator reasonably interpreted these apparent inconsistencies

as providing a limited exclusion for costs.

The district court focused on paragraph fifteen of the

policy, which refers to the apportionment of costs incurred "with

the written consent of the Company," and found that North River

could only be liable for defense costs associated with litigation

or settlement to which it had given its formal consent. But such

a literal reading of paragraph fifteen would be inconsistent with

paragraph eleven of the policy, which provides that North River's
obligation to pay costs shall not attach until the underlying

limits have been paid. Compliance with both paragraphs is

practically infeasible. Read literally, these paragraphs would

require an insured to obtain written consent from its excess

insurer before it could permit its primary insurer to engage in

litigation or settlement in its behalf -- even though the excess

insurer would not be responsible for the resulting liability

unless the primary insurer's limits were exhausted. Strict

construction of both provisions would yield an unreasonable

effect.

After examining the policy language, the arbitrator

determined, "The word `consent' and associated words employed in

[the insurance policy] are not to be given their plain or literal

meanings . . . ." Arb. Op. at 23. Having implicitly found an

ambiguity, he looked to extrinsic evidence to explain the meaning

of consented-to costs. He noted that credible evidence

established that these words have particular meaning within the

insurance industry and relied on testimony that the condition of

consent is a term of art within the insurance industry. Id. For

example, Graves Hewitt, an insurance consultant and former Chief

Executive Officer of First State Insurance Company, stated that

it would be "very rare" for an insured to make a formal request

of an insurer for consent. Id. at 20. C. James Ayliffe, a

retired British insurance executive "whose substantial career was

involved within the American insurance market," testified that he

had never experienced a case where the insured would go to the

excess carrier for consent to costs being incurred. Id. And
William G. Carson, Director of Home Office Underwriting for Crum

& Forster, explained that a policy requirement that written

consent be obtained before costs are incurred does not

necessarily constitute a condition to the payment of costs. Id.

Therefore, on the basis of the language of the policy and

industry practice, the arbitrator concluded that the inconsistent

provisions could not establish an express exclusion of

coverage.20 Id. at 23. We believe the arbitrator's

interpretation is not unreasonable under Ohio law and gives

20
. Recently, the Court of Appeals for the Sixth Circuit
addressed this question in a similar context and, finding an
ambiguity in an insurance policy, ordered a remand for
consideration of extrinsic evidence of intent to cover defense
costs. In Affiliated FM Insurance Co. v. Owens-Corning Fiberglas
Corp., 16 F.3d 684 (6th Cir. 1994), the court considered an
identical definitional provision, but focused on different
language: Within the paragraph excluding costs from the
definition of loss, a parenthetical excluded from the exclusion
in-house defense costs. The court noted that neither the
district court nor the parties was "able to explain, without
looking outside of the policy, why the definition of loss would
carve out" this exception within an exception. Id. at 687. The
court then found the policy ambiguous because, under Ohio law,
"contracts are not to be interpreted in a manner that renders any
phrase surplusage." Id.
Neither North River, Owens-Corning, nor the arbitrator
addressed whether the same parenthetical exclusion within the
exclusion rendered the definition of costs ambiguous in this
case. Without adopting the Sixth Circuit's conclusion, we
nevertheless note that the presence of such an ambiguity might
have defeated North River's efforts to establish an express
exclusion for costs. It is well settled under Ohio law that
provisions in an insurance contract that are "reasonably
susceptible of more than one meaning will be construed liberally
in favor of the insured and strictly against the insurer."
Faruque v. Provident Life & Accident Ins. Co., 508 N.E.2d 949,
952 (Ohio 1987) (citing numerous cases). Accordingly, we note
that application of this rule to the provision could have yielded
the conclusion that defense costs were covered.
effect to the inconsistent requirements of prior consent and

exhaustion of underlying limits in the policy.

2.

To deny reimbursement under "follow the fortunes"

doctrine, the reinsurer must show that the arbitrator's decision

allowed coverage of defense costs that were not reasonably within

the scope of the policy. See, e.g., North River, 831 F. Supp. at

1144 (requiring demonstration that underlying policies

"unambiguously" do not pay defense costs). Accordingly, it is

CIGNA Re's burden to prove that Ohio law would not support the

arbitrator's construction of the policy. CIGNA Re, however, has

neither relied on nor cited to any Ohio case directly on point.

Nor have we found any.

The arbitrator asserted, without citation to supporting

cases, that his interpretation of the consent clause was

"consistent with the overwhelming body of American case law which

declares where the reservation to consent to a material contract

matter is made, such consent cannot unreasonably be withheld."

Arb. Op. at 22. Consent clauses are drafted for the benefit of

insurers -- they are intended to protect insurers against

liability for mishandled suits and settlements. See 7C Appleman

& Appleman, supra, § 4681 (provision requiring insurer's prior

consent gives insurer right to protect itself against unwarranted

liability claims). Ohio courts construing such language have

required reimbursement despite the absence of formal consent,
finding the condition applies only where consent has been

reasonably withheld.21

The district court stated that "cases from numerous

other jurisdictions support the conclusion that these policy

terms unambiguously do not provide for the payment of defense

costs." North River, 831 F. Supp. at 1145. The cases cited by

the district court linked liability for defense costs to an

insurer's duty to defend, relieving insurers of liability for

costs where there was no duty to defend.22 We note, however,

that because these cases come from jurisdictions other than Ohio,

they do not control our interpretation of the insurance contract.

