Christiania General Ins. Corp. of N.Y. v. Great American Ins. Co.

Issue Discussed: Follow the Fortunes / Settlements

Submitted by Cecilia Froelich Moss, Justinian Doreste

Date Promulgated: September 3, 1992

Christiania General Ins. Corp. of N.Y. v. Great American Ins. Co., 979 F.2d 268 (2d Cir. 1992)

Court: United States Court of Appeals for the Second Circuit

Issues Decided:  Whether the follow the fortunes doctrine precluded the reinsurer from arguing that the reinsured made ex gratia payments because the reinsured may have been entitled to rescind its contract with the insured.
(This case also addresses issues related to Notice, Utmost Good Faith, and Rescission.  Those issues are addressed in separate summaries in those sections of the ARIAS Case Law Summaries).

Factual Background

Great American issued excess policies to American Honda Motor Co., which manufactured ATVs in addition to other motor vehicles.  In the 1980s, ATV-related accidents produced a number of personal injury claims which reached its excess insurance coverage, including the layer covered by Great American.

Great American reinsured a portion of its Honda excess insurance policy under facultative certificates with plaintiff Christiania.

Christiania argued that Great American’s payments to Honda were ex gratia because Great American could have rescinded the Honda policies based on an argument that Great American was not aware that the ATVs presented a material risk.

Key Holdings

(See additional case summaries for discussion of the Court’s rulings on Notice, Rescission, and Utmost Duty of Good Faith).

Ex gratia payment / follow the fortunes issue

The court found Christiana’s ex gratia argument lacked merit.  It held that, “even assuming arguendo, [Great American] could have rescinded its policy with Honda,” the follow the fortunes doctrine requires a reinsurer to indemnify “for payments reasonably within the terms of the original policy, even if technically not covered by it,” and precludes the reinsurer from “second-guess[ing] the good faith liability determinations made by its reinsured, or the reinsured’s good faith decision to waive defenses to which it may be entitled.”  979 F.2d 268, 280 (2d Cir. 1992).  Here, the court found this was not a case where indemnification imposed liability “for risks not encompassed in the underlying policy.”  Id. at 280.

Key Takeaways

• Where a claim is reasonably within the terms of the original policy, an argument that the payment was ex gratia will likely fail.

Cecilia Froelich Moss is a founding partner of Chaffetz Lindsey LLP, where her practice focuses on representing major insurance companies in reinsurance disputes and in coverage litigation.  Ms. Moss also handles large scale commercial disputes in court and in international arbitration.

Justinian Doreste is an associate of Chaffetz Lindsey LLP, and has experience representing clients in insurance and reinsurance dispute resolutions, international arbitration, commercial litigation, and class actions.