Public Policy Encourages Reinsurers to “Follow the Fortunes” of a Settlement when Payment is Reasonably Within Policy Terms
Reinsurers provide an additional layer of protection to an insured who may need insurance coverage that goes beyond the insured’s first layer of liability protection. Occasionally, a reinsurer may passively wait for the outcome of a settlement that an insured may have with a claimant that exceeds the insured’s first layer of liability protection. In such a circumstance, there is a body of law commonly called the “follow the fortunes” or “follow the settlements” doctrine that provides that a reinsurer is required to indemnify and reimburse the insured for payments reasonably within the terms of the original policy, even if technically not covered by the policy. See, Christiania Gen. Ins. Corp. v. Great Am. Ins. Co., 979 F.2d 268, 280 (2nd Cir. 1992). While the “follow the fortunes” or “follow the settlements” doctrine cannot be used to create greater obligations for coverage on reinsurers than exist in reinsurance agreements, provisions in reinsurance policies often provide the reinsured with reasonable latitude to settle claims against it by the primary insured and to bind the reinsurer, at least in some measure, from contesting the extent of liability to the primary insured. See, Travelers Cas. & Sur. Co. v. Certain Underwriters at Lloyd’s of London, 96 N.Y.2d 583, 734 N.Y.S.2d 531, 760 N.E.2d 319, 328 (2001).
If you would like to discuss a reinsurance issue, contact Lemons, Grundy & Eisenberg for more information.