reinsurance powerpoint

The “Follow-the-Fortunes” The “Follow-the-Fortunes” Doctrine in Insurer/Reinsurer Doctrine in Insurer/Reinsurer

DisputesDisputes

By Bob Redmond By Bob Redmond

Williams Mullen Williams Mullen

[email protected]@williamsmullen.com

804-783-6439 804-783-6439

Overview Overview

» The “Follow-the-The “Follow-the-Fortunes” Fortunes” Doctrine Doctrine

» Development of Development of Doctrine Doctrine

» Key Terms Key Terms » Basis for Basis for

Application Application » What is governed What is governed

by Doctrine by Doctrine

» Defenses Defenses » Application in Application in

Mass Tort Mass Tort ContextContext

» Considerations Considerations for for Insurers/ReinsuInsurers/Reinsurersrers

The “Follow-the-Fortunes” The “Follow-the-Fortunes” Doctrine Doctrine

» The “Follow-the-Fortunes” Doctrine The “Follow-the-Fortunes” Doctrine imposes on the reinsurer the duty:imposes on the reinsurer the duty:› To indemnify the insurer for payments To indemnify the insurer for payments

insurer makes pursuant to a loss insurer makes pursuant to a loss settlement under its own policy as settlement under its own policy as long the settlement is long the settlement is › Made in Good Faith Made in Good Faith › Reasonable Reasonable › Arguably within the terms of the Arguably within the terms of the policypolicy

Purpose of The Follow-Purpose of The Follow-the-Fortunes Doctrine the-Fortunes Doctrine

» The main rationale of the doctrine is The main rationale of the doctrine is › ““to foster the goals of maximum to foster the goals of maximum

coverage and settlement and to prevent coverage and settlement and to prevent courts, through courts, through de novo de novo review of the review of the cedent’s decision-making process, cedent’s decision-making process, from undermining the foundation of from undermining the foundation of the cedent/reinsurer relationshipthe cedent/reinsurer relationship” ” › Travelers Ins. Co. v. Gerling, Travelers Ins. Co. v. Gerling, 419 F. 419 F. 3d 181, 188 ( 2d. Cir. 2005) 3d 181, 188 ( 2d. Cir. 2005)

Purpose of The Follow-Purpose of The Follow-the-Fortunes Doctrinethe-Fortunes Doctrine

» Purpose: “ A reinsurer cannot second Purpose: “ A reinsurer cannot second guess the good faith liability guess the good faith liability determinations made by its determinations made by its reinsured, or the insured’s good faith reinsured, or the insured’s good faith decision to waive defenses to which decision to waive defenses to which it may be entitled” it may be entitled” › Christiana General Ins. v. Great Christiana General Ins. v. Great

American Ins. American Ins. 979 F. 2d 269, 280 (2d. 979 F. 2d 269, 280 (2d. Cir. 1992) Cir. 1992)

Purpose of the “Follow Purpose of the “Follow the Fortunes” Doctrine the Fortunes” Doctrine

» ““The Doctrine precludes wasteful The Doctrine precludes wasteful relitigation by a reinsurer of relitigation by a reinsurer of defenses to underlying policy defenses to underlying policy coverage in cases where the ceding coverage in cases where the ceding insurer has in good faith paid a insurer has in good faith paid a settlement” settlement” › National Union Ins. v. American Re-Ins. National Union Ins. v. American Re-Ins.

Co. 441 F. Supp. 2d. 646, 650 (S.D.N.Y Co. 441 F. Supp. 2d. 646, 650 (S.D.N.Y 2006) 2006)

Purpose of the “Follow-Purpose of the “Follow-the-Fortunes” Doctrine the-Fortunes” Doctrine

» The purpose is to preserve the The purpose is to preserve the insurer/reinsurer relationship and insurer/reinsurer relationship and prevent the prevent the de novo de novo review of claims review of claims determinations by reinsurers and determinations by reinsurers and thereby make insurers less likely to thereby make insurers less likely to settle underlying coverage claims settle underlying coverage claims › Int’l Surplus Lines v. Certain Lloyds Int’l Surplus Lines v. Certain Lloyds

UnderwritersUnderwriters 868 F. Supp. 917 (N.D. 868 F. Supp. 917 (N.D. Ohio 1992) Ohio 1992)

Glossary of Key Terms Glossary of Key Terms

““Primary Insurance”: Insurance that Primary Insurance”: Insurance that provides the initial layer of coverage; provides the initial layer of coverage;

