Ronald S. Gass
Reinsurance and Insurance Arbitrator and Umpire
Reinsurance and Insurance Dispute Resolution Services Consultant

"Follow the Settlements" Doctrine Held Inapplicable When Reinsurer Funded Settlement under a Reservation of Rights

Rejecting a cedent's invocation of “follow the settlements” in an unusual context, a Kansas federal district court held that this doctrine was inapplicable to the cedent's allocation of a settlement to its insured's commercial general liability coverage, with lower retentions, versus its hospital professional liability coverage, carrying a substantially higher retention.

In this declaratory judgment action, the cedent's hospital insured reached a $7.6 million settlement with a heart attack victim who had collapsed in the hospital's parking lot. Due to delays caused by the security guards' compliance with hospital procedure, which required them to call 911 to dispatch an ambulance to the scene, the man allegedly sustained irreversible brain damage.

The reinsurer agreed to contribute $6.6 million to the settlement pursuant to an Interim Funding Agreement, which specifically reserved its right to seek judicial determination of whether the cedent's retention for this loss was either $1 million or $5 million under the CGL coverage or $10 million under the HPL coverage. In its summary judgment motion, the reinsurer contended that the higher HPL retention applied and that it was due a reimbursement. Preliminarily, the cedent argued that because it had allocated the loss to the CGL coverage, the reinsurer was obligated to follow its settlement determination in the absence of fraud, collusion, or bad faith. According to the cedent, the “follow-the-settlements” doctrine precluded the court from undertaking a de novo review of its settlement allocation.

Based on the facts, however, the court concluded that the cedent's intent to allocate the loss entirely to the CGL, versus HPL, coverage was not documented in the settlement agreement and that the reinsurer had expressly reserved its right to seek a judicial determination of that very issue in the Interim Funding Agreement. Thus, the “follow-the-fortunes” doctrine was inapplicable. Nevertheless, the reinsurer's summary judgment motion was denied because the court concluded that the facts surrounding the settlement did not fit it within the terms of the HPL coverage.

Employers Reinsurance Corp. v. NewCap Insurance Co., Ltd., No. 01-2276-JWL, 2002 U.S. Dist. LEXIS 12936 (D. Kan. July 11, 2002).


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