## Facts

- Travelers (the cedent) insured Owens-Corning Fiberglas Corp. (OCF) under primary and excess liability policies covering bodily injury and property damage caused by an “occurrence,” with separate products/completed-operations coverage and premises/operations (non-products) coverage.
- Gerling provided facultative reinsurance under five certificates covering portions of Travelers’ excess policies for 1975–1977; the certificates included follow-the-fortunes/follow-the-settlements language binding Gerling to Travelers’ settlements within the terms and conditions of the policies and certificates.
- OCF faced extensive asbestos bodily injury claims and disputes arose with Travelers over whether claims fell under products coverage (often subject to aggregates) or non-products coverage (potentially more favorable), and over whether claims constituted a single occurrence or multiple occurrences.
- Travelers and OCF arbitrated coverage issues but settled before obtaining a definitive ruling on the occurrence structure; the settlement did not specify an allocation by year or occurrence.
- After settlement, Travelers unilaterally allocated most of the settlement to a single non-products occurrence and then spread remaining amounts into excess layers, reaching layers reinsured by Gerling.
- Gerling denied payment, asserting Travelers’ allocation conflicted with the settlement and the occurrence framework of the underlying policies and improperly shifted losses into Gerling’s reinsured layers.
- The district court granted summary judgment for Gerling, concluding follow-the-fortunes did not require Gerling to accept Travelers’ allocation.
- Travelers appealed, relying heavily on a prior Second Circuit decision enforcing a cedent’s allocation under follow-the-fortunes principles.

## Issues

1. Whether follow-the-fortunes/follow-the-settlements required the reinsurer to accept the cedent’s post-settlement allocation of a settlement with the insured.
2. Whether the cedent’s allocation was binding when it appeared inconsistent with the settlement actually reached and the contractual occurrence framework.
3. Whether the result was controlled by the Second Circuit’s earlier decision enforcing a cedent’s allocation as reasonable and in good faith.

## Decision

- The Second Circuit affirmed summary judgment for Gerling.
- The court held follow-the-fortunes did not obligate Gerling to accept Travelers’ post-settlement allocation because Travelers did not show the allocation corresponded to the settlement reached with OCF and remained within the governing contract terms.
- The court distinguished the earlier Second Circuit allocation case, finding that decision involved an allocation anchored in the settlement and not a later allocation that effectively adopted a materially different coverage/occurrence position for reinsurance billing.

## Legal Principles

- Follow-the-fortunes/follow-the-settlements generally requires a reinsurer to honor a cedent’s reasonable, good-faith settlement and related allocation decisions when they fall within the terms and conditions of the underlying policy and the reinsurance contract.
- The doctrine does not require acceptance of a post-settlement allocation that is inconsistent with the cedent’s actual settlement with the insured or that effectively rewrites unresolved coverage/occurrence questions to shift loss into reinsured layers.
- A reinsurer is not required to pay for losses that are not even arguably within the scope of the reinsured policy terms as implemented by the underlying settlement.

## Conclusion

The Second Circuit refused to apply follow-the-fortunes to bind a reinsurer to a cedent’s unilateral, post-settlement allocation where the allocation lacked a demonstrated connection to the settlement’s substance and contractual occurrence structure, and therefore could not be imposed on the reinsurer as a matter of law.


Travelers Casualty & Surety Co. v. Gerling Global Reinsurance Corp. of Am., 419 F.3d 181 (2d Cir. 2005)