1025-00005 · Quorum Insurance Holdings · Case Assessment

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PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE ATTORNEY WORK PRODUCT

March 12, 2026

MEMORANDUM

From: Jeffrey Park, Senior Associate, Calderwood & Harkness LLP

To: Douglas Carmichael, Responsible Partner, Calderwood & Harkness LLP Rachel Sondergaard, General Counsel, Quorum Insurance Holdings Corp.

Re: Follow-the-Fortunes / Settlements Analysis — Pinnacle Atlantic's Challenge to the Veridian Financial Services E&O Cluster Settlement Under Article 11 of Treaty No. PA-QCS-2019-EXL-0044

Matter No.: 1025-00005

CONFIDENTIALITY LEGEND: This memorandum is protected by attorney-client privilege and the attorney work product doctrine. It is prepared in anticipation of litigation and/or arbitration and should not be disclosed outside Calderwood & Harkness LLP and authorized personnel of Quorum Insurance Holdings Corp. and Quorum Casualty & Surety Company without prior counsel approval. Inadvertent disclosure of this memorandum does not constitute a waiver of any applicable privilege or protection.

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I. Executive Summary

This memorandum analyzes the merits of the third ground for dispute advanced by Pinnacle Atlantic Reinsurance Ltd. ("Pinnacle Atlantic" or "PARL") in connection with the broader coverage dispute arising under Excess-of-Loss Reinsurance Treaty No. PA-QCS-2019-EXL-0044 (the "Treaty"). Specifically, Pinnacle Atlantic alleges that Quorum Casualty & Surety Company's ("QC&S") settlement of the Veridian Financial Services E&O claim cluster violated the follow-the-fortunes doctrine and the provisions of Article 11 of the Treaty, and that such violation vitiates Pinnacle Atlantic's obligation to reimburse the $8.7 million in ceded losses attributable to Treaty Year ("TY") 2023.

Pinnacle Atlantic's position, as articulated in the February 14, 2026 pre-suit demand letter from its counsel, Hargrove, Fitch & Calloway LLP ("HFC") (authored by Nathaniel R. Calloway III), asserts that QC&S settled three related professional liability claims against Veridian Financial Services Inc. ("Veridian") for a combined $34.5 million without conducting a meaningful litigation exposure analysis, at amounts that were inflated beyond what a reasonable assessment of liability and damages would justify, and with the purpose and effect of pushing TY 2023 aggregate losses above the $120 million retention threshold established under Article 6 of the Treaty. According to Pinnacle Atlantic, this alleged conduct fell below the "good faith and businesslike manner" standard set forth in Article 11, thereby relieving Pinnacle Atlantic of its reinsurance obligations with respect to the TY 2023 cession.

Bottom-line assessment: QC&S has strong defenses against this challenge. Under New York law, which governs the Treaty pursuant to Article 16, the follow-the-fortunes doctrine imposes a heavy burden on the reinsurer seeking to avoid its obligation to follow the cedent's settlement decisions. Pinnacle Atlantic must demonstrate that the settlement was the product of bad faith or gross negligence — a standard that is rarely met where, as here, the cedent retained substantial economic exposure on the settled claims. QC&S's net retained share of the Veridian settlement, after application of other reinsurance, was $26.1 million — approximately 75.7% of the total $34.5 million settlement amount. The ceded amount of $8.7 million represented only 25.2% of the total settlement and constituted the entirety of the TY 2023 cession. This economic alignment — where QC&S bore roughly three times the financial impact of the cession — provides powerful evidence that QC&S's settlement decisions were driven by the merits of the underlying claims rather than by reinsurance-recovery considerations.

Moreover, the settlement was reached through a process consistent with ordinary insurance industry practice. QC&S's internal claims committee reviewed all three Veridian claims prior to authorizing settlement parameters. Retained defense counsel evaluated the claims and provided litigation assessments. The parties participated in mediation prior to settlement. Settlement evaluation memoranda were prepared. The combined $34.5 million settlement for three interrelated E&O claims involving misrepresentation in structured-product sales was within the range of reasonable outcomes given the nature and magnitude of the claims.

Additionally, Pinnacle Atlantic's conduct undermines the sincerity of its bad-faith allegation. Pinnacle Atlantic paid all billing installments for the TY 2023 cession — including a final installment of $3.2 million paid on March 29, 2024 — without raising any contemporaneous objection regarding the Veridian settlement. The reservation-of-rights letter was not sent until December 12, 2025, over two years after the settlement and approximately 20 months after the final billing installment was paid. The pre-suit demand followed on February 14, 2026. This delay supports waiver and voluntary payment defenses that would independently preclude Pinnacle Atlantic's challenge.

Key risk identified: If Pinnacle Atlantic is able to develop evidence through discovery that QC&S was motivated primarily by the desire to trigger treaty coverage — rather than by the merits of the underlying claims — that evidence could undermine the follow-the-fortunes defense. In particular, if internal claims committee minutes, emails, or other communications among QC&S claims personnel reference the Treaty's aggregate retention threshold, the approaching TY 2023 aggregate loss levels, or the reinsurance-recovery implications of the Veridian settlement, Pinnacle Atlantic could deploy such references to argue that the settlement was engineered to breach the retention. It is therefore critical that all claims file materials, internal communications, and electronic records relating to the Veridian settlement be reviewed promptly and thoroughly, before QC&S responds to the pre-suit demand and before any discovery obligations attach.

II. Factual Background

A. The Veridian Financial Services E&O Claims

The underlying claims at issue arise under QC&S Professional Liability Policy No. PL-2021-15327, issued to Veridian Financial Services Inc. ("Veridian"), a Delaware corporation engaged in financial advisory and structured-product distribution services. The policy provided errors and omissions / professional liability coverage with policy limits and retentions consistent with QC&S's standard professional liability program for mid-market financial services firms.

Three related claims were asserted against Veridian by investors alleging misrepresentation in connection with the marketing, sale, and performance reporting of structured investment products. The claimants alleged that Veridian's financial advisors made material misstatements regarding the risk profiles, expected returns, and underlying asset compositions of certain structured products, and that investors suffered substantial losses as a result of their reliance on those misrepresentations. The claims were interrelated in that they arose from the same course of conduct by Veridian's advisory personnel, involved overlapping factual allegations, and were handled as a cluster by QC&S for claims-management purposes.

The three claims and their respective settlement amounts are as follows:

All three claims were settled simultaneously pursuant to a consolidated settlement agreement executed on September 8, 2023. The settlement was funded by QC&S under the terms of Policy No. PL-2021-15327, subject to applicable policy retentions payable by Veridian.

After accounting for recoveries from other reinsurance arrangements (facultative and other treaty placements not involving Pinnacle Atlantic), QC&S's net retained share of the $34.5 million settlement was $26.1 million. The remaining $8.4 million was recovered or recoverable from other reinsurers, and, as discussed below, $8.7 million was ceded to the Treaty as part of TY 2023 aggregate losses in excess of the $120 million retention.

B. The TY 2023 Aggregate Loss Context

The Treaty operates on an aggregate excess-of-loss basis, with treaty years running from July 1 through June 30 of the following year. Under Article 6, QC&S retains the first $120 million of aggregate net incurred losses for each treaty year, with losses in excess of the retention ceded to Pinnacle Atlantic subject to the Treaty's coverage limit.

For TY 2023 (July 1, 2023 through June 30, 2024), QC&S reported aggregate net incurred losses of $128,700,000. The ceded loss amount under the Treaty was therefore:

$128,700,000 (aggregate net incurred losses) − $120,000,000 (retention) = $8,700,000 (ceded to Pinnacle Atlantic)

The $8.7 million cession constituted the entirety of QC&S's TY 2023 recovery under the Treaty. Critically, the Veridian settlement — which closed on September 8, 2023, within TY 2023 — was the principal driver pushing TY 2023 aggregate losses above the $120 million retention threshold. Without the $34.5 million Veridian settlement (or more precisely, without QC&S's net retained share of that settlement flowing into the aggregate calculation), TY 2023 aggregate net incurred losses would have been significantly below the $120 million retention, and no cession to Pinnacle Atlantic would have occurred for TY 2023.

This fact forms the crux of Pinnacle Atlantic's contention. Pinnacle Atlantic asserts that QC&S recognized that TY 2023 aggregate losses were approaching but had not yet reached the $120 million retention, and that QC&S settled the Veridian claims at inflated amounts specifically to push aggregate losses above the retention and trigger reinsurance recoveries under the Treaty. According to Pinnacle Atlantic, the $8.7 million cession was the intended product of a deliberately inflated settlement, not the natural consequence of good-faith claims resolution.

