Reinsurance and follow the settlements clauses: What you need to know

By Jacob Foster

The Ontario Superior Court of Justice (Commercial List) recently released a decision regarding a “follow the settlements” clause in a reinsurance agreement. While follow the settlements clauses are common in reinsurance, this was the first time that a Canadian court has addressed the interpretation and application of such clauses.

Follow the settlements clauses are one of several types of loss settlement clauses that are used in reinsurance agreements. Reinsurance agreements are agreements between insurers where one insurer (the reinsured) transfers some part of a risk insured to another insurer (the reinsurer). Generally, the purpose of loss settlement clauses is to avoid the expense and burden on a reinsured of proving that a settled claim under the reinsured policy was actually covered under that policy. In the absence of a loss settlement clause, the reinsured must prove that they were liable for the underlying claim, and the reinsurer is entitled to raise any defence that would have been available to the reinsured, as well as any defence available under the reinsurance policy.

Although wordings vary, there are two general types of follow the settlements clauses: unqualified and qualified. A qualified or “double proviso” follow the settlements clause places a heavier burden on the reinsured to prove that the settled claim was covered by the underlying policy.

In Wiener Städtische Versicherung AG v Infrassure Ltd., 2023 ONSC 5256, the plaintiff (“VIG”) was the fronting reinsurer and had accepted and paid the claim of the reinsured, Zurich, which had entered into a settlement with its insured. Infrassure, the defendant, had entered into a retrocession agreement with VIG whereby, if the loss or settlement exceeded a threshold amount, Infrassure took on most of VIG’s risk under the reinsurance policy.