Follow the Fortunes

What is the Follow the Fortunes Doctrine?

The follow the fortunes (or follow the settlements) doctrine is a foundational principle of reinsurance law that requires the reinsurer to honour the cedant's good-faith underwriting and claims decisions, even when those decisions are not necessarily the ones the reinsurer would have made itself. The doctrine recognizes that the reinsurer has accepted the cedant's portfolio in its entirety — the good years and the bad — and must therefore share in the consequences of the cedant's reasonable business judgement, rather than having the ability to cherry-pick recoveries only on claims where the reinsurer believes coverage is clearly established.

The practical effect is significant: a reinsurer bound by the follow-the-fortunes doctrine cannot refuse to pay its share of a cedant's claim settlement simply because the reinsurer would have denied the underlying claim, or would have interpreted the original policy differently. As long as the cedant's decision was made in good faith, was within the general scope of the original policy, and was not the result of fraud, collusion, or coverage clearly beyond the policy terms, the reinsurer must follow. The doctrine prevents the reinsurer from second-guessing every claims decision with the benefit of hindsight.

Limits of the Follow the Fortunes Doctrine

The doctrine is not unlimited. Reinsurers are not obligated to follow cedant decisions that are made in bad faith, that are the product of collusion between the cedant and the original insured to extract a recovery, that clearly fall outside the coverage provided by the original policy, or that violate applicable law. If a cedant makes an ex gratia payment — paying a claim for business reasons when coverage is legally questionable — the reinsurer may not be bound to follow, depending on the jurisdiction and the treaty wording.

The distinction between "follow the fortunes" and "follow the settlements" is a nuanced one that varies by jurisdiction and treaty language. Follow the fortunes is the broader principle (encompassing all underwriting decisions, not just claim settlements), while follow the settlements more narrowly addresses the reinsurer's obligation to honour the cedant's claim payments. UK and US courts have developed substantial case law on the boundaries of these doctrines, and treaty wordings increasingly seek to define the principle explicitly rather than relying on implied terms.

Importance for Reinsurance Disputes

Follow the fortunes is most consequential in large, complex, or coverage-disputed claims. When a cedant settles a significant claim under questionable coverage — for example, accepting a broad interpretation of a policy exclusion to maintain a customer relationship — the reinsurer may seek to challenge the recovery on the grounds that the settlement was outside the original policy terms. The cedant must then demonstrate that its decision was within the reasonable scope of the policy and made in good faith, relying on its claims files, legal advice obtained at the time, and documented coverage analysis to support its position.

Follow the Fortunes in Treaty Wordings

Most modern reinsurance treaties include an express follow-the-fortunes or follow-the-settlements clause, defining precisely the extent of the reinsurer's obligation. Some wordings include "honourable engagement" clauses that encourage arbitrators to apply the spirit of the reinsurance relationship rather than strict legal analysis in resolving disputes. The inclusion, scope, and drafting of the follow-the-fortunes clause is therefore a significant point of negotiation at treaty placement, with cedants seeking broad protection and reinsurers seeking to preserve challenge rights on arguably out-of-scope recoveries.