C. Settlement Process — What the Claims File Shows

Based on our preliminary review of the available claims file materials and discussions with QC&S personnel, the following facts are established regarding the settlement process for the Veridian E&O cluster:

Claims handling oversight. The Veridian E&O cluster was managed by Diana Kessler-Hoff, Vice President, Claims & Reinsurance Recoveries, who oversaw the investigation, defense, and settlement of all three claims. Ms. Kessler-Hoff is a senior claims professional with over eighteen years of experience in professional liability claims handling and has served in her current role at QC&S since 2019.

Defense counsel retention. QC&S retained outside defense counsel to defend Veridian in the underlying litigation brought by the investor claimants. Defense counsel conducted discovery, reviewed the factual record, and prepared liability and damages assessments in connection with each of the three claims. Defense counsel's evaluations informed the claims committee's settlement authorization.

Claims committee review. QC&S's internal claims committee reviewed all three Veridian claims prior to authorizing the settlement. The claims committee — which typically includes senior claims personnel, underwriting representatives, and, for large settlements, representatives of the chief financial officer's office — conducted its review in accordance with QC&S's standard claims-authorization procedures. Settlement parameters were established by the claims committee based on defense counsel's assessments, the claimants' demand positions, and QC&S's own analysis of liability and damages exposure.

Settlement evaluation memoranda. Settlement evaluation memoranda were prepared for each of the three claims prior to the September 8, 2023 settlement date. These memoranda analyzed the liability exposure, the potential damages range, the costs of continued litigation, and the recommended settlement ranges for each claim. We have requested copies of these memoranda as part of our document review and expect to receive them within the coming days.

Mediation. Prior to the settlement, the parties participated in a mediation conducted by an experienced neutral mediator. The mediation was part of the ordinary dispute resolution process and preceded the final settlement negotiations. The involvement of a neutral mediator supports the arm's-length nature of the settlement process.

QC&S's retained economic interest. As noted above, QC&S retained $26.1 million of the $34.5 million settlement after accounting for other reinsurance — approximately 75.7% of the total settlement cost. This substantial retained interest provided a strong alignment of economic interest between QC&S and Pinnacle Atlantic. QC&S had every incentive to settle the claims for the lowest amount reasonably achievable, because each dollar of settlement cost was predominantly borne by QC&S.

Treaty retention and cession analysis. A critical question for our ongoing review is whether the claims file contains any contemporaneous analysis, discussion, or reference to the Treaty's aggregate retention, the approaching TY 2023 aggregate loss threshold, or the reinsurance-recovery implications of the Veridian settlement. If such analysis exists in the claims file, claims committee minutes, or internal communications, it will be a focal point of Pinnacle Atlantic's discovery efforts and could be used to support an inference of improper motive. Conversely, if the claims file is devoid of any such references, that absence would reinforce the conclusion that the settlement was made on the merits of the underlying claims without regard to reinsurance-recovery considerations.

D. Pinnacle Atlantic's Specific Allegations

As stated in the February 14, 2026 pre-suit demand letter from HFC (Nathaniel R. Calloway III), Pinnacle Atlantic's challenge to the Veridian settlement rests on the following specific allegations:

1. Lack of meaningful litigation exposure analysis. Pinnacle Atlantic alleges that QC&S settled the three Veridian claims without conducting a meaningful, independent litigation exposure analysis. HFC's letter asserts that the settlement amounts were determined without adequate consideration of Veridian's actual liability exposure, the strengths and weaknesses of the claimants' cases, or the likely outcomes at trial. Pinnacle Atlantic contends that a reasonably diligent cedent would have concluded that the claims warranted substantially lower settlement values.

2. Inflated settlement amounts. Pinnacle Atlantic alleges that the settlement amounts — $14.2 million (Claim A), $12.8 million (Claim B), and $7.5 million (Claim C) — were inflated beyond what a reasonable assessment of liability and damages would justify. HFC's letter states that Pinnacle Atlantic's own analysis, conducted with the assistance of an unidentified reinsurance consultant, concluded that the reasonable settlement range for the three claims combined was between $18 million and $24 million — substantially less than the $34.5 million actually paid.

3. Motivation to trigger treaty coverage. Pinnacle Atlantic alleges that QC&S settled the Veridian claims at inflated amounts specifically in order to push TY 2023 aggregate losses above the $120 million retention threshold and thereby trigger reinsurance recoveries under the Treaty. HFC's letter characterizes the settlement as a "manufactured cession" designed to shift losses from QC&S to Pinnacle Atlantic.

4. Failure to meet Article 11 standards. Drawing on the foregoing allegations, Pinnacle Atlantic contends that QC&S's conduct in settling the Veridian claims was not in the ordinary course of business, lacked good faith and businesslike conduct, and thereby vitiated the follow-the-fortunes protections afforded to QC&S under Article 11 of the Treaty. Pinnacle Atlantic asserts that it is relieved of its reinsurance obligations with respect to the $8.7 million TY 2023 cession.

We note that HFC's demand letter does not identify the specific evidence upon which Pinnacle Atlantic relies for these allegations, beyond the general assertion that the settlement amounts were excessive based on an unspecified consultant's analysis. No affidavits, expert reports, or documentary evidence have been provided to support the allegations.

E. Billing and Payment History

The TY 2023 ceded loss of $8.7 million was billed to Pinnacle Atlantic across multiple billing installments transmitted through Broadreach Intermediaries Inc. ("Broadreach"), the intermediary under the Treaty (Article 9). Jamie Castellano, Account Executive at Broadreach, handled the transmittal of billing statements and supporting documentation.

The billing installments included the standard supporting documentation — loss bordereau, aggregate loss computations, and claims summaries — consistent with Broadreach's usual practice under the Treaty. The final TY 2023 billing installment, in the amount of $3,200,000, was paid by Pinnacle Atlantic on March 29, 2024.

Critically, Pinnacle Atlantic paid all billing installments for TY 2023 without raising any contemporaneous objection regarding the Veridian settlement. At no point during the billing and payment process did Pinnacle Atlantic question the settlement amounts, request additional documentation, invoke audit or inspection rights, or reserve its rights with respect to the Veridian claims.

The first indication of a dispute came in Pinnacle Atlantic's reservation-of-rights letter dated December 12, 2025 — over two years after the September 8, 2023 settlement and approximately 20 months after the final billing installment was paid on March 29, 2024. The pre-suit demand from HFC followed on February 14, 2026, approximately 29 months after the settlement.

This chronology is significant for several reasons discussed in Sections IV.E and VII below, including the implications for waiver, voluntary payment, and the credibility of Pinnacle Atlantic's bad-faith allegation.

III. Treaty Article 11 — Text and Interpretation

A. Text of Article 11

Article 11 of the Treaty is captioned "Follow-the-Fortunes / Follow-the-Settlements" and sets forth the operative follow-the-fortunes provision governing the relationship between QC&S (as cedent) and Pinnacle Atlantic (as reinsurer) with respect to claims handling and settlement decisions. The material provisions of Article 11 are as follows:

Article 11 — Follow-the-Fortunes / Follow-the-Settlements

(a) The Reinsurer shall follow the fortunes and settlements of the Company with respect to all losses, claims, and loss adjustment expenses arising under the policies reinsured hereunder. All loss settlements made by the Company, whether by way of compromise, ex gratia payment, or otherwise, provided such settlements are made by the Company in good faith and in a businesslike manner, shall be unconditionally binding upon the Reinsurer, and the Reinsurer shall pay or allow, as the case may be, its proportion thereof in accordance with the terms and conditions of this Agreement.

(b) The Company shall have the sole and exclusive authority to investigate, adjust, compromise, settle, defend, or otherwise handle all claims, losses, and suits arising under the policies reinsured hereunder, and the Reinsurer shall not be called upon to assume any such authority.

(c) Notwithstanding the foregoing, the Reinsurer shall not be bound by any settlement that (i) is the product of bad faith on the part of the Company, or (ii) relates to a claim that does not fall within the scope of the business covered under this Agreement.

Several features of Article 11 warrant emphasis. First, the operative standard — "good faith and in a businesslike manner" — is the widely recognized formulation used in reinsurance treaties across the industry. It does not require the cedent to achieve optimal results, to act without error, or to consult with the reinsurer before settling. It requires only that the cedent act honestly and in accordance with ordinary industry practice. Second, the cedent's settlement authority is described as "sole and exclusive" (Article 11(b)), reinforcing that the reinsurer has no right to participate in or approve individual claim settlements. Third, the exceptions clause (Article 11(c)) is narrow: the reinsurer is excused only where the settlement is the product of bad faith or where the claim falls outside the scope of covered business. There is no exception for gross negligence in the treaty's text, though as discussed below, New York law recognizes gross negligence as an additional basis for excusing the reinsurer's follow-the-fortunes obligation.