““Excess Insurance”: Insurance that Excess Insurance”: Insurance that covers losses when primary layer of covers losses when primary layer of coverage is exhausted;coverage is exhausted;

““Reinsurance”: Insurance for losses Reinsurance”: Insurance for losses that primary or excess insurer incursthat primary or excess insurer incurs

Glossary of Key TermsGlossary of Key Terms

» ““Cedent”/ “Ceding Insurer”: Primary Cedent”/ “Ceding Insurer”: Primary or Excess Carrier that “cedes” risk to or Excess Carrier that “cedes” risk to reinsurer reinsurer

» ““Facultative Reinsurance”: Facultative Reinsurance”: Reinsurance to cover specific policies Reinsurance to cover specific policies

» ““Treaty Reinsurance”: Reinsurance Treaty Reinsurance”: Reinsurance to cover all policies falling within a to cover all policies falling within a specified classspecified class

Glossary of Key TermsGlossary of Key Terms

» ““Allocation”: The manner in which Allocation”: The manner in which an insurer allocates a loss across an insurer allocates a loss across multiple layers/ years of insurance multiple layers/ years of insurance coverage coverage

» ““Rising Bathtub Allocation”: Method Rising Bathtub Allocation”: Method of allocation where loss is allocated of allocation where loss is allocated equally across all policies at same equally across all policies at same level over defined time period. level over defined time period.

Glossary of Terms Glossary of Terms

» ““Manifestation Trigger”: Manner to Manifestation Trigger”: Manner to identify date of loss based on identify date of loss based on manifestation of physical injury or manifestation of physical injury or property damageproperty damage

» ““Continuous Trigger”: Manner to Continuous Trigger”: Manner to identify date of loss based on initial identify date of loss based on initial exposure continuing through end exposure continuing through end of exposure of exposure

When is the “Follow-the-When is the “Follow-the-Fortunes” Doctrine Fortunes” Doctrine

Applied Applied » Contractual : “All loss settlements Contractual : “All loss settlements

by [insurer] provided that they are by [insurer] provided that they are within the terms and conditions of within the terms and conditions of this Certificate of Reinsurance this Certificate of Reinsurance shall be binding on the [reinsurer] shall be binding on the [reinsurer] The liability of the [reinsurer] shall The liability of the [reinsurer] shall follow that of the [insurer]. . . .” follow that of the [insurer]. . . .” › Gerling Policy Gerling Policy


AppliedApplied» Custom and Usage: In the absence of Custom and Usage: In the absence of

a contractual provision, the insurer a contractual provision, the insurer may present evidence that the “follow-may present evidence that the “follow-the-fortunes” doctrine is incorporated the-fortunes” doctrine is incorporated into reinsurance contract based on into reinsurance contract based on custom and usage in the industry custom and usage in the industry › American Ins. v. American Reinsurance 2006 American Ins. v. American Reinsurance 2006

Lexis 95801, Lexis 95801, fn 3 (N.D. Cal. 2006) citing fn 3 (N.D. Cal. 2006) citing Aetna v. Aetna v. Home Ins. Co. Home Ins. Co. 882 F. Supp. 1328 882 F. Supp. 1328


AppliedApplied» Implied at Law: Courts have held that the Implied at Law: Courts have held that the “follow-the-fortunes” doctrine is “follow-the-fortunes” doctrine is not not implied implied in reinsurance contracts as a matter of law.in reinsurance contracts as a matter of law.

» Rather the doctrine applies if expressly Rather the doctrine applies if expressly included or included by custom and usage. included or included by custom and usage.

» The doctrine could be implied based on The doctrine could be implied based on course of dealing of the parties course of dealing of the parties

› American Ins. v. American Reinsurance 2006 Lexis American Ins. v. American Reinsurance 2006 Lexis 95801, 95801, fn 3 (N.D. Cal. 2006); fn 3 (N.D. Cal. 2006); North River Ins. v. North River Ins. v. Employers Reinsurance Corp. Employers Reinsurance Corp. 197 F. Supp. 2d 972, 197 F. Supp. 2d 972, 986- 990 (S.D. Ohio 2002) 986- 990 (S.D. Ohio 2002)

What is Governed by the What is Governed by the “Follow-the-Fortunes” “Follow-the-Fortunes”

DoctrineDoctrine» The Doctrine applies to: The Doctrine applies to:

› The insurer’s decision to settle;The insurer’s decision to settle;› The insurer’s waiver of coverage The insurer’s waiver of coverage

defenses ;defenses ;› The amount of settlement;The amount of settlement;› Claims covered under settlement Claims covered under settlement › The post-settlement allocation of The post-settlement allocation of

the lossthe loss


DoctrineDoctrine» Decision to Settle: Decision to Settle:

› The insurer’s decision to settle is The insurer’s decision to settle is evaluated under the doctrine: evaluated under the doctrine: › Was the decision to settle Was the decision to settle reasonable? reasonable?