Although the district court believed that the policies

did not contemplate North River consenting to pay defense costs

without first agreeing to associate in the defense, the

arbitrator declined to link the consent clause to the exclusion

21
. See, e.g., Bogan v. Progressive Casualty Ins. Co., 521
N.E.2d 447, 452 (Ohio 1988) ("[A]n insurer may not avoid coverage
by unreasonably refusing to consent to a settlement . . . .");
Motorists Mut. Ins. Co. v. Handlovic, 492 N.E.2d 417, 419 (Ohio
1986) ("An insurer may not avoid a valid judgment obtained by an
insured . . . solely because the insurer did not provide written
consent to the prosecution of the action resulting in the
judgment."); c.f. American Employers Ins. Co. v. Metro Regional
Transit Auth., 802 F. Supp. 169, 183 (N.D. Ohio 1992) (insured
had a right to be reimbursed for its expenditures where insurer
wrongfully refused to defend), rev'd on other grounds, 12 F.3d
591 (6th Cir. 1993).
22
. See Chubb/Pacific Indem. Group v. Insurance Co. of N. Am.,
233 Cal. Rptr. 539, 543 (Cal. Ct. App. 1987); Cornhusker Agric.
Ass'n v. Equitable Gen. Ins. Co., 392 N.W.2d 366, 372 (Neb.
1986); Crown Ctr. Redevelopment Corp. v. Occidental Fire &
Casualty Co., 716 S.W.2d 348, 357 (Mo. Ct. App. 1986); Chicago &
Illinois R.R. Co. v. Reserve Ins. Co., 425 N.E.2d 429, 433-34
(Ill. App. Ct. 1981).
of a duty to defend. He found that the language in paragraphs

eight and nine, making the insured "solely responsible" for the

defense effort and acquitting North River of any responsibility

to assume charge of the defense effort, was "not dispositive of

any substantive economic matter" but controlled the assignment of

procedural responsibilities. Arb. Op. at 18. We do not think it

was unreasonable to interpret this policy without linking the

obligation to pay defense costs to a duty to defend. It would

appear that an excess insurer and its insured would have good

reason to omit a duty to defend clause from an excess policy: in

most instances the primary insurer already would have accepted

the duty to defend the insured. That reason, however, does not

compel the conclusion that the insured also intended to relieve

the excess insurer of all liability for defense costs accrued in

excess of the primary insurer's limits -- especially when such

costs would be incurred in an effort to avoid liability that the

excess insurer would have to pay. Accordingly, we cannot agree

with the district court that under the facts of this case an

agreement to pay costs must be linked to acceptance of a duty to

defend.

C.

CIGNA Re relies on the district court's finding that

the arbitrator's decision was based on the Wellington Agreement

and was not supported by the language of the original policies as

reinsured. North River, 831 F. Supp. at 1145. But we believe

the district court erred when it concluded that the arbitrator's

decision was not supported by the underlying insurance policies.
The arbitrator devoted several pages of his opinion to an

analysis of the condition of consent to the payment of defense

costs in the insurance policy. He concluded North River was

obligated to cover Owens-Corning's defense costs because the

insurer had failed to meet its burden of establishing that the

policy excluded coverage of defense costs. Arb. Op. at 19-23.

The district court rejected the arbitrator's

conclusion, adopting instead the reasoning of courts from

jurisdictions other than Ohio to interpret the policy. But this

de novo review of the arbitrator's judgment was improper. As we

have noted, the purpose of "follow the fortunes" doctrine is to

preserve the risk transfer mechanism. Without "follow the

fortunes" doctrine, reinsureds would be in the impossible

position of advancing defenses in coverage contests that could be

used against them by reinsurers seeking to deny liability. This

would frustrate the expectations of the reinsurance relationship.

To that end, the doctrine forecloses courts from conducting de

novo review of dispositions of coverage disputes between insurers

and their insureds for the benefit of reinsurers. Generally,

reinsurers are limited to two inquiries: first, they may ask

whether an insurer engaged in fraud or collusion in the payment

of a claim, and second, whether a claim arose from a risk clearly

outside the policy as reinsured. Once those questions are

answered in the negative, the reinsurer may not second guess the

resolution of a particular dispute over coverage.

Accordingly, absent fraud or collusion, to avoid

liability CIGNA Re had to show that the arbitrator's decision
ordered payments that were not reasonably within the scope of the

policy as interpreted under Ohio law. But the arbitrator's

conclusion that defense costs are reasonably within the scope of

coverage contemplated by the original policy is not inconsistent

with Ohio law. Because CIGNA Re has failed to establish that

Ohio law would not support the arbitrator's construction of the

insurance policy provision as requiring the insurer to pay

defense costs, we hold CIGNA Re must follow North River's

fortunes and reimburse for the defense costs paid.23

1.

CIGNA Re emphasizes that, under Wellington, there was a

presumption of coverage for defense costs: "[U]nless it

expressly provides otherwise, each excess insurance policy . . .

also shall pay allocated expenses . . . ." Wellington Agreement

§ XI, ¶ 1. CIGNA Re contends this provision changed the

insurance coverage, and the reinsurer need not follow the

insurer's fortunes because, before the Agreement, North River was

not liable for defense costs.24 We disagree. Under Ohio law,

23
. We also recognize that CIGNA Re could have avoided liability
for defense costs if it had expressly excluded such coverage in
the reinsurance certificates it issued to North River. The
reinsurance certificates, however, did not contain such an
exclusion. On the contrary, the "follow the fortunes" clauses in
the CIGNA Re-North River reinsurance certificates expressly refer
to the reinsurer's obligation to reimburse for "court costs and
interest on any judgment or award" arising out of consented-to
litigation. Reinsuring Agreement ¶ C. Because CIGNA Re has not
contended that its certificates excluded costs, we will not
explore the implications of this provision.
24
. CIGNA Re has noted that in another case involving North
River excess insurance certificates, the Court of Appeals for the
Second Circuit concluded that signing Wellington altered North
the standard for establishing an exclusion from coverage is

substantially the same as that provided by Wellington: "An

exclusion must be stated clearly in explicit wording setting

forth with specificity exactly what is to be excluded." River

Servs., 449 F. Supp. at 626. We have found that under this

standard North River could have been liable for Owens-Corning's

defense costs even before it signed onto Wellington. See supra

part III.B.