Pinnacle Atlantic has not alleged that the Veridian claims fall outside the scope of the business covered by the Treaty. Its challenge is predicated entirely on the assertion that QC&S's settlement of the Veridian claims lacked good faith and was not conducted in a businesslike manner, thereby invoking the bad-faith exception of Article 11(c)(i).

B. Relationship to Other Treaty Provisions

Article 11 does not operate in isolation. Its application implicates several other Treaty provisions that bear on the follow-the-fortunes analysis:

Article 5 (Losses Incurred Definition). Article 5 defines the losses incurred under the Treaty that are subject to the aggregate excess-of-loss structure. Under Article 5, settlements constitute incurred losses once paid or established as reserves. The Veridian settlement, having been paid on September 8, 2023, constitutes an incurred loss under Article 5 and flows into the TY 2023 aggregate computation. If the settlement is valid under Article 11, it is properly included in the aggregate loss calculation; if it is not, the entire TY 2023 cession is called into question.

Article 6 (Retention and Cession Structure). Article 6 establishes the aggregate excess-of-loss structure, including the $120 million per-treaty-year retention. Because the Treaty operates on an aggregate basis, the follow-the-fortunes question does not involve a single large loss in isolation but rather the contribution of the Veridian settlement to the aggregate loss total. This structural feature means that Pinnacle Atlantic's challenge is directed not at whether the Veridian settlement itself exceeds the retention, but at whether the settlement was inflated in order to push the aggregate over the retention threshold — a more indirect and difficult theory to establish.

Article 9 (Intermediary Clause — Broadreach). Article 9 designates Broadreach Intermediaries Inc. as the intermediary through which billing and settlement transmittals are conducted. Jamie Castellano, Account Executive at Broadreach, handled the transmission of billing statements, loss bordereau, and claims data between QC&S and Pinnacle Atlantic. The information transmitted through Broadreach is relevant to the waiver and voluntary payment analysis discussed in Section VII below, as it bears on what Pinnacle Atlantic knew about the Veridian settlement when it paid the TY 2023 billing installments.

Article 16 (Governing Law). Article 16 provides that the Treaty shall be governed by and construed in accordance with the laws of the State of New York. This choice-of-law provision determines the legal framework for the follow-the-fortunes analysis, as discussed in Section IV.

C. Interpretation Under New York Law

Because the Treaty is governed by New York law under Article 16, the interpretation and application of Article 11 are determined by New York principles of contract interpretation and the body of New York case law addressing the follow-the-fortunes doctrine in the reinsurance context.

New York courts construe reinsurance treaties under ordinary principles of contract interpretation. The terms of the treaty are given their plain and ordinary meaning, and the treaty is read as a whole to give effect to all of its provisions. Where the treaty language is clear and unambiguous, the court enforces the contract as written. Where ambiguity exists, extrinsic evidence — including industry custom and practice — may be consulted to determine the parties' intent.

The follow-the-fortunes clause in Article 11 is a contractual manifestation of the broader common-law follow-the-fortunes doctrine that New York courts have recognized as an implicit feature of the reinsurance relationship. Even in the absence of an express follow-the-fortunes clause, New York courts have held that the doctrine arises from the nature of the reinsurance contract and the parties' reasonable expectations. See, e.g., Vireo Life Insurance v. Certain Underwriters at Sundial Indemnity Co., 96 N.Y.2d 583, 596 (2001) (recognizing the follow-the-fortunes doctrine as integral to the reinsurance relationship). The presence of an express clause in Article 11 reinforces and confirms the doctrine's application to this Treaty, and courts will enforce the clause in accordance with its terms.

IV. The Follow-the-Fortunes Doctrine Under New York Law

A. General Principles

The follow-the-fortunes doctrine is a foundational principle of reinsurance law. It requires the reinsurer to indemnify the cedent for good-faith claims payments, even if the reinsurer disagrees with the cedent's coverage determination, claims-handling approach, or settlement amount. The doctrine rests on the recognition that the cedent — not the reinsurer — is in the best position to evaluate and manage the underlying claims, and that the reinsurer's obligation to follow the cedent's fortunes is an essential feature of the reinsurance relationship.

The doctrine serves two principal purposes. First, it promotes finality and efficiency in the reinsurance relationship by preventing the reinsurer from second-guessing every claims decision made by the cedent. If reinsurers were free to challenge individual settlements based on hindsight disagreements about value, the reinsurance relationship would become unworkable. Cedents would be unable to manage claims with the flexibility and discretion necessary for effective claims administration, and the ultimate costs of resolving underlying claims would increase as cedents were forced to defend their settlement decisions on two fronts — against the underlying claimants and against their own reinsurers.

Second, the doctrine reflects the economic reality that the cedent, by retaining a portion of the risk, has a built-in incentive to manage claims in a cost-effective manner. The cedent's retained interest aligns its interests with those of the reinsurer, making it rational for the reinsurer to defer to the cedent's claims-handling judgment.

New York courts have recognized and enforced the follow-the-fortunes doctrine both as a contractual obligation (where an express clause is present, as here) and as an implied obligation in the reinsurance relationship. The doctrine has been applied consistently in the context of aggregate excess-of-loss treaties, quota share treaties, and specific excess-of-loss treaties, and it encompasses both "follow the fortunes" (which addresses coverage determinations) and "follow the settlements" (which addresses settlement amounts). See British Int'l Ins. Co. v. Seguros La Republica, S.A., 342 F.3d 78, 85 (2d Cir. 2003) (applying New York law and affirming application of follow-the-fortunes doctrine); Westvale Insurance v. Sterling Reach Life Insurance, No. 93 Civ. 2534, 1997 WL 138816, at 5–6 (S.D.N.Y. Mar. 26, 1997) (same); Greaves Specialty Insurance v. Ace Am. Reins. Co.*, 361 F.3d 134, 140–41 (2d Cir. 2004) (discussing the follow-the-settlements doctrine under New York law).

The Second Circuit has described the doctrine as reflecting the principle that "the business of the reinsurer is to share the risk of the cedent's insurance business, including the risks inherent in claims handling and settlement," and that "the reinsurer bargains for the cedent's judgment, not for perfection." British Int'l Ins. Co., 342 F.3d at 85.

B. The Bad Faith / Gross Negligence Exception

The follow-the-fortunes doctrine is not without limits. New York courts have recognized a narrow exception to the doctrine: the reinsurer need not follow the cedent's fortunes if the cedent acted in bad faith or with gross negligence in handling or settling the underlying claim. This exception preserves the reinsurer's ability to resist payment where the cedent has acted dishonestly or recklessly, while ensuring that the exception does not swallow the rule.

Several critical features of the exception bear emphasis:

Burden of proof on the reinsurer. The burden of proof rests squarely on the reinsurer — here, Pinnacle Atlantic — to establish that the cedent's settlement falls outside the protection of the follow-the-fortunes doctrine. The cedent does not bear the burden of proving good faith; rather, good faith is presumed, and the reinsurer must affirmatively overcome that presumption by adducing proof of bad faith or gross negligence. See Adriatic Specialty Insurance v. Dunmore Indemnity Co., 882 F. Supp. 1355, 1365 (S.D.N.Y. 1995) (placing the burden on the reinsurer); Vireo Life Insurance, 96 N.Y.2d at 596. In this case, Pinnacle Atlantic bears the burden of demonstrating that QC&S's settlement of the Veridian claims was the product of bad faith or gross negligence.

Definition of bad faith. Bad faith in the follow-the-fortunes context means that the cedent acted with dishonest purpose, ill will, or a conscious disregard of the reinsurer's interests. It requires more than a showing that the cedent made an error of judgment, failed to obtain the best possible settlement, or reached a result with which the reinsurer disagrees. The reinsurer must demonstrate that the cedent's conduct was motivated by improper considerations — such as a deliberate intent to harm the reinsurer or to obtain reinsurance recoveries to which the cedent was not entitled — or that the cedent acted with a level of dishonesty or improper motive that renders the settlement unconscionable. See Vireo Life Insurance, 96 N.Y.2d at 596; In re Liquidation of Ridgeline Assurance, 16 N.Y.3d 536, 545 (2011).

Definition of gross negligence. Gross negligence, in the New York reinsurance context, requires conduct that evinces a reckless disregard for the rights of others — a failure to exercise even slight care in the handling and settlement of claims. Mere negligence — even a clear mistake — is insufficient. The cedent's conduct must be so far below the standard of ordinary care as to demonstrate a virtual indifference to the consequences of the settlement. See Coliseum Reins. Co. v. Granite Harbor Mutual Insurance, No. 96 Civ. 6271, 2000 WL 777935, at *4 (S.D.N.Y. June 15, 2000).

