Patton Boggs Reinsurance Newsletter - March 2013: A Brief Review of Reinsurance Trends in 2012: Follow-The-Fortunes and Follow-The-Settlements Clauses

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In 2012, courts continued to recognize the viability of follow-the-fortunes and follow-the-settlements clauses. In United States Fid. & Guar. Co. v. Am. Re-Ins. Co., 939 N.Y.S.2d 307 (1st Dep't 2012), aff'd as modified, 2013 WL 451666 (N.Y. Feb. 7, 2013), a New York appellate court affirmed summary judgment in favor of the cedent and against the reinsurers upholding the cedent's allocation of asbestos losses to its reinsurance contract on follow-the-fortunes grounds. In 2013, the New York Court of Appeals modified the Appellate Division's judgment, reversed the finding of summary judgment for the cedent on two grounds, and remanded the case for trial. This analysis focuses on the since modified Appellate Division determination.

Following a settlement of underlying asbestos losses, the cedent billed its reinsurers for a share of the settlement. The billings allocated the settlement to the 1959 policy year and all the reinsurance claims to the 1959 treaty year. The reinsurers resisted based on a different understanding of the cedent's retention under the reinsurance agreements and that the cedent's bad faith claim exposure was being ceded when that exposure was not covered. Litigation commenced, and the cedent's motion for summary judgment was granted, while the reinsurers' was denied. On appeal, the reinsurers contended that the cedent acted in bad faith from its initial denial of its duty to defend and indemnify to its reinsurance presentation, breaching its duty of utmost good faith. The appellate court affirmed, with one justice dissenting, distilling the dispute down to a question of fact concerning the increase of the cedent's retention in the excess-of-loss reinsurance agreements, and a question of law concerning the application of the follow-the-fortunes doctrine. On the follow-the-fortunes point, the majority agreed that the follow-the-fortunes doctrine required the reinsurers to accept the cedent's reinsurance presentation. The court stated that all of the reinsurers' arguments on bad faith, allocation, valuation, changes to the loss presentation, were all efforts to second guess the cedent's decisions and barred by the follow-the-fortunes doctrine. Even if considered on the merits, the reinsurers' complaints would not excuse the reinsurers from their obligations. This finding, as discussed above, was reversed by the New York Court of Appeals in February 2013.

Similarly, in 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. After settlement, the reinsurer paid the underlying loss, 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. In granting summary judgment to the cedent, the court, under Connecticut law, construed the loss settlements, follow-the-settlements, and follow-the-fortunes clauses and found for the cedent. The treaty required 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, pointing to the treaty's ECO clause.

Topics:  Bad Faith, Follow-the-Fortunes Clause, Follow-the-Settlements Law, Reinsurance, Settlement, Summary Judgment

Published In: Insurance Updates

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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