Furthermore, we believe CIGNA Re's argument that the

arbitrator's decision is tainted by Wellington's presumption of

coverage for costs is misleading. It overlooks one purpose of

"follow the fortunes" doctrine, which is to foreclose the

relitigation of coverage disputes. Our analysis is governed by

the inquiry required by "follow the fortunes" doctrine: Was the

paid risk clearly outside the scope of the original policy's

coverage? Because a reasonable interpretation of the original

policy under Ohio law would allow coverage for defense costs, the

arbitrator's decision survives our limited review. Therefore we

(..continued)
River's obligation to pay costs. Unigard III, 4 F.3d at 1068
("[T]he Agreement altered North River's liabilities, including
requiring it to pay some claims and administrative costs for
which it was not liable under the original policies."); see also
id. at 1066 ("[T]he signing of the Wellington Agreement
substantially altered the terms of the reinsurance
certificate."). Unigard III is distinguishable from our case,
however. In Unigard III, the court found that the payments for
which North River sought reinsurance coverage were made pursuant
to an insurance-allocation formula that was purely a creature of
the Wellington Agreement. Here CIGNA Re has not challenged the
allocation formula. Thus, the Second Circuit's holding that the
Wellington Agreement materially altered North River's coverage is
not applicable to the dispute in this case.
hold that absent bad faith "follow the fortunes" compels coverage

by the reinsurer.

IV.

We turn next to the question whether North River

violated the duty of good faith implied in every reinsurance

contract. To establish a breach of the duty, the district court

required the reinsurer, CIGNA Re, to prove "(1) that the

reinsured acted with gross negligence or recklessness, and (2)

that the reinsurer as a result has suffered `prejudice,' defined

as `economic injury.'" North River, 831 F. Supp. at 1146

(citing Unigard III, 4 F.3d at 1068-69). Holding that the

failure to take all businesslike steps could constitute gross

negligence, the court concluded that North River violated its

duty to CIGNA Re through "gross negligence in: (1) failing to

recognize how signing the Wellington Agreement materially

expanded the defense obligation under the Owens-Corning policies,

and (2) triggering the strict penalty in Appendix D of the

agreement by failing to schedule the policies within the 20-day

period." Id. North River contends the district court erred

because bad faith requires a willful disregard of the reinsurer's

interest. Although North River incorrectly states the applicable

standard of care,25 we hold that CIGNA Re has not established, as

25
. Under New York law, which the parties agree governs the
reinsurance relationship, an insurer violates the duty of good
faith where its conduct rises to the level of gross negligence or
recklessness. See Unigard III, 4 F.3d at 1069. It is,
therefore, not necessary to find willful disregard of the
reinsurer's interests.
a matter of law, that North River breached its duty of good

faith. On the contrary, we find only two instances of North

River's conduct that raise questions of bad faith.

A.

When analyzing the duty of notice owed by a reinsured

to its reinsurer, the Court of Appeals for the Second Circuit

described the duty as one of "utmost good faith, requiring the

reinsured to disclose to the reinsurer all facts that materially

affect the risk of which it is aware and of which the reinsurer

itself has no reason to be aware." Christiania Gen. Ins. v.

Great Am. Ins., 979 F.2d 268, 278 (2d Cir. 1992) (citing Sun Mut.

Ins. Co. v. Ocean Ins. Co., 107 U.S. 485, 510 (1883)).

Nevertheless, "because these contracts are usually negotiated at

arms length by experienced insurance companies," the court went

on to reject Christiania's characterization of the relationship

between a reinsured and reinsurer as being inevitably fiduciary

in nature. Id. at 280-81. In the same vein, in Unigard III, the

Second Circuit conceded that utmost good faith may not accurately

describe the modern relationship of sophisticated insurers

bargaining at "arms length." Unigard III, 4 F.3d at 1066.
"Nevertheless," the court concluded, "because information

regarding risks lies with the ceding insurer, the reinsurance

market depends upon a high level of good faith to ensure prompt

and full disclosure." Id. at 1066.

But in applying this standard, the Unigard III court

required the reinsurer to show bad faith, not mere negligence.

In Unigard III, the court held that North River's negligent
failure to give Unigard, its reinsurer, adequate notice of its

signature to the Wellington Agreement did not breach its duty of

good faith.26 The court emphasized that "the proper minimum

standard for bad faith should be gross negligence or

recklessness." Id. at 1069.

The origin of the standard of utmost good faith lies in

the insurer-insured relationship. But, as a recent commentator

has noted, "[r]einsurance involves two sophisticated business

entities familiar with the business of insurance who bargain at

arm's length for the terms in their contract." Steven W. Thomas,

Utmost Good Faith in Reinsurance: A Tradition in Need of

Adjustment, 41 Duke L.J. 1548, 1554 (1992). Thomas notes, "The

phrase `good faith' is used in a variety of contexts, and its

meaning varies somewhat with the context." Id. (citing the

Restatement (Second) of Contracts § 205 (1981)). He reasons,

"[T]he differences between original insurance and reinsurance

argue for a more fact-specific application of the good faith

standard." Id. at 1553. In our view, the approach taken by the

26
. Unigard III addressed two issues that have not been raised
in this dispute. First, Unigard had objected to the effects of
Wellington because, under the Agreement, North River and Unigard
became liable for a greater proportion of claims due to an
insurance-allocation formula peculiar to the Agreement. Unigard
III, 4 F.3d at 1066. That provision of Wellington is not raised
in this dispute. See supra note 24. Second, in Unigard III, the
reinsurance certificates gave the reinsurer the right to
associate in the defense and settlement of claims, but under
Wellington the Facility became the "sole agent" and had
"exclusive authority and discretion to administer, evaluate,
settle, pay or defend all asbestos-related claims." Id. This
issue has not been raised in the present dispute, either.
Second Circuit in Unigard III applies an appropriate standard of

good faith. We adopt that standard in the reinsurance context.

