Opinion ID: 148187
Heading Depth: 2
Heading Rank: 1

Heading: The Follow-the-Fortunes Doctrine and the Reinsurance Relationship

Text: Because the events that gave rise to this dispute occurred in the context of a relationship between an insurer (Travelers) and its reinsurer (INA), we begin with some background into the reinsurance relationship. Reinsurance is a mechanism `by which one insurer insures the risk of another insurer.' N. River Ins. Co. v. Ace Am. Reins. Co., 361 F.3d 134, 137 (2d Cir.2004) ( quoting People ex rel. Cont'l Ins. Co. v. Miller, 177 N.Y. 515, 70 N.E. 10, 12 (1904)). The insurer pays the reinsurer a premium in exchange for which the reinsurer assumes a portion of the [insurer's] potential financial exposure under certain direct insurance policies it has issued to its insured. Id. Obtaining reinsurance allows an insurer to diversify its risk exposure, thus increasing its capacity to insure other customers and decreas[ing] the likelihood that . . . insolvency will result from any large claim. N. River Ins. Co. v. CIGNA Reins. Co., 52 F.3d 1194, 1199 (3d Cir.1995). A crucial feature of the reinsurance relationship is that [r]einsurance involves contracts of indemnity, not liability. Unigard Sec. Ins. Co. v. N. River Ins. Co., 4 F.3d 1049, 1054 (2d Cir.1993). That is, in providing reinsurance, the reinsurer acquires no direct liability to the original policyholder; rather, the reinsurer assumes an obligation to indemnify the insurer for payments it makes under the reinsured policies. Id. Indeed, a reinsurance agreement typically contains two specific provisions designed to prevent the reinsurance relationship from encroaching on coverage disputes between the insurer and its insured: a follow-the-form provision, in which the reinsurer agrees to reinsure the policies as written, and a follow-the-fortunes provision, in which the reinsurer agrees to follow the coverage provided by the insurer. See CIGNA, 52 F.3d at 1199-1200. Of these two provisions, the most crucial is the follow-the-fortunes provision. See Barry R. Ostrager & Mary Kay Vyskocil, Modern Reinsurance Law & Practice § 2.03[d] (2d ed.2000), at 2-17 (noting that the follow-the-fortunes provision lies at the heart of the reinsurance agreement). The follow-the-fortunes doctrine significantly restricts a reinsurer's ability to challenge the coverage decisions that led to its liability to the insurer. This is so for a basic reason[i]f the [insurer] knew that its settlement decisions could be challenged by every reinsurer, there would be little incentive to settle with the insured. The costs and risks of litigation avoided by settling with the insured would only be revived at the reinsurance stage. Commercial Union Ins. Co. v. Seven Provinces Ins. Co., 9 F.Supp.2d 49, 66 (D.Mass.1998); see also CIGNA, 52 F.3d at 1206 (To permit the reinsurer to revisit coverage issues resolved between the insurer and its insured would place insurers in the untenable position of advancing defenses in coverage contests that would be used against them by reinsurers seeking to deny coverage.). Accordingly, the follow-the-fortunes doctrine insulates a reinsured's liability determinations from challenge by a reinsurer unless they are . . . in bad faith, or the payments are clearly beyond the scope of the original policy. [3] Ace, 361 F.3d at 140 (internal quotation marks and citation omitted). In other words, a reinsurer seeking to avoid payment must show either that the coverage decisions that led to the reinsurer's liability to the insurer were made in bad faith, or that the coverage provided clearly fell outside the scope of the policies the reinsurer agreed to reinsure. See Mentor Ins. Co. (U.K.) Ltd. v. Brannkasse, 996 F.2d 506, 517 (2d Cir. 1993). Otherwise, the reinsurer must simply cover the losses allocated to it.