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The “Follow-the-Fortunes” Doctrine in Insurer/Reinsurer Disputes <ul><li>By Bob Redmond  </li></ul><ul><li>Williams Mullen...
Overview  <ul><li>The “Follow-the-Fortunes” Doctrine  </li></ul><ul><li>Development of Doctrine  </li></ul><ul><li>Key Ter...
The “Follow-the-Fortunes” Doctrine  <ul><li>The “Follow-the-Fortunes” Doctrine imposes on the reinsurer the duty: </li></u...
Purpose of The Follow-the-Fortunes Doctrine  <ul><li>The main rationale of the doctrine is  </li></ul><ul><ul><li>“ to fos...
Purpose of The Follow-the-Fortunes Doctrine <ul><li>Purpose: “ A reinsurer cannot second guess the good faith liability de...
Purpose of the “Follow the Fortunes” Doctrine  <ul><li>“ The Doctrine precludes wasteful relitigation by a reinsurer of de...
Purpose of the “Follow-the-Fortunes” Doctrine  <ul><li>The purpose is to preserve the insurer/reinsurer relationship and p...
Glossary of Key Terms  <ul><li>“Primary Insurance”: Insurance that provides the initial layer of coverage;  </li></ul><ul>...
Glossary of Key Terms <ul><li>“ Cedent”/ “Ceding Insurer”: Primary or Excess Carrier that “cedes” risk to reinsurer  </li>...
Glossary of Key Terms <ul><li>“Allocation”: The manner in which an insurer allocates a loss across multiple layers/ years ...
Glossary of Terms  <ul><li>“Manifestation Trigger”: Manner to identify date of loss based on manifestation of physical inj...
When is the “Follow-the-Fortunes” Doctrine Applied  <ul><li>Contractual : “All loss settlements by [insurer] provided that...
When is the “Follow-the-Fortunes” Doctrine Applied <ul><li>Custom and Usage:  In the absence of a contractual provision, t...
When is the “Follow-the-Fortunes” Doctrine Applied <ul><li>Implied at Law: Courts have held that the “follow-the-fortunes”...
What is Governed by the “Follow-the-Fortunes” Doctrine <ul><li>The Doctrine applies to:  </li></ul><ul><ul><li>The insurer...
What is Governed by the “Follow-the-Fortunes” Doctrine <ul><li>Decision to Settle:  </li></ul><ul><ul><li>The insurer’s de...
What is Governed by the “Follow-the-Fortunes” Doctrine <ul><li>Waiver of coverage defenses : </li></ul><ul><ul><li>Was it ...
What is Governed by the “Follow-the-Fortunes” Doctrine <ul><li>Amount of Settlement </li></ul><ul><ul><li>Was it reasonabl...
What is Governed by the “Follow-the-Fortunes” Doctrine <ul><li>Claims covered by Settlement  </li></ul><ul><ul><li>Claims ...
What is Governed by the “Follow-the-Fortunes” Doctrine <ul><li>Claims covered by Settlement  </li></ul><ul><ul><li>Future ...
Defenses Under the Follow-the-Fortunes Doctrine <ul><li>The Doctrine is intended to apply to most cases:  </li></ul><ul><l...
Defenses Under the Follow-the-Fortunes Doctrine <ul><li>Doctrine does not apply to settlements that are </li></ul><ul><ul>...
Defenses Under the Follow-the-Fortunes Doctrine <ul><li>Standard for Defenses to Doctrine:  </li></ul><ul><li>“Bad Faith r...
Defenses Under the Follow-the-Fortunes Doctrine <ul><li>Bad Faith Standard Can Be Met by:  </li></ul><ul><ul><li>Showing t...
Defenses Under the Follow-the-Fortunes Doctrine <ul><li>Bad Faith Defense:  </li></ul><ul><ul><li>Fact that reinsured poli...
Defenses Under the Follow-the-Fortunes Doctrine <ul><li>Defense: Underlying Settlement Not Within Terms of  Policy: </li><...
Defenses Under the Follow-the-Fortunes Doctrine <ul><li>Defense: Underlying Settlement Not Within Terms of Policy  </li></...