The district court granted summary judgment to CIGNA

Re, finding North River had violated its duty of good faith by

gross negligence in (1) failing to recognize how signing the

Wellington Agreement materially expanded the defense obligation

under the original policies, and (2) triggering the strict

penalty in Appendix D of the Agreement by failing to schedule.

North River, 831 F. Supp. at 1146. The district court found

other evidence of bad faith that it did not rely on in granting

summary judgment to CIGNA Re because the evidence presented

disputed questions of fact: specifically, North River's

rejection of the compromise settlement, its failure to inform

CIGNA Re of the nature of the settlement, and its failure to keep

CIGNA Re apprised of the progress of the arbitration proceeding.

Id. at 1147-48. The district court also noted that North River's

decision to drop the appeal could have raised a question of bad

faith, but found the unlikelihood of success meant that no

economic prejudice resulted to CIGNA Re. Id. at 1148.

1.

The district court noted that before signing onto

Wellington, Crum & Forster did not perform a cost-benefit

analysis of the Agreement's impact on various types of policies

and, particularly, did not analyze the effect on the Owens-

Corning policies. Id. at 1146-47. But Crum & Forster made a

general assessment of the benefits Wellington offered to its

policyholders, to itself as an insurer, and to its reinsurers.
The company decided to join Wellington "because it was

unconscionable that public money was being wasted the way it

was." See Heap Dep. at 119, reprinted in app. at 1816. Before

signing Wellington, senior executive officers at North River's

corporate parent, Crum & Forster, evaluated the proposal and

considered the overall benefits of entering into the Agreement.

Ian Heap, a Senior Vice President who was the senior executive

officer responsible for Crum & Forster's participation in the

Wellington negotiations, attended informational meetings and

provided status reports to senior management. And before

entering into the final Agreement, Crum & Forster signed a

"Conditional Subscription" to Wellington. One of the conditions

to proceeding with the final Agreement was the receipt of

sufficient support from reinsurers. To that end, the company

alerted all its reinsurers that it was considering signing

Wellington and asked for their opinions. None of them questioned

the decision. Crum & Forster held meetings with reinsurers in

May and June, 1985, and received reinsurer support for the idea

of signing the Agreement. A memorandum from Ian Heap reporting

on these meetings concludes, "The commitment by major reinsurers

in both the international and domestic markets to support the

Facility was sufficient comfort to the majority of conditional

insurer subscribers that most of them signed the final Agreement

on June 19th."27 App. at 1831. Thus, the record indicates

27
. Among the reinsurers North River believed had "accepted the
basic principles and agreed the payments made by the Facility on
these principles would be seen to be good payments" was INA
Reinsurance Company. App. at 1830. CIGNA Re is the successor to
North River broadly considered the effect that signing the

Agreement would have on its reinsurance coverage and made a

deliberate judgment that it would be beneficial to participate.28

Nevertheless, it appears that Crum & Forster failed to make a

narrow analysis of the effect of Wellington on individual

policies or policyholders and consequently on its reinsurance

agreements.

We need not decide whether this failure raises a

question of Crum & Forster's gross negligence or recklessness

toward its reinsurers because to establish a breach of the duty

of good faith, CIGNA Re also must show that it suffered prejudice

due to North River's conduct. We have found, however, that the

standard for establishing an exclusion from coverage was

substantially the same under Wellington as under Ohio law, and

the terms of the Agreement did not expand the coverage of the

underlying policies. See supra parts III.B. and C. Accordingly,

(..continued)
INA Re. See North River, 831 F. Supp. at 1132 (caption), 1135
(text).
28
. The district court referred to testimony by Ian Heap,
relying on his statement that "if in their judgment reinsurers
failed [to go along with Wellington], then we had the business
risk of being without reinsurance, and it was one that I felt
Crum and Forster was prepared to take." North River, 831 F.
Supp. at 1137 (emphasis omitted). But Heap came to this
conclusion because he was, "extremely concerned about the
inability of the reinsurance community to articulate its position
clearly of whether or not it was to give full support to the
Wellington Agreement." He testified, "It seemed to me that the
industry had to move along the path of this alternative dispute
resolution, and in the public interest we as insurers had to go
along with it." Id. We do not believe this testimony
establishes bad faith.
we find, as a matter of law, that CIGNA Re cannot show economic

prejudice due to North River's entry into Wellington.

2.

The district court found that North River's failure to

abide by the scheduling procedures amounted to gross negligence

and resulted in economic prejudice to CIGNA Re. North River, 831

F. Supp. at 1147. We believe, however, that these are disputed

questions of material fact. North River did not execute the

scheduling certificate for the Owens-Corning policies, and under

the Wellington Agreement an insurer who did not execute the

scheduling certificate within twenty days of signing was deemed

to have assented to the schedules as submitted by the insured.

But we cannot say, as a matter of law, whether under these

circumstances noncompliance with the scheduling procedure amounts

to gross negligence or recklessness and whether, as a result,

CIGNA Re suffered economic injury. These are questions for the

trier of fact.

