Brief review of the follow-the-settlements doctrine in the United States.

• Author: Allen, Robert D.

April 2008 Reinsurance, Excess and Surplus Lines

The follow-the-settlements doctrine is a powerful tool available to cedents when seeking indemnity from reinsurers. This doctrine obligates reinsurers to indemnify cedents for any payments the cedent makes for claims covered by the underlying insurance. (37) While a reinsurer is not required to pay for losses that are not covered under the underlying policy, reinsurers cannot second guess the good faith liability determinations made by the cedent, or the cedent's good faith decision to waive defenses to which it may be entitled. (38) So long as the payment of claims arguably fall within the scope of the underlying policy, the reinsurer must indemnify the cedent. (39) This standard is "purposefully low" and the decision making process of the ceding insurer is not subject to the courts' de novo review. (40)

The purpose behind the follow-the--settlements doctrine is to promote the cedent's good-faith settlements. (41) The rationale underlying the doctrine is that the interest of the cedent and reinsurer are aligned and the interests of both parties are furthered by allowing the cedent to settle the dispute against its insured on the best terms possible. (42) Another rationale underlying the doctrine is that it protects the integrity of the cedent-reinsurer relationship. (43)

1. Recent Case Law Applying the Follow-the-Settlements Doctrine

   While it appears that the follow-the-settlements doctrine remains a powerful tool governing the relationship between cedents and reinsurers, recent case law demonstrates the courts' willingness to question its application. In Surer v. General Accident Insurance Co., the cedent, who was an excess carrier for a manufacturer of heart valves, settled a number of class actions asserted against its insured. (44) The cedent did not conduct its own investigation. Rather, it relied on the underlying carrier's investigation to determine if the claims were arguably within coverage. (45) As it turned out, some of the claims the cedent settled did not fall within the policy period. (46) Nevertheless, the cedent ceded the claims to the reinsurer and argued that the follow-the-settlements doctrine required the reinsurer to indemnify it for those claims that did not fall within the policy period.

   Noting the tension between the follow- the-settlements doctrine and the court's duty to protect the reinsurer's contractual expectations, the court re-examined the cedent's settlement...