Defenses Under the Follow-the-Fortunes Doctrine <ul><li>Defense: Allocation Not Reasonable:  </li></ul><ul><ul><li>Insurer...
Defenses Under the Follow-the-Fortunes Doctrine <ul><li>Defenses: Reasonableness: </li></ul><ul><ul><li>Courts will find a...
Application of Doctrine in Mass Tort Context  <ul><li>Insurer settles numerous pending and future claims based on primary/...
Considerations for Reinsurers/Insurers <ul><ul><li>Does the Doctrine even apply ? </li></ul></ul><ul><ul><ul><li>Contractu...
Considerations for Reinsurers/Insurers <ul><ul><li>Was the settlement amount reasonable?  </li></ul></ul><ul><ul><li>Was t...
Considerations for Reinsurers/Insurers <ul><ul><li>Is there evidence of bad faith or self-serving by insurer?  </li></ul><...
Considerations for Reinsurers/Insurers <ul><ul><ul><li>Courts look at whether persons making allocation were aware of rein...
Considerations for Reinsurers/Insurers <ul><li>Limitations on Evidence of Bad Faith:  </li></ul><ul><ul><li>“ACE’s appeal ...
Considerations for Reinsurers/Insurers <ul><li>Standard for applying doctrine “is purposefully low”  </li></ul><ul><ul><ul...
Considerations for Reinsurers/Insurers <ul><li>Considerations  </li></ul><ul><ul><li>Pre-Judgment Interest on unpaid claim...
Conclusion <ul><li>“Follow-the-Fortunes” if applicable:  </li></ul><ul><ul><li>Is deferential to insurer’s  </li></ul></ul...
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The &quot;Follow-the-Fortunes&quot; Doctrine in Reinsurance Litigation

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Overview of the &quot;Follow-the-Fortunes&quot; Doctrine as applied by courts to disputes between insurers and reinsurers, particularly in the Mass Tort Context

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The &quot;Follow-the-Fortunes&quot; Doctrine in Reinsurance Litigation

  1. 1. The “Follow-the-Fortunes” Doctrine in Insurer/Reinsurer Disputes <ul><li>By Bob Redmond </li></ul><ul><li>Williams Mullen </li></ul><ul><li>[email_address] </li></ul><ul><li>804-783-6439 </li></ul>
  2. 2. Overview <ul><li>The “Follow-the-Fortunes” Doctrine </li></ul><ul><li>Development of Doctrine </li></ul><ul><li>Key Terms </li></ul><ul><li>Basis for Application </li></ul><ul><li>What is governed by Doctrine </li></ul><ul><li>Defenses </li></ul><ul><li>Application in Mass Tort Context </li></ul><ul><li>Considerations for Insurers/Reinsurers </li></ul>
  3. 3. The “Follow-the-Fortunes” Doctrine <ul><li>The “Follow-the-Fortunes” Doctrine imposes on the reinsurer the duty: </li></ul><ul><ul><li>To indemnify the insurer for payments insurer makes pursuant to a loss settlement under its own policy as long the settlement is </li></ul></ul><ul><ul><ul><li>Made in Good Faith </li></ul></ul></ul><ul><ul><ul><li>Reasonable </li></ul></ul></ul><ul><ul><ul><li>Arguably within the terms of the policy </li></ul></ul></ul>
  4. 4. Purpose of The Follow-the-Fortunes Doctrine <ul><li>The main rationale of the doctrine is </li></ul><ul><ul><li>“ to foster the goals of maximum coverage and settlement and to prevent courts, through de novo review of the cedent’s decision-making process, from undermining the foundation of the cedent/reinsurer relationship ” </li></ul></ul><ul><ul><ul><li>Travelers Ins. Co. v. Gerling, 419 F. 3d 181, 188 ( 2d. Cir. 2005) </li></ul></ul></ul>
  5. 5. Purpose of The Follow-the-Fortunes Doctrine <ul><li>Purpose: “ A reinsurer cannot second guess the good faith liability determinations made by its reinsured, or the insured’s good faith decision to waive defenses to which it may be entitled” </li></ul><ul><ul><li>Christiana General Ins. v. Great American Ins. 979 F. 2d 269, 280 (2d. Cir. 1992) </li></ul></ul>
