“Follow the Fortunes” and “Follow the Settlements”

Has the world changed since WASA versus 

Lexington? 

“Follow the Fortunes” and 

“Follow the Settlements” 

Presentation given at the 2011 Cologne 

R&Q / Global Re Run-Off Rendez-Vous

Slide 2 

Has the world changed since WASA versus Lexington? 

Indeed it has… 

� William and Kate are soon going to marry 

� The ozone hole is going to heal (rather than to expand) by the middle of 

this century 

� ARIAS Europe has moved its seat to Hamburg 

� The Arabian World has removed some dictators from office 

� The German government has removed the only star in boring German 

politics from his payroll 

� The American government has waited for being asked by the World before 

exercising their legal rights as the world„s policemen 

� …

stolen from 

Dirk Meissner 

Der letzte 

Leistungsträger 

© 2004 

Wirtschaftsverlag 

Carl Ueberreuter 

Slide 3 

Never forget, we all have our problems. 

Just like yourself, you know, I am up to 

my neck in deep water!

Slide 4 

Outline of the presentation 

� “Follow the Fortunes” and “Follow the Settlements” in 

Reinsurance Contracts 

� Wasa v. Lexington and its impact on Continental Europe

Slide 5 

Gliederung 



– Common Law v. Statutory Law Jurisdiction 

– German (Re-)Insurance Contract Law as the showcase for a statutory 

law Jurisdiction 

– System of the Law of Contract in German statutory law 

– „Customs of the Trade“ (§ 346 HGB) „biasing“ the German reinsurance 

contract 

– „International Customs of the Reinsurance Trade“ ? 

– German Customs of the Reinsurance Trade put into the international 

(common law v. statutory law) perspective 

– „Customs of the Trade“ v. Scope of the Reinsurance Contract 

� Wasa v. Lexington and its impact on Continental Europe

Slide 6 

“Follow the Fortunes” & “Follow the Settlements” in 

R/I Contracts 

Common Law v. Statutory Law Jurisdictions 

� the obligation assumed by one party to a contract to follow the other party 

in its fortunes or in as much as that settles his obligations in lieu of a third 

party are specific contractual obligations common for reinsurance contracts 

� even though reinsurance contracts very often involve parties of differing 

nationality, no „international“ reinsurance contract law can be referred to 

as governing these contracts – as an almost general rule contract law is 

the law of a state 

� in as much as a contract does not specify the applicable contract law, the 

(national) rules on the conflict of laws define, which law to apply 

� Common law jurisdictions (law set by legal precedent) such as the Anglo- 

American and statutory law jurisdictions such as the Continental European 

both claim leadership in this field of (contract) law

Slide 7 


R/I Contracts 

German (Re-)Insurance Contract Law as the showcase for a 

statutory law Jurisdiction Jurisdiction 

� is there a German Reinsurance Contract Law ? 

� German law of contract is strongly governed by the principle that the 

parties to a contract shall decide if and in what form to conclude it and 

what shall be its content („Privatautonomie“) 

� this general rule is restricted only by a very limited set of manadatory 

rules of law 

� these rules will most probably be codified and may claim to be expression 

of public policy („ordre public“)

Slide 8 


R/I Contracts 

System of the Law of Contract in German statutory law 

� to the extent that such mandatory rules shall not be breached the parties„ 

intentions in concluding their contract shall primarily govern their 

relationship 

� customs of the specific trade (§ 346 HGB) or non-mandatory („dispositive“) 

rules applicable to the specific type of contract shall be used to interpret 

the contract terms or to fill in gaps 

– according to the prevailing legal opinion a number of customary terms 

shall be implied to a reinsurance contract 

– no German statute has – however – been stipulated to specifically 

govern a reinsurance contract (reinsurance contracts are not governed 

by insurance contract law (§ 209 VVG)) 

� thus general law of contract as provided by the BGB will govern the 

contracts – unless contrary to the parties agreement and intentions

Slide 9 


R/I Contracts 

„Customs of the Trade“ „biasing“ the German reinsurance contract 

� according to German statutory law, the parties to a commercial transaction 

shall abide to the custom and usage of their trade (§ 346 HGB) 

� customs of a specific trade – in reinsurance trade „reinsurance custom“ – 

supplement the terms of a contract – are implied to such contract – and take 

precedence over dispositive codified law 

� custom is based on a uniform, consistent and voluntary usage by those 

acting in a trade: its application and scope are defined by that common 

usage 

� custom applies like a norm (normatively) independent from the parties‟ 

intentions or even knowledge as to its existence 

� custom can be deviated from – it can also be waived – but such deviation 

should be the exemption rather than the rule; thus unless the parties 

specifically agree not to apply such custom or agree on terms contrary to 

such custom it shall govern their contract

Slide 10 


R/I Contracts 


� according to German prevailing – if not general – opinion the following 

reinsurance custom form the backbone of any reinsurance contract subject 

to German contract law: 

– the cedent‟s right and duty to manage the business which is the subject 

matter of the reinsurance contract (“Geschäftsführungsrecht and –pflicht”) 

