Typically, a reinsurer in the complex relationship with its reinsured, must adhere to the follow-the-fortunes doctrine. A recent case, Allstate Insurance v. American Home appears to have craved out a niche in which a reinsurer does not have to abide by the “follow-the-fortunes” doctrine if the settlement fails to comply with a court’s ruling and is contrary to the reinsured’s position during litigation.

A reinsurer when evaluating the terms of reinsured’s settlement, has the discretion to inquire into the underlying court’s determination in order to ensure that the reinsured’s settlement is fair, reasonable and consistent with the court’s and reinsured’s position relating to the underlying action. In other words, the “follow the-fortunes” doctrine does not mandate the reinsurer to indemnify a reinsured of a settlement if its position relating to settlement is contradictory to its position during litigation.

Daniel Gerber and Jeffrey Kingsley explain “[t]he Allstate decision was one of the first decisions that allowed a reinsurer to decline to follow the “follow-the-fortunes” doctrine when it did not demonstrate bad faith or fraudulent conduct. Rather, the Allstate decision provided reinsurers the basis to investigate positions a reinsured makes during the underlying litigation to ensure that it position is consistent.”

The authors also write: “[w]hile Allstates impact on the scope of the follow-the-fortunes doctrine is still unknown, the mere fact that the follow-the-fortunes doctrine was not adhered to due to a position the reinsured took during litigation is significant. It is therefore important for attorneys representing reinsurers and reinsured alike to understand that a reinsured’s position during the underlying litigation has the possibility of playing a major role in determining whether the reinsured can seek indemnification from its reinsurer.”

The authors conclude: “[w]hile the Appellate Division in the Allstate decision proclaimed that the factual circumstances in the case were unique, the impact from the decision may be much broader than it even realized. As such, practitioners need to recognize that any position taken by a party during litigation is significant and could have a tremendous impact on reinsurance coverage at a later time.”

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