  6. 6. Purpose of the “Follow the Fortunes” Doctrine <ul><li>“ The Doctrine precludes wasteful relitigation by a reinsurer of defenses to underlying policy coverage in cases where the ceding insurer has in good faith paid a settlement” </li></ul><ul><ul><li>National Union Ins. v. American Re-Ins. Co. 441 F. Supp. 2d. 646, 650 (S.D.N.Y 2006) </li></ul></ul>
  7. 7. Purpose of the “Follow-the-Fortunes” Doctrine <ul><li>The purpose is to preserve the insurer/reinsurer relationship and prevent the de novo review of claims determinations by reinsurers and thereby make insurers less likely to settle underlying coverage claims </li></ul><ul><ul><li>Int’l Surplus Lines v. Certain Lloyds Underwriters 868 F. Supp. 917 (N.D. Ohio 1992) </li></ul></ul>
  8. 8. Glossary of Key Terms <ul><li>“Primary Insurance”: Insurance that provides the initial layer of coverage; </li></ul><ul><li>“Excess Insurance”: Insurance that covers losses when primary layer of coverage is exhausted; </li></ul><ul><li>“Reinsurance”: Insurance for losses that primary or excess insurer incurs </li></ul>
  9. 9. Glossary of Key Terms <ul><li>“ Cedent”/ “Ceding Insurer”: Primary or Excess Carrier that “cedes” risk to reinsurer </li></ul><ul><li>“ Facultative Reinsurance”: Reinsurance to cover specific policies </li></ul><ul><li>“ Treaty Reinsurance”: Reinsurance to cover all policies falling within a specified class </li></ul>
  10. 10. Glossary of Key Terms <ul><li>“Allocation”: The manner in which an insurer allocates a loss across multiple layers/ years of insurance coverage </li></ul><ul><li>“Rising Bathtub Allocation”: Method of allocation where loss is allocated equally across all policies at same level over defined time period. </li></ul>
  11. 11. Glossary of Terms <ul><li>“Manifestation Trigger”: Manner to identify date of loss based on manifestation of physical injury or property damage </li></ul><ul><li>“Continuous Trigger”: Manner to identify date of loss based on initial exposure continuing through end of exposure </li></ul>
  12. 12. When is the “Follow-the-Fortunes” Doctrine Applied <ul><li>Contractual : “All loss settlements by [insurer] provided that they are within the terms and conditions of this Certificate of Reinsurance shall be binding on the [reinsurer] The liability of the [reinsurer] shall follow that of the [insurer]. . . .” </li></ul><ul><ul><li>Gerling Policy </li></ul></ul>
  13. 13. When is the “Follow-the-Fortunes” Doctrine Applied <ul><li>Custom and Usage: In the absence of a contractual provision, the insurer may present evidence that the “follow-the-fortunes” doctrine is incorporated into reinsurance contract based on custom and usage in the industry </li></ul><ul><ul><li>American Ins. v. American Reinsurance 2006 Lexis 95801, fn 3 (N.D. Cal. 2006) citing Aetna v. Home Ins. Co. 882 F. Supp. 1328 </li></ul></ul>
  14. 14. When is the “Follow-the-Fortunes” Doctrine Applied <ul><li>Implied at Law: Courts have held that the “follow-the-fortunes” doctrine is not implied in reinsurance contracts as a matter of law. </li></ul><ul><li>Rather the doctrine applies if expressly included or included by custom and usage. </li></ul><ul><li>The doctrine could be implied based on course of dealing of the parties </li></ul><ul><ul><ul><li>American Ins. v. American Reinsurance 2006 Lexis 95801, fn 3 (N.D. Cal. 2006); North River Ins. v. Employers Reinsurance Corp. 197 F. Supp. 2d 972, 986- 990 (S.D. Ohio 2002) </li></ul></ul></ul>
