It is not uncommon for ceding companies and their reinsurers to become embroiled in disputes on the manner in which a claim or settlement payment is allocated, whether a loss falls within the scope of coverage provided by the reinsurance contract, or whether a cedent’s claims-related decisions were reasonable and made in good faith.
Under prevailing law throughout the United States, the follow the fortunes doctrine requires a reinsurer to indemnify a cedent for payments reasonably or arguably within the terms of the reinsured policy, even if not technically covered by it, provided that such payment is within the terms and conditions of the reinsurance contract at issue, and was not made in a fraudulent, collusive, or bad faith manner. It is also generally agreed that follow the fortunes principles apply to a cedent’s loss allocation.
In 2010, several state and federal courts addressed the scope and limitations of the follow the fortunes doctrine as applied in the various contexts noted above. This article provides a summary of the most notable decisions and the lessons to be learned from them.