New York Appeals Court Holds Follow-the-Settlements Does Not Apply When Coverage Is Beyond the Scope of the Reinsured Policy

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The follow-the-settlements doctrine severely limits the ability of a reinsurer to deny coverage to settlement paid by the cedent. But the doctrine is not absolute. As many courts have said, a follow-the-settlements clause does not create coverage where none existed. In a recent case, a New York intermediate appellate court addressed the application of a follow-the-settlements clause to a claim for defense costs paid under umbrella policies for asbestos settlements.

In Utica Mutual Insurance Co. v. Abeille General Insurance Co., 2022 NY Slip Op 03815 (N.Y. App. 4th Dep’t Jun. 10, 2022), the cedent sought reinsurance recoveries for defense costs paid under umbrella policies for underlying asbestos settlements where the primary policies had been exhausted. The reinsurance contracts covering the umbrella policies had express follow-the-settlements provisions. The reinsurers denied the claims stating that defenses costs were not covered under the umbrella policies and the reinsurance contract.

Both sides moved for partial summary judgment and the motion court denied both motions. Each side appealed. The appeals court modified the order and granted the reinsurers’ motion, holding that there was no coverage for defense costs under the umbrella policies and the reinsurance contracts.

On the merits, the court concluded that the motion court properly determined that the reinsurers established that its interpretation of the umbrella policies, i.e., that those policies did not cover defense costs in the underlying actions inasmuch as those costs were covered by the primary insurance policies, is the only fair construction of those policies. The court held that “the unambiguous terms of the umbrella policies establish that [reinsurers] were not required to reimburse [cedent] under the reinsurance contracts for the disputed defense costs related to the underlying actions.”

On the follow-the-settlements argument, the court agreed with the reinsurers that, contrary to the motion court’s determination, the follow-the-settlements doctrine did not alter the analysis above. There was no dispute that the reinsurance contracts contained an express follow-the-settlements clause. The court explained the manner in which the follow-the-settlement clause mandates the reinsurers to follow the good faith claims determinations of the cedent. But, as the court stated, there are limitations to the doctrine.

The follow-the-settlements doctrine “insulates a reinsured’s liability determinations from challenge by a reinsurer unless they are fraudulent, in bad faith, or the payments are clearly beyond the scope of the original policy or in excess of [the reinsurer’s] agreed-to
exposure” (citations omitted).

The court concluded that in this case, “the reimbursement sought by [cedent} from [reinsurers] was beyond the scope of coverage in the umbrella policies and, thus, the follow-the-settlements doctrine does not apply under the circumstances.” A neat and clean analysis based on the plain reading of the relevant contracts.

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