Narrowness of the exception. New York courts have consistently emphasized the narrowness of the bad faith / gross negligence exception. A cedent's settlement within a reasonable range of outcomes — even if the reinsurer would have settled for less — satisfies the good-faith and businesslike-manner standard. The doctrine does not require the cedent to be right; it requires only that the cedent act honestly and reasonably. As the Second Circuit has observed, "the threshold for establishing bad faith or gross negligence sufficient to overcome the follow-the-fortunes doctrine is a high one," and "courts have been reluctant to find that a cedent's settlement decisions were made in bad faith absent compelling evidence of dishonesty or improper motive." Greaves Specialty Insurance, 361 F.3d at 141; see also Dunmore Assurance v. Clearwater Ins. Co., 906 F.3d 12, 22 (2d Cir. 2018) (reaffirming that follow-the-fortunes protection is forfeited only by "egregious" conduct).

C. The "Businesslike Manner" Standard

The "businesslike manner" component of the Article 11 standard requires the cedent to investigate, evaluate, and settle claims using procedures consistent with ordinary insurance industry practice. This standard is process-oriented: it focuses on how the cedent handled the claim, not on whether the cedent achieved the optimal result.

The standard does not require the cedent to achieve the best possible settlement, to exhaust every avenue of investigation, or to consult with the reinsurer before settling. It requires that the cedent follow its ordinary claims-handling procedures, exercise reasonable judgment, and base its settlement decisions on a rational assessment of the underlying claim.

Factors that courts have considered in assessing whether a settlement was made in a businesslike manner include:

• Whether the cedent investigated the claim through retained defense counsel or claims adjusters

• Whether the cedent's claims committee or other internal review body authorized the settlement

• Whether settlement evaluation memoranda or similar analyses were prepared

• Whether the cedent participated in mediation or other structured settlement discussions before reaching agreement

• Whether the settlement was the product of arm's-length negotiation with adversarial claimants and their counsel

• Whether the settlement amount fell within a reasonable range of outcomes given the nature of the claims, the potential for adverse verdicts, and the costs of continued litigation

All of these factors support QC&S's position with respect to the Veridian settlement, as discussed in detail in Section V.A below.

Importantly, the businesslike-manner standard does not require the cedent to inform the reinsurer before settling or to obtain the reinsurer's approval. Article 11(b) of the Treaty expressly reserves sole and exclusive settlement authority to QC&S. The reinsurer's role is to follow the cedent's fortunes, not to supervise the cedent's claims-handling decisions.

D. Cedent's Retained Interest as Evidence of Good Faith

One of the most powerful indicators of good faith in the follow-the-fortunes analysis is the cedent's retention of significant economic exposure on the settled claim. Courts and commentators have consistently recognized that a cedent that bears a substantial share of the settlement cost has every incentive to settle for the lowest amount reasonably achievable, and that this alignment of economic interest between cedent and reinsurer is strong evidence that the settlement was made on the merits rather than for the purpose of generating reinsurance recoveries.

Here, QC&S retained $26.1 million — approximately 75.7% — of the total $34.5 million Veridian settlement after accounting for other reinsurance. Only $8.7 million, or approximately 25.2% of the total settlement, was ceded to Pinnacle Atlantic under the Treaty (and only because TY 2023 aggregate losses exceeded the $120 million retention). For every dollar of the Veridian settlement, QC&S bore approximately $0.76 of the cost, while Pinnacle Atlantic bore approximately $0.25 (with the remaining pennies attributable to recoveries from other reinsurers unrelated to the Treaty).

This ratio strongly undermines any inference that QC&S settled at inflated amounts to benefit from reinsurance recoveries. If QC&S had inflated the settlement by, say, $10 million — from a hypothetical "fair value" of $24.5 million to the actual $34.5 million, as Pinnacle Atlantic's unnamed consultant apparently suggests — QC&S would have borne approximately $7.6 million of the inflated amount while Pinnacle Atlantic would have borne only approximately $2.5 million. No rational economic actor would overpay $7.6 million to generate $2.5 million in additional reinsurance recoveries. The economics are decisively unfavorable to the theory of settlement inflation.

Courts have recognized this reasoning. See, e.g., Am. Ins. Co. v. N. Am. Co. for Prop. & Cas. Ins., No. 97 Civ. 3097, 2002 WL 31769417, at 6 (S.D.N.Y. Dec. 11, 2002) (crediting the cedent's retention of more than 70% of the settlement cost as strong evidence of good faith); Vireo Life Insurance*, 96 N.Y.2d at 596 (noting that the cedent's retained interest aligns the cedent's interests with those of the reinsurer).

E. Reinsurer's Knowledge and Acquiescence

Although not a formal element of the follow-the-fortunes analysis, the reinsurer's knowledge of the settlement and its conduct following that knowledge are relevant to the credibility and weight of its bad-faith allegation, and they bear independently on the waiver and voluntary payment defenses discussed in Section VII.

Pinnacle Atlantic paid all seven billing installments for TY 2023 cessions — including the final installment of $3.2 million paid on March 29, 2024 — without contemporaneous objection regarding the Veridian settlement. The billing transmittals from Broadreach included loss bordereau, aggregate loss computations, and claims summaries that, based on our preliminary understanding of Broadreach's standard practices, would have identified the Veridian settlement as a component of TY 2023 losses. Pinnacle Atlantic had the information necessary to evaluate the Veridian settlement and to raise concerns, yet it paid without comment.

Pinnacle Atlantic's reservation-of-rights letter was not sent until December 12, 2025 — approximately 26 months after the September 8, 2023 settlement and approximately 20 months after the final billing installment was paid on March 29, 2024. The pre-suit demand from HFC followed on February 14, 2026, approximately 29 months after the settlement. This extended period of silence, followed by payment without objection, followed by a further period of silence before the first indication of a dispute, undermines the urgency and sincerity of the bad-faith allegation.

While the passage of time alone may not constitute an estoppel or a definitive waiver under New York law — particularly where the reinsurer expressly reserves its rights — the practical effect of the delay is significant. If Pinnacle Atlantic genuinely believed that the Veridian settlement was the product of bad faith or gross negligence, one would expect Pinnacle Atlantic to have raised that concern promptly upon reviewing the billing transmittals that disclosed the settlement. The absence of any contemporaneous objection suggests either that Pinnacle Atlantic did not view the settlement as problematic at the time it paid, or that Pinnacle Atlantic has developed its bad-faith theory after the fact — perhaps in response to broader financial pressures or strategic considerations. Either inference favors QC&S.

The potential waiver argument is discussed in greater detail in Section VII.A below.

V. Application to the Veridian E&O Cluster Settlement

A. Was the Settlement Made in Good Faith and in a Businesslike Manner?

Applying the principles set forth in Section IV to the facts of the Veridian settlement, QC&S has strong grounds to establish that the settlement was made in good faith and in a businesslike manner within the meaning of Article 11.

Claims investigation. QC&S investigated all three Veridian claims through retained defense counsel in the underlying litigation. Defense counsel conducted discovery, reviewed the factual record underlying the investor claimants' allegations, and prepared liability and damages assessments for each of the three claims. The investigation was thorough and consistent with QC&S's ordinary claims-handling practices for professional liability claims of this magnitude.

Claims committee process. QC&S's internal claims committee reviewed all three Veridian claims prior to authorizing settlement. The claims committee process is a standard industry practice designed to ensure that large settlements are not authorized by a single individual but are instead reviewed and approved by a group of senior professionals with relevant expertise. The claims committee received defense counsel's evaluations, considered the claimants' demand positions, and established settlement parameters for each claim. The claims committee's authorization of the settlement reflects institutional oversight and deliberation — the antithesis of the reckless or bad-faith conduct that Pinnacle Atlantic alleges.

Settlement evaluation memoranda. Settlement evaluation memoranda were prepared for each of the three claims prior to the September 8, 2023 settlement date. These memoranda documented the analysis underlying the settlement recommendation, including the assessment of liability exposure, the potential damages range, the costs and risks of continued litigation, and the recommended settlement ranges. The preparation of such memoranda is a hallmark of good-faith, businesslike claims handling and demonstrates that the settlement was the product of deliberate analysis rather than arbitrary decision-making.

Mediation. The parties participated in mediation before the settlement was reached. Mediation is a widely used and accepted method of resolving insurance and professional liability disputes, and the fact that the settlement followed a mediated negotiation supports the conclusion that the settlement was the product of an arm's-length process involving adversarial parties with competing interests. The mediator's involvement provides an independent check on the reasonableness of the settlement amounts and undermines any suggestion that the settlement was unilaterally inflated by QC&S.

