Most reinsurance contracts by which an insurance company cedes or reinsures a portion of the coverage for policyholders to a reinsurer call for the reinsurer to "follow the fortune" of the insurer. Thus, the reinsurer is expected to pay the reinsured percentage of a claim without questioning how the insurer handled the claim. The follow the fortune doctrine is an extension of the "utmost good faith" that by tradition has governed the relationship of the ceding insurer to the reinsurer.
In the more usual situation in which an insurer pays a claim well within the limits of a policy for a particular year, application of the follow the fortune doctrine signifies simply that the reinsurer will pay the portion of the claim called for in the reinsurance contract with the insurer resolving the claim. However, there are several situations which, if not explicitly dealt with in the reinsurance contract, may require further examination by the courts in order to arrive at a conclusion fair to the policyholder, the insurer, and the reinsurer.
For example, if the claim involves an occurrence that took place over more than one policy period, how the insurer apportions the claim to particular policy years will affect reinsurers for each of those years. While the insurer may act in good faith or in response to precedents for multiple policy period occurrences, the outcome from the perspective of one or more of the affected reinsurers may seem overly burdensome and yet not governed by any relationship or good faith considerations with the other reinsurers. While there is a contract between the insurer and a particular reinsurer, there is not a contract among the reinsurers stating what their responsibilities to each other should be.
Another issue concerns responsibility for costs of defense. While reinsurance contracts provide for payment of indemnity in proportion to amounts of insurance ceded to the reinsurer, such contracts may not provide for payment of a corresponding share of costs of defense of the claim. In such a situation, despite an industry understanding that reinsurers will share a proportionate amount of defense costs even if such costs when added to the indemnity exceed the limits that are reinsured, courts may be reluctant to require payment of such additional costs absent an unambiguous requirement for such payment in the reinsurance contract. There is no basis for application of the doctrine that ambiguities are interpreted in favor of the policyholder when the dispute is between the insurer and a reinsurer.
In handling most claims, insurers may be reassured by the follow the fortunes doctrine that their good faith decisions will not be subject to second-guessing by reinsurers. However, regarding more complicated claims in which multiple policy years or multiple layers of insurance are implicated, significant contributions from reinsurers may be at issue. Resolution of such issues are likely to depend on the specific language of reinsurance contracts and specific facts of the claim in addition to industry practices in the past that were relied upon to resolve less complex claims.
Copyright 2009 LexisNexis, a division of Reed Elsevier Inc.
