Reinsurer need not “follow the settlements” of reinsured An insurer settled an injury claim by paying the claimant $750,000. The reinsurer, rather than reinsuring the $750,000, acted as a direct excess insurer and paid an additional $4.5 for the underlying injury and then ceded the $4.5 million to its retrocessionaire. The retrocessionaire refused the reinsurer’s claim, arguing that the reinsurer misinterpreted its obligations and paid six times the amount that was due. On May 29, 2007, the U.S. District Court for the Northern District of California ruled that the retrocessionaire need not “follow the settlements” of its reinsured who appeared to settle a claim for far more than was due. American Motorists Ins. Co. v. American Re-Insurance Company. No. C 05-5202 (May 29, 2007). Click here for the opinion The underlying insured was a pool of municipal entities, including the city of Great Falls Montana. One of the insurers for the municipalities was the Montana Municipal Insurance Authority (MMIA). The MMIA policy provided the city's coverage limits of $750,000 per “claim” and $1.5 million per “occurrence” for claims that fell under the statutory recovery cap of $750,000 and $1.5 million respectively. For claims against the municipalities that fell outside of the statutory caps, MMIA provided coverage limits of $10 million. The MMIA insurance policy was reinsured by AMICO. In turn, the AMICO certificate was 100% reinsured by American Re. A claimant suffered a severe brain injury when a steel beam fell off of a concrete pillar at the county fairgounds in Great Falls. The claimant filed a direct action against MMIA and the city of Great Falls to recover damages and insurance proceeds in excess of the statutory caps. MMIA paid its statutory limit of $750,000 for the claim. The claimant then added MMIA’s reinsurer, AMICO, to the suit, claiming that AMICO was actually the excess insurer incepting upon exhaustion of MMIA’s coverage. Despite actually being a reinsurer of MMIA’s $750,000 in liability, AMICO nevertheless filed an answer that took the position AMICO was indeed the excess insurer of MMIA. AMICO eventually settled the claim for $4.5 million. American Re, as the retrocessionaire of AMICO, refused to pay the claim, arguing that AMICO should only have been liable for the $750,000 that its own insured (MMIA) had paid. AMICO countered that American Re was bound to “follow the fortunes” and “follow the settlements” of AMICO’s interpretation of its own policy. The District Court noted that, in cases where a reinsurer (such as American Re) specifically agrees to language through which the reinsurer promises to “follow the fortunes” or “follow the settlements,” then the reinsurer is prohibited from second-guessing the good faith settlement decisions of its reinsured. However, there was no language in the American Re certificate issued to AMICO through which American Re made such promises. Because the American Re certificate contained no express wording that American Re would follow AMICO’s “fortunes,” “settlements,” or “adjustments,” AMICO would be forced to bear the burden of proving to American Re that AMICO’s payment of six times more than its own reinsured had paid, in fact constituted a covered loss under the AMICO certificate.