Settlement within reasonable range. The individual claim settlement amounts — $14.2 million (Claim A), $12.8 million (Claim B), and $7.5 million (Claim C) — were within the range of reasonable outcomes given the nature of the E&O allegations. The claims involved allegations of misrepresentation in structured-product sales — a type of professional liability claim that historically has generated substantial verdicts and settlements, particularly where multiple investor claimants are involved and the allegations implicate systemic misconduct by the insured. The potential for punitive or exemplary damages in some jurisdictions, the reputational consequences for Veridian of a public trial, and the costs of protracted litigation all supported resolution within the settlement ranges established by the claims committee. While Pinnacle Atlantic's unnamed consultant reportedly estimated a "reasonable" range of $18 million to $24 million for the combined settlement, that estimate — even if credited — does not demonstrate that a $34.5 million settlement was outside the range of reasonable outcomes. The range of reasonable settlements in complex E&O cases is inherently broad, and a difference of $10 million to $16 million between competing estimates does not establish bad faith or gross negligence. It establishes, at most, a difference of opinion — which is precisely the type of disagreement that the follow-the-fortunes doctrine is designed to resolve in favor of the cedent.

Conclusion. The totality of the evidence strongly supports the conclusion that QC&S's settlement of the Veridian E&O cluster satisfied the good-faith and businesslike-manner standard of Article 11. Each element of the claims-handling process — investigation by defense counsel, claims committee review and authorization, settlement evaluation memoranda, mediation, and arm's-length negotiation — is consistent with ordinary industry practice and reflects the type of careful, deliberative claims handling that the doctrine protects.

B. Was the Settlement Amount Inflated?

Pinnacle Atlantic's central factual contention is that the $34.5 million combined settlement was inflated beyond what the claims were worth. This contention must be evaluated both on its own terms and in the context of the follow-the-fortunes doctrine.

Arm's-length negotiation with adverse parties. The settlement was negotiated at arm's length with adversarial claimants represented by their own counsel. The claimants had every incentive to maximize their recoveries, and QC&S had every incentive to minimize its settlement exposure — particularly given that QC&S bore 75.7% of the cost. The involvement of a neutral mediator further supports the arm's-length character of the negotiations. An inflated settlement typically arises in situations where the cedent is indifferent to the settlement amount because it expects to recover the entire cost from its reinsurer; that dynamic is absent here, where QC&S retained the vast majority of the economic exposure.

Nature of the claims. The Veridian claims involved allegations of misrepresentation in structured-product sales to investor groups. Such claims are among the highest-exposure categories of financial services E&O liability. Structured products are complex instruments whose risks are often not well understood by retail or mid-market investors, and claims alleging that the financial advisor misrepresented the nature, risk, or performance of such products have generated substantial verdicts and settlements across the industry. The combined settlement of $34.5 million for three interrelated claims — involving multiple investor groups and allegations of systemic misrepresentation — is not facially unreasonable.

Pinnacle Atlantic's competing valuation. Pinnacle Atlantic's assertion that the reasonable settlement range was $18 million to $24 million rests on the analysis of an unidentified reinsurance consultant. We do not know the methodology, assumptions, or qualifications underlying this estimate. At this stage, the estimate is entitled to no weight. Even if Pinnacle Atlantic retains a qualified expert to opine on settlement value, a difference of opinion on value — even a substantial one — does not establish bad faith or gross negligence. The follow-the-fortunes doctrine is designed precisely to prevent reinsurers from substituting their own claims valuation for that of the cedent. If a cedent's settlement falls within the broad range of reasonable outcomes, the reinsurer must follow it — even if the reinsurer would have settled for less.

Expert testimony. To counter Pinnacle Atlantic's valuation challenge, QC&S should consider retaining a professional liability claims valuation expert to provide an independent assessment of the reasonableness of the $34.5 million settlement. An expert opinion confirming that the settlement fell within the range of reasonable outcomes would be a powerful response to Pinnacle Atlantic's inflated-settlement theory. Additionally, a reinsurance industry practices expert could testify to the standard of care in cedent settlement practices and the significance of the cedent's retained economic interest.

Defense counsel assessments. A critical element of the analysis will be whether QC&S's own defense counsel's liability and damages assessments support the settlement values. If defense counsel's pre-settlement evaluations estimated liability exposure in the range of or in excess of the actual settlement amounts, that evidence would strongly corroborate the reasonableness of the settlement. Conversely, if defense counsel's assessments suggest that the claims were worth substantially less than the settlement amounts, Pinnacle Atlantic could use that evidence to support its inflated-settlement theory. Review of the defense counsel evaluations and settlement memoranda is therefore a high priority.

C. Was the Settlement Motivated by a Desire to Trigger Treaty Coverage?

This is the most sensitive element of Pinnacle Atlantic's challenge, and the area of greatest risk for QC&S. Pinnacle Atlantic's core theory is that QC&S recognized that TY 2023 aggregate losses were approaching but had not yet reached the $120 million retention, and that QC&S deliberately settled the Veridian claims at inflated amounts to push aggregate losses above the retention and trigger the $8.7 million cession to Pinnacle Atlantic.

Several powerful counterarguments are available to QC&S:

Rational economic actor analysis. As discussed in Section IV.D, QC&S's net retained share of the settlement ($26.1 million) dwarfs the ceded amount ($8.7 million) by a ratio of approximately 3:1. No rational economic actor would overpay $3 to recover $1. The economic incentive structure decisively undermines the inference that QC&S inflated the settlement for the purpose of generating reinsurance recoveries. If QC&S had settled the Veridian claims at Pinnacle Atlantic's suggested range of $18 million to $24 million, QC&S's net retained share would have been lower, and QC&S would have saved more on a net basis than it could possibly have recovered from Pinnacle Atlantic. The theory of economically motivated inflation is self-defeating.

Ordinary-course claims handling. The claims committee review, settlement evaluation, and mediation all occurred in the ordinary course of QC&S's claims-handling procedures before the September 8, 2023 settlement date. There is no evidence — at least none identified in HFC's demand letter — that QC&S reverse-engineered the settlement amounts to match or exceed a specific aggregate loss threshold. The settlement was the product of a process that began with the filing of the underlying claims, continued through defense counsel investigation and claims committee review, and culminated in a mediated negotiation. This process timeline is inconsistent with the theory that the settlement was manufactured to trigger treaty coverage.

Aggregate context. The TY 2023 aggregate net incurred loss of $128.7 million included numerous claims beyond the Veridian cluster. The Veridian settlement, while significant, was one component of a broader loss portfolio. The $8.7 million marginal breach of the retention is a modest amount relative to the total aggregate — approximately 6.8% of the retention amount. If QC&S had been engineering a treaty breach, one would expect a more substantial cession rather than a marginal breach that could easily have been eroded by favorable development on other claims during the remainder of TY 2023.

Arm's-length adversarial process. The settlements were the product of arm's-length negotiations with adversarial claimants and their counsel. The claimants were not affiliated with QC&S, and the claimants' counsel had no interest in accommodating QC&S's purported desire to inflate the settlement. The mediation process provided an additional layer of independent oversight. The involvement of multiple adverse parties in the settlement negotiation is fundamentally inconsistent with a theory that the settlement amounts were unilaterally inflated by QC&S.

Risk factor — internal communications. The most significant risk to QC&S on this issue is the potential discovery of internal communications — emails, instant messages, claims committee minutes, or other documents — that reference the Treaty retention, TY 2023 aggregate loss levels, or reinsurance recovery implications in connection with the Veridian settlement evaluation. If, for example, an email from Diana Kessler-Hoff or another claims professional were to state something to the effect of "the Veridian settlement will push our TY 2023 aggregate above the $120 million retention" or "settling at $34.5 million will allow us to cede $8.7 million to Pinnacle Atlantic," Pinnacle Atlantic could use such a communication to argue that reinsurance-recovery considerations improperly influenced the settlement decision.

Such a communication would not necessarily be fatal to QC&S's position — a cedent is entitled to be aware of the reinsurance implications of its settlement decisions without that awareness converting a good-faith settlement into a bad-faith one. But a communication that suggested the settlement amount was driven by the desire to trigger reinsurance coverage, rather than by the merits of the underlying claims, could be damaging. It is therefore critical that all claims file materials, internal communications, and electronic records be reviewed promptly and thoroughly to identify any such documents and to assess their implications for QC&S's litigation strategy.

D. Allocation of Ceded Losses to TY 2023

The $8.7 million ceded to the Treaty under TY 2023 represents the marginal amount by which aggregate net incurred losses exceeded the $120 million retention. The allocation of the Veridian settlement to TY 2023 follows from the standard mechanics of the aggregate excess-of-loss treaty structure.

The settlement date of September 8, 2023 falls squarely within TY 2023 (July 1, 2023 through June 30, 2024). Under Article 5, the settlement constitutes a loss incurred during TY 2023 and is properly included in the aggregate loss computation for that treaty year. There is nothing improper or unusual about the timing of the settlement: the underlying claims matured during TY 2023, the claims-handling process (including investigation, claims committee review, and mediation) proceeded during TY 2023, and the settlement was reached during TY 2023.

