FoundationsApplied

Follow the Fortunes

Why reinsurers don't re-litigate every claim

The doctrine that binds a reinsurer to a cedent's good-faith claims decisions, so long as they fall within the treaty's terms.

Open the interactive version → definition, quiz, structure diagram and progress tracking

Definition

Under follow the fortunes (claims payments) and its close cousin follow the settlements (compromises and negotiated settlements as well as adjudicated claims), a reinsurer agrees in advance to stand behind the cedent's reasonable, good-faith handling of claims within the scope of the underlying policy and the reinsurance contract, without re-underwriting or re-litigating every individual decision. It exists because reinsurance would be unworkable if every claim payment had to be separately re-proven to, and justified for, the reinsurer.

The doctrine has real limits: it does not extend to payments clearly outside the original policy's coverage, that breach the reinsurance contract's own terms, or that were made in bad faith or without a reasonable basis.
"Follow the settlements" is the broader form, covering negotiated compromises as well as adjudicated claims — most modern treaty wordings cover both together.
The doctrine shifts the practical burden onto the reinsurer: to avoid paying, it must show the cedent acted unreasonably or outside the contract, not merely that it would have handled the claim differently.

Worked example

A cedent settles a disputed liability claim for $2M rather than fight it to trial and risk a $5M jury verdict. Even though the reinsurer would have litigated, follow the settlements binds it to the $2M compromise as long as the decision was reasonable and made in good faith.

Scenario · figures in USD

Two settlements, one honoured and one not

Cascade Casualty cedes a liability book on an excess-of-loss treaty carrying a standard follow-the-settlements clause. Two claims settle in the same quarter.

Claim 1 — bodily injury, disputed liability	Settled for $1.8M ahead of trial, within the policy's scope
Reinsurer's view of Claim 1	Disagrees with the amount, but the decision was reasonable
Reinsurer's obligation on Claim 1	Bound — pays its share of $1.8M
Claim 2 — product recall, expressly excluded peril	Settled for $900,000 anyway, to preserve the client relationship
Reinsurer's view of Claim 2	Outside the original policy's coverage entirely
Reinsurer's obligation on Claim 2	Not bound — follow the settlements cannot extend cover to an excluded peril

So whatThe doctrine protects a cedent's judgment calls inside the four corners of the policy, not its commercial generosity outside them. Settling a claim you were never covered for does not create coverage that never existed.

Check your understanding

A cedent settles a claim for more than the reinsurer believes it was worth, but the claim was clearly within the original policy and the settlement was reasonable. Must the reinsurer pay its share?

Yes — follow the settlements binds it to a reasonable, good-faith decision within the policy's scope. The doctrine exists precisely to bind a reasonable settlement decision, even one the reinsurer would not have made itself.

What is the one thing follow the fortunes / follow the settlements can never do?

Extend coverage to a loss the original policy never covered. The doctrine is generous about how a covered claim is valued and settled — it cannot manufacture coverage for a loss the underlying policy never insured in the first place.

Word problem

A treaty covers named-peril property damage up to $10M per occurrence, with a standard follow-the-settlements clause, on a 70% quota share to Deepwater Re. The cedent settles a covered fire claim for $6.4M — reasonable, within scope — and, in the same negotiation, adds a $1.1M goodwill payment for uncovered flood damage at the same site, to keep the client happy. What does Deepwater Re owe?

Show a hint

Separate the two payments by whether the original policy actually covered the peril, before applying the quota share percentage.

Reveal the worked answer

Fire damage: covered peril, within the $10M limit, reasonable settlement ⇒ follow the settlements binds the reinsurer to the full $6.4M
Flood damage: uncovered peril under the original policy ⇒ outside what the reinsurance was ever written to follow, however reasonable the gesture
Deepwater Re's share of the bound fire amount = 70% × $6.4M = $4.48M
Deepwater Re's share of the goodwill flood payment = $0 — not a recoverable loss under the treaty at all
Total owed by Deepwater Re = $4.48M

Deepwater Re owes $4.48M — 70% of the covered fire settlement — and nothing on the flood goodwill payment. Follow the settlements is generous about how a covered claim is valued; it is not a mechanism for ceding a loss the policy was never written to cover.