The two previous lessons said what must be ceded and which treaty year answers. Neither says whether the reinsurer must pay what the cedant has settled. The question is not academic: on a treaty the reinsurer never meets the insured, does not run the adjustment, does not pick the lawyer, and learns the amount when it is billed. Three clauses share this ground, and they form a ladder: follow the fortunes, where the reinsurer is bound by the cedant's decision; cooperation, where it is informed and consulted; control, where it takes the decision. Knowing which one a treaty carries, and what happens when it carries two, decides the fate of every large loss.
The follow clause, which London practice splits into follow the fortunes and follow the settlements, obliges the reinsurer to share the cedant's fate on the risks covered. It accepts the decisions and settlements made in good faith and in a reasonable manner, without reopening the merits of each file. That community of fate is the logical counterpart of a relationship where claims handling is left to the party in contact with the insured. Without it, reinsurance would lose most of its fluidity: the reinsurer could contest settlements indefinitely, and every loss would turn into a negotiation. What the clause buys is therefore not extra cover, it is speed of recovery.
The follow clause has limits, and that is where the disputes sit. The reinsurer is bound to follow only settlements that genuinely fall within the treaty's cover, made without manifest fault or collusion. The boundary between a reasonable settlement and a liberality the reinsurer should not have to fund feeds an abundant body of case law, and it is hard to draw for a structural reason: above its attachment the cedant has nothing left to lose. It can settle quickly and generously, to preserve a commercial relationship, with somebody else's money. Follow the fortunes taken alone therefore leaves the payer with no grip on the decision that binds it.
The claims control clause answers that asymmetry by reversing the hand. Above an agreed threshold the reinsurer appoints the adjuster, runs the defense, and its consent conditions any settlement. The cedant remains the sole debtor towards its insured, but it loses control over how the file is resolved. The mechanism restores the interest of the party that pays, and that is its entire justification. Its counterpart is heavy and it is not financial: control exercised clumsily can cost the cedant its client relationship, and exposes it to the charge of having abandoned the handling of a file for which it remains legally answerable to the insured and to its regulator.
Here is the technical point that makes this lesson, and it appears in neither clause taken on its own. The follow clause says the reinsurer follows; the control clause says it decides. A treaty that carries both contradicts itself, and nothing in the contract says which prevails. The contradiction stays invisible for as long as the two parties agree on the amount, which is to say for years. It surfaces at the first loss where they do not, and it is then the loss that arbitrates, in the circumstances least favorable to calm arbitration. Rereading a wording to check that these two clauses do not coexist without a hierarchy is peacetime work.
Between follow and control, the cooperation clause is the usual compromise. It requires the cedant to notify without delay any loss above a threshold, to pass on the documents and to consult the reinsurer before any material settlement, without surrendering the decision: the cedant must listen, not obey. What it solves is late notification, which deprives the reinsurer of any chance to reserve properly and to adjust its own retrocession. Its sensitive point is the sanction, and it is a formidable one. Depending on the drafting, failure to cooperate brings outright forfeiture of the right to indemnity, or only compensation for the prejudice that failure caused. The first turns an administrative oversight into a clean loss.
All of this plays out in the wording, not in the slip, which fixed only the economics of the placement. The disputes arising from the attacks of September 11, 2001 showed it at the highest possible price: the question was whether there had been one event or two, the answer was worth up to 3.5 billion dollars, and several policies and retrocessions had no signed wording at all. The courts had to reconstruct the parties' intention from drafts exchanged between them. The British Financial Services Authority imposed in 2005 the discipline known as contract certainty, with a target of 85 percent of contracts complete at inception. The lesson fits in one sentence: a wording is not drafted at the loss, it is negotiated when nobody yet has an interest in reading it one way.
A facultative treaty on an energy risk, written in 2026, carries both a follow clause and a claims control clause above 3 million dollars, with no hierarchy between them. The cedant retains an attachment of 3 million. It values a business interruption loss at 11 million and is about to settle. The reinsurer invokes its control clause, appoints its own adjuster and challenges the indemnity period adopted; the loss is finally agreed at 6.8 million. Who bears what, and what did that clause actually cost each party?
The split reads in two steps. On the initial valuation of 11 million the cedant would have kept its 3 million attachment and recovered 8 million. On the agreed valuation of 6.8 million it keeps the same 3 million, unchanged because they sit below the attachment point, and now recovers only 3.8 million. The reinsurer therefore saves 4.2 million and the cedant loses nothing in cash on this file: its attachment did not move. That is the first thing to see, and it is counter-intuitive. Claims control does not shift the burden onto the cedant, it reduces the total settlement, so it costs only the reinsurer that exercises it and the insured that receives less. What the cedant loses lies elsewhere, and appears on no technical account: it loses the client's renewal the following year. An insured indemnified for 6.8 million when its own insurer had acknowledged 11 does not renew, and it does not know the decision did not come from its insurer. The cedant has therefore funded a 4.2 million gain for its reinsurer with a commercial asset that belonged to it alone. That leaves the contradiction in the wording, and it is the real fault in this file. The two clauses coexist with no hierarchy: the follow clause bound the reinsurer to follow a good faith settlement of 11 million, the control clause gave it the decision above 3 million. Both readings are defensible, neither prevails, and had the cedant paid the 11 million before the reinsurer stepped in, the dispute would have gone to an arbitral tribunal over the 4.2 million. This loss arbitrated a question that should have been settled at drafting.
- 01Three clauses form a ladder: follow, where the reinsurer is bound by the cedant's decision, cooperation, where it is informed and consulted, control, where it decides.
- 02The follow clause does not buy extra cover, it buys speed of recovery, by keeping every loss from turning into a negotiation.
- 03Above its attachment the cedant has nothing left to lose: that asymmetry of interest is what the control clause exists to correct.
- 04A treaty carrying both follow and control with no hierarchy contradicts itself, and the contradiction stays invisible until the first loss on which the parties no longer agree.
- 05Everything turns on the sanction attached to cooperation: forfeiture turns an administrative oversight into a clean loss, a proportionate sanction repairs only the prejudice caused.
- 06The September 11, 2001 disputes, where 3.5 billion dollars turned on the number of events, led the FSA to impose contract certainty in 2005, with 85 percent of contracts complete at inception.