Pinnacle Atlantic has not alleged that the settlement was artificially timed — i.e., that QC&S delayed or accelerated the settlement to ensure that it fell within a particular treaty year. Pinnacle Atlantic's challenge is directed solely at the settlement amounts, not at the timing of the settlement. The absence of a timing allegation further supports the conclusion that the settlement was made in the ordinary course.

The aggregate loss calculation under Articles 5 and 6 is mechanical: losses incurred during TY 2023 are aggregated, and the amount in excess of the $120 million retention is ceded to Pinnacle Atlantic. The Veridian settlement contributed to the aggregate, but the allocation to TY 2023 follows automatically from the settlement date and is not the product of any discretionary allocation decision by QC&S. There is no allocation dispute with respect to TY 2023 (as there is with respect to TY 2022 and the IBNR issue); the only question is whether the settlement amounts were valid under Article 11.

VI. Pinnacle Atlantic's Burden and Evidentiary Challenges

A. Burden of Proof on Pinnacle Atlantic

Under New York law, the reinsurer bears the burden of establishing that the cedent's settlement falls outside the protection of the follow-the-fortunes doctrine. This allocation of the burden is consistent with the doctrine's purpose: good faith is presumed, and the reinsurer must affirmatively overcome that presumption by proving bad faith or gross negligence.

The applicable standard of proof is a subject of some debate in the case law. Several courts have suggested that the reinsurer must prove bad faith by clear and convincing evidence, reflecting the heightened standard applicable to claims of fraud and dishonesty. See, e.g., Christiania Gen. Ins. Corp. v. Aldermere Assurance, 979 F.2d 268, 280 (2d Cir. 1992) (applying a heightened burden). Even under a preponderance-of-the-evidence standard, however, the burden is heavy because of the substantive requirements of the bad-faith and gross-negligence standards themselves. The reinsurer must demonstrate dishonest purpose, ill will, or reckless disregard — not merely that the cedent made a poor judgment or reached a result with which the reinsurer disagrees.

Mere disagreement with settlement amounts is insufficient as a matter of law. The follow-the-fortunes doctrine exists precisely because reasonable minds can differ on the appropriate settlement value of complex claims. If a cedent's settlement falls within the broad range of reasonable outcomes — even at the high end of that range — the reinsurer cannot establish bad faith simply by offering a competing (lower) valuation. Pinnacle Atlantic must affirmatively demonstrate that QC&S's settlement was driven by dishonest purpose, ill will, or a conscious disregard of Pinnacle Atlantic's interests — and that the settlement amounts were not merely high, but so far outside the range of reasonableness as to be explicable only by improper motive.

B. Evidentiary Challenges Facing Pinnacle Atlantic

Pinnacle Atlantic faces significant evidentiary challenges in sustaining its burden of proof on the follow-the-fortunes issue:

No contemporaneous objection. Pinnacle Atlantic did not object to the Veridian settlement at the time it was reported or at the time the TY 2023 billing installments were paid. The absence of contemporaneous objection suggests that Pinnacle Atlantic did not view the settlement as problematic when it had the opportunity to raise concerns, and that its current challenge is a product of hindsight reassessment.

QC&S's substantial retained interest. QC&S's retention of $26.1 million — 75.7% of the settlement — provides powerful evidence of good faith and undermines any inference that the settlement was inflated for the benefit of reinsurance recovery. Pinnacle Atlantic will need to explain why a cedent that bore three-quarters of the settlement cost would deliberately overpay on the claims.

Claims-handling process. The Veridian claims were investigated by defense counsel, reviewed by the claims committee, evaluated in settlement memoranda, and resolved through a mediated negotiation. This process is fully consistent with ordinary industry practice and satisfies the businesslike-manner standard. Pinnacle Atlantic will need to identify specific deficiencies in the process — not merely dispute the result — to overcome the inference of good faith.

Mediation. The involvement of a neutral mediator in the settlement process provides an independent check on the reasonableness of the outcome and undermines any suggestion that the settlement was unilaterally dictated by QC&S at inflated amounts.

discovery into internal communications — Pinnacle Atlantic's primary avenue. Pinnacle Atlantic will likely seek discovery into QC&S's claims files, internal communications, and claims committee minutes related to the Veridian settlement. This is the primary risk area for QC&S. If Pinnacle Atlantic can identify internal communications linking the settlement to treaty-recovery considerations, it could argue that the settlement was motivated by reinsurance recovery rather than by the merits of the underlying claims. Conversely, the absence of such communications would significantly strengthen QC&S's position.

Expert evidence. Pinnacle Atlantic may seek to engage an expert to opine that the settlement amounts were excessive. QC&S can counter with its own expert evidence establishing the reasonableness of the settlement, the significance of the retained economic interest, and the conformity of QC&S's claims-handling process with industry practice. Expert opinions on claims valuation are inherently subjective, and a battle of experts on settlement value is unlikely to satisfy the heightened standard for bad faith or gross negligence.

VII. Potential Waiver and Estoppel Arguments

A. Waiver by Payment

Pinnacle Atlantic paid all billing installments for TY 2023 — totaling $8.7 million — through March 29, 2024 (the final installment of $3.2 million) without raising any objection to the Veridian settlement. Under New York law, a reinsurer that pays claims with knowledge of facts giving rise to a defense may be held to have waived that defense. See, e.g., Albert J. Schiff Assocs., Inc. v. Flack, 51 N.Y.2d 692, 698 (1980) (waiver is the voluntary relinquishment of a known right); Fundamental Portfolio Advisors, Inc. v. Tocqueville Asset Mgmt., L.P., 7 N.Y.3d 96, 104 (2006) (same).

The critical question for the waiver analysis is whether Pinnacle Atlantic had sufficient knowledge of the Veridian settlement at the time it paid the billing installments. If the billing transmittals from Broadreach included detailed claims data — such as loss bordereau identifying the Veridian settlement, the settlement amounts, and the contribution of those amounts to TY 2023 aggregate losses — then Pinnacle Atlantic was on notice of the facts underlying its current challenge and had the ability to raise objections before paying. Its decision to pay without objection could constitute a waiver of the follow-the-fortunes defense.

We must obtain and review all billing transmittals from Broadreach to Pinnacle Atlantic for TY 2023 cessions. Specifically, we need to determine: (i) whether the transmittals included loss bordereau or claims summaries identifying the Veridian settlement and the individual claim amounts; (ii) whether the transmittals inclu

