No “Follow-the-Fortunes” Doctrine Where a Reinsurance Agreement’s Terms Are Plainly Inconsistent with the Doctrine

The Eleventh Circuit in Public Risk Management of Florida v. Munich Reinsurance America, Inc., 38 F.4th 1298 (11th Cir. June 29, 2022), held that courts cannot infer application of the “follow-the fortunes” doctrine where a reinsurance agreement’s plain and unambiguous language is inconsistent with the doctrine.

Public Risk Management of Florida (“PRM”), a self-insured intergovernmental risk-management program that exclusively insures local governments in Florida, brought suit against one of its reinsurers, Munich Reinsurance of America, Inc. (“Munich”). The reinsurance agreement between Munich and PRM covered the time period from April 1, 2008, to April 1, 2009.  During that time, Munich reinsured coverage that PRM provided to the City of St. Pete Beach. On April 26, 2006, a couple brought a quiet title action against St. Pete Beach, and the court eventually quieted title to the couple’s property in November 2008. In November 2009, the couple again sued the City. In the second suit, the couple alleged a § 1983 claim and an inverse condemnation claim. PRM defended the suit for the City and applied for coverage with Munich. Munich denied the claim because it arose from wrongful acts that predated the reinsurance agreement’s coverage period. PRM took the position that the date of loss was November 2008 when the couple successfully quieted title to the property.

PRM sued Munich in federal court, alleging that Munich had a duty under the reinsurance agreement to reimburse PRM for the cost of its legal defense of St. Pete Beach and its settlement with the couple. The district court granted summary judgment to Munich on the basis that the date of occurrence underlying the claim occurred prior to April 1, 2008, and therefore Munich had no duty to reimburse PRM under the reinsurance agreement.

In an opinion written by Judge Anderson and joined by Judges Jill Pryor and Grant, the Eleventh Circuit affirmed. Applying Florida law, the court held that the reinsurance agreement required Munich to indemnify PRM for “Ultimate Net Loss” paid by PRM as a result of “Occurrences” once Munich receives proof of payment and proof of coverage from PRM. The court noted that the policy at issue was an “occurrence policy,” meaning coverage depends on when the act occurs rather than the date when the claim was asserted. Crucially, the reinsurance agreement specified that a series of wrongful acts is deemed one occurrence. The court ultimately held that the allegations in the couple’s complaint made it clear that St. Pete Beach’s actions began well before April 1, 2008. Therefore, the court determined that the occurrence took place outside of the coverage period and Munich was not required to reimburse PRM.

PRM’s main argument on appeal was that the district court erred in failing to conclude that the follow-the-fortunes doctrine required Munich to reimburse PRM for its good faith decision to defend and indemnify St. Pete Beach. Under the follow-the-fortunes doctrine, reinsurers are generally bound by the reinsured’s decision to pay the claim and must refrain from second guessing a good faith decision to do so. If the doctrine applied to PRM and Munich, it would mean that Munich could not second guess PRM’s coverage decision and would be bound to reimburse on the basis of PRM’s good faith coverage decision. The court held that the relevant reinsurance provisions did not contain an express follow-the-fortunes doctrine and were in fact “squarely inconsistent” with the doctrine. The court pointed to the reinsurance provisions requiring that PRM show proof of payment and proof of coverage to Munich and concluded that those provisions were inconsistent with the follow-the-fortunes doctrine.

PRM also argued that even absent an explicit follow-the-fortunes clause, the court should infer the doctrine applies to any reinsurance contact under Florida law. The court declined to do so. The court expressly did not address whether an inference would be appropriate under other circumstances and noted that other courts seem to be divided over whether an inference would be permissible where there is neither an express follow-the-fortunes clause nor language that is plainly inconsistent with the doctrine.

Posted by Rebekah Whittington.

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