Understanding Reinsurance Terminology—Follow-the-
Terjemahan bebas dari KESIMPULAN:
Prinsip-prinsip yang terkandung dalam doktrin follow-the fortune mewakili salah satu ciri khas dari hubungan reasuransi. Secara sederhana, jika perusahaan reasuransi membayar klaim secara wajar dan dengan iktikad baik, dan klaim berada dalam ketentuan kontrak yang mendasari dan kontrak reasuransi, reasuransi harus membayar, dan penentuan klaim reasuransi tidak akan dapat diragukan/disangkal.
Larry Schiffer explains “follow-the-fortunes,” a bedrock doctrine in reinsurance that exemplifies the unique business partnership between the reinsured and reinsurer.
Reinsurance, like other specialized industries, has its own unique terms and phrases that seem foreign to the uninitiated. Over the next several columns, we will explore some of these reinsurance terms of art and try to make them more understandable.
One of the bedrock doctrines in reinsurance is the concept of follow-the-fortunes. This doctrine exemplifies the unique business partnership that exists between the reinsured and the reinsurer.
The follow-the-fortunes doctrine provides generally that a reinsurer must follow the underwriting fortunes of its reinsured and, therefore, is bound by the claims-handling decisions of its reinsured so long as there is no evidence of fraud, collusion with the insured, or bad faith. It is a burden-shifting doctrine that allows the reinsured the freedom of making good-faith claims decisions without the fear of having to relitigate those decisions with its reinsurer.
To confuse things more, there is the similar doctrine of follow-the-settlements. In the United States, courts and many practitioners use “follow-the-fortunes” and “follow-the-settlements” interchangeably, and so will we.
Application of the follow-the-fortunes doctrine to reinsurance contracts in the United States began in as early as the 1800s. These early interpretations of the doctrine, however, did not originate from English common law, but instead appear to have evolved from general principles applied to reinsurance contracts in France. By the 1800s in France, it was customary for reinsurance agreements to contain an express provision binding the reinsurer to reimburse the reinsured for payment of loss so long as the reinsured acted in good faith and could produce evidence of payment of the loss.
This clause obligated the reinsured to exercise sound discretion when deciding whether to contest or pay a claim presented by the insured. Without this “special contract,” however, reinsurers were entitled to raise every defense that could have been asserted by the reinsured in a suit upon the underlying insurance policy.
General Applications of the Doctrine
The general rule is that follow-the-fortunes obligates a reinsurer to follow the underwriting fortunes of its reinsured and bars the reinsurer from relitigating the good-faith claims-handling decisions of its reinsured. Traditionally, courts have interpreted this doctrine to apply to the reinsured’s decisions regarding settlement of claims. The doctrine holds that a reinsurer is bound by the reinsured’s decisions regarding payment of settled claims so long as the decision was made reasonably and in good faith.
This obligation not to relitigate a reinsured’s good-faith claims decisions extends to a reinsured’s good-faith decision to waive defenses to which it may have been entitled. This standard is purposefully low in order to preclude a completely new review of the reinsured’s decision-making process.
Although a reinsurer is entitled to inquire into the dispositions of coverage disputes between reinsureds and their insureds, a reinsurer may not conduct a de novo review of these dispositions. Thus, the follow-the-fortunes doctrine creates an exception to the general rule allowing de novo review of contract interpretation. By prohibiting a court or arbitration panel from conducting a de novo review of the reinsured’s claims decisions, the follow-the-fortunes doctrine obligates a reinsurer to reimburse the reinsured unless the reinsurer can demonstrate that the reinsured did not act in good faith or failed to conduct a reasonable investigation.
An exception to the follow-the-fortunes doctrine exists where the reinsurer demonstrates that the reinsured’s decision-making process was fraudulent, collusive, made in bad faith, or that the underlying claim was not arguably within the scope of the reinsurance coverage. The standard for “bad faith” is usually a high one and generally requires some evidence of gross negligence or recklessness by the reinsured, or evidence that the settlement is arguably not within the scope of reinsurance coverage.
For example, courts have stated that the following scenarios do not constitute a reinsured’s bad faith:
- Failing to accurately inform reinsurers of an offer of settlement;
- Failure to inform the reinsurer of the reinsured’s decision to forego an appeal where there was little likelihood of success; and
- Treating a group of similar claims as one occurrence where there was considerable debate as to whether a large group of claims should be treated as one occurrence or as multiple occurrences.
In addition, at least one court has allowed the jury to consider the failure to obtain an opinion from counsel as evidence of bad faith in evaluating a reinsured’s refusal to defend. Evidence of mere negligence, therefore, is likely to be insufficient.
During the past several years, the question of whether the follow-the-fortunes doctrine may be invoked absent an explicit clause in the reinsurance contract has been the subject of debate and judicial scrutiny. Early case law indicates that courts were not willing to read follow-the-fortunes type language into reinsurance contracts when not expressly stated in the agreement. Reinsurance contracts were instead viewed within the confines of the general rules applicable to contract interpretation.
