Reinsurance and Insurance Arbitrator and Umpire Ronald S. Gass
ARIAS-U.S. Certified Arbitrator and Umpire
AAA Roster of Neutrals
Reinsurance and Insurance Dispute Resolution Services Consultant

8th Circuit Rejects "Anti-Follow-The-Fortunes" Argument and Adopts Familiar "Bad Faith" Standard

In dismissing quota share life retrocessionaires' rescission and bad faith claims, the U.S. Court of Appeals for the Eighth Circuit rejected an unusual "anti-follow-the-fortunes" argument. The retrocessionaires asserted that the customary follow-the-fortunes doctrine was inapplicable in this case because their slips contained a "conditions clause" that specifically cross-referenced the attached underlying reinsurance agreement and, therefore, incorporated by reference that agreement's loss notice and settlement procedures, which required strict proof of all claims paid. The Eighth Circuit also embraced the well-known "bad faith" standard, previously adopted by several other circuits, that requires a minimum showing by reinsurers of "deliberate deception, gross negligence or recklessness" in the payment or settlement of claims to rebut cedents' invocation of follow-the-fortunes.

A life reinsurer sued its two quota share retrocessionaires for breach of contract for failure to pay losses arising from certain short-term medical insurance policies written for individuals. The retrocessionaires counterclaimed for rescission and breach of contract alleging, inter alia, that the reinsurer had failed to provide the requested claim documentation in accordance with the "conditions clause" in their slips.

Affirming the trial court's summary judgment in favor of the reinsurer finding no factual bases to support rescission or the retrocessionaires' bad faith allegations, the Eighth Circuit also agreed that the retrocessionaires had failed to produce any evidence indicating that the "conditions clause" language was intended to incorporate the strict proof of claims requirement in the underlying reinsurance agreement and that its purpose was merely to identify the pertinent agreement being reinsured. In the absence of any ambiguity given the "plain language" of the reinsurance agreement, neither the slips nor the "conditions clause" could "reasonably be interpreted as sweeping under its scope a set of specific procedures agreed to between the [underlying cedent and reinsurer] to which neither of the retrocessionaires were a party."

Citing precedents from the Second, Third and Eleventh Circuits, the court also adopted the now-familiar formulation of the "bad faith" defense to the follow-the-fortunes doctrine, i.e., that there must be a showing of "deliberate deception, gross negligence or recklessness" in the cedent's payment or settlement of claims.

ReliaStar Life Insurance Co. v. IOA Re, Inc., No 01-3287, 2002 U.S. App. LEXIS 18435 (8th Cir. Sept. 9, 2002).

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