Court determines reinsurer’s duty to follow settlements under Canadian law

In Wiener Städtische Versicherung AG v. Infrassure Ltd, 2023 ONSC 5256, the Ontario Superior Court of Justice (Commercial List) ordered a reinsurer to follow the settlement of a claim by a lead insurer under a global insurance program. Although follow settlements clauses (a form of “follow the fortunes” clauses, as they are sometimes referred to) are commonplace in reinsurance arrangements, the case marks the first time a court has directly interpreted such a clause under Canadian law and provides important guidance on how such clauses will be interpreted, when reinsurers will be required to follow settlements pursuant to such clauses, and the steps insurers should take in entering into settlements in order to trigger a duty to follow.

What you need to know

• The Court will generally interpret contracts of reinsurance according to the principles of contractual interpretation applicable to commercial contracts.
• The effect of a follow settlements clause in a contract of reinsurance is an issue of contractual interpretation to be determined in each case.
• In the case of an unqualified follow settlements clause, a reinsurer is bound by the settlement of a claim by a lead insurer provided that (a) the claim falls within coverage “as a matter of law” and (b) the settlement was entered into in good faith and through “proper and businesslike steps”.
• A settlement will be within coverage “as a matter of law” if it is covered or arguably covered under the underlying insurance policy. The settling insurer does not have to prove that the insured would have succeeded in establishing coverage had its claim been submitted to the Court.
• Whether a settlement is entered into through “proper and businesslike steps” is contextual and depends on the facts of each case.