An Update on the 'Follow the Fortunes' Doctrine in the Reinsurance Context

Reinsurance, the insurance of insurance companies, arose in the 14th century, the same century that saw the rise of the Ming Dynasty and the decimation of Europe's population by the Black Plague. Despite its 600-year history, however, until recently, judicial decisions on reinsurance disputes were few and far between. Instead, "differences [were] often ... settled by handshakes and umpires[.]" <i>Sumitomo Marine &amp; Fire Ins. Co. v. Cologne Reins. Co.</i>, 75 N.Y.2d 295, 298, 552 N.E.2d 139, 140 (1990). But with the flood of mass tort and environmental litigation in the last 20 years, there has been a rise in reinsurance litigation. One historic response to deflect protracted reinsurance litigation is the "follow the fortunes" doctrine. When courts and insurers talk about follow the fortunes, they may mean one of two similar concepts: follow the fortunes or "follow the settlements." While the follow the fortunes doctrine "requires reinsurers to accept a reinsured's good faith decision that a particular loss is covered by the terms of the underlying policy," the follow the settlements clause "requires reinsurers to abide by a reinsured's good faith decision to settle, rather than litigate, claims on that policy. <i>Commercial Union Ins. Co. v. Seven Provinces Ins. Co.</i>, 9 F. Supp. 2d 49, 66 (D. Mass. 1998), <i>aff'd,</i> 217 F.3d 33 (1st Cir. 2000), <i>cert. denied,</i> 531 U.S. 1146 (2001). Typically, the follow the fortunes doctrine is implied in the reinsurance contract whereas the follow the settlements clause is a specific provision in the agreement. While these doctrines share the underlying predicate of "good faith," this article focuses on the follow the fortunes doctrine: the doctrine that requires a reinsurer to indemnify its reinsured whenever the reinsured makes a good faith payment of an insured loss.

49 minute read May 01, 2004 at 12:30 PM

By

Kim V. Marrkand and Nancy D. Adams