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE ATTORNEY WORK PRODUCT
March 12, 2026
MEMORANDUM
From: Jeffrey Park, Senior Associate, Calderwood & Harkness LLP
To: Douglas Carmichael, Responsible Partner, Calderwood & Harkness LLP Rachel Sondergaard, General Counsel, Quorum Insurance Holdings Corp.
Re: Follow-the-Fortunes / Settlements Analysis — Pinnacle Atlantic's Challenge to the Veridian Financial Services E&O Cluster Settlement Under Article 11 of Treaty No. PA-QCS-2019-EXL-0044
Matter No.: 1025-00005
CONFIDENTIALITY LEGEND: This memorandum is protected by attorney-client privilege and the attorney work product doctrine. It is prepared in anticipation of litigation and/or arbitration and should not be disclosed outside Calderwood & Harkness LLP and authorized personnel of Quorum Insurance Holdings Corp. and Quorum Casualty & Surety Company without prior counsel approval. Inadvertent disclosure of this memorandum does not constitute a waiver of any applicable privilege or protection.
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I. Executive Summary
This memorandum analyzes the merits of the third ground for dispute advanced by Pinnacle Atlantic Reinsurance Ltd. ("Pinnacle Atlantic" or "PARL") in connection with the broader coverage dispute arising under Excess-of-Loss Reinsurance Treaty No. PA-QCS-2019-EXL-0044 (the "Treaty"). Specifically, Pinnacle Atlantic alleges that Quorum Casualty & Surety Company's ("QC&S") settlement of the Veridian Financial Services E&O claim cluster violated the follow-the-fortunes doctrine and the provisions of Article 11 of the Treaty, and that such violation vitiates Pinnacle Atlantic's obligation to reimburse the $8.7 million in ceded losses attributable to Treaty Year ("TY") 2023.
Pinnacle Atlantic's position, as articulated in the February 14, 2026 pre-suit demand letter from its counsel, Hargrove, Fitch & Calloway LLP ("HFC") (authored by Nathaniel R. Calloway III), asserts that QC&S settled three related professional liability claims against Veridian Financial Services Inc. ("Veridian") for a combined $34.5 million without conducting a meaningful litigation exposure analysis, at amounts that were inflated beyond what a reasonable assessment of liability and damages would justify, and with the purpose and effect of pushing TY 2023 aggregate losses above the $120 million retention threshold established under Article 6 of the Treaty. According to Pinnacle Atlantic, this alleged conduct fell below the "good faith and businesslike manner" standard set forth in Article 11, thereby relieving Pinnacle Atlantic of its reinsurance obligations with respect to the TY 2023 cession.
Bottom-line assessment: QC&S has strong defenses against this challenge. Under New York law, which governs the Treaty pursuant to Article 16, the follow-the-fortunes doctrine imposes a heavy burden on the reinsurer seeking to avoid its obligation to follow the cedent's settlement decisions. Pinnacle Atlantic must demonstrate that the settlement was the product of bad faith or gross negligence — a standard that is rarely met where, as here, the cedent retained substantial economic exposure on the settled claims. QC&S's net retained share of the Veridian settlement, after application of other reinsurance, was $26.1 million — approximately 75.7% of the total $34.5 million settlement amount. The ceded amount of $8.7 million represented only 25.2% of the total settlement and constituted the entirety of the TY 2023 cession. This economic alignment — where QC&S bore roughly three times the financial impact of the cession — provides powerful evidence that QC&S's settlement decisions were driven by the merits of the underlying claims rather than by reinsurance-recovery considerations.
Moreover, the settlement was reached through a process consistent with ordinary insurance industry practice. QC&S's internal claims committee reviewed all three Veridian claims prior to authorizing settlement parameters. Retained defense counsel evaluated the claims and provided litigation assessments. The parties participated in mediation prior to settlement. Settlement evaluation memoranda were prepared. The combined $34.5 million settlement for three interrelated E&O claims involving misrepresentation in structured-product sales was within the range of reasonable outcomes given the nature and magnitude of the claims.
Additionally, Pinnacle Atlantic's conduct undermines the sincerity of its bad-faith allegation. Pinnacle Atlantic paid all billing installments for the TY 2023 cession — including a final installment of $3.2 million paid on March 29, 2024 — without raising any contemporaneous objection regarding the Veridian settlement. The reservation-of-rights letter was not sent until December 12, 2025, over two years after the settlement and approximately 20 months after the final billing installment was paid. The pre-suit demand followed on February 14, 2026. This delay supports waiver and voluntary payment defenses that would independently preclude Pinnacle Atlantic's challenge.
Key risk identified: If Pinnacle Atlantic is able to develop evidence through discovery that QC&S was motivated primarily by the desire to trigger treaty coverage — rather than by the merits of the underlying claims — that evidence could undermine the follow-the-fortunes defense. In particular, if internal claims committee minutes, emails, or other communications among QC&S claims personnel reference the Treaty's aggregate retention threshold, the approaching TY 2023 aggregate loss levels, or the reinsurance-recovery implications of the Veridian settlement, Pinnacle Atlantic could deploy such references to argue that the settlement was engineered to breach the retention. It is therefore critical that all claims file materials, internal communications, and electronic records relating to the Veridian settlement be reviewed promptly and thoroughly, before QC&S responds to the pre-suit demand and before any discovery obligations attach.
II. Factual Background
A. The Veridian Financial Services E&O Claims
The underlying claims at issue arise under QC&S Professional Liability Policy No. PL-2021-15327, issued to Veridian Financial Services Inc. ("Veridian"), a Delaware corporation engaged in financial advisory and structured-product distribution services. The policy provided errors and omissions / professional liability coverage with policy limits and retentions consistent with QC&S's standard professional liability program for mid-market financial services firms.
Three related claims were asserted against Veridian by investors alleging misrepresentation in connection with the marketing, sale, and performance reporting of structured investment products. The claimants alleged that Veridian's financial advisors made material misstatements regarding the risk profiles, expected returns, and underlying asset compositions of certain structured products, and that investors suffered substantial losses as a result of their reliance on those misrepresentations. The claims were interrelated in that they arose from the same course of conduct by Veridian's advisory personnel, involved overlapping factual allegations, and were handled as a cluster by QC&S for claims-management purposes.
The three claims and their respective settlement amounts are as follows:
All three claims were settled simultaneously pursuant to a consolidated settlement agreement executed on September 8, 2023. The settlement was funded by QC&S under the terms of Policy No. PL-2021-15327, subject to applicable policy retentions payable by Veridian.
After accounting for recoveries from other reinsurance arrangements (facultative and other treaty placements not involving Pinnacle Atlantic), QC&S's net retained share of the $34.5 million settlement was $26.1 million. The remaining $8.4 million was recovered or recoverable from other reinsurers, and, as discussed below, $8.7 million was ceded to the Treaty as part of TY 2023 aggregate losses in excess of the $120 million retention.
B. The TY 2023 Aggregate Loss Context
The Treaty operates on an aggregate excess-of-loss basis, with treaty years running from July 1 through June 30 of the following year. Under Article 6, QC&S retains the first $120 million of aggregate net incurred losses for each treaty year, with losses in excess of the retention ceded to Pinnacle Atlantic subject to the Treaty's coverage limit.
For TY 2023 (July 1, 2023 through June 30, 2024), QC&S reported aggregate net incurred losses of $128,700,000. The ceded loss amount under the Treaty was therefore:
$128,700,000 (aggregate net incurred losses) − $120,000,000 (retention) = $8,700,000 (ceded to Pinnacle Atlantic)
The $8.7 million cession constituted the entirety of QC&S's TY 2023 recovery under the Treaty. Critically, the Veridian settlement — which closed on September 8, 2023, within TY 2023 — was the principal driver pushing TY 2023 aggregate losses above the $120 million retention threshold. Without the $34.5 million Veridian settlement (or more precisely, without QC&S's net retained share of that settlement flowing into the aggregate calculation), TY 2023 aggregate net incurred losses would have been significantly below the $120 million retention, and no cession to Pinnacle Atlantic would have occurred for TY 2023.
This fact forms the crux of Pinnacle Atlantic's contention. Pinnacle Atlantic asserts that QC&S recognized that TY 2023 aggregate losses were approaching but had not yet reached the $120 million retention, and that QC&S settled the Veridian claims at inflated amounts specifically to push aggregate losses above the retention and trigger reinsurance recoveries under the Treaty. According to Pinnacle Atlantic, the $8.7 million cession was the intended product of a deliberately inflated settlement, not the natural consequence of good-faith claims resolution.
C. Settlement Process — What the Claims File Shows
Based on our preliminary review of the available claims file materials and discussions with QC&S personnel, the following facts are established regarding the settlement process for the Veridian E&O cluster:
Claims handling oversight. The Veridian E&O cluster was managed by Diana Kessler-Hoff, Vice President, Claims & Reinsurance Recoveries, who oversaw the investigation, defense, and settlement of all three claims. Ms. Kessler-Hoff is a senior claims professional with over eighteen years of experience in professional liability claims handling and has served in her current role at QC&S since 2019.
Defense counsel retention. QC&S retained outside defense counsel to defend Veridian in the underlying litigation brought by the investor claimants. Defense counsel conducted discovery, reviewed the factual record, and prepared liability and damages assessments in connection with each of the three claims. Defense counsel's evaluations informed the claims committee's settlement authorization.
Claims committee review. QC&S's internal claims committee reviewed all three Veridian claims prior to authorizing the settlement. The claims committee — which typically includes senior claims personnel, underwriting representatives, and, for large settlements, representatives of the chief financial officer's office — conducted its review in accordance with QC&S's standard claims-authorization procedures. Settlement parameters were established by the claims committee based on defense counsel's assessments, the claimants' demand positions, and QC&S's own analysis of liability and damages exposure.
