Legal focus
AND THE FOLLOW THE FORTUNES DOCTRINE
ALLOCATION OF CLAIM PAYMENTS
Two recent cases have resulted in important decisions by courts, which have ramifi cations on the way cedants allocate claim payments to their reinsurers post settlement. Robert W. DiUbaldo explores the implications of the cases.
applicable reinsurance contracts. This article discusses two recent noteworthy decisions that illustrate
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both the deference accorded to, and the limitations placed on, ceding companies’ allocations of claim payments to their reinsurers.
The fi rst case, Travelers Casualty & Surety Co. v. Insurance Co. of North
America, involved a settlement between Travelers and its insured to resolve, among other things, breast implant and chemical products claims. Travelers Casualty (Travelers) allocated the settlement amount ($137 million) among three tiers of insurance that provided coverage for those claims.
The fi rst tier consisted of primary policies (AL policies) that were captively reinsured by the insured’s subsidiary and also subject to
t is not uncommon for ceding companies and their reinsurers to become embroiled in disputes concerning the manner in which a claim or settlement payment is allocated to the reinsured policies or
retrospective premiums that reimbursed Travelers up to the amount of a particular policy’s loss limit for any payments it made.
The second tier of insurance, referred to as the ‘buffer or XS policies’, was also reinsured by the insured’s captive.
The third, and highest, layer of coverage included excess policies (XN policies) facultatively reinsured by Ace America Reinsurance Company and Insurance Company of North America (collectively known as INA). Each facultative certifi cate contained a follow-the-form (of the underlying policies) and follow-the-fortunes provision.
During settlement negotiations with its insured, an in-house attorney
at Travelers prepared a memorandum that explained the reinsurance implications of the different coverage scenarios advanced in the litigation. It also noted that a fi nding that the breast implant claims were non- products claims arising out of multiple occurrences could result in signifi cant exposure to Travelers under the AL policies.
November 2011 | INTELLIGENT INSURER | 47
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