The record indicates that before signing the Agreement,

representatives from Crum & Forster and Owens-Corning, along with

other manufacturers and insurers, met in Pittsburgh to discuss

outstanding issues pertaining to the Wellington Agreement. The

policy schedules were discussed, and North River's

representatives took the position that defense costs were not

covered by its excess policies. Owens-Corning maintained they

were covered. The meeting ended with the parties agreeing to

disagree. Following the final execution of the Wellington

Agreement, Owens-Corning submitted schedules of expected coverage
and certificates indicating its policy form designation

concerning defense costs.29 Robert Clare, a representative from

Crum & Forster who was actively involved in evaluating the

Wellington Agreement and who had attended the Pittsburgh

meetings, drafted a letter response with eight paragraphs of

coverage reservations. This letter also noted that Crum &

Forster "understood a final determination re any Policy Form has

not been made" with respect to defense costs. See McMahon Dep.

at 124, reprinted in app. at 1171 (deposition transcript quoting

letter).

At arbitration, North River argued Owens-Corning's

defense costs were not covered and claimed it had expressed its

continuing disagreement with a "G" designation to Owens-Corning

at the Pittsburgh meeting and in the Clare letter. The

arbitrator found, however, that the right to challenge a policy's

designation could be exercised only by employing Wellington's

scheduling procedures, and that even if the Agreement did permit

alternative methods of noting disagreement, North River's letter

did not sufficiently communicate a rejection of the "G"

designation. Arb. Op. at 12-15.

The district court found that North River's conduct

violated the duty of good faith. In light of the Agreement's

sanction for failing to execute the scheduling form, North

29
. As we have noted, those certificates designated the policies
as form "G," which provided, "[t]he insurance policy pays
allocated expenses and such expenses do not apply against
aggregate limits." See supra part II.A.
River's attempt to preserve its defense certainly was inadequate.

Nevertheless, the detail of North River's letter response

reflects its clear intent to preserve coverage defenses.

Furthermore, we note that North River and Owens-Corning shared a

history of dealing. At this stage, the Wellington Agreement was

terra incognita to both companies and the parties who formed

Wellington did so with the aim of encouraging discussion and non-

litigious resolution of disagreements. We do not believe, on

these facts, that the failure to execute the scheduling

certificate establishes as a matter of law either gross

negligence or recklessness. Instead, whether North River's

conduct manifested gross negligence or recklessness is a disputed

question of material fact.

Furthermore, to establish a breach of the duty of good

faith, CIGNA Re must prove that it suffered economic injury

because of North River's allegedly grossly negligent or reckless

conduct. But even had North River complied with the scheduling

requirements the outcome for CIGNA Re may not have been

different.30 Thus, this, too, is a question that must be

resolved by the trier of fact.

3.

CIGNA Re contends that North River's behavior in

connection with the initial arbitrator's settlement

30
. Because Owens-Corning had scheduled the policies as "G,"
paying defense costs beyond policy limits, even if North River
had scheduled properly, the arbitrator could have found that the
policy language contemplated coverage of defense costs.
recommendation manifested bad faith.31 The district court found

that CIGNA Re had presented evidence raising factual disputes on

this point. The district court discussed two events relating to

the settlement recommendation. First, the district court found

evidence that North River failed accurately to inform its

reinsurers of the nature of the settlement offered. Second, the

court considered whether North River's rejection of the

settlement recommendation reflected a failure to act in a proper

and businesslike manner toward its reinsurers.

In September, 1988, Crum & Forster wrote to its

reinsurers that the mediator had recommended a settlement that

would require payment of defense expenses in addition to policy

limits. North River, 831 F. Supp. at 1147-48. In fact, however,

the mediator had recommended that the parties settle on an "H"

form designation, allowing payment of defense costs, but within

policy limits. Id. at 1148. We do not believe the inaccuracy in

the letter standing alone could establish gross negligence of the

insurer's duty to its reinsurers.

But in further support of its contention that Crum &

Forster's rejection of the settlement recommendation manifested

bad faith, CIGNA Re proffered a January 29, 1988 memorandum from

George B. Luteran describing a meeting where Crum & Forster

officials discussed the possibility of compromising on the

allocated costs issue. The memorandum notes, "[I]f we were to

31
. The arbitrator had advised Crum & Forster to settle with
Owens-Corning by designating the policies as "H," paying defense
costs within indemnity limits.
compromise on the allocated costs issue we would have an

extremely difficult time in recovering any money spent for such

costs from our reinsurers." Supp. app. at 1965. It may be that

the memorandum reflects a prediction that Crum & Forster's

reinsurers would successfully defend against coverage of a

settlement on the allocated costs issue. CIGNA Re contends this

memorandum betrays North River's belief that its obligation to

pay defense costs was due entirely to its failure to schedule and

its desire to avoid acknowledging this to its reinsurer.

As we have noted, the duty of good faith requires the

reinsured to align its interests with those of the reinsurer. We

cannot say, as a matter of law, that, taken together, the

September, 1988 letter and the January, 29, 1988 memorandum

cannot show a breach of that duty. But we also note that a Crum

& Forster official testified that North River had been advised

during mediation that Owens-Corning would not accept the

arbitrator's compromise. If Owens-Corning would not have

accepted the settlement in any case, then CIGNA Re cannot

establish the second prong of a breach of the duty of good faith:

economic injury. We agree with the district court that whether

these circumstances establish a breach of the duty of good faith

remains a disputed issue of fact.

4.