More recent case law suggests a greater tendency to apply the doctrine to all contracts of reinsurance whether expressly provided for or not. As recently as 1999, however, an appellate court in Michigan refused to impose liability on a reinsurer for a settlement contribution absent an express provision in the contract indicating an agreement between the parties to do so. The court noted that a reinsurer’s liability was determined solely by the terms of the reinsurance contract. Conclusion The principles embodied in the follow-the-fortunes doctrine represent one of the hallmarks of the reinsurance relationship. Simply stated, if the reinsured pays a claim reasonably and in good faith, and the claim falls within the terms of the underlying contract and the reinsurance contract, the reinsurer must pay, and the reinsured’s claims determination will not be second-guessed.
The principles embodied in the follow-the-fortunes doctrine represent one of the hallmarks of the reinsurance relationship. Simply stated, if the reinsured pays a claim reasonably and in good faith, and the claim falls within the terms of the underlying contract and the reinsurance contract, the reinsurer must pay, and the reinsured’s claims determination will not be second-guessed.
Terjemahan bebas dari Kesimpulan:
Sementara prinsip-prinsip dasar doktrin follow-the fortune tetap dipegang teguh, beberapa pengadilan telah membatasi penggunaan doktrin di mana pihak yang direasuransikan telah berupaya memaksakan metodologi penyelesaian dan alokasi pada reasuransinya. Namun pengadilan lain memandang keputusan alokasi dan penyelesaian sebagai hal yang sama dan telah mengikat reasuransi terikat dengan penentuan alokasi reasuransi. Namun, kasus-kasus terbaru menunjukkan bahwa doktrin tersebut tidak dapat digunakan untuk memperluas pertanggungjawaban reasuransi di luar ketentuan perjanjian reasuransi yang tertulis.
Seperti dalam perselisihan kontrak yang paling kompleks, bahasa kontrak operasi dan perilaku para pihak akan mempengaruhi keputusan akhir tentang perselisihan tindak lanjut. Pada akhirnya, ketika lebih banyak kasus diputuskan di mana masalah metodologi alokasi dan penyelesaian direasuransikan dipertanyakan, gambaran yang lebih jelas akan muncul tentang ruang lingkup doktrin follow-the-fortune.
In an update of a 2001 article, the follow-the-fortunes doctrine is rexamined, focusing on how some new reinsurance cases have interpreted the doctrine in environmental and asbestos contexts.
In our October 2001 commentary, we provided an overview of the follow-the-fortunes doctrine, including its early history and general application. In its pure form, the doctrine precludes the reinsurer from second-guessing the reinsured’s good faith claims decisions. But reinsureds have attempted to use the doctrine to bind reinsurers to a variety of claims-related decisions, including payment of declaratory judgment expenses and the methods used by the reinsured to settle underlying claims and allocate those claims to the relevant insurance policies.
In the last few years, a number of new cases have been decided, which, while not radically changing the general application of the doctrine, provide some insight into how some courts have interpreted the doctrine in the context of the more difficult settlement of environmental and asbestos cases.
Follow-The-Fortunes and Limits of Liability
Courts, particularly in New York, have made it clear that a follow-the-fortunes clause will not override the limits section of the reinsurance contract. Typically these decisions have interpreted facultative certificates rather than treaties, where attempts to charge the reinsurer for declaratory judgment expenses in addition to the reinsurance certificate limits have met with stiff resistance in the courts.
Recent cases on this subject continue to follow the reasoning that the follow-the-fortunes clause does not supersede or supplant the overall reinsurance limit in a facultative certificate. Courts generally find that the reinsurance terms in facultative certificates are unambiguous and will not allow evidence of custom and practice in the industry to override the clear terms of the certificates. This means that even if the majority of the insurance industry understands that certain expenses typically are paid by the reinsurer in addition to the limits of the facultative certificate, the courts likely will not consider that industry understanding if the terms of the facultative certificate are unambiguous. For these types of cases the lesson is clear: if the reinsured wants certain expenses to be paid in addition to the stated limits in a facultative certificate, that intent must be expressed in clear and unambiguous language in the certificate.
But how does the limits clause in a facultative certificate work with the reinsured’s decision to annualize environmental settlements? Recent case law suggests that some courts will not read the follow-the-fortunes clause to expand the reinsurance contract to allow annualization of claims, thereby circumventing the stated limits in the contract.
In Commercial Union Insurance Co. v Swiss Reinsurance American Corp., No. Civ 00-12267-DPW, 2003 US Dist LEXIS 4974 (D Mass Mar 31, 2003), a Massachusetts federal court held that the reinsurer was only obligated to follow the fortunes of the reinsured’s settlement of environmental claims up to the per occurrence limit specified in the facultative certificates. The court refused to allow the reinsured’s annualization of the claims, which was not expressly authorized by the certificates, to expand the reinsurer’s liability.
The dispute arose from the reinsured’s settlement of environmental damages claims at nine sites. The settlement was calculated on an annualized basis with a one-occurrence limit per year. The reinsurer argued that it only had to pay a portion of the settlement because the settlement was calculated on an annualized basis instead of the single per occurrence limits stated in the reinsurance certificates and thereby far exceeded its bargained-for liability. The court agreed with the reinsurer and found that the “follow form” language, which did not provide any limitations on the liability of the reinsurer, did not supersede the limitation on liability contained in the facultative certificates. The court held that even absent the existence of separate endorsements, the certificates unambiguously identified all crucial terms and annualized limits should not be read into multiyear reinsurance policies without an express statement that the policy coverage is to be calculated on an annual basis.
