A cedent's allocation of Owens-Corning asbestos-related loss settlements to one of its facultative reinsurers was upheld by the federal district court for the Southern District of New York based on the "follow the settlements" doctrine as it was applied to allocations in Commercial Union Insurance Co. v. Seven Provinces Insurance Co., 9 F. Supp. 2d 49 (D. Mass 1998), aff'd, 217 F.3d 33 (1st Cir. 2000), cert. denied, 531 U.S. 1146 (2001).
The reinsurer contended that the "follow the settlements" doctrine did not preclude it from challenging the cedent's choice of allocation methodology notwithstanding the absence of fraud or collusion or evidence that the settlement went beyond the scope of the underlying policy.
Citing Seven Provinces, which was not binding precedent in the Southern District, the court held that it made "perfect sense" that in the absence of evidence of bad faith, the cedent's allocation must be followed by the reinsurer and that any attempt to distinguish between following the cedent's "settlement" and following its "allocation" would undermine the entire "follow the settlements" doctrine. When numerous good faith allocation methods are available to the cedent and one is chosen, according to the district court, allowing reinsurers to second-guess that allocation "would be to make settlement impossible and reinsurance itself problematic."
North River Insurance Co. v. ACE American Reinsurance Co., 00 Civ. 7993 (JSR), 2002 U.S. Dist. LEXIS 5536 (S.D.N.Y. Mar. 29, 2002).