Reinsurance: allocation of losses

The interpretation of the “follow the settlements” clause in English law is well settled: the reinsurer is obliged to follow the reinsured’s settlement so long as the settlement is bona fide and businesslike and the loss is covered by the terms of the reinsurance agreement. In the United States, the “follow the fortunes” clause is used interchangeably with the “follow the settlements” clause to express a similar interpretation that the reinsurer cannot second-guess the reinsured’s settlement made in good faith.

However, a further issue which may arise in relation to the interpretation of the “follow the fortunes/settlement” clause is the allocation of the settled insured amount to the reinsurance claim. Long-tail risks, such as claims for asbestos exposure, may be insured and reinsured by several different insurance and reinsurance arrangements covering different periods of time. If the reinsurers have agreed to follow the reinsured’s fortunes, does this preclude the reinsurers from challenging the allocation made by the reinsured especially if the reinsured’s incentive is to allocate the loss in a way maximising the reinsurance coverage. In a recent decision, US Fidelity & Guaranty Co v American Reinsurance Co 2012 NY Slip Op 00421 (24 January 2012), the Appellate Divisions of the New York Supreme Court decided the matter in favour of the reinsured. The case is discussed by Dr Özlem Gürses of the University of Southampton.