Follow the Settlements Clause
The follow-the-settlements clause contractually obliges the reinsurer to accept the cedent's claims settlement, provided it falls within the terms of the original policy and is made in good faith, without re-examining liability or quantum.
- Clause type
- Condition
- Origin/Market
- Reinsurance market
- Favours
- Insured
- Negotiability
- Market standard
Purpose
While follow the fortunes is treated as an unwritten principle, the follow-the-settlements clause makes the binding effect an express term of the contract: the reinsurer agrees to accept a claims settlement made by the cedent where it falls within the terms of the original policy, is commercially reasonable and does not breach the reinsurance conditions. The clause developed mainly in English-language reinsurance markets in response to court decisions that declined to imply a binding effect absent an express clause.
Effect and limits
The clause prevents the reinsurer from re-litigating every settlement decision taken by the cedent after the event. It does not bind the reinsurer for payments outside the scope of cover, for fraud, or for clearly improper claims handling. The precise wording – whether “follow the settlements” or “follow the fortunes” is used – can be interpreted differently by courts, which is why precision in the contract language matters.
Negotiation and practice
Reinsurers frequently seek additional information or consent rights (claims cooperation or claims control clauses) to limit the control risk associated with the binding effect. Drafting should ensure a clear interplay with those clauses.