Transcript No Slide Title

Prepared for:
AIDA Word Congress
September 30, 2014
“FOLLOW THE LEADER”
A BRIEF HISTORY OF “FOLLOW THE SETTLEMENTS”
CLAUSES – THE U.S. VIEW
Prepared By:
Richard K. Traub
Traub Lieberman Straus & Shrewsberry LLP
INTRODUCTION
 Designed to prevent reinsurers from second guessing the
good faith claims handling decisions of cedents.
 Without such a clause, the reinsured would bear the onus of
proving that the reinsurer is liable to it.
 This would required strict proof of both legal liability and
evaluation of amount of payment.
 Difficult enough with facultative reinsurance, in the treaty
context, impossible.
 Thus the reinsurer agrees not to dispute the settlement
made.
 Leaves claims handling to the reinsured – which is most often
the one that wrote the risk and most familiar with it.
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EVOLUTION OF THE CLAUSE
• Historical business process where reinsured has
direct relationship with insured and direct
access to pertinent information about the risk –
• And the reinsurer usually must rely on the
utmost good faith of the reinsured to:
▫ Underwrite the risk and
▫ Handle claims properly and reasonably
• In fact, some courts imply the doctrine of
“Follow the Settlements” even when it is not
present – most do not.
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EVOLUTION OF THE CLAUSE
• While most courts do not imply the language,
the word “Follow” is not determinative of the
issue.
• As long as the language indicates that reinsurer
is bound by the reinsured’s determination, the
clause is likely to be considered following.
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EVOLUTION OF THE CLAUSE
• Early cases looked to see if reinsurer could avoid
payment because of:
▫ The nature of the settlement;
▫ The amount of the settlement, or;
▫ The manner in which the case was settled.
• Reinsurance allocations in the context of
asbestos and environmental claims lead the
charge on this front.
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EVOLUTION OF THE CLAUSE
• Context of reasonableness does apply
• Early courts applied test of reasonableness to
reinsured’s allocation of good faith settlement to
the reinsurers.
• Did not have to be followed “no matter what” but
the reinsurer id have to follow those allocations
if they were reasonable, in good faith, and within
the applicable policies
EVOLUTION OF THE CLAUSE
At one point of time or another, reinsurers were:
• Bound to pay any claim honestly paid by the reinsured;
• Bound to pay only if the reinsured could prove that it was strictly
liable under the original policy for the precise amount of the loss;
• Bound to pay so long as the reinsured could show that an insured
loss had taken place. An honest mistake was not a reason to avoid
the contract.
• Bound to pay so long as the reinsured could provide that the the loss
was covered under the original policy;
• Bound to pay provided the reinsured’s settlement was not dishonest
or careless.
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EVOLUTION OF THE CLAUSE
• Finally resolved in Insurance Company of Africa
v. Scor (1985) 1 Lloyd’s Rep 312.
▫ Warehouse fire which was held to be covered
under the ICA policy which was reinsured in part
by Scor.
▫ Scor refused to settle arguing that the claim was
fraudulent.
▫ Insured sued ICA, ICA had no evidence of fraud,
lost the case, and settled underlying case.
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Insurance Company of Africa v. Scor
• Lord Justice Goff held that the reinsurer binds
itself to pay a claim settled by the reinsured with
two exceptions:
▫ Where the reinsured did not take a proper or
business like steps in making the settlement, or
▫ Where the claim does not fall within the risk
covered by the reinsurance contract.
▫ Thus, obligation to follow the settlements extends
to fraudulent claims if the reinsured, acting in a
businesslike manner cannot prove the fraud –
even if the reinsurer is later able to do so.
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Evolution of the Clause
• Thus it does not matter whether the claim falls
within the direct policy, it matters only that it
falls within the reinsurance policy
• There are other limitations
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BURDEN OF PROOF and “PROPER
BUSINESS LIKE STEPS”
• So long as cedent can show it paid underlying
insured and that claim falls within reinsurance
contract –
• The burden of proving the ABSENCE of good
faith or the fact that the settlement was not
made in a business like manner, falls to the
reinsurer.
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Burden of Proof
• Its significant. For example, proper and
business like steps is more than merely having
he matter handled by a competent loss adjuster.
That loss adjuster must adjust the claims in a
businesslike manner and settle the claim in a
businesslike manner.
• But, it is the reinsurer that most show that this
did NOT happen. Very difficult to prove.
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OTHER LIMITATIONS
• Ex Gratia payments
▫ Made when no obligation to do so, perhaps for
commercial reason
▫ Coverage will depend on precise language of the
reinsurance contract.
▫ Unless clause refers to “ex gratia” payments, the
reinsurer will NOT be liable to follow the
settlements regardless of how businesslike or
reasonable the payment may have been.
• Gross negligence in claims handling
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OTHER LIMITATIONS
• Without Prejudice Settlements
▫ Settlement made where there is no admission of the existence of a
any liability under the terms and conditions of the underlying
policy.
▫ Distinguished from “ex gratia” whereas here it means only that
there is no admission of liability and the settlement is of a
disputed amount.
▫ Certain, albeit few, courts have held that this compromise falls
OUTSIDE the reinsurer’s obligation to pay – usually were
reinsurance contract requires that the settlements must fall
within the terms and conditions of the reinsured contract.
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FOLLOW THE FORTUNES
• Sometimes used interchangeably especially in
the U.S.
• “Follow the Fortunes” reminded the reinsurer of
obligation to provide indemnification to
reinsured even when mistakes were made in the
bordereaux or general administration
• Not subject of many court decisions.
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CONCLUSION
• Case law suggests that multiple different words
can be used to describe follow the settlements or
to describe obligation of reinsurer.
• Scope and effect will depend on specific
construction within context of particular
reinsurance.
• Cases prefer language that identifies real
intention of the parties
• Beware of inconsistencies
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CONCLUSION
• Case law useful of course, in demonstrating
situations where exceptions apply – BUT
• Case law is not definitive in demonstrating the
practical differences between the two ways in
which the exception is articulated i.e. a
“reasonable, business like investigation” or the
“absence of gross negligence or recklessness”
• Why burden of proof is so important.
• Either way, closer scrutiny of how claims are
handled can be expected.
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CONCLUSION
• So long as case law limits exceptions to truly
incompetent and/or dishonest claims adjusting
and settlement, it should not undercut, but place
only reasonable limits on the cedent’s judgment
calls which are protected by the “follow the
settlements” clause.