After the New York Court of Appeals issued its decision in United States Fidelity & Guaranty Co. v. American Re-Insurance Co. (N.Y. Feb. 7, 2013), some commentators have characterized the decision as one favorable to reinsurers. However, the Court of Appeals actually provides further support for expanding the protections of the “follow-the-settlement” doctrine to postsettlement allocation decisions. In addition, the court rejected the reinsurers’ defenses based on the fact that the cedent’s actions allowed it to access additional reinsurance than could have been accessed if the claims had been settled on different terms. Ultimately, the decision gives cedents additional ammunition to combat recalcitrant reinsurers’ attempts to second-guess the cedents’ settlement and allocation 

decisions. 

Background 

The reinsurers argued that the follow-the-settlement doctrine did not bind them to USF&G’s (their cedent’s) decisions about how to bill to the reinsurers the amounts USF&G paid to settle the coverage litigation, i.e., USF&G’s post-settlement allocation decisions. In particular, the reinsurers claimed that the doctrine did not bind them to USF&G’s decisions about which USF&G policies were triggered by the underlying asbestos claims; the amount USF&G paid to settle its insured’s bad faith claim; and the monetary value of the underlying 

claims. 

The New York Court of Appeals’ Ruling 

Following decisions from the U.S. Court of Appeals for the Second Circuit and the U.S. Court of Appeals for the Third Circuit, the New York Court of Appeals rejected the reinsurers’ position. The court held that the follow-the-settlement doctrine applied to a cedent’s post-settlement allocation decisions. The court recognized that reviewing each allocation decision anew “would invite long litigation over complex issues that courts may not be well equipped to resolve, creating cost and uncertainty and making the reinsurance market less efficient.”