Second Circuit Finds for Cedent in Follow-the-Settlements Asbestos Settlements Allocation Dispute

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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.

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Without a Contractual Relationship, Claims Against Reinsurers Fail

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To sustain a claim against reinsurers there has to be a contractual relationship between the party making the claim and the reinsurers. That is the prevailing rule in all jurisdictions, subject to rare exceptions. Nevertheless, policyholders, when left without a recovery from their insurer, will try to make out a claim directly against their insurer’s reinsurers. Typically, this effort meets with little success as we described in a blog post back in 2020.

Earlier this year, in a complicated credit insurance/reinsurance transaction involving a special purpose vehicle, a policyholder left without an insurance recovery tried again to recover its loss from its insurer’s reinsurers. The result was the same.

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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.

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Follow-the-Fortunes Rejected By 11th Circuit

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Follow-the-fortunes is a reinsurance concept that often is misconstrued. Some wish to impose it on every reinsurance contract regardless of whether a follow-the-fortunes clause exists. Cedents invoke it to compel payment from their reinsurers. In a recent case, the Eleventh Circuit had an opportunity to weigh in on whether the follow-the-fortunes doctrine should be inferred regardless of the contract wording and whether the terms of the reinsurance contract contained follow-the-fortunes language.

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Federal Jurisdiction Matters to Vacate or Confirm an Arbitration Award

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Insurance and reinsurance arbitrations are often governed by the Federal Arbitration Act (“FAA”). Enforcement of arbitration rights under the FAA, however, may take place in either federal or state courts. To proceed in federal court, subject matter jurisdiction must exist. In a recent case, the United States Supreme Court addressed an open question concerning whether subject matter jurisdiction existed on competing applications to vacate and confirm an arbitration award so that the federal district court could hear the dispute.

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ARIAS US Form Plays Major Role in Court’s Decision to Seal Documents

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Whether courts will seal reinsurance arbitration documents when the parties come to court for judicial relief has been a significant topic for several years. Most courts refuse to seal arbitration information when motions to vacate or confirm an arbitration award are made. But when the controversy is over whether arbitration should be compelled, sometimes the result is different. In a recent case, the court agreed to seal arbitration-related documents in large part because of the ARIAS U.S. confidentiality agreement.

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Compelling Arbitration After Assignment

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Reinsurance disputes sometimes become complicated when the original parties to the reinsurance contract are no longer involved. Enforcing arbitration rights also becomes more complicated when contracts are assigned or where a receiver is involved. Who has the right to compel arbitration and was the arbitration demand properly served are questions that arise. In a recent case, a New York State motion court addressed some of these issues.

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Follow the Fortunes: The Case for Aggregation Under a CAT XL

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COVID-19 has sparked new debates about how insurance losses are identified, categorized, defined and potentially aggregated. This is especially true in the reinsurance context. While in the US, insurance claims for losses sustained under business income and extra expense provisions of commercial property policies have largely been denied leaving little to cede to reinsurers, that is not the case under other lines of business including event cancellation and travel insurance coverages. Moreover, in the United Kingdom and in the EU, business interruption claims have been allowed under certain policy forms, which has led to reinsurance cessions.

My colleague Curtis Leitner asked me to co-author an article with him discussing the possibility of aggregating COVID-19 losses using follow-the-fortunes and related principles. I gladly admit that Curtis did the heavy lifting on this one from an analytical point of view. We published the article in the ARIAS Quarterly, Q1 2022. We hope you enjoy the article.

Courts Continue to Order Production of Reinsurance Information

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Parties routinely seek reinsurance information in insurance coverage cases and the courts routinely allow those requests to go forward. Yes, each case is different and each request is different and the reinsurance information may be different as well so drawing a general conclusion is fraught with danger. Nevertheless, two recent cases continue the trend of requiring production of reinsurance information.

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