An Illinois district court granted summary judgment to a ceding company on a breach of contract suit against its reinsurer, finding that the reinsurer was obligated to fund settlement amounts pursuant to a follow the settlements clause, and that the reinsurer’s late notice defense had no merit. Arrowood Indem. Co. v. Assurecare Corp., 2012 WL 4340699 (N.D. Ill. Sept. 19, 2012).

Arrowood sought payment of settlement amounts from Assurecare under a quota share reinsurance treaty. Assurecare contested payment, arguing that because the settlement fell outside the scope of both Arrowood’s underlying policy and the reinsurance treaty, it was not subject to the follow the settlements clause. The court disagreed.

Applying Connecticut law, the court held that Assurecare was bound by Arrowood’s good faith settlement decisions pursuant to the follow the settlements clause. The court rejected Assurecare’s argument that, because the settlement was based on a coverage position (relating to the number of covered occurrences) contrary to the litigation position taken by Arrowood, the clause was inapplicable. The court held that absent a showing of bad faith, collusion or fraud, a reinsurer may not second-guess settlement decisions. The court also rejected Assurecare’s contention that the settlement was not covered under the reinsurance treaty because it resolved bad faith claims against Arrowood. The court found the treaty’s “Extra Contractual Expenses” provision arguably covered settlements of bad faith claims.

In rejecting Assurecare’s late notice defense, the court held that a treaty provision requiring Arrowood to “furnish the Reinsurer with a report summarizing the Net Subject Written Premium ceded and the Net Subject Earned Premium ceded … and net balance due either party” was a reporting provision rather than a notice provision. Moreover, the court held that a reinsurer’s late notice defense requires a showing of prejudice, which was not alleged by Assurecare.

As Arrowood demonstrates, a follow the settlements clause can limit a reinsurer’s ability to question a ceding company’s settlement decisions. See Travelers Cas. & Sur. Co. v. Gerling Global Reinsurance Corp. of America, 419 F.3d 181, 188 (2d Cir. 2005) (“a cedent’s post-settlement allocation is subject to follow-the-fortunes, regardless of any pre-settlement position taken by the cedent”).