Travelers Cas. & Sur. Co. v. Gerling Global Reinsurance Corp. of Am.

Issue Discussed: Follow the Fortunes / Settlements

Submitted by Cecilia Froelich Moss, David Byowitz

Date Promulgated: August 18, 2005

Travelers Cas. & Sur. Co. v. Gerling Global Reinsurance Corp. of Am., 419 F.3d 181 (2d Cir. 2005)

Court: United States Court of Appeals for the Second Circuit

Issues Decided: Whether the follow-the-fortunes doctrine applies to a cedent’s post-settlement allocation, where the allocation is allegedly inconsistent with the settlement.

Factual Background:

Travelers entered a settlement with its policyholder, Owens-Corning, to resolve an arbitration regarding coverage of non-product asbestos claims under various policies issued by Travelers.

In the underlying coverage arbitration, Travelers took the position that all of Owens-Corning’s claims, both products and non-products, arose out of a single occurrence; Owens-Corning contended that its claims arose out of multiple occurrences.   Travelers paid approximately one additional occurrence limit to settle with Owens-Corning, but the settlement explicitly disclaimed any particular theory of coverage, and so did not resolve the occurrence issue.

Travelers then allocated the settlement among its policies as a single additional occurrence of non-products claims, using the rising bathtub method of allocation.  This allocation quickly exhausted its primary limits, and assigned substantial liability to excess policies, including policies reinsured by Gerling.

Gerling refused to pay, and Travelers filed suit.  Gerling moved for summary judgment, arguing that by settling, Travelers had necessarily accepted that there were multiple occurrences.  Gerling argued that the follow-the-fortunes doctrine did not apply to Travelers’ allocation because it was inconsistent with the underlying settlement.  The district court held that the doctrine prevented a reinsurer from second-guessing the settlement, but that it was inapplicable here because Gerling was trying to enforce, rather than second-guess, the settlement.  Travelers appealed.

Key Holding:

Follow the Fortunes

The Second Circuit found that its recent decision in North River Ins. Co. v. ACE Am. Reinsurance Co., 361 F.3d 134 (2d Cir. 2004),[2] controlled.  In North River, the Court held that follow-the-fortunes applies to a cedent’s post-settlement allocation, even if inconsistent with its pre-settlement analysis, as long as it is reasonable, made in good faith, and within the policy.

In this case, the only factual distinction with North River was that North River involved allegations that the cedent’s allocation conflicted with a pre-settlement litigation analysis that the cedent conducted.  As such, the Court found Travelers’ case here was stronger than the prevailing cedent’s case in North River, because it was allocating based on the theory that it advanced during arbitration.  Further, Travelers never rejected its one-occurrence theory, because the settlement explicitly declined to resolve the issue.

Finally, the Second Circuit rejected Gerling’s claims that Travelers acted in bad faith, that the settlement was outside the scope of the policies, and that the settlement was unreasonable.  It reversed and ordered the district court to enter summary judgment for Travelers.

Key Takeaways:

“A cedent’s post-settlement allocation is subject to follow-the-fortunes, regardless of any pre-settlement position taken by the cedent, whether that position is articulated in a pre-settlement risk analysis, or implicit in the settlement with the underlying insured.”

“Follow-the-fortunes extends to a cedent’s post-settlement allocation decisions . . . as long as the allocation meets the typical follow-the-fortunes requirements, i.e. is in good faith, reasonable, and within the applicable policies.”


* 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.

* David Byowitz is an associate of Chaffetz Lindsey LLP, and has experience representing clients in reinsurance disputes and commercial litigation.