On November 3, 2006 we reported on a decision of a New York state court that followed the follow-the-fortunes provision of a reinsurance agreement, granting summary judgment as to the majority of the reinsurance claims. A New York appellate court recently reversed that decision, revisiting the scope of the follow-the-fortunes doctrine and ex gratia exceptions under New York reinsurance law. The court found that the general “follow-the-fortunes” obligation comes with exceptions for claim payments that are “fraudulent, collusive or otherwise made in bad faith” or are “ex gratia.” Ex gratia payments are payments made by a cedent insurer “that recognizes no legal obligation to pay, but makes payment to avoid greater expense, as in the case of a settlement by an insurance company to avoid the cost of a suit.”
The reinsurer in this case contended that, years after making settlements in thousands of pesticide poisoning cases, the cedent’s parent company reallocated some of its settlement payments from sister companies to the cedent/plaintiff just to obtain the benefit of the reinsurance coverage. The reinsurer charged that the cedent insurance company's conduct constituted bad faith or at least an ex gratia payment that should relieve the reinsurer of any obligation as a matter of law on summary judgment. The New York appellate court disagreed, finding that issues as to the intent and circumstances of the underlying settlements remained unresolved, requiring a trial. Granite State Ins. Co. v. ACE American Reinsurance Co., 2007 NY Slip Op. 10464 (NY App. Div., Dec. 27, 2007).
This post written by Lynn Hawkins.