– the reinsurer‟s duties to follow the reinsured in those decsions taken in 

course of exercising his abovementioned duty (follow the settlements / 

“Folgepflicht”) and to carry the burden of any obligation arising to the 

cedent without his contribution in course of exercising that duty (follow the 

fortunes / “Schicksalsteilung”) 

� other reinsurance custom is also accepted and adhered to in German 

reinsurance contract law which is not relevant for this presentation 

(e.g. reinsured‟s duty to hold a net retention; broker as agent of reinsured)

Slide 11 


R/I Contracts 


� thus, 

– in a reinsurance contract governed by German contract law, 

– to the extent that the terms of that contract cover the relevant business 

and against the relevant (insured) perils in the relevant original policy 

term and reinsurance contract liability term 

– unless the parties to such contract specifically agree to waive such 

custom or to alter its scope 

� the reinsured is entitled and obliged to manage the business covered 

applying the diligence he applies in his own matters („diligentia quam in 

suis“) and 

� the reinsurer is obliged to follow the reinsured„s decisions taken in course of 

managing the business and to pay as his reinsured may be obliged to pay 

independantly from his intention(s) by virtue of having been the risk carrier 

in the original business covered

Slide 12 


R/I Contracts 

„International Customs of the Reinsurance Trade“ ? 

� the custom of an international trade may be acceptable as applicable 

under German law – and reinsurance custom is widely accepted as 

international custom 

� however, local custom shall prevail even if applied to an international trade 

if and as long as the relevant local law shall be applied to the contract 

� thus, to the extent that the parties to an international reinsurance contract 

have agreed to application of German law, German custom shall also be 

applicable… 

� …even if on an international level a common and uniform approach to the 

relevant custom cannot be ascertained

Slide 13 


R/I Contracts 

German Customs of the Reinsurance Trade put into the 

international (common law v. statutory law) perspective 

Reinsurance Custom 

(Rückversicherungsbrauch ) 

BGB statutory law jurisdictions 

(e.g. Germany, Switzerland, Austria) 

Code Napoléon statutory law 

Jurisdictions (e.g. France) 

European Common Law jurisdictions 

(e.g. England) 

Overseas Common Law jurisdictions 

(e.g. member states of the US) 

Cedant's 

Right to Manage the 

Business Covered 

Cedant's 

Duty to Manage the 

Business Covered 

Reinsurer's 

Duty to 

Follow the Fortunes 

Reinsurer's 

Duty to 

Follow the Settlements 

Geschäftsführungsrecht Geschäftsführungspflicht Folgepflicht Schicksalsteilung 

local custom local custom local custom local custom 

probably 

local custom 

probably 

local custom 

n/a n/a 

n/a n/a 

local custom local custom 

incorporation by clear 

language required 

local custom 

in some states 

incorporation by clear 

language required 

local custom

Slide 14 


R/I Contracts 

„Customs of the Trade“ v. Scope of the Reinsurance Contract 

� most common – though often unintentional – way of limiting the impact of 

custom is by defining the scope of reinsurance cover constituing agreement 

on terms contrary to such custom 

� subject matter may be 

– the reinsured risks (e.g. risks attaching during a specified term) 

– the reinsured peril (e.g. losses arising from certain named perils only) 

– the reinsured loss (e.g. losses occuring during a specified term) 

… deviating from or limiting as compared to the original coverage provided 

� such definition may be „positive“ or „negative“ (i.e. by excluding certain 

risks, perils or losses) 

� it may also be introduced in case of facultative reinsurance

Slide 15 

Gliederung 



� Wasa v. Lexington and its impact on Continental Europe 

– facts of the case 

– implied terms of the reinsurance contract (under English law) 

– scope of reinsurance coverage provided 

– implied terms of the reinsurance contract (under German law) 

– how will the Courts (or Tribunals of Arbitrators) decide ? 

– has the reinsurance world, from the German legal perspective, 

changed since Wasa v. Lexington ?

Slide 16 

Wasa v. Lexington and its impact on Continental 

Europe 

facts of the case 

� Wasa (and AGF) reinsuring Lexington for 2.5% each xs a 250„ US$ „per 

occurance“ deductible of a DIC Property Damage insurance policy provided 

by Lexington to ALCOA for the period 01.07.1977 – 01.07.1980 

� „Contributing Facultative reinsurance“ covering „All Risks of Physical Loss 

or Damage … &/or as original“, „Full R/I Clause“, „Follow the Settlements 

Clause“, reinsurance contract governed by English law 

� proportinal reinsurance „warranted same gross rate, terms and conditions 

as … original“ 

� insurance formalized on Lexington„s „Special Floater Form“ providing 

coverage for the policy„s three year term limited to US$ 20„„ any one 

occurance, „occurance“ being defined as „any one loss(es), disaster(s) or 

casualty(ies) arising out of one event or common cause“ 

� waste related contamination to (58) ALCOA sites over a period commencing 

in the early 1940„s and continuing well into the 1980„s (at least 1984)

Slide 17 


Europe 

facts of the case (continued) 

