Courts have long held that a cedent’s settlement allocation decisions fall within the follow-the-fortunes/follow-the-settlements doctrines. Nevertheless, with the many ways settlements and claims can be allocated to policies and then ceded to applicable reinsurance contracts there are bound to be disagreements that arise. In a recent case involving a cedent’s allocation of asbestos settlements to excess polices, the reinsurer raised various issues why it did not have to respond to the portion of the settlement billed to it, including that the cedent failed to exhaust the underlying excess policies. The case worked its way to the Second Circuit Court of Appeals, no stranger to follow-the-settlements and allocation decisions.
In Fireman’s Fund Insurance Co. v. OneBeacon Insurance Co., No. 20-4282 (2d Cir. Sep. 15, 2022), the Second Circuit addressed an appeal of a grant of summary judgment to the cedent, which compelled the reinsurer to follow the settlements of the cedent in its allocation and cession of asbestos settlements. The key issue was whether the exhaustion of underlying excess policies by actual payments was required by the reinsured excess policy and the reinsurance contract.
In affirming the district court, the Second Circuit spent considerable time discussing whether exhaustion by actual payment of the underlying excess policies was required. The court’s analysis is helpful in understanding how courts read ambiguous language in insurance policies. The court agreed with the district court and found that the ambiguity in the language, which did not expressly require exhaustion by actual payment of losses, meant that the exhaustion requirement could be satisfied by a below-limits settlement of the underlying policies.
On the follow-the-settlements issue, the circuit court relied on its precedents and set forth the well-known aspects of the doctrine.
Where, as here, the reinsurance contract contains a “follow-the-settlements” clause, the reinsurer must indemnify there insured for the settled claim “as long as the settlement decision `is in good faith, reasonable, and within the terms of the applicable policies.'” The follow-the-settlements principle applies also “to a cedent’s post-settlement allocation decisions, . . . as long as the allocation meets the typical follow-the-settlements requirements.” Importantly, a follow-the-settlements provision “does not alter the terms or override the language” of the policies at issue. Instead, “it simply requires payment where the cedent’s good-faith payment is at least arguably within the scope of the insurance coverage that was reinsured.” (citations omitted).
The circuit court addressed and dismissed several other arguments made by the reinsurer, including the applicability of the limit of liability provision in the excess policy, judicial estoppel based on the cedent’s arguments in previous cases concerning exhaustion, and the applicability of prior decisions. On the reinsurance contract itself, the court held that the reinsurance policy’s attachment point was not contingent upon payment by the underlying insurers. The court concluded that “[t]he parties could have agreed to reinsurance coverage that was far narrower in scope than the excess policy itself, but we find no suggestion in the text of the reinsurance contract that they intended to do so here.” “Because [the cedent] has adequately supported its position that [its insured’s] covered losses exceeded the attachment point of the reinsurance policy, we conclude that the portion of the settlement allocated to Policy 3 is covered by the reinsurance policy.”