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Will Reinsurers Still 'Follow-the- Settlements'?
In the insurance arena, allocations of claims amounts are frequently the subject of litigation among policyholders and insurers. Courts seek to fashion allocation formulas based upon a number of factors including policy language, legal principles and equitable considerations. In the reinsurance context, allocation questions are generally resolved in arbitration. A number of courts, however, have recently addressed the allocation of claims settlements in the reinsurance context. The issue in reinsurance is whether the reinsurer is bound by the cedents' allocation of a loss or settlement amount to the cedents' policies at issue in the underlying claim. Reinsurers are generally bound to “follow-the-fortunes” or “follow-the-settlements” of a cedent provided the cedent has acted reasonably and in good faith and in accordance with the terms of the reinsurance contracts. Aetna Cas. & Sur. Co. v. Home Ins. Co., 882 F. Supp. 1328, 1346 (S.D.N.Y. 1995). This article surveys recent case law that has addressed the question of whether the “follow-the-settlements” or “follow-the-fortunes” doctrine applies to allocation of claims payments or settlements to reinsured policies.
The 'Follow-the-Settlements' Doctrine
The “follow-the-settlements” or “follow-the-fortunes” doctrine requires a reinsurer to cover settlements made by the reinsured, as long as they are not fraudulent, collusive, or made in bad faith. Aetna Cas. & Sur., 882 F. Supp. at 1346. The doctrine obligates the reinsurer to indemnify a cedent for good faith payment of claims that arguably fall within the scope of the underlying policy that was reinsured. Mentor Ins. Co. (U.K.) Ltd. v. Brankasse, 996 F.2d 506, 517 (2d Cir. 1993). The term “follow-the-fortunes” describes the reinsurer's obligation to follow the ceding insurer's underwriting fortunes, whereas “follow-the-settlements” refers to the duty to follow the actions of the cedent adjusting and settling claims. Aetna Cas. & Sur., 882 F. Supp. at 1346 n.9. However, most commentators and courts use the two terms interchangeably.
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