Follow the fortune(s)

Insurance is a contract upon speculation. The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only; the underwriter trusts to his representation, and proceeds upon confidence that he does not keep back any circumstance in his knowledge, to mislead the underwriter into a belief that the circumstance does not exist, and to induce him to estimate the risque, as if it did not exist.

Lord Mansfield in Carter v Boehm

Lord Mansfield, also known as the Father of Insurance Law, is quoted above in the landmark case Carter v Boehm in which he established the duty of utmost good faith or?uberrimae fidei?in insurance contracts. The case was as follows: Carter was the Governor of Fort Marlborough (now Bengkulu, Sumatra), built by the British East India Company. Carter took out an insurance policy with Boehm against the fort being taken by a foreign enemy. A witness, Captain Tryon, testified that Carter was aware that the fort was built to resist attacks from natives but would be unable to repel European enemies, and he knew the French were likely to attack. The French successfully attacked, but Boehm refused to honor the indemnifier Carter, who promptly sued. Lord Mansfield held that Mr Carter, as the proposer owed a duty of utmost good faith (uberrimae fidei) to the insurer, he was required to disclose all facts material to the risk.[1]

Duty of utmost good faith. Such a noble principle. The very basic core of reinsurance (and insurance) dealings. Actually, insurance contracts with the uberrimae fidei principle are of a higher standard than general contract law which does not imply the utmost good faith. I mean, general contract law does not advocate bad faith, but insurance contract law has higher expectations. When you think about it, general contract law gives much more freedom in giving statements in contrary to the insurance law which equates silence with false statements.

Then we have another essential principle of reinsurance – the follow the fortune doctrine. Let's look at one typical example:

The Reinsurer’s liability under this Agreement shall be subject in all respects to the same risks, terms, rates, conditions, interpretations, assessments, waivers, and to the same modifications, alterations, terminations and recaptures, as the respective Business Reinsured to which liability under this Agreement attaches, the true intent of this Agreement being that the Reinsurer shall, subject to the terms, conditions and limits of this Agreement, follow the fortunes of the Ceding Company under the Business Reinsured, and the Reinsurer shall be bound, without limitation, by all payments and settlements under the Business Reinsured.

Of course, there are many other clauses that basically allow the reinsurer to take over (Claims Control Clause) etc. to not go into the details. But then again, does the Cedent really have the moral option to include the follow the fortune clause if it retains nothing i.e. cedes 100% of the risk to the reinsurer? This a question to discuss, for sure.

But, let's not go into details too much, as the debate is quite a lengthy one.

From a wider perspective, one thing remains key, one thing without which the RI world would collapse. Trust. When you come to think about it, reinsurance is basically a trust chain, to use the blockchain terminology (good use case perhaps for the blockchain reinsurance combo, but then again, this is another topic).

Reinsurance is premised upon a fundamental quid pro quo: as reinsurers are deprived of some rights by doctrines such as ‘‘follow the fortunes,’’ they are to get other rights in return through doctrines such as the duty of utmost good faith. Here is how it works: When a reinsurer agrees to reinsure part of a risk, that reinsurer is typically deprived of any significant control over claims management, and therefore the reinsurer sacrifices the ability to protect its money on the risk. However, in return, the reinsurer receives the reciprocal protections and legal guarantees that the reinsured will actively protect the risk and the reinsurer’s interests as if they were the reinsured’s own. The symbiotic relationship between ‘‘follow the fortunes’’ and utmost good faith is discussed below. Essentially, the ‘‘follow the fortunes’’ doctrine exists to prevent a reinsurer from challenging the results or conclusions of the reinsured’s good faith claims handling. On the other hand, the duty of utmost good faith allows the reinsurer to challenge the claims handling process itself undertaken by the reinsured. If the process itself was not performed with the utmost good faith, then the reinsurer has a strong argument to deny coverage without directly challenging the reinsured’s conclusions.[2]

And is there a better way to illustrate this unique reinsurer/insurer relationship than an animal kingdom crazy legend? I don't think so. The legend goes like this – as noted by Herodotus, an ancient Greek historian, a bird called the Egyptian Plover has a very unique relationship with a fierce predator from the animal world – the crocodile. Supposedly, when the crocodile rests on the shore, it opens its mouth, and then the small cute Plover bird land inside the ferocious open jaws and basically cleans the teeth of the crocodile by eating the leftover meat stuck between the crocodile teeth. Quite a unique relationship, innit? Although no evidence exists, only writing by the beforementioned Herodotus (by the way known in history as the Father of Lies), this surreal legend serves our purpose here perfectly. The crocodile reinsurer lets the insurer bird to his domain and they both benefit from each other's actions – acting in true utmost good faith and indeed following their fortunes.

But, there's always a but, the crocodile has strong predatory instincts, what if it feels the tickling by the bird inside its jaw? What if he suddenly grips his firm jaw? What if? A key question...

Reinsurance haiku

Dwell you must not but

Act with utmost good faith and

Follow thy fortune

Although the above may seem a bit complicated and too?legalese, the whole premise is actually quite simple. Most of the law we know today spurs from the Roman legal system. And ancient Rome was also big on philosophy. It is considered by some that the basis of the Roman law system was actually founded by a certain ?branch“ of philosophy – stoicism (absorbed from ancient Greece by the Roman Empire) – a philosophical school that is gaining quite a lot of attention in recent years, myself included in the ?hype“. One of the principal ideas of the stoics is that virtue is the highest and only good. Only to live a virtuous life is worthwhile. The Stoics asserted that the universe existed according to a rational and purposeful order (a divine or eternal law), and that the means by which a rational being lived in accordance with this order was the natural law, which dictated actions that accorded with virtue. These theories became highly influential among Roman jurists, and played an important role in subsequent legal theory[3] .

Now, what is utmost good faith? What is the meaning behind following the fortune of someone? It all stems from virtue. Stoics defined 4 main virtue types: wisdom, justice, courage, and moderation. When you give your utmost good faith to someone, when you agree to follow their fortune (or misfortune) you are being courageous, you are wise, moderate certainly, and finally and perhaps most importantly, you are just.

There are other philosophical schools and other ways of thinking, but this just shows how all, and I mean all, can be easily deconstructed back to fairly simple terms.

Finally, and most importantly, it can all be linked to you. Thus, don't forget to exhibit utmost good faith in yourself, and please follow your own fortune because what else are you gonna do while you're here, follow someone else's?

First say to yourself what you would be; and then do what you have to do.

Epictetus

[1] Wikipedia

[2] https://www.batescarey.com/files/REI041913cm1.pdf

[3] https://www.newworldencyclopedia.org/entry/Natural_law