› Was it made in good faith? Was it made in good faith? › North River Insurance v. ACE North River Insurance v. ACE (North River II)(North River II) 361 F.3d 134, 141 361 F.3d 134, 141 (2d. Cir. 2004) (2d. Cir. 2004)


DoctrineDoctrine» Waiver of coverage defenses :Waiver of coverage defenses :

› Was it reasonable under existing law? Was it reasonable under existing law? › Was it done in good faith? Was it done in good faith? › Was the waiver arguably within the Was the waiver arguably within the

applicable policy language? applicable policy language? › National Union v. American Re-National Union v. American Re-Insurance Co. Insurance Co. 441 F. Supp. 646 441 F. Supp. 646 (S.D.N.Y. 2006) (S.D.N.Y. 2006)


DoctrineDoctrine» Amount of SettlementAmount of Settlement

› Was it reasonable? Was it reasonable? › Was it in good faith Was it in good faith › Was it within the applicable policy Was it within the applicable policy

› See Bellefonte Reinsurance v. See Bellefonte Reinsurance v. Mission InsuranceMission Insurance 903 F.2d 910 (2d. 903 F.2d 910 (2d. Cir. 1990) Cir. 1990) (reinsurers not liable for (reinsurers not liable for insurer’s costs in excess of express cap on insurer’s costs in excess of express cap on loss in reinsurance contract)loss in reinsurance contract)


DoctrineDoctrine» Claims covered by Settlement Claims covered by Settlement

› Claims settled must be claims covered by Claims settled must be claims covered by underlying policy underlying policy › North River Ins. v. Cigna North River Ins. v. Cigna 52 F.3d 1194, 1206 52 F.3d 1194, 1206

(3d Cir. 1995)(3d Cir. 1995)› However, Courts apply doctrine to waivers of However, Courts apply doctrine to waivers of

certain policy defenses and scope of coveragecertain policy defenses and scope of coverage› See See National Union v. American Re-Insurance National Union v. American Re-Insurance 441 F. 441 F.

Supp. 2d 646 (S.D.N.Y. 2006) (claims ‘arguably’ Supp. 2d 646 (S.D.N.Y. 2006) (claims ‘arguably’

within policy years can be settled)within policy years can be settled)


DoctrineDoctrine» Claims covered by Settlement Claims covered by Settlement

› Future Claims can be covered by Future Claims can be covered by settlement between insurer and settlement between insurer and underlying insured underlying insured › Ins. Co. of Penn. v. Associated Ins. Co. of Penn. v. Associated International International 922 F. 2d 516, 922 F. 2d 516, 525 ( 9525 ( 9thth Cir. 1990) Cir. 1990)

Defenses Under the Defenses Under the Follow-the-Fortunes Follow-the-Fortunes

DoctrineDoctrine» The Doctrine is intended to apply to The Doctrine is intended to apply to

most cases: most cases: » ““the follow-the-fortunes doctrine simply the follow-the-fortunes doctrine simply

requires payment where the cedent’s good requires payment where the cedent’s good faith payment is at least arguably within the faith payment is at least arguably within the scope of the insurance coverage that was scope of the insurance coverage that was reinsured. This standard is reinsured. This standard is purposefully lowpurposefully low””› National Union v. American Re-Ins. 441 National Union v. American Re-Ins. 441

F. Supp. 2d 646, 650-651 (S.D.N.Y. F. Supp. 2d 646, 650-651 (S.D.N.Y. 2006) 2006)


DoctrineDoctrine» Doctrine does not apply to Doctrine does not apply to settlements that aresettlements that are› Fraudulent; Collusive; Made in Bad Faith; Fraudulent; Collusive; Made in Bad Faith; › Clearly and manifestly outside terms of Clearly and manifestly outside terms of

underlying policyunderlying policy› Unreasonable and self-servingUnreasonable and self-serving

› Hartford Acc. V. Columbia Cas. Hartford Acc. V. Columbia Cas. 98 98 F.Supp.2d 251, 258 (D. Conn.); F.Supp.2d 251, 258 (D. Conn.); Nat’l Nat’l Union v. American Re-InsUnion v. American Re-Ins. 441 F. Supp. . 441 F. Supp. 2d 646, 650 (S.D.N.Y. 2006)2d 646, 650 (S.D.N.Y. 2006)


