Recently, the United District for the Northern District of California rejected a cedent’s contention that the follow-the-settlements clause is implied in reinsurance contracts. See American Motorists Ins. Co. v American Re-Insurance Co., No. C5-5202 (N.D. Cal. May 29, 2007).

American Re-Insurance Company (“American Re”) issued a facultative reinsurance certificate to Specialty National Insurance Company (“SNIC”), American Motorist Insurance Company's predecessor in interest (“AMICO”). SNIC settled a claim arising under the reinsured policy and, subsequently, AMICO sought indemnification form American Re. American Re denied AMICO’s claim and litigation ensued.

AMICO argued that American Re was bound to follow its settlement, even though the facultative certificate at issue did not contain follow the fortunes or follow the settlements language. American Re, on the other hand, claimed that the absence of such a clause precluded application of the follow the settlements doctrine. The Court rejected AMICO’s argument that the follow-the-settlements doctrine was implied in the facultative certificate at issue, noting that the two decisions from California courts relied upon by AMICO involved reinsurance contracts that contained express follow-the-fortunes/settlements language, and thus were inapplicable.

Jurisdictions are split as to whether the follow-the-fortunes or follow the settlements doctrine should be implied in reinsurance contracts where such language does not otherwise exit. The American Motorists Ins. Co. decision affirms that, under California law, it should not.