Follow the Fortunes Clauses in Reinsurance
Law – Practical Problems in Ensuring their
Effectiveness
Ralph Fearnhead
Follow the Fortunes Clauses
Reinsurer
Reinsurer
Reinsurer
Reinsurer
Reinsurer
Reinsurer
Insurer
Policyholder
Reinsurer
Example wordings
 Single Proviso
"Settlements hereunder in respect of losses coming under the scope of clause
AVN.48B [War Hijacking and Other Perils Exclusion Clause] from the Reinsured's
Excess of Loss acceptances are to follow those made by the Reinsured in all
respects…..“ (LSW 343)
 Double Proviso
"….All loss settlements by the Reinsured including compromise settlements and
the establishment of Funds for the settlement of losses shall be binding upon the
Reinsurers, providing such settlements are within the terms and conditions of the
original policies and/or contracts…. and within the terms and conditions of this
Contract.” (LSW 334)
Single Proviso Clauses
“... the reinsurers agree to indemnify insurers in the event
that they settle a claim by their assured, i.e. when they
dispose, or bind themselves to dispose, of a claim, whether
by reason of admission or compromise, provided that the
claim so recognized by them falls within the risks covered by
the policy of reinsurance as a matter of law, and provided
also that in settling the claim the insurers have acted
honestly and have taken all proper and businesslike steps in
making the settlement.”
Robert Goff L.J., Insurance Company of Africa v Scor
Double Proviso Clauses
 Losses must be within the terms and conditions of the original policies
and the reinsurance
 Acting in good faith when settling the claim is not enough. There must be
evidence of legal liability (not just the risk of an adverse jury
determination).
 An Insurer’s good faith determination of the facts will bind reinsurers but
it must still prove (on the balance of probabilities) that those facts would
have given rise to a liability within the terms of the reinsurance.
 In the case of a settlement the matters of fact alleged must give rise to a
liability under the relevant governing law and of a type within the terms of
the contract.
The Nature of 9/11 Losses
 Total losses estimated at around $40bn.
 Loss of life and personal injury dealt with primarily through
various victim compensation funds.
 $4.4bn claim brought against airlines and security
companies by certain plaintiffs and subrogated insurers
relating to property damage.
 $1.2bn settlement entered into in July 2010 by the airlines
and their insurers.
The Property Damage Settlement
 ATSSSA limits liability to amount of available insurance.
 US courts affirmed the settlement counted towards the ATSSA limits.
 Questions over the existence and scope of any duty of care owed by
Airlines to victims on the ground.
 £1.2bn was a “reasonable settlement” and a 72% discount from the
original claim.
 Huntleigh’s limit’s of indemnity exhausted and Airlines released from any
future claims by plaintiffs.
 Settlement apportioned 60/40 between American and United.
Potential issues - Aggregation
 "each and every loss or accident or occurrence or series
thereof arising out of one event, each aircraft."
 "All such losses sustained by the Reinsured which occur
during any one period of 24 consecutive hours and within an
area of radius 10 miles which arise from one of the perils
stipulated in clause AVN.48B [War Hi-jacking and other
perils]".
Potential Issues – Proving the Loss
“There are only two rules, both obvious. First, that the reinsurer cannot be held liable unless the
loss falls within the cover of the policy reinsured and within the cover created by the reinsurance.
Second, that the parties are free to agree on ways of proving whether these requirements are
satisfied. Beyond this, all the problems come from the efforts of those in the market to strike a
workable balance between conflicting practical demands and then to express the balance in words.
These practical demands can be seen most easily in the context of traditional reinsurance, where the
party reinsured is the insurer under a contract made directly with the person whose property or
other interest is at risk. Two impulses act in opposite directions. The first is to avoid the investigation
of the same issues twice; and, moreover, an investigation on the second occasion by a reinsurer
whose knowledge of what happened when the risk was written, and whose facilities for investigating
the claim, are inferior to those of the direct insurer. The second impulse, acting in the other
direction, is to ensure that the integrity of the reinsurer's bargain is not eroded by an agreement over
which he has had no control.”
- Lord Mustill, Hill v M&G, [1996] 3 All ER 865 at 879
Possible Solutions?
 Broader follow the settlements terms to ensure Reinsurers
are bound.
 Standard form contracts under a universal governing law.
 The adoption of a completely new form of Reinsurance
contracts.