Insurers and their reinsurers are all too familiar with the competing tensions of a “follow the fortunes” clause wherein a reinsurer is prevented from challenging the claim settlement decisions of its cedant. First, there is the interest of the insurer in avoiding duplication of its claims investigation by a reinsurer whose knowledge of the underlying facts and general ability to adjust claims likely is inferior to that of the insurer. This interest often “butts heads” with the desire of the reinsurer to protect its interest in the event of questionable or erroneous settlement practices of the insurer. These opposing interests often evolve into a legal dispute wherein the obligations and standards of the “follow the fortunes” clause are hotly contested. Interestingly, most of the reported opinions on these disputes deal with treaties wherein the reinsurance coverage is “back to back” with the insurance coverage, i.e. they are equal in scope and terms.
The more interesting question arises, however, when the reinsurer agrees to reinsure only certain types of claims or occurrences covered by the insurer. Combine this disconnect with the addition of the phrase “as far as applicable” to the end of the “follow the fortunes” clause, and you have the much more complex issue recently decided by the Commercial Court of the Queen’s Bench Division in London. (See Aegis Elec. & Gas Int’l. Servs. Co. Ltd. v. Continental Cas. Co., 2007 EWHC 1762).
Essentially, new layers are added to the “follow the fortunes” analysis when the reinsurance cover differs from the underlying cover, and the following issues must be analyzed:
- Is the claim within the coverage of the underlying policy;
- Is the claim within the coverage of the reinsurance agreement; and, most importantly,
- Does the reinsurer have to accept the insurer’s assessment of the claim in determining whether it falls
within the scope of the reinsurance?
Consider the example of an underlying policy covering losses of any kind at a power plant and a reinsurance treaty that excludes coverage for explosions. Is the reinsurer bound by the insurer’s determination that a loss at the power plant was caused by an explosion as opposed to precedent, intervening or subsequent causes? Not according to the court in Aegis Electric which refused to apply the “follow the fortunes” clause if it meant that the reinsurer was forced to put itself unconditionally in the hands of the underlying insurer even where their interests were diametrically opposed. The court did not force the reinsurer to rely upon or “follow” the causal determination of the insurer. Instead, the reinsurer was allowed to deny coverage based upon its independent determination that the loss (which had been paid by the insurer) was due to a cause excluded under the terms of the reinsurance coverage (e.g. explosions).
Insurers and reinsurers should take note that the “follow the fortunes” clause is not applicable to claim determinations made by the underlying insurer if there is a relevant difference in scope between the underlying coverage and the reinsurance coverage.
* While the Court appears to interpret a “follow the settlements” clause, the analysis and holding are presented in terms of a “follow the fortunes” clause.
Jessica Pardi is a partner in the firm’s insurance group. She practices in the areas of insurance litigation, reinsurance dispute resolution, complex coverage disputes, and insurer insolvency. Jessica received her bachelor’s degree from Boston University and her law degree from University of Virginia.