� 04.05.2000 Washington Supreme Court ruling: 

– original insuring clause shall cover any physical loss or damage 

„manifesting“ itself during the time a DIC policy was in effect 

– including pollution damage starting (occuring) before policy inception 

– involving – in the aggregate – potential claims of US$ 180„„ 

– Wasa and AGF do not submit that this ruling was perverse or wrong 

under the law applied to the original policy (Pennsylvania) 

� ALCOA and Lexington settling the case for US$ 103„„ (common ground 

of the parties that this was to be considered an honest and businesslike 

settlement) 

� proportional share of loss claimed under facultative reinsurance after 

deduction of US$ 250„

Slide 18 


Europe 

implied terms of the reinsurance contract (under English law) 

� English law does not envisage 

– neither the cedent‟s right and duty to manage the business 

– nor the reinsurer‟s duties to follow the reinsured in those decsions taken 

in course of exercising his abovementioned duty (follow the settlements) 

or to carry the burden of any obligation arising to the cedent without his 

contribution in course of exercising that duty (follow the fortunes) 

an implied term of a reinsurance contract 

� however, the parties are entitled to incorporate such provisions into their 

contract which make it subject to such terms along a very similar line as 

considered customary in other major jurisdictions 

� generally speaking, clear and unambiguous language of the contract is 

required to prove that intention of the parties

Slide 19 


Europe 

scope of reinsurance coverage provided 

� the reinsurance contract was subject to „full reinsurance“, thus to „follow the 

settlements“ and possibly even covering the reinsured „back to back“ 

� the reinsurance contract incorporates the original scope of coverage, 

including the policy term and its insuring clause 

� the reinsurance contract is governed by English law, which gives rise to the 

assumption that – inasmuch as the interpretation of original policy terms is 

concerned – the law applicable to the insurance contract has to be taken into 

consideration 

� however, given the importance of the term and the scope of the reinsurance, 

these – in English law – cannot be changed from „losses occuring during 

01.07.1977 through 01.07.1980“ to „losses manifesting itself, but occuring at 

any time befrore, during or after 01.07.1977 through 01.07.1980“

Slide 20 


Europe 

implied terms of the reinsurance contract (under German law) 

� in a reinsurance contract governed by German contract law, 

– the reinsured is entitled and obliged to manage the business covered 

applying the diligence he applies in his own matters („diligentia quam 

in suis“) and 

– the reinsurer is obliged to follow the reinsured„s decisions taken in 

course of managing the business and to pay as his reinsured may be 

obliged to pay independantly from his intention(s) by virtue of having 

been the risk carrier in the original business covered… 

� …unless these terms implied by local custom are waived by the parties or 

the parties specifically agree to alter its scope 

� …but only to the extent that the terms of that contract cover the relevant 

business and against the relevant (insured) perils in the relevant original 

policy term and reinsurance contract liability term; 

defining the scope of reinsurance cover constituing agreement on terms 

contrary to such custom is the most common – though often unintentional 

– way of limiting the impact of custom

Slide 21 

Wasa v. Lexington and its impact on 

Continental Europe 

how will the Courts (or Tribunals of Arbitrators) decide? 

� who is to know ? 

� however, according to almost unanimous legal opinion in Germany, neither 

the duty to follow the settlements, nor that to follow the fortunes, shall oblige 

the reinsurer to pay a claim which is outside of the reinsurance coverage 

provided 

� the formula „All Risks of Physical Loss or Damage … &/or as original, 36 

months at date 1.1.77“ will incorporate the original insuring clause including 

the original limit and loss occurance definition into the reinsurance contract 

� this may limit the effect of the customs of the trade just as it was intended to 

be the starting point for their application 

� inasmuch as the terms of the reinsurance contract limit the scope of 

coverage to losses occuring during the contract term, the reinsurer is not 

covered against losses manifesting itself during the term but occuring prior to 

or after that term

Slide 22 

Wasa v. Lexington and its impact on 

Continental Europe 

has the reinsurance world, from the German legal perspective, 

changed since Wasa v. Lexington ? 

� no one ever questioned the opinion that even the bloodiest nuisance if 

binding on the reinsured will oblige the reinsurer to pay „following the 

reinsured„s fortunes“ 

� neither Wasa nor AGF and in turn neither of the Courts called in to judge 

ever questioned the commercial correctness of the settlement achieved by 

Lexington 

� however, the English decision may imply a deeper questioning and 

analyzing of the reinsurance cover provided – to what extent may contract 

terms have a broadening as well as limiting effect on the coverage provided

Slide 23 

Thank you for your attention ! 

please visit our website: 

www.arias-europe.org 

Dr. Andreas Schwepcke 

Managing Director and Member of the Board 

ARIAS Europe e. V., Hamburg 

Starnberg Branch 

Wilhelmshöhenstr. 11a 

82319 Starnberg, Germany 

Phone +49 8151 12644 

fax +49 8151 9713335 

andreas.schwepcke@arias-europe.org

“Follow the Fortunes” and “Follow the Settlements”

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