A concept inherent in any reinsurance relationship which, when expressed in an agreement, generally runs to a statement that the reinsurer "shall follow the fortunes of the ceding company in all matters falling under this Agreement" or shall do so "...in all respects as if being a party to the insurance," or similar language. Expressed or not, the concept speaks to a relationship under which the reinsured's duty - to treat reinsured policy rights and obligations as if there were no reinsurance - is extended into a right. This right is not open ended: it cannot carry a reinsurer outside its agreement, neither is it fixed. Rather, it rests on mutual trust within the circumstances of each case. Accordingly, some reinsurers avoid "following-the-fortunes" clauses in their agreements, while those in use are normally found in pro rata treaties where the sharing nature of cessions makes proper implementation reasonably evident and self-controlling.
Historically, the "follow-the-fortunes" clause was designed to deal with "errors and omissions," particularly in the case of inadvertent omission by the ceding company of a specific risk on a bordereau, intending to permit the ceding company to include the risk on a bordereau upon discovery of the oversight with retroactive reinsurance. However, the courts have held that under the "follow-the-fortunes" language of a reinsurance treaty, the reinsurer adopts the language of the primary policy, and thus a third-party creditor of the primary insurer has a right of action against the reinsurer under a reinsurance contract. Such a holding is an exception to the general rule of law applicable to reinsurance agreements that such agreements operate solely between the reinsured and the reinsurer and create no privity between the rein-surer and any third party, and afford no right of action by any third party against the reinsurer on the reinsurance agreement. The historical objective of the clause can be achieved by inserting an "errors and omissions" clause in any reinsurance agreement which is not fully automatic. Neither a "follow-the-fortunes" nor "errors and omissions" clause is necessary in an automatic reinsurance agreement