Commitments and Contingencies

3 Months Ended

Mar. 31, 2012

Commitments and Contingencies

Note 9. Commitments and Contingencies

In the ordinary course of conducting business, the Company’s subsidiaries are involved in various legal proceedings, either indirectly as insurers for parties or directly as defendants. Most of these proceedings consist of claims litigation involving the Company’s subsidiaries as either (a) liability insurers defending or providing indemnity for third party claims brought against insureds or (b) insurers defending first party coverage claims brought against them. The Company accounts for such activity through the establishment of unpaid loss and loss adjustment reserves. The Company’s management believes that the ultimate liability, if any, with respect to such ordinary-course claims litigation, after consideration of provisions made for potential losses and cost of defense, will not be material to the Company’s consolidated financial condition, results of operations or cash flows.

The Company’s subsidiaries are also from time to time involved with other legal actions, some of which assert claims for substantial amounts. These actions include claims asserting extra contractual obligations, such as claims involving allegations of bad faith in the handling of claims or the underwriting of policies. In general, the Company believes it has valid defenses to these cases. The Company’s management expects that the ultimate liability, if any, with respect to future extra-contractual matters will not be material to its consolidated financial position, results of operations or cash flows. Nonetheless, given the large or indeterminate amounts sought in certain of these matters, and the inherent unpredictability of litigation, an adverse outcome in such matters could, from time to time, have a material adverse outcome on the Company’s consolidated results of operations or cash flows in a particular fiscal quarter or year.

In October 2010, Equitas, represented by Resolute Management Services Limited (“Resolute”), commenced a lawsuit in the Supreme Court of the State of New York (the “Court Proceeding”) and separate arbitration proceedings (the “Arbitration” and collectively with the Court Proceeding, the “Resolute Proceedings”) against Navigators Management Company, Inc. (“NMC”) a wholly-owned subsidiary of the Company. The arbitration demand and complaint in the Resolute Proceedings allege that NMC failed to make timely payments to Resolute under certain reinsurance agreements in connection with subrogation recoveries received by NMC with respect to several catastrophe losses that occurred in the late 1980’s and early 1990’s.

On October 25, 2011, an order was issued in the Court Proceeding denying NMC’s motion for summary judgment and granting Resolute’s cross-motion for partial summary judgment (the “Partial Summary Judgment Order”). The Partial Summary Judgment Order found that NMC had breached its obligations under the reinsurance agreements at issue in the Court Proceeding and further found that Resolute was entitled to damages for unpaid interest at the statutory rate of 9%. On December 2, 2011, a Stipulation and Order was entered with the Court in favor of Resolute in the amount of $4.7 million with respect to the Partial Summary Judgment Order. Navigators disagreed with and appealed the Partial Summary Judgment Order. As a result of the entry of the Partial Summary Judgment Order on December 2, 2011, however, Navigators established an interest expense accrual of $4.7 million during the fourth quarter of 2011, pending the resolution of the appeal.

On March 9, 2012, the Arbitration Panel granted Resolute’s motion for summary judgment in the Arbitration and found that NMC breached its obligations under the reinsurance agreement and that Resolute was entitled to damages for unpaid interest at the New York statutory rate of 9%. The Arbitration Panel’s ruling is binding and non-appealable.

Navigators disagrees with the two summary judgment rulings in the Resolute Proceedings, but rather than continue to litigate these related matters and incur additional legal expenses, NMC entered into a settlement agreement with Resolute, effective as of April 19, 2012, and agreed to withdraw its appeal and fully and finally settle this dispute. Navigators has agreed to pay $9.2 million to Resolute as part of the settlement.

As a result of the settlement, Navigators recognized an additional interest expense accrual of $4.5 million during the first quarter of 2012.