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The “Following the Settlements” Doctrine and “Following Form” Clauses as They Apply to Reinsurers Discussed in Some Depth

The First Department, in a full-fledged opinion by Justice Friedman, determined questions of fact precluded summary judgment in an action by an insurance company, New Hampshire, against a reinsurer, Clearwater.  The underlying actions were against the manufacturer Kaiser and consisted primarily, but not entirely, of asbestos-related products liability claims.  AIG, an insurer-participant in the Kaiser/AIG settlement of the claims, had allocated 100% of Kaiser’s settlement to asbestos liability claims. Clearwater challenged that allocation.  A summary of the nature of the primary action is quoted below, followed by descriptions of the “follow the settlements” doctrine and “following form” clauses:

New Hampshire has brought this action against defendant Clearwater Insurance Company (Clearwater), a reinsurer of the excess policy New Hampshire issued to Kaiser, seeking to require Clearwater to indemnify New Hampshire for the share prescribed by its reinsurance certificate of the portion of the Kaiser settlement payments (which are being made over a 10-year period) that AIG has allocated to the New Hampshire policy. In its defense, Clearwater challenges AIG’s allocation of 100% of the settled losses to asbestos products liability claims, contending that this allocation unreasonably results in the reinsured New Hampshire policy bearing part of the cost of settling the premises, bad faith and defense cost claims that Kaiser had not asserted against New Hampshire or that were not covered by the New Hampshire policy. … * * *

…[T]he “follow the settlements” doctrine “ordinarily bars challenge by a reinsurer to the decision of [the cedent] to settle a case for a particular amount” … . Specifically, under this doctrine,

“a reinsurer is required to indemnify for payments reasonably within the terms of the original policy, even if technically not covered by it. A reinsurer cannot second guess the good faith liability determinations made by its reinsured . . . . The rationale behind this doctrine is two-fold: first, it meets the goal of maximizing coverage and settlement and second, it streamlines the reimbursement process and reduces litigation . . .” … .

Stated otherwise, as “an exception to the general rule that contract interpretation is subject to de novo review” …, the “follow the settlements” doctrine “insulates a reinsured’s liability determinations from challenge by a reinsurer unless they are fraudulent, in bad faith, or the payments are clearly beyond the scope of the original policy or in excess of the reinsurer’s agreed-to exposure” … . * * *

The purpose of a “following form” clause is “to achieve concurrency between the reinsured contract and the policy of reinsurance, thereby assuring the ceding company, that by purchasing reinsurance, it has covered the same risks by reinsurance that it has undertaken on behalf of the original insured under its own policy” … . Accordingly, “[a] following form’ clause in a policy of reinsurance incorporates by reference all the terms and conditions of the reinsured policy, except to the extent that the reinsurance contract by its own terms specifically defines the scope of coverage differently” … .  * * * The authors of one treatise on reinsurance law caution that “a follow the form’ clause should not be confused with a follow the fortunes’ clause or a follow the settlements’ clause” (Ostrager § 2:03[a] at 73).  New Hampshire Ins. Co. v Clearwater Ins. Co., 2015 NY Slip Op 02438, 1st Dept 3-24-15

 

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