In a recent decision of the United States District Court for the Western District of Missouri, the court held that a reinsurer was required to follow the settlements of its cedent, finding that the treaty contained language sufficient to be deemed a “follow-the-settlements” provision. Employers Reinsurance Corp. v. Massachusetts Mut. Ins. Co., Case No. 06-0188-CV-W-FJG (W.D. Mo. Aug. 19, 2008).

In 1993, Employers Reinsurance Corporation (“ERC”) and Connecticut Mutual Life Insurance Company (“CML”) entered into an Excess Disability Income Reinsurance Agreement (the “Treaty”) under which ERC agreed to indemnify CML for a portion of losses incurred on individual disability income policies. CML later merged with Massachusetts Mutual Life Insurance Company (“Mass Mutual”), and Mass Mutual assumed the rights and obligations of CML under the Treaty. ERC raised concerns about Mass Mutual’s claims handling and its alleged failure to allow ERC to participate in the investigation, adjustment or defense of claims. The parties eventually entered into a series of claims review agreements. During the course of a claims review, ERC alleged it discovered “serious breaches” by Mass Mutual. ERC identified twelve claims that Mass Mutual allegedly failed to properly investigate, settle or defend, and for which ERC demanded reimbursement. Mass Mutual informed ERC that it would not reimburse ERC for the claims in question because ERC was required to follow Mass Mutual’s fortunes under the Treaty. On March 2, 2006, ERC filed suit against Mass Mutual for alleged breach of contract for mishandling of claims.

The court determined that Connecticut law applied to the interpretation of the Treaty. The central issue in the case was whether ERC was required to follow the settlements of Mass Mutual under the Treaty, and both parties sought summary judgment on this issue. ERC gave examples of typical follow-the-settlements clauses and argued that the Treaty contained no such follow-the-settlements language. Mass Mutual, on the other hand, argued that language requiring Mass Mutual to investigate, settle, pay or defend claims constituted a follow-the-settlements clause when read together with a provision that ERC was to indemnify Mass Mutual for losses sustained under the Treaty. The court concluded that based upon the four corners of the contract, the Treaty contained a follow-the-settlements provision.

Significant to the decision was the fact that that nowhere in the Treaty did it state that ERC could question claims once losses were incurred and paid, and ERC’s right of joint participation in claims handling under the Treaty did not negate ERC’s obligation to promptly pay claims. Further, the court noted that ERC was the drafter of the Treaty and could have included language stating that it would not follow the settlement decisions of Mass Mutual, but did not. Since the follow-the-settlements doctrine applied to the Treaty, Mass Mutual’s claims handling practices and liability determinations could not be successfully challenged unless they were fraudulent, made in bad faith, or the claim payments were outside the scope of the Treaty.

Click here to review a copy of the court’s decision.