According to the district court, North River kept

"CIGNA Re in the dark on key elements of [the arbitration]
proceeding."32 North River, 831 F. Supp. at 1148. We do not

believe the evidence presented raises an issue of bad faith. As

we have noted, bad faith requires an extraordinary showing of a

disingenuous or dishonest failure to carry out a contract. The

standard is not mere negligence, but gross negligence or

recklessness. Unigard III, 4 F.3d at 1069. In support of its

finding, the district court noted that North River was late in

providing CIGNA Re a complete copy of the arbitrator's thirty-one

page opinion. But after the arbitrator released his opinion,

North River gave its reinsurers access to its files, which

included a copy of the decision. We do not believe North River's

actions demonstrate gross negligence or reckless disregard of

CIGNA Re's interests.

Furthermore, although North River did not provide CIGNA

Re a full copy of the opinion, CIGNA Re was not prejudiced

because it had already received a copy from another source

shortly after the decision was announced. As a matter of law,

North River's behavior does not manifest disingenuous, dishonest,

or grossly negligent conduct that caused economic harm to CIGNA

Re.

5.

32
. The district court did not base its grant of summary
judgment to CIGNA Re on this failure to inform because it found
that CIGNA Re had not suffered economic loss. According to the
district court, even had CIGNA Re been able to associate in the
arbitration proceeding, it would not have changed the result
because North River was bound to pay defense costs through its
failure to schedule the policies properly.
 Finally, the district court found that North River's

conduct with respect to the appeal of the arbitration decision

may have violated its duty of good faith. North River, 831 F.

Supp. at 1148. But as the district court observed, "[t]he

reinsurer has the burden of proving that the reinsured has not

acted in good faith." Id. at 1146. Accordingly, CIGNA Re bore

the burden of showing how North River's failure to apprise CIGNA

Re of its abandonment of that appeal manifested gross negligence

or recklessness, and how that failure caused CIGNA Re economic

injury. North River, 831 F. Supp. at 1146 (citing Unigard III, 4

F.3d at 1068-69). The Wellington Agreement provided for an

appeal process and required the Facility to maintain a list of

appellate judges approved by the initial subscribers. Wellington

Agreement Appendix C ¶ 11.3. In the event a party filed a notice

of appeal, the Agreement provided a procedure for selecting a

panel of three judges from the list. Id. Appendix C ¶¶ 11.4-

11.6. The standard for reversal on appellate review under

Wellington was clearly erroneous. Wellington Agreement Appendix

C ¶ 100.2.

We believe North River had little chance of prevailing

on appeal and we find no bad faith here.33 In light of the

33
. The district court also found that North River's failure to
schedule the policies made a successful appeal unlikely. North
River, 831 F. Supp. at 1148. The district court came to that
conclusion, however, because it found the arbitrator's decision
was based on the Wellington schedules. As noted, we disagree
with that finding. See supra part III.B. We believe the
arbitrator's decision was based on his interpretation of the
underlying policy and we believe an appellate panel would have
affirmed the arbitrator's decision on that basis as well.
unlikelihood of success, North River's decision to forego an

appeal cannot be characterized as reckless or grossly negligent.

Furthermore, we agree with the district court that because of the

unlikelihood of success on appeal, CIGNA Re could not establish

the economic prejudice that forms the second prong of a claim of

bad faith. North River, 831 F. Supp. at 1148. As a matter of

law, we find North River's decision to forego the appeal cannot

be characterized as reckless or grossly negligent and does not

manifest bad faith.

V.

The district court also rejected North River's argument

that the "following form" clause in the reinsurance certificates

required CIGNA Re to pay the defense costs involving the Owens-

Corning policies. In its summary judgment brief North River had

contended that the "following form" clause also bound CIGNA Re to

the terms of the underlying policy and that because the

arbitrator held the terms of the underlying policies required

North River to pay defense costs in addition to policy limits,

CIGNA Re was likewise bound. The district court rejected this

contention on two bases: First, the court held that CIGNA Re was

not bound by the arbitrator's decision because the reinsurer had

not been a signatory to Wellington. Second, the court believed

the arbitrator relied on the Wellington Agreement, and not on the

underlying policies, in requiring payment of defense costs. We

disagree.34

34
. North River has not addressed the "following forms" issue in
its appeal. Because we have found CIGNA Re bound to cover North
 Arbitration is a favored means of dispute resolution,

especially in the insurance industry,35 and it would thwart that

sound policy to treat arbitration outcomes differently from

litigation judgments or settlement agreements for reinsurance

purposes. Accordingly, the fact that the insurer and its insured

agreed to arbitrate disputes after the reinsurance certificate

was issued cannot suspend operation of the "following forms"

clause in the certificate.36 We also disagree with the district

court's conclusion that the arbitrator did not rely on the
(..continued)
River's payment of defense costs under the "follow the fortunes"
clause, we need not decide whether the reinsurer is also bound by
the "following forms" clause. Accordingly, we will not address
the merits of the district court's "following forms" analysis.
In disposing of the summary judgment motions, the district
court also rejected North River's arguments of waiver and
estoppel. Because North River has not appealed those decisions,
we will not review them.
35
. See, e.g., Progressive Casualty Ins. Co. v. C.A.
Reaseguradora Nacional de Venezuela, 991 F.2d 42, 45 (2d Cir.
1993) ("Federal policy, as embodied in the Federal Arbitration
Act, strongly favors arbitration as an alternative dispute
resolution process."); Nationwide Gen. Ins. Co. v. Investors Ins.
Co. of America, 332 N.E.2d 333, 335 (N.Y. 1975) ("It is always
useful to bear in mind that the announced policy of this State
favors and encourages arbitration as a means of conserving the
time and resources of the courts and the contracting parties.").
36
. The district court's reliance on Unigard III is misplaced.
The court cited Unigard III's holding that an arbitration result
did not alter the terms of the bargained for agreement. North
River, 831 F. Supp. at 1150 (citing Unigard III, 4 F.3d at 1071).
But that language referred only to the narrow question of whether
the reinsurer was liable to follow the arbitrator's decision
ordering payments that exceeded express limits of the reinsurance
certificate. The Second Circuit held that the arbitrator's
decision could not nullify express limits written into the
reinsurance certificate, but the court did not say that the
arbitrator's interpretation of the agreement was otherwise
without effect. Unigard III, 4 F.3d at 1071.
underlying policies in ordering coverage of Owens-Corning's

defense costs. As noted, see part III.C. supra, the arbitrator

analyzed the underlying policy at length and concluded that it

did not exclude coverage of defense costs.