DoctrineDoctrine» Standard for Defenses to Doctrine: Standard for Defenses to Doctrine: » ““Bad Faith requires an Bad Faith requires an

extraordinary showing extraordinary showing of a of a disingenuous or dishonest failure to disingenuous or dishonest failure to carry out a contract. The standard is carry out a contract. The standard is not mere negligence but gross not mere negligence but gross negligence” negligence” › North River Ins. v. Cigna North River Ins. v. Cigna 53 F.3d 1194, 53 F.3d 1194,

1217 (3d. Cir. 1995)1217 (3d. Cir. 1995)


DoctrineDoctrine» Bad Faith Standard Can Be Met by: Bad Faith Standard Can Be Met by:

› Showing that the insurer did not use an Showing that the insurer did not use an expert to evaluate the underlying claimexpert to evaluate the underlying claim

› Showing that the insurer unreasonably Showing that the insurer unreasonably allocated all the settlement to a reinsured allocated all the settlement to a reinsured policy policy

› Showing insurer internal documents that Showing insurer internal documents that suggest an effort to manipulate the allocation suggest an effort to manipulate the allocation › Hartford Cas. v. ColumbiaHartford Cas. v. Columbia 98 F. Supp. 2d 98 F. Supp. 2d

251, 258-9 (D. Conn.) 251, 258-9 (D. Conn.)


DoctrineDoctrine» Bad Faith Defense: Bad Faith Defense:

› Fact that reinsured policy is Fact that reinsured policy is only only policy policy to which settlement to which settlement allocated is not allocated is not per se per se evidence evidence of bad faithof bad faith› Nat’l Union v. American Re-Ins. Nat’l Union v. American Re-Ins. 441 F. Supp. 2d 646, 653 441 F. Supp. 2d 646, 653 (S.D.N.Y 2006) (S.D.N.Y 2006)


DoctrineDoctrine» Defense: Underlying Settlement Not Defense: Underlying Settlement Not

Within Terms of Policy:Within Terms of Policy:› This defense fails “if payment of the This defense fails “if payment of the

claim is claim is arguably within scope arguably within scope of the of the policy [insured] issued to [underlying policy [insured] issued to [underlying insured].” insured].”

› Reinsurer must prove that settlement Reinsurer must prove that settlement was “was “clearly and manifestly clearly and manifestly outside outside scope of the reinsured’s coverage” scope of the reinsured’s coverage” › National Union. v. American Re-Ins. National Union. v. American Re-Ins. 441 F. 441 F.

Supp. 2d 646, 651 (S.D.N.Y 2006) Supp. 2d 646, 651 (S.D.N.Y 2006)


DoctrineDoctrine» Defense: Underlying Settlement Not Defense: Underlying Settlement Not

Within Terms of Policy Within Terms of Policy › Insurer is permitted to take different Insurer is permitted to take different

positions positions vis vis insured and re-insurer insured and re-insurer › Against insured, insurer argued that certain Against insured, insurer argued that certain

claims manifested before policy period; claims manifested before policy period; › Against re-insurer, insurer argued that Against re-insurer, insurer argued that

same claims manifested during policy same claims manifested during policy periodperiod

› Nat’l Union, Nat’l Union, 441 F. Supp. 2d 646,(S.D.N.Y 2006) 441 F. Supp. 2d 646,(S.D.N.Y 2006)


DoctrineDoctrine» Defense: Allocation Not Defense: Allocation Not

Reasonable: Reasonable: › Insurer is permitted to take different Insurer is permitted to take different

positions positions vis vis insured and re-insurer insured and re-insurer › Against insured, Insurer argued that Against insured, Insurer argued that

claims were for multiple occurrences claims were for multiple occurrences › Against reinsurer, Insurer allocated Against reinsurer, Insurer allocated

claims as a single occurrence claims as a single occurrence › Travelers v. Gerling Travelers v. Gerling 419 F.3d 181, 419 F.3d 181,

186 (2d. Cir. 2005) 186 (2d. Cir. 2005)


DoctrineDoctrine» Defenses: Reasonableness:Defenses: Reasonableness:

› Courts will find an allocation reasonable Courts will find an allocation reasonable if if › It was one of several reasonable It was one of several reasonable alternatives; alternatives;

› It was based on disputed law or law It was based on disputed law or law existing at time of allocation existing at time of allocation

› Travelers Ins. v. Gerling Travelers Ins. v. Gerling 419 F. 3d 419 F. 3d 181, 194 (2d. Cir. 2005) 181, 194 (2d. Cir. 2005)

Application of Doctrine Application of Doctrine in Mass Tort Context in Mass Tort Context

» Insurer settles numerous pending Insurer settles numerous pending and future claims based on and future claims based on primary/excess coverage; primary/excess coverage;

» Insurer allocates claims across Insurer allocates claims across several years of primary and several years of primary and excess policiesexcess policies

» Insurer bills reinsurer for reinsured Insurer bills reinsurer for reinsured portion of policies. portion of policies.

