Patton Boggs Reinsurance Newsletter - December 2012: Illinois Federal Court Grants Summary Judgment to Cedent Under Follow-the-Settlements Clause


Arrowood Indemn. Co. v. Assurecare Corp., No. 11 CV 5206, 2012 WL 4340699 (N.D. Ill. Sept. 19, 2012).

An Illinois federal court granted summary judgment to a cedent against its reinsurer in a dispute over settlement of a coverage declaratory judgment action following settlement of an underlying wrongful death action.  The reinsurer provided a 100 percent quota share treaty covering the first $250,000 of net liability, plus a proportion of loss adjustment expenses.  An underlying loss was settled and the reinsurer paid, but the insured brought a coverage action against the cedent claiming that more of the underlying settlement should have been covered.  The cedent settled the coverage action and billed the reinsurer for its share of the settlement plus expenses.  The reinsurer refused to pay and the cedent drew down on letters of credit that the reinsurer was required to maintain to satisfy a portion of the settlement and commenced this action.

In granting summary judgment to the cedent, the court, construing the contract under Connecticut law, construed the loss settlements, follow-the-settlements, and follow-the-fortunes clauses and found for the cedent.  The court sets out a good summary of follow-the-settlements law.  On the merits, the court noted that the underlying dispute was about how the term medical incident was construed under the policy.  The treaty requires that all loss settlements by the cedent by way of compromise confer liability on the reinsurer.  Because there was no evidence of bad faith by the cedent, the court held that the settlement was covered under the treaty.

The reinsurer argued that a portion of the settlement that was allocated to the insured’s bad faith claim was not covered, but the court found that it was arguably covered and pointed to the treaty’s ECO clause.  The court rejected the reinsurer’s argument that the claim was reported late and therefore was not covered because the provision of the treaty cited was not a true notice provision and no prejudice had been shown.  Finally, the court required the reinsurer to replenish its collateral as required under the treaty after the draw down on the letters of credit.


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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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