In a subsequent case between the same parties, American Employers’ Insurance Co. v Swiss Reinsurance American Corp., 275 F Supp 2d 29 (D Mass Aug 5, 2003), a similar result was reached. The court held that the follow-the-fortunes doctrine could not be used to alter the terms of these facultative certificates, which did not allow for annualization. Again, the court held that the follow-the-fortunes clause could not be used to circumvent the stated limits of the facultative certificates.
Allocation and Follow-the-Fortunes
In a similar vein, a number of courts in the past few years have addressed whether the reinsurer must follow the reinsured’s allocation methodology. Some courts have held the reinsurer bound by the reinsured’s allocation decisions, stating that to distinguish between settlement and allocation would undermine the follow-the-fortunes doctrine. See Commercial Union Ins. Co. v Seven Provinces Ins. Co., 9 F Supp 2d 49 (D Mass 1998), aff’d on other grounds, 217 F3d 33 (1st Cir 2000); see also The North River Ins. Co. v ACE American Reinsurance Co., 2002 US Dist LEXIS 5536 (SDNY Mar 29, 2002), aff’d, No. 02-7902, 2004 US App LEXIS 4861 (2d Cir Mar 15, 2004).
More recently, a Connecticut federal court held that the follow-the-fortunes doctrine did not obligate the reinsurer to follow the single occurrence allocation method used by the reinsured. In Travelers Casualty & Surety Co. v Gerling Global Reinsurance Corp., No. 3:01cv872, 2003 US Dist 17407 (D Conn Sep 30, 2003), the reinsurer objected to the single occurrence allocation methodology employed by the reinsured in settling asbestos claims that arose out of exposure from various job sites. The reinsurer argued that a multiple occurrence allocation methodology was appropriate because each asbestos job performed by the underlying insured involved different circumstances at over 700 job sites, which constituted over 700 separate occurrences. Under a multiple occurrence theory, the settlement payments would never reach the insured’s excess policies and the reinsurer would not be required to indemnify the reinsured.
The reinsured argued that the follow-the-fortune doctrine required the reinsurer to follow the reinsured’s allocation of the settlement payments because the settlement was reasonable and in good faith. Agreeing with the reinsurer and rejecting the reinsured’s argument, the court held that the doctrine does not obligate reinsurers to indemnify reinsureds for settlement payments that clearly fall outside the scope of the original policy and are in excess of the exposure agreed upon. The court found that the settlement agreement did not specify an allocation of the settlement payment and expressly disclaimed any theory of coverage. Interestingly, the court said that holding the reinsurer to the reinsured’s allocation methodology would not promote the purpose of the follow-the-fortunes doctrine—to encourage settlement—because the reinsurer was not contending that the reinsured should not have settled on any basis other than the single occurrence theory.
The Gerling Global decision, however, must be read as limited to its specific facts in light of the Second Circuit’s very recent pronouncement in The North River Insurance Co. v Ace American Reinsurance Co., No. 02-7902, 2004 US App LEXIS 4861 (Mar 15, 2004). In North River, the cedent settled its asbestos exposure with its insured after a detailed analysis of its risk of exposure across and through all its policy layers. The settlement reached only the second layer of its excess policies and a reinsurer on the second layer objected to the allocation. In rejecting the reinsurer’s arguments, the court held “that the follow-the-settlements doctrine extends to a cedent’s post-settlement allocation decisions, regardless of whether an inquiry would reveal an inconsistency between that allocation and the cedent’s pre-settlement assessments of risk, as long as the allocation meets the typical follow-the-settlements requirements, i.e., is in good faith, reasonable, and within the applicable policies.” Because the allocation was within the definition of loss contemplated by the underlying insurance contracts, there was no breach of the reinsurance contract by allocating the settlement to the second excess layer of policies.
While the basic principles of the follow-the-fortunes doctrine remain steadfast, some courts have limited the use of the doctrine where the reinsured has sought to impose its settlement and allocation methodologies on its reinsurers. Yet other courts view allocation and settlement decisions as the same and have held reinsurers bound to the reinsureds’ allocation determinations. The recent cases show, however, that the doctrine cannot be used to expand the reinsurer’s liability beyond the stated terms of the reinsurance agreement.
As in most complex contract disputes, the language of the operative contract and the conduct of the parties will affect the ultimate decision on follow-the-fortunes disputes. Ultimately, as more cases are decided where the issue of the reinsured’s allocation and settlement methodologies is questioned, a clearer picture will emerge about the scope of the follow-the-fortunes doctrine.
Profil Pengutip dan Penerjemah:
Februari 2014, di ADB Manila – FIlipina bersama ahli risiko Mary Jane V. David, ADB Senior Public Management Office dan perwakilan dari Swiss RE, AIR dan beberapa asuransi dari Hongkong, Vietnam, Thailand dan Filipina.