Travelers 2007 Annual Report Download - page 238

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. CONTINGENCIES, COMMITMENTS AND GUARANTEES (Continued)
Odyssey America Reinsurance Corporation (Odyssey), Employers Reinsurance Company (Employers)
and Gerling Global Reinsurance Corporation of America (Gerling), to recover amounts due under
reinsurance contracts issued to Gulf and related to Gulf’s February 2003 settlement of a coverage
dispute under a vehicle residual value protection insurance policy. The reinsurers asserted
counterclaims seeking rescission of the vehicle residual value reinsurance contracts issued to Gulf and
unspecified damages for breach of contract. Gerling commenced a separate action asserting the same
claims, which has been consolidated with the original Gulf action for pre-trial purposes.
Gulf has entered into final settlement agreements with Employers, XL, Transatlantic and Odyssey
which resolve all claims between Gulf and these defendants under the reinsurance agreements at issue
in the litigation.
In November 2007, the court issued rulings denying Gulf’s motion for partial summary judgment
against Gerling, the sole remaining defendant, but granting Gerling’s motion for partial summary
judgment on certain claims and counterclaims asserted by Gulf and Gerling. Gulf has appealed the
court’s decision to the Supreme Court of New York Appellate Division, First Department, and has
been granted a stay of trial on the remaining claims pending that appeal. Gulf denies Gerling’s
allegations, believes that it has a strong legal basis to collect the amounts due under the reinsurance
contracts and intends to vigorously pursue the action.
Based on the Company’s beliefs about its legal positions in its various reinsurance recovery
proceedings, the Company does not expect any of these matters will have a material adverse effect on
its results of operations in a future period.
The Company is a defendant in three consolidated lawsuits in the U.S. District Court for the
Eastern District of Louisiana arising out of disputes with certain policyholders over whether insurance
coverage is available for flood losses arising from Hurricane Katrina: Chehardy, et al. v. State Farm, et
al., Vanderbrook, et al. v. State Farm Fire & Cas. Co., et al., and Xavier University of Louisiana v. Travelers
Property Ca. Co. of America. Chehardy and Vanderbrook are purported class actions in which the
Company is one of several insurer defendants. Xavier is an individual suit involving a property
insurance policy brought by one of the Company’s insureds. All of these actions allege that the losses
were caused by the failure of the New Orleans levees. On November 27, 2006, the district court issued
a ruling in the three consolidated cases denying the motions of the Company and certain other insurers
for a summary disposition of the cases.
On August 2, 2007, the U.S. Court of Appeals for the Fifth Circuit reversed the district court’s
ruling, holding that there is no coverage for the plaintiffs’ flood losses under the policies at issue
(including policies issued by the Company) because the policies’ flood exclusions unambiguously
exclude coverage. On August 27, 2007, the Fifth Circuit denied the plaintiffs’ petition for rehearing.
The plaintiffs filed a Petition for Writ of Certiorari with the U.S. Supreme Court, which was denied on
February 19, 2008.
The district court to which these cases were remanded following the Fifth Circuit decision
discussed above has issued an order staying all proceedings concerning the interpretation of the flood
exclusion until a decision is rendered in an appeal pending in the Louisiana Supreme Court entitled
Joseph Sher v. Lafayette Insurance Co., et al. Sher is an appeal from a decision of a Louisiana state
appellate court in which, contrary to the Fifth Circuit’s ruling discussed above, certain judges on the
panel ruled that the flood exclusion at issue in the case is ambiguous. Although the Company is not a
party to Sher, the district court issued the stay on the basis that the Louisiana Supreme Court’s
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