  15. 15. What is Governed by the “Follow-the-Fortunes” Doctrine <ul><li>The Doctrine applies to: </li></ul><ul><ul><li>The insurer’s decision to settle; </li></ul></ul><ul><ul><li>The insurer’s waiver of coverage defenses ; </li></ul></ul><ul><ul><li>The amount of settlement; </li></ul></ul><ul><ul><li>Claims covered under settlement </li></ul></ul><ul><ul><li>The post-settlement allocation of the loss </li></ul></ul>
  16. 16. What is Governed by the “Follow-the-Fortunes” Doctrine <ul><li>Decision to Settle: </li></ul><ul><ul><li>The insurer’s decision to settle is evaluated under the doctrine: </li></ul></ul><ul><ul><ul><li>Was the decision to settle reasonable? </li></ul></ul></ul><ul><ul><ul><li>Was it made in good faith? </li></ul></ul></ul><ul><ul><ul><ul><li>North River Insurance v. ACE (North River II) 361 F.3d 134, 141 (2d. Cir. 2004) </li></ul></ul></ul></ul>
  17. 17. What is Governed by the “Follow-the-Fortunes” Doctrine <ul><li>Waiver of coverage defenses : </li></ul><ul><ul><li>Was it reasonable under existing law? </li></ul></ul><ul><ul><li>Was it done in good faith? </li></ul></ul><ul><ul><li>Was the waiver arguably within the applicable policy language? </li></ul></ul><ul><ul><ul><li>National Union v. American Re-Insurance Co. 441 F. Supp. 646 (S.D.N.Y. 2006) </li></ul></ul></ul>
  18. 18. What is Governed by the “Follow-the-Fortunes” Doctrine <ul><li>Amount of Settlement </li></ul><ul><ul><li>Was it reasonable? </li></ul></ul><ul><ul><li>Was it in good faith </li></ul></ul><ul><ul><li>Was it within the applicable policy </li></ul></ul><ul><ul><ul><li>See Bellefonte Reinsurance v. Mission Insurance 903 F.2d 910 (2d. Cir. 1990) (reinsurers not liable for insurer’s costs in excess of express cap on loss in reinsurance contract) </li></ul></ul></ul>
  19. 19. What is Governed by the “Follow-the-Fortunes” Doctrine <ul><li>Claims covered by Settlement </li></ul><ul><ul><li>Claims settled must be claims covered by underlying policy </li></ul></ul><ul><ul><ul><li>North River Ins. v. Cigna 52 F.3d 1194, 1206 (3d Cir. 1995) </li></ul></ul></ul><ul><ul><li>However, Courts apply doctrine to waivers of certain policy defenses and scope of coverage </li></ul></ul><ul><ul><ul><li>See National Union v. American Re-Insurance 441 F. Supp. 2d 646 (S.D.N.Y. 2006) (claims ‘arguably’ within policy years can be settled) </li></ul></ul></ul>
  20. 20. What is Governed by the “Follow-the-Fortunes” Doctrine <ul><li>Claims covered by Settlement </li></ul><ul><ul><li>Future Claims can be covered by settlement between insurer and underlying insured </li></ul></ul><ul><ul><ul><li>Ins. Co. of Penn. v. Associated International 922 F. 2d 516, 525 ( 9 th Cir. 1990) </li></ul></ul></ul>
  21. 21. Defenses Under the Follow-the-Fortunes Doctrine <ul><li>The Doctrine is intended to apply to most cases: </li></ul><ul><li>“ the follow-the-fortunes doctrine simply requires payment where the cedent’s good faith payment is at least arguably within the scope of the insurance coverage that was reinsured. This standard is purposefully low ” </li></ul><ul><ul><li>National Union v. American Re-Ins. 441 F. Supp. 2d 646, 650-651 (S.D.N.Y. 2006) </li></ul></ul>
