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Argued January 2, 2013; decided February 7, 2013
United States Fid. & Guar. Co. v American Re-Ins. Co., 93 AD3d 14, modified.
{**20 NY3d at 414} OPINION OF THE COURT
Smith, J.
An insurance company, United States Fidelity & Guaranty Company (USF&G), having settled asbestos claims for nearly a{**20 NY3d at 415} billion dollars, seeks to recover a share of its settlement payment from its reinsurers. The courts below granted summary judgment for [*2]USF&G. We modify the Appellate Division's order to deny summary judgment on two issues, and otherwise affirm.
We conclude, as did the dissenting Justice in the Appellate Division, that there is an issue of fact as to whether USF&G, in allocating the settlement amount, reasonably attributed nothing to the so called "bad faith" claims made against it. We also find a factual issue as to whether certain claims were given unreasonable values for settlement purposes. However, we hold that the courts below correctly rejected the reinsurers' other defenses.
I
From 1948 or earlier until mid-1960, USF&G was one of the liability insurers of Western
Asbestos Company, a distributor of asbestos products. The business of Western Asbestos was taken over in the 1960s by Western MacArthur Company, a subsidiary of Mac Arthur Corporation. (The difference between the subsidiary and the parent is unimportant here, and we will refer to both as "MacArthur.") It was eventually decided that MacArthur was liable for personal injury claims arising out of exposure to the products that Western Asbestos had sold (Kaminski v Western MacArthur Co., 175 Cal App 3d 445, 220 Cal Rptr 825 [1985]). By 1991, such claims had apparently exhausted MacArthur's own insurance coverage, and MacArthur demanded a defense from Western Asbestos's insurers, including USF&G. USF&G refused the demand, and in 1993 MacArthur brought suit in a California state court against USF&G and others to establish the existence of coverage.
USF&G relied principally on two grounds in defense of the coverage litigation. First, in the decades that passed between the issuance of the USF&G policies and the claims made under them, the policies themselves had been lost; USF&G took the position that MacArthur, lacking copies of the policies, could not prove that they had ever been issued. Secondly, USF&G argued that it had, at most, insured only Western Asbestos, not MacArthur, and had no obligation to defend the latter company.
USF&G's first line of defense did not fare well. Although the policies themselves had disappeared, other documents, including the form of policy used by USF&G at the time, and documents showing that Western Asbestos was among its insureds, sufficed to prove both the existence of the policies and their terms. In 2001, more than seven years after the litigation began,{**20 NY3d at 416} USF&G acknowledged that it had had an insurance relationship with Western Asbestos during the years in question.
But USF&G initially prevailed on its second argument. A California Court of Appeal held in 1997 that MacArthur, though it was liable on claims made against Western Asbestos, did not succeed by operation of law to Western Asbestos's liability insurance (General Acc. Ins. Co. of Am. v Superior Ct. of Cal., Alameda County, 55 Cal App 4th 1444, 64 Cal Rptr 2d 781 [1997]). This victory proved hollow, however, because MacArthur obtained an assignment of Western Asbestos's rights, and in 2002 the trial court in the coverage litigation held that USF&G lacked standing to challenge the assignment. [*3]
While the coverage litigation wore on, MacArthur's underlying liability to the asbestos claimants grew. After Western Asbestos's insurers refused to defend MacArthur, MacArthur agreed not to oppose the entry of default judgments against it in favor of the asbestos claimants; in exchange the asbestos claimants, hoping for a favorable outcome of the coverage litigation, agreed to refrain from executing against MacArthur on the judgments. According to figures used in settlement negotiations, there were by 2002 more than a thousand such default judgments, totaling $1.4 billion without interest. MacArthur faced additional risks from pending and possible future claims.
USF&G had not insured the full amount of MacArthur's liability. The policies it issued to Western Asbestos contained "per person" and "per accident" limits in varying amounts; the highest per person limit was $200,000. But the policies contained no aggregate limit; USF&G could be liable under the policies for any number of separate claims. In addition, MacArthur alleged in the coverage litigation that USF&G had, by refusing to defend the asbestos claimants' lawsuits, breached its implied covenant of good faith and fair dealing. These "bad faith" claims, if successful, could have led to a judgment against USF&G for whatever liability of MacArthur was found to be attributable to USF&G's failure to defend

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