VI.

CIGNA Re cross-appeals the district court's denial of

its motion for reconsideration of the court's order to include,

as an alternative basis for summary judgment, that the

reinsurance certificates cap CIGNA Re's liability to the limit

stated in the certificates.37 Throughout the district court

proceedings CIGNA Re repeatedly disavowed this argument. The

district court issued its summary judgment order without

addressing the limits issue because it found, "CIGNA Re has never

raised this defense." North River, 831 F. Supp. at 1142. CIGNA

Re then filed a motion for reconsideration under Federal Rule of

Civil Procedure 59(e), which provides, "A motion to alter or

amend the judgment shall be served not later than 10 days after

entry of the judgment."38

37
. At the same time that it filed its motion for
reconsideration, CIGNA Re also filed a motion to amend judgment
because of errors. The district court corrected the errors, but
denied the motion for reconsideration.
38
. CIGNA Re also sought reargument under Rule 12(I) of the
General Rules of the United States District Court for the
District of New Jersey, which provides,

A motion for reargument shall be served and
filed within 10 days after the entry of the
order or judgment on the original motion by
the Judge or Magistrate Judge. There shall
be served with the notice a brief setting
forth concisely the matters or controlling
 A proper motion to alter or amend judgment "must rely

on one of three major grounds: `(1) an intervening change in

controlling law; (2) the availability of new evidence [not

available previously]; [or] (3) the need to correct clear error

[of law] or prevent manifest injustice.'" Natural Resources

Defense Council v. United States Envtl. Protection Agency, 705 F.

Supp. 698, 702 (D.D.C.) (quoting All Hawaii Tours, Corp. v.

Polynesian Cultural Ctr., 116 F.R.D. 645, 649 (D. Haw. 1987),

rev'd on other grounds, 855 F.2d 860 (9th Cir. 1988)), vacated on

other grounds, 707 F. Supp. 3 (D.D.C. 1989). CIGNA Re contended

Unigard III presented an intervening change in controlling law,

but the district court denied the motion. North River Ins. Co.

v. Philadelphia Reinsurance, No. 91-1323, slip op. at 6-7.

(D.N.J. November 15, 1993).

Generally, the denial of a motion for reconsideration

is reviewed for an abuse of discretion. Koshatka v. Philadelphia

Newspapers, Inc., 762 F.2d 329, 333 (3d Cir. 1985). However,

"[b]ecause an appeal from a denial of a Motion for

Reconsideration brings up the underlying judgment for review, the

standard of review varies with the nature of the underlying

judgment." McAlister v. Sentry Ins. Co., 958 F.2d 550, 552-53
(3d Cir. 1992) (citing Federal Kemper Ins. Co. v. Rauscher, 807

(..continued)
decisions which counsel believes the Judge or
Magistrate Judge has overlooked. No oral
argument shall be heard unless the Judge or
Magistrate Judge grants the motion and
specifically directs that the matter shall be
reargued orally.
F.2d 345, 348-49 (3d Cir. 1986)). Where there is a mixed

question of law and fact, "the reviewing court should separate

the issue into its respective parts, applying the clearly

erroneous test to the factual component, the plenary standard to

the legal." Ram Constr. Co. v. American States Ins. Co., 749

F.2d 1049, 1053 (3d Cir. 1984).

CIGNA Re's appeal of the denial of its motion raises

two issues: first, whether the district court properly found

that CIGNA Re had failed to raise the indemnity limits defense;

and second, whether, despite a failure to raise the defense, the

Second Circuit's decision in Unigard III represented an

intervening change in controlling law sufficient to warrant grant

of a motion for reconsideration. We will apply a "clearly

erroneous" standard to the first question and plenary review to

the second.39

In March, 1992, CIGNA Re urged the district court to

deny North River discovery on the indemnity cap issue, saying,

"We are not defending this case on that basis." App. at 1011.

Thereafter, while it was considering the summary judgment

39
. In conducting plenary review over the second question,
however, we are mindful that ordinarily, under law of the case
doctrine, we will "refuse to consider issues that are raised for
the first time on appeal." Salvation Army v. New Jersey Dep't of
Community Affairs, 919 F.2d 183, 196 (3d Cir. 1990) (quoting
Newark Morning Ledger Co. v. United States, 539 F.2d 929, 932 (3d
Cir. 1976)). Nevertheless, where "a previously ignored legal
theory takes on new importance due to an intervening development
in the law, it is appropriate . . . to exercise . . . discretion
to allow a party to revive that theory." Id. We note that this
standard is substantially the same as that governing disposition
of a motion for reconsideration.
motions, the district court invited CIGNA Re to address this

issue. Nevertheless, CIGNA Re declined. In a letter to the

district court, dated September 9, 1993, (which was eleven days

before the summary judgment opinion was filed), CIGNA Re wrote:
CIGNA Re does not take the position that it
could never have an obligation in excess of
its certificate limits. According to
industry practice, and according to the law
as CIGNA Re understands it . . ., CIGNA Re
could have an obligation for expense in
excess of its certificate limits -- if the
reinsured policy, when issued, had an
obligation to pay defense [costs] in excess
of its limit. The contractual problem in
this case is not the certificate limits per
se, but rather the fact that the policies as
originally issued and reinsured had no
defense obligation.

