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Aetna Cas. & Sur. Co. v. Home Ins. Co.

Issue Discussed: Follow the Fortunes / Settlements

Submitted by Cecilia Froelich Moss, Karen C. Baswell

Date Promulgated: March 27, 1995

Aetna Cas. & Sur Co. v. Home Ins. Co., 882 F. Supp. 1328 (S.D.N.Y. 1995)

Court:                         United States District Court for the Southern District of New York

Issues Decided:          1. Whether the “follow the settlements” doctrine is applicable in facultative reinsurance, or only in treaty reinsurance?

  1. Whether the “follow the settlements” doctrine applies as a matter of law, even in the absence of a “follow the settlements” clause?

Factual Background

This case arose out of the Dalkon Shield mass tort litigations, which involved several hundred thousands of claims against Dalkon Shield manufacturer, A.H. Robins (“Robins”).  Aetna provided products liability insurance coverage to Robins from 1968-78 pursuant to multiple primary and excess-layer policies.  Home was a facultative reinsurer on various Aetna excess policies.

While Aetna did not originally have a duty to defend Robins under its excess-layer policies, Aetna and Robins entered into an Interim Agreement (as an endorsement to Aetna’s policies) which provided, inter alia, that Aetna would defend Robins against pending and future Dalkon Shield claims.  Before execution, Aetna sent the proposed Interim Agreement to its reinsurers, and Home responded that it “consent[ed] to following the reinsured concerning the application of this agreement.”

Robins later sued Aetna, claiming that under the Aetna policies and the Interim Agreement, it was entitled to defense costs in addition to its policy limits.  Aetna’s Claim Counsel reviewed the policies and determined there was a reasonable chance that Robins would prevail at trial.  He therefore recommended settlement, and Aetna ultimately paid approximately $75 million to settle the coverage dispute.

Aetna then billed Home for its share of the additional defense expenses, but Home refused to pay.  Aetna sued, arguing that Home was bound by the “follow the settlements” doctrine to indemnify Aetna for its reasonable settlement decision.  Home argued first that the parties’ intent was that the reinsurance policies would be cost-inclusive, and therefore it was not required to pay costs in addition to its reinsurance limits.  Home also argued that the “follow the settlements” doctrine did not apply to facultative reinsurance, or alternatively, that the doctrine did not apply because the reinsurance contracts did not contain a standard “follow the settlements” clause, or because the settlement was not reasonable or made in good faith.

Key Holding

The court first determined, based on an extensive review of the Aetna excess policies and amendments thereto and the Home reinsurance policies and endorsements thereto that the parties did intend for costs to be included within the monetary limits.  However, it also found that the Home policies were intended to be concurrent with the Aetna policies, and that the Aetna policies “did not plainly establish how defense costs were to be paid.”  Accordingly, the district court found that it had to analyze the effect of the “follow the settlements” doctrine.

The court first rejected Home’s claim that the doctrine does not apply to facultative reinsurance, noting that: (i) Home failed to articulate any meaningful distinction between facultative and treaty reinsurance in regards to the applicability of the doctrine; (ii) Home’s own expert conceded the doctrine could apply to facultative reinsurance; and (iii) the New York Court of Appeals had recently applied the doctrine to facultative certificates.

The court then analyzed whether the doctrine was inapplicable to this case as the reinsurance contracts did not contain a standard “follow the settlements” clause, as Home argued, or, as Aetna argued, whether the doctrine is implicit in any contract or reinsurance due the custom and practice of the reinsurance industry.  The court noted that “the weight of authority appears to favor Aetna’s position.”  However, because the existence of an industry custom “is in the first instance a question of fact,” the court also heard expert testimony from both parties.  The court relied heavily on testimony from Aetna’s expert that specific language was not required to invoke the doctrine, but that “[i]t is inherent in the transaction of reinsurance,” and that Home’s expert did not deny that the doctrine was customary in the industry.  Ultimately, based on the evidence presented, the court concluded that “it is customary within the reinsurance industry for reinsurers to follow the claim settlement decisions of the ceding company even in the absence of an explicit loss settlements clause.”

Finally, the court found that Aetna’s decision to settle, based on its determination that Robins had a colorable claim for defense costs in addition to Aetna’s policy limits, was reasonable, and that there was no evidence to support a finding of bad faith.

Key Takeaways

The “follow the settlements” doctrine applies to both facultative and treaty reinsurance.

When supported by evidence of industry custom and practice, a reinsurer’s duty to “follow the settlements” can be implied into a reinsurance contract as a matter of law, even in the absence of an explicit “follow the settlements” clause.