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Reinsurance, the insurance of insurance companies, arose in the 14th century, the same century that saw the rise of the Ming Dynasty and the decimation of Europe's population by the Black Plague. Despite its 600-year history, however, until recently, judicial decisions on reinsurance disputes were few and far between. Instead, “differences [were] often … settled by handshakes and umpires[.]” Sumitomo Marine & Fire Ins. Co. v. Cologne Reins. Co., 75 N.Y.2d 295, 298, 552 N.E.2d 139, 140 (1990). But with the flood of mass tort and environmental litigation in the last 20 years, there has been a rise in reinsurance litigation. One historic response to deflect protracted reinsurance litigation is the “follow the fortunes” doctrine. When courts and insurers talk about follow the fortunes, they may mean one of two similar concepts: follow the fortunes or “follow the settlements.” While the follow the fortunes doctrine “requires reinsurers to accept a reinsured's good faith decision that a particular loss is covered by the terms of the underlying policy,” the follow the settlements clause “requires reinsurers to abide by a reinsured's good faith decision to settle, rather than litigate, claims on that policy. Commercial Union Ins. Co. v. Seven Provinces Ins. Co., 9 F. Supp. 2d 49, 66 (D. Mass. 1998), aff'd, 217 F.3d 33 (1st Cir. 2000), cert. denied, 531 U.S. 1146 (2001). Typically, the follow the fortunes doctrine is implied in the reinsurance contract whereas the follow the settlements clause is a specific provision in the agreement. While these doctrines share the underlying predicate of “good faith,” this article focuses on the follow the fortunes doctrine: the doctrine that requires a reinsurer to indemnify its reinsured whenever the reinsured makes a good faith payment of an insured loss.
In an era when reinsurers frequently underwrote risks by putting their mark on a slip passed around Lloyd's Coffee House, the follow the fortunes doctrine was developed to streamline both the underwriting process and the payment of claims. Basically, the follow the fortunes doctrine states that a reinsurer must indemnify its reinsured ' the cedent ' whenever the reinsured makes a good faith payment of an insured loss. See American Bankers Ins. Co. v. Northwest Nat'l Ins. Co., 198 F.3d 1332, 1335 (11th Cir. 1999) (follow the fortunes requires reinsurers to be “bound by the reinsured's decision to pay the claim and … refrain from second guessing a good faith decision to do so”); North River Ins. Co. v. CIGNA Reinsurance Co., 52 F.3d 1194, 1212-13 (3d Cir. 1995) (follow the fortunes “obligates the reinsurer to indemnify the reinsured for any good faith payment of an insured loss”); Commercial Union Ins. Co. v. Seven Provinces Ins. Co., 9 F. Supp. 2d 49, 66 (D. Mass. 1998), aff'd, 217 F.3d 33 (1st Cir. 2000), cert. denied, 531 U.S. 1146 (2001) (follow the fortunes “requires reinsurers to accept a reinsured's good faith decision that a particular loss is covered by the terms of the underlying policy”) As explained by one commentator:
[t]he purpose of the 'follow the fortunes' clause is to preclude wasteful relitigation by a reinsurer of defenses to underlying policy coverage in cases where the ceding insurer has in good faith paid a settlement or judgment which is 'reasonably encompassed within the bounds of the [underlying] policy.' See Barry R. Ostrager and Thomas R. Newman, Handbook on Insurance Coverage Disputes '16.01(a) (10th ed. 2000) (collecting cases).
Without the follow the fortunes doctrine, “reinsureds would be in the impossible position of advancing defenses in coverage contests that could be used against them by reinsurers seeking to deny liability.” North River Ins. Co., 52 F.3d at 1211.
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