  22. 22. Defenses Under the Follow-the-Fortunes Doctrine <ul><li>Doctrine does not apply to settlements that are </li></ul><ul><ul><li>Fraudulent; Collusive; Made in Bad Faith; </li></ul></ul><ul><ul><li>Clearly and manifestly outside terms of underlying policy </li></ul></ul><ul><ul><li>Unreasonable and self-serving </li></ul></ul><ul><ul><ul><li>Hartford Acc. V. Columbia Cas. 98 F.Supp.2d 251, 258 (D. Conn.); Nat’l Union v. American Re-Ins . 441 F. Supp. 2d 646, 650 (S.D.N.Y. 2006) </li></ul></ul></ul>
  23. 23. Defenses Under the Follow-the-Fortunes Doctrine <ul><li>Standard for Defenses to Doctrine: </li></ul><ul><li>“Bad Faith requires an extraordinary showing of a disingenuous or dishonest failure to carry out a contract. The standard is not mere negligence but gross negligence” </li></ul><ul><ul><li>North River Ins. v. Cigna 53 F.3d 1194, 1217 (3d. Cir. 1995) </li></ul></ul>
  24. 24. Defenses Under the Follow-the-Fortunes Doctrine <ul><li>Bad Faith Standard Can Be Met by: </li></ul><ul><ul><li>Showing that the insurer did not use an expert to evaluate the underlying claim </li></ul></ul><ul><ul><li>Showing that the insurer unreasonably allocated all the settlement to a reinsured policy </li></ul></ul><ul><ul><li>Showing insurer internal documents that suggest an effort to manipulate the allocation </li></ul></ul><ul><ul><ul><li>Hartford Cas. v. Columbia 98 F. Supp. 2d 251, 258-9 (D. Conn.) </li></ul></ul></ul>
  25. 25. Defenses Under the Follow-the-Fortunes Doctrine <ul><li>Bad Faith Defense: </li></ul><ul><ul><li>Fact that reinsured policy is only policy to which settlement allocated is not per se evidence of bad faith </li></ul></ul><ul><ul><ul><li>Nat’l Union v. American Re-Ins. 441 F. Supp. 2d 646, 653 (S.D.N.Y 2006) </li></ul></ul></ul>
  26. 26. Defenses Under the Follow-the-Fortunes Doctrine <ul><li>Defense: Underlying Settlement Not Within Terms of Policy: </li></ul><ul><ul><li>This defense fails “if payment of the claim is arguably within scope of the policy [insured] issued to [underlying insured].” </li></ul></ul><ul><ul><li>Reinsurer must prove that settlement was “ clearly and manifestly outside scope of the reinsured’s coverage” </li></ul></ul><ul><ul><ul><li>National Union. v. American Re-Ins. 441 F. Supp. 2d 646, 651 (S.D.N.Y 2006) </li></ul></ul></ul>
  27. 27. Defenses Under the Follow-the-Fortunes Doctrine <ul><li>Defense: Underlying Settlement Not Within Terms of Policy </li></ul><ul><ul><li>Insurer is permitted to take different positions vis insured and re-insurer </li></ul></ul><ul><ul><li>Against insured, insurer argued that certain claims manifested before policy period; </li></ul></ul><ul><ul><li>Against re-insurer, insurer argued that same claims manifested during policy period </li></ul></ul><ul><ul><li>Nat’l Union, 441 F. Supp. 2d 646,(S.D.N.Y 2006) </li></ul></ul>
  28. 28. Defenses Under the Follow-the-Fortunes Doctrine <ul><li>Defense: Allocation Not Reasonable: </li></ul><ul><ul><li>Insurer is permitted to take different positions vis insured and re-insurer </li></ul></ul><ul><ul><li>Against insured, Insurer argued that claims were for multiple occurrences </li></ul></ul><ul><ul><li>Against reinsurer, Insurer allocated claims as a single occurrence </li></ul></ul><ul><ul><li>Travelers v. Gerling 419 F.3d 181, 186 (2d. Cir. 2005) </li></ul></ul>
  29. 29. Defenses Under the Follow-the-Fortunes Doctrine <ul><li>Defenses: Reasonableness: </li></ul><ul><ul><li>Courts will find an allocation reasonable if </li></ul></ul><ul><ul><ul><li>It was one of several reasonable alternatives; </li></ul></ul></ul><ul><ul><ul><li>It was based on disputed law or law existing at time of allocation </li></ul></ul></ul><ul><ul><ul><li>Travelers Ins. v. Gerling 419 F. 3d 181, 194 (2d. Cir. 2005) </li></ul></ul></ul>
