Follow the Settlements

What Is Follow the Settlements?

In the insurance industry, the phrase "follow the settlements" alludes to a legal provision that is much of the time remembered for reinsurance contracts. The purpose of the provision is to explain that, assuming the reinsured party chooses to settle a claim with at least one policyholders, the reinsurer will respect those settlements. The phrase is like the connected term, "follow the fortunes."

Understanding Follow the Settlements

The reinsurance market is a large and important part of the insurance industry. Through it, insurance companies can deal with their risk by offloading a portion of their liability to other insurance companies.

In that scenario, the party purchasing reinsurance surrenders part of their liability to another insurer, and is thusly known as the "ceding party." In exchange, the ceding party consents to give a percentage of the insurance premiums they collect on those policies. The party selling the reinsurance is known as the reinsurer.

Now and again, insurance companies will challenge the claims made by their policyholders, contending that the claim is ill-conceived due to reasons like inappropriate documentation or thought fraud. These disputes can lead to extended legal battles. To assist with staying away from delays and exorbitant legal fees, insurance companies once in a while decide to resolve these disputes by consenting to pay the policyholder a portion of the challenged claim.

In the event that the insurance company making the settlement was likewise party to a reinsurance contract, then, at that point, the reinsurer probably won't concur with the decision to settle the claim. For instance, the ceding party and the reinsurer could differ about the benefits of the insurance claim or the logical time and expense of litigation. To keep away from extra conflict between the ceding party and reinsurer, numerous reinsurance contracts incorporate a "follow the settlements" clause that plainly states the reinsurer will acknowledge any settlement decisions made by the ceding party.

In practice, this means that the ceding party would settle the claim and present a reimbursement request to the reinsurer. The reinsurer would then be expected to pay the reimbursement, except if they can exhibit that the ceding party committed fraud or failed to exercise reasonable due process before choosing to settle the claim.

Real-World Example of Follow the Settlements

Michaela is the owner of an insurance company represent considerable authority in real estate development and rental properties. As of late, she agreed to endorse insurance policies for a real estate development project in which the policyholder constructed and leased an apartment building.

Under the terms of the insurance contract, Michaela's firm would be at risk for claims connecting with the physical condition of the building as well as any landlord-occupant disputes. Since the project was somewhat large compared to her previous insurance bargains, Michaela chose to acquire reinsurance to assist her with dealing with her insurance liability.

Sadly, the apartment building gave indications of physical crumbling soon after it was built. Tenants grumbled about spilling rooftops and other costly issues, compelling the landlord to cause critical repair and restoration costs. Since these costs were covered under their insurance contract, the landlord recorded several large claims with Michaela's insurance company. Michaela thought that the issues with the building might be due to errors made by the engineer during construction, in which case she wouldn't be responsible for covering these costs.

After an extended dispute with the designer, she chose to arrive at a settlement and documented a request for reimbursement with her reinsurer. Albeit the reinsurer was initially distrustful about Michaela's decision to settle, the follow the settlements clause in their contract made it unfeasible for the reinsurer to dispute this decision. To do as such, they would have needed to show the Michaela failed to put forth reasonable attempts in questioning the claim, which would be challenging to demonstrate in practice.

Features

• It explains that a reinsurer will acknowledge and respect the settlements made by the ceding party.
• These provisions are an important way for insurance companies to deal with their risks.
• "Follow the settlements" is a phrase utilized in reinsurance contracts.