(Letter from Thomas A. Allen to the district court of Sept. 9,

1993, at 1-2), reprinted in app. at 934-35.

Later, in the course of a September 16, 1993,

conference call, CIGNA Re advised the court that it was

considering applying for leave to raise the defense after all, in

light of the Second Circuit's decision in Unigard III. The
district court, however, informed counsel that it was not going

to entertain further briefing and issued its summary judgment

order on September 20, 1993, without addressing the indemnity

limits issue. Because the record supports the court's conclusion

that CIGNA Re failed to raise the indemnity cap defense, it was

not "clearly erroneous" and we will affirm the finding.

CIGNA Re also argues that the Second Circuit's decision

in Unigard III represents an intervening change in controlling
law, warranting reconsideration of the district court's summary
judgment. See Natural Resources Defense Council, 705 F. Supp. at

702. CIGNA Re explains that it failed to raise the indemnity

limits defense because it believed Bellefonte Reinsurance Co. v.

Aetna Casualty & Surety Co., 903 F.2d 910 (2d Cir. 1990), in

which the Court of Appeals for the Second Circuit held the

reinsurer not liable for defense costs above caps stated in the

reinsurance certificates, would be limited to its specific facts.

CIGNA Re then vaults its analysis into a rule of law, asserting

that without Unigard III, Bellefonte would have been so limited.

We do not find that Unigard III represents a significant

development from the Bellefonte rule.

In Bellefonte, A.H. Robbins Co. had sued its primary

and excess insurer, Aetna, for defense costs Robbins incurred

defending against personal injury claims involving the Dalkon

Shield intra-uterine device. After Aetna settled the litigation

for an amount "substantially in excess" of the cap stated in its

policies, Aetna sought indemnity from its reinsurers for a

portion of the overage. Bellefonte, 903 F.2d at 911. The

reinsurers agreed to indemnify Aetna to the limit stated in their

reinsurance certificates, but refused to pay any additional

costs. Id.
After the reinsurers sought a declaratory judgment

limiting their liability, Aetna counterclaimed for a declaratory

judgment that its reinsurers had to "follow the fortunes" and

cover all costs. The district court awarded summary judgment to

the six reinsurers. Thus, the issue on appeal was "whether the

reinsurers [were] obligated to Aetna for an amount greater than
the amounts stated in the reinsurance certificates." Id. at 912.

The Court of Appeals for the Second Circuit held that "follow the

fortunes" doctrine could not override a reinsurance certificate's

express indemnity limit, reasoning that to do so "would strip the

limitation clause and other conditions of all meaning; the

reinsurer would be obliged merely to reimburse the insurer for

any and all funds paid." Id. at 913.

CIGNA Re rejected the indemnity cap theory throughout

discovery because, it claims, it reasonably believed courts would

restrict Bellefonte to its unique facts. But the Second Circuit

did not indicate that Bellefonte would be limited to its facts.

And, of course, subsequently, in Unigard III, that court did not

limit Bellefonte. In Unigard III, the Second Circuit considered

a "follow the fortunes" clause virtually identical to that in

Bellefonte. What is especially significant is that the court

expressly adopted the reasoning of Bellefonte, holding, "'[T]he

limitation on liability provision capped the reinsurers'

liability under the [Certificate]. All other contractual

language must be construed in light of that cap.'" Unigard III,

4 F.3d at 1071 (quoting Bellefonte, 903 F.2d at 914).
Clearly, CIGNA Re's restrictive view of Bellefonte is

not dispositive here. In Salvation Army v. New Jersey Dep't of

Community Affairs, 919 F.2d 183, 196 (3d Cir. 1990), this court

considered a claim raised for the first time on appeal because,

without the teaching of the intervening case, the party had been

"quite reasonable in believing" the new claim would have added

little to its cause. But we cannot say that CIGNA Re was "quite
reasonable in believing" that it could not rely on Bellefonte on

this issue.40 Thus, contrary to CIGNA Re's claim that Unigard

III is a significant development in reinsurance law, we find the

decision expressly follows Bellefonte. Accordingly, we deny

CIGNA Re's request that the merits of its certificate limits

defense be addressed.

VII.

For the foregoing reasons, we will reverse the summary

judgment granted to CIGNA Re. We cannot say that defense costs

were outside the scope of coverage provided under the reinsurance

certificates and we will not relieve CIGNA Re of its obligation

to "follow the fortunes" of North River on that basis. We will

reverse the district court's finding that North River, as a

matter of law, violated its duty of good faith to CIGNA Re. And

we will reverse the denial of summary judgment to North River on

all points except whether North River, by failing to schedule its

policies and by rejecting the settlement proposal, breached its

duty of good faith to CIGNA Re. We will affirm the district

court's denial of CIGNA Re's motion for reconsideration.

40
. To bolster its theory that before Unigard III other courts
would have restricted Bellefonte to its facts, CIGNA Re cites an
article by Deborah Cohen, Aetna's attorney in Bellefonte. See
Deborah F. Cohen, The Bellefonte Decision and the "Follow the
Fortunes" Doctrine, Mealey's Litigation Reports (Reinsurance),
Dec. 6, 1990, at 24, 29. Although the article makes a case for
limiting Bellefonte, we do not find that it was "quite
reasonable" for a party to rely on the writings of an interested
attorney in light of the clear language of Bellefonte.