  30. 30. Application of Doctrine in Mass Tort Context <ul><li>Insurer settles numerous pending and future claims based on primary/excess coverage; </li></ul><ul><li>Insurer allocates claims across several years of primary and excess policies </li></ul><ul><li>Insurer bills reinsurer for reinsured portion of policies. </li></ul>
  31. 31. Considerations for Reinsurers/Insurers <ul><ul><li>Does the Doctrine even apply ? </li></ul></ul><ul><ul><ul><li>Contractual? </li></ul></ul></ul><ul><ul><ul><li>Implied by Custom and Usage? </li></ul></ul></ul><ul><ul><ul><li>Implied by Course of Dealing? </li></ul></ul></ul>
  32. 32. Considerations for Reinsurers/Insurers <ul><ul><li>Was the settlement amount reasonable? </li></ul></ul><ul><ul><li>Was the allocation reasonable? </li></ul></ul><ul><ul><ul><li>Reasonable as to pending claims </li></ul></ul></ul><ul><ul><ul><li>Reasonable at to future claims </li></ul></ul></ul><ul><ul><li>Was it reasonable to settle the claims that were settled? </li></ul></ul><ul><ul><li>Is there evidence of bad faith or self-serving by insurer? </li></ul></ul>
  33. 33. Considerations for Reinsurers/Insurers <ul><ul><li>Is there evidence of bad faith or self-serving by insurer? </li></ul></ul><ul><ul><ul><li>Courts look at insurer’s internal analyses of allocation; </li></ul></ul></ul><ul><ul><ul><li>Courts look at internal documents for evidence of manipulation; </li></ul></ul></ul><ul><ul><ul><ul><li>Hartford Cas. v. Columbia 98 F. Supp. 2d 251, 258-9 (D. Conn.) </li></ul></ul></ul></ul>
  34. 34. Considerations for Reinsurers/Insurers <ul><ul><ul><li>Courts look at whether persons making allocation were aware of reinsurance coverage </li></ul></ul></ul><ul><ul><ul><li>Travelers Ins. v. Gerling 419 F. 3d 181, 192 (2d. Cir. 2005) </li></ul></ul></ul>
  35. 35. Considerations for Reinsurers/Insurers <ul><li>Limitations on Evidence of Bad Faith: </li></ul><ul><ul><li>“ACE’s appeal relies. . ..on specific factual information on which it alleges North River relied in its settlement negotiations… </li></ul></ul><ul><ul><li>But it is precisely this kind of intrusive factual inquiry into the settlement process that the deference prescribed by the [doctrine] is designed to prevent” </li></ul></ul><ul><ul><li>North River Ins. v. ACE (North River II) 361 F.2d 134, 141 (2d. Cir. 2004) </li></ul></ul>
  36. 36. Considerations for Reinsurers/Insurers <ul><li>Standard for applying doctrine “is purposefully low” </li></ul><ul><ul><ul><li>National Union v. American Re-Ins . 441 F. Supp. 2d 646, 650-651 (S.D.N.Y. 2006) </li></ul></ul></ul><ul><li>Proof of bad faith/collusion requires “extraordinary showing of a disingenuous or dishonest failure to follow the contract” </li></ul><ul><ul><ul><li>Travelers Ins. v. Gerling 419 F. 3d 181, 191 (2d. Cir. 2005) </li></ul></ul></ul>
  37. 37. Considerations for Reinsurers/Insurers <ul><li>Considerations </li></ul><ul><ul><li>Pre-Judgment Interest on unpaid claim. </li></ul></ul><ul><ul><ul><li>National Union v. American Re-Ins . 441 F. Supp. 2d 646, 655 (S.D.N.Y. 2006) </li></ul></ul></ul>
  38. 38. Conclusion <ul><li>“Follow-the-Fortunes” if applicable: </li></ul><ul><ul><li>Is deferential to insurer’s </li></ul></ul><ul><ul><ul><li>Settlement Decisions </li></ul></ul></ul><ul><ul><ul><li>Allocation of loss </li></ul></ul></ul><ul><ul><li>Contain high hurdles for reinsurers seeking to challenge settlement decisions and allocation of loss. </li></ul></ul>

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