Considerations for Considerations for Reinsurers/InsurersReinsurers/Insurers

› Does the Doctrine even apply ?Does the Doctrine even apply ?

› Contractual?Contractual?› Implied by Custom and Usage?Implied by Custom and Usage?› Implied by Course of Dealing? Implied by Course of Dealing?


› Was the settlement amount Was the settlement amount reasonable? reasonable?

› Was the allocation reasonable?Was the allocation reasonable?› Reasonable as to pending claims Reasonable as to pending claims › Reasonable at to future claims Reasonable at to future claims

› Was it reasonable to settle the claims Was it reasonable to settle the claims that were settled? that were settled?

› Is there evidence of bad faith or self-Is there evidence of bad faith or self-serving by insurer? serving by insurer?


› Is there evidence of bad faith or Is there evidence of bad faith or self-serving by insurer? self-serving by insurer? › Courts look at insurer’s internal Courts look at insurer’s internal analyses of allocation; analyses of allocation;

› Courts look at internal Courts look at internal documents for evidence of documents for evidence of manipulation; manipulation;

› Hartford Cas. v. ColumbiaHartford Cas. v. Columbia 98 F. Supp. 2d 98 F. Supp. 2d 251, 258-9 (D. Conn.) 251, 258-9 (D. Conn.)

›


›Courts look at whether Courts look at whether persons making allocation persons making allocation were aware of reinsurance were aware of reinsurance coverage coverage

› Travelers Ins. v. Gerling Travelers Ins. v. Gerling 419 F. 3d 419 F. 3d 181, 192 (2d. Cir. 2005)181, 192 (2d. Cir. 2005)


» Limitations on Evidence of Bad Faith: Limitations on Evidence of Bad Faith: › ““ACE’s appeal relies. . ..on specific factual ACE’s appeal relies. . ..on specific factual

information on which it alleges North River information on which it alleges North River relied in its settlement negotiations… relied in its settlement negotiations…

But it is precisely this kind of intrusive But it is precisely this kind of intrusive factual inquiry into the settlement factual inquiry into the settlement process process that the deference prescribed that the deference prescribed by the [doctrine] is designed to by the [doctrine] is designed to prevent” prevent” North River Ins. v. ACENorth River Ins. v. ACE (North River II) 361 (North River II) 361 F.2d 134, 141 (2d. Cir. 2004)F.2d 134, 141 (2d. Cir. 2004)


» Standard for applying doctrine “is Standard for applying doctrine “is purposefully low” purposefully low”

› National Union v. American Re-InsNational Union v. American Re-Ins. 441 F. . 441 F. Supp. 2d 646, 650-651 (S.D.N.Y. 2006)Supp. 2d 646, 650-651 (S.D.N.Y. 2006)

» Proof of bad faith/collusion requires Proof of bad faith/collusion requires “extraordinary showing of a “extraordinary showing of a disingenuous or dishonest failure to disingenuous or dishonest failure to follow the contract”follow the contract”

› Travelers Ins. v. Gerling Travelers Ins. v. Gerling 419 F. 3d 181, 191 (2d. 419 F. 3d 181, 191 (2d. Cir. 2005)Cir. 2005)


» Considerations Considerations › Pre-Judgment Interest on unpaid Pre-Judgment Interest on unpaid

claim.claim.› National Union v. American Re-InsNational Union v. American Re-Ins. . 441 F. Supp. 2d 646, 655 441 F. Supp. 2d 646, 655 (S.D.N.Y. 2006)(S.D.N.Y. 2006)

ConclusionConclusion

» ““Follow-the-Fortunes” if Follow-the-Fortunes” if applicable: applicable: › Is deferential to insurer’s Is deferential to insurer’s

› Settlement DecisionsSettlement Decisions› Allocation of loss Allocation of loss

› Contain high hurdles for reinsurers Contain high hurdles for reinsurers seeking to challenge settlement seeking to challenge settlement decisions and allocation of loss.decisions and allocation of loss.

reinsurance powerpoint

Documents