McCarter & English on Eighth Circuit Affirms Summary Judgment in Favor of Reinsured Concluding the Reinsurance Agreement Unambiguously Requires the Reinsurer to Follow the Settlements

Cynthia Morrison   By Cynthia Morrison, Associate, McCarter & English, LLP

"Reinsurance, as a specialized industry, utilizes unique terms that are often the subject of disputes between the reinsurer and reinsured.  One unique term is the 'follow the fortunes' doctrine which is interpreted, generally, to mean a reinsurer must follow the underwriting fortunes of the reinsured," writes Cynthias Morrison. "A typical follow the fortunes clause provides:  'The reinsurer agrees to follow the fortunes of the reinsured under the policies reinsured, subject to the terms, conditions and limitations of this Agreement.'  Eugene Wollan, Handbook of Reinsurance Law, Aspen Publishers, 2003 Supplement, § 2.04(C).  The terms 'follow the fortunes' and 'follow the settlements' frequently are used interchangeably.  As explained by the courts, however, 'follow the fortunes more accurately describes the obligation to follow the reinsureds underwriting fortunes, whereas follow the settlements refers to the duty to follow the actions of the cedent in adjusting and settling claims.'  North River Ins. Co. v. Employers Reins. Corp., 197 F. Supp. 2d 972, 978, fn. 1 (S.D. Ohio 2002) (citing Aetna Cas. And Sur. Co. v. Home Ins. Co., 882 F. Supp. 1328, 1346 (S.D.N.Y. 1995)).  One relatively common dispute among a reinsurer and reinsured involves whether the 'follow the settlements' doctrine is express or, if not, whether it is implied in the reinsurance agreement."

"The Eighth Circuit Court of Appeals recently issued a decision that primarily addressed the application of the 'follow the settlements' doctrine in the reinsurance context," the author reports. "The Court affirmed the district court's finding that the reinsurance agreement obligated the reinsurer to 'follow the settlements' even though it did not contain a typical 'follow the settlements' provision.  Employers Reinsurance Company v. Massachusetts Mutual Life Insurance Company, 2011 U.S. App. LEXIS 18561 (8th Cir. Sept. 7, 2011)."

(Download a free copy of the Lexis unenhanced version of the Employers Reinsurance Company v. Massachusetts Mutual Life Insurance Company, 2011 U.S. App. LEXIS 18561 (8th Cir. Sept. 7, 2011).

"The ERC case is instructive because the Reinsurance Agreement at issue did not contain a typical provision obligating the reinsurer to 'follow the fortunes' or 'follow the settlements' of its reinsured, but the Court read the terms of the contract to impose such an obligation," explains Morrison.  "Furthermore, the case should serve as a warning to reinsurers that an offset provision may not serve as a basis to cease payment of a reinsured's disputed claims."

Cynthia Morrison is an associate in the Insurance Coverage Practice Group in the Philadelphia, Pennsylvania office of McCarter & English, LLP. She concentrates her practice in commercial litigation, with an emphasis in insurance coverage litigation and counseling. Ms. Morrison has been involved in major environmental insurance coverage litigation, insurance coverage litigation relating to product liabilities, and in first-party property coverage litigation, including property damage and business interruption claims. She has also counseled clients regarding D&O liability issues and has litigated D&O coverage issues. Ms Morrison has also counseled commercial clients in areas involving the Uniform Commercial Code and breach of contract issues arising out of sales disputes and alleged defective product disputes.

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