Settlement evaluation memoranda. Settlement evaluation memoranda were prepared for each of the three claims prior to the September 8, 2023 settlement date. These memoranda analyzed the liability exposure, the potential damages range, the costs of continued litigation, and the recommended settlement ranges for each claim. We have requested copies of these memoranda as part of our document review and expect to receive them within the coming days.
Mediation. Prior to the settlement, the parties participated in a mediation conducted by an experienced neutral mediator. The mediation was part of the ordinary dispute resolution process and preceded the final settlement negotiations. The involvement of a neutral mediator supports the arm's-length nature of the settlement process.
QC&S's retained economic interest. As noted above, QC&S retained $26.1 million of the $34.5 million settlement after accounting for other reinsurance — approximately 75.7% of the total settlement cost. This substantial retained interest provided a strong alignment of economic interest between QC&S and Pinnacle Atlantic. QC&S had every incentive to settle the claims for the lowest amount reasonably achievable, because each dollar of settlement cost was predominantly borne by QC&S.
Treaty retention and cession analysis. A critical question for our ongoing review is whether the claims file contains any contemporaneous analysis, discussion, or reference to the Treaty's aggregate retention, the approaching TY 2023 aggregate loss threshold, or the reinsurance-recovery implications of the Veridian settlement. If such analysis exists in the claims file, claims committee minutes, or internal communications, it will be a focal point of Pinnacle Atlantic's discovery efforts and could be used to support an inference of improper motive. Conversely, if the claims file is devoid of any such references, that absence would reinforce the conclusion that the settlement was made on the merits of the underlying claims without regard to reinsurance-recovery considerations.
D. Pinnacle Atlantic's Specific Allegations
As stated in the February 14, 2026 pre-suit demand letter from HFC (Nathaniel R. Calloway III), Pinnacle Atlantic's challenge to the Veridian settlement rests on the following specific allegations:
1.  Lack of meaningful litigation exposure analysis. Pinnacle Atlantic alleges that QC&S settled the three Veridian claims without conducting a meaningful, independent litigation exposure analysis. HFC's letter asserts that the settlement amounts were determined without adequate consideration of Veridian's actual liability exposure, the strengths and weaknesses of the claimants' cases, or the likely outcomes at trial. Pinnacle Atlantic contends that a reasonably diligent cedent would have concluded that the claims warranted substantially lower settlement values.
2.  Inflated settlement amounts. Pinnacle Atlantic alleges that the settlement amounts — $14.2 million (Claim A), $12.8 million (Claim B), and $7.5 million (Claim C) — were inflated beyond what a reasonable assessment of liability and damages would justify. HFC's letter states that Pinnacle Atlantic's own analysis, conducted with the assistance of an unidentified reinsurance consultant, concluded that the reasonable settlement range for the three claims combined was between $18 million and $24 million — substantially less than the $34.5 million actually paid.
3.  Motivation to trigger treaty coverage. Pinnacle Atlantic alleges that QC&S settled the Veridian claims at inflated amounts specifically in order to push TY 2023 aggregate losses above the $120 million retention threshold and thereby trigger reinsurance recoveries under the Treaty. HFC's letter characterizes the settlement as a "manufactured cession" designed to shift losses from QC&S to Pinnacle Atlantic.
4.  Failure to meet Article 11 standards. Drawing on the foregoing allegations, Pinnacle Atlantic contends that QC&S's conduct in settling the Veridian claims was not in the ordinary course of business, lacked good faith and businesslike conduct, and thereby vitiated the follow-the-fortunes protections afforded to QC&S under Article 11 of the Treaty. Pinnacle Atlantic asserts that it is relieved of its reinsurance obligations with respect to the $8.7 million TY 2023 cession.
We note that HFC's demand letter does not identify the specific evidence upon which Pinnacle Atlantic relies for these allegations, beyond the general assertion that the settlement amounts were excessive based on an unspecified consultant's analysis. No affidavits, expert reports, or documentary evidence have been provided to support the allegations.
E. Billing and Payment History
The TY 2023 ceded loss of $8.7 million was billed to Pinnacle Atlantic across multiple billing installments transmitted through Broadreach Intermediaries Inc. ("Broadreach"), the intermediary under the Treaty (Article 9). Jamie Castellano, Account Executive at Broadreach, handled the transmittal of billing statements and supporting documentation.
The billing installments included the standard supporting documentation — loss bordereau, aggregate loss computations, and claims summaries — consistent with Broadreach's usual practice under the Treaty. The final TY 2023 billing installment, in the amount of $3,200,000, was paid by Pinnacle Atlantic on March 29, 2024.
Critically, Pinnacle Atlantic paid all billing installments for TY 2023 without raising any contemporaneous objection regarding the Veridian settlement. At no point during the billing and payment process did Pinnacle Atlantic question the settlement amounts, request additional documentation, invoke audit or inspection rights, or reserve its rights with respect to the Veridian claims.
The first indication of a dispute came in Pinnacle Atlantic's reservation-of-rights letter dated December 12, 2025 — over two years after the September 8, 2023 settlement and approximately 20 months after the final billing installment was paid on March 29, 2024. The pre-suit demand from HFC followed on February 14, 2026, approximately 29 months after the settlement.
This chronology is significant for several reasons discussed in Sections IV.E and VII below, including the implications for waiver, voluntary payment, and the credibility of Pinnacle Atlantic's bad-faith allegation.
III. Treaty Article 11 — Text and Interpretation
A. Text of Article 11
Article 11 of the Treaty is captioned "Follow-the-Fortunes / Follow-the-Settlements" and sets forth the operative follow-the-fortunes provision governing the relationship between QC&S (as cedent) and Pinnacle Atlantic (as reinsurer) with respect to claims handling and settlement decisions. The material provisions of Article 11 are as follows:
Article 11 — Follow-the-Fortunes / Follow-the-Settlements
(a) The Reinsurer shall follow the fortunes and settlements of the Company with respect to all losses, claims, and loss adjustment expenses arising under the policies reinsured hereunder. All loss settlements made by the Company, whether by way of compromise, ex gratia payment, or otherwise, provided such settlements are made by the Company in good faith and in a businesslike manner, shall be unconditionally binding upon the Reinsurer, and the Reinsurer shall pay or allow, as the case may be, its proportion thereof in accordance with the terms and conditions of this Agreement.
(b) The Company shall have the sole and exclusive authority to investigate, adjust, compromise, settle, defend, or otherwise handle all claims, losses, and suits arising under the policies reinsured hereunder, and the Reinsurer shall not be called upon to assume any such authority.
(c) Notwithstanding the foregoing, the Reinsurer shall not be bound by any settlement that (i) is the product of bad faith on the part of the Company, or (ii) relates to a claim that does not fall within the scope of the business covered under this Agreement.
Several features of Article 11 warrant emphasis. First, the operative standard — "good faith and in a businesslike manner" — is the widely recognized formulation used in reinsurance treaties across the industry. It does not require the cedent to achieve optimal results, to act without error, or to consult with the reinsurer before settling. It requires only that the cedent act honestly and in accordance with ordinary industry practice. Second, the cedent's settlement authority is described as "sole and exclusive" (Article 11(b)), reinforcing that the reinsurer has no right to participate in or approve individual claim settlements. Third, the exceptions clause (Article 11(c)) is narrow: the reinsurer is excused only where the settlement is the product of bad faith or where the claim falls outside the scope of covered business. There is no exception for gross negligence in the treaty's text, though as discussed below, New York law recognizes gross negligence as an additional basis for excusing the reinsurer's follow-the-fortunes obligation.
Pinnacle Atlantic has not alleged that the Veridian claims fall outside the scope of the business covered by the Treaty. Its challenge is predicated entirely on the assertion that QC&S's settlement of the Veridian claims lacked good faith and was not conducted in a businesslike manner, thereby invoking the bad-faith exception of Article 11(c)(i).
B. Relationship to Other Treaty Provisions
Article 11 does not operate in isolation. Its application implicates several other Treaty provisions that bear on the follow-the-fortunes analysis:
Article 5 (Losses Incurred Definition). Article 5 defines the losses incurred under the Treaty that are subject to the aggregate excess-of-loss structure. Under Article 5, settlements constitute incurred losses once paid or established as reserves. The Veridian settlement, having been paid on September 8, 2023, constitutes an incurred loss under Article 5 and flows into the TY 2023 aggregate computation. If the settlement is valid under Article 11, it is properly included in the aggregate loss calculation; if it is not, the entire TY 2023 cession is called into question.
Article 6 (Retention and Cession Structure). Article 6 establishes the aggregate excess-of-loss structure, including the $120 million per-treaty-year retention. Because the Treaty operates on an aggregate basis, the follow-the-fortunes question does not involve a single large loss in isolation but rather the contribution of the Veridian settlement to the aggregate loss total. This structural feature means that Pinnacle Atlantic's challenge is directed not at whether the Veridian settlement itself exceeds the retention, but at whether the settlement was inflated in order to push the aggregate over the retention threshold — a more indirect and difficult theory to establish.
Article 9 (Intermediary Clause — Broadreach). Article 9 designates Broadreach Intermediaries Inc. as the intermediary through which billing and settlement transmittals are conducted. Jamie Castellano, Account Executive at Broadreach, handled the transmission of billing statements, loss bordereau, and claims data between QC&S and Pinnacle Atlantic. The information transmitted through Broadreach is relevant to the waiver and voluntary payment analysis discussed in Section VII below, as it bears on what Pinnacle Atlantic knew about the Veridian settlement when it paid the TY 2023 billing installments.
Article 16 (Governing Law). Article 16 provides that the Treaty shall be governed by and construed in accordance with the laws of the State of New York. This choice-of-law provision determines the legal framework for the follow-the-fortunes analysis, as discussed in Section IV.
C. Interpretation Under New York Law
Because the Treaty is governed by New York law under Article 16, the interpretation and application of Article 11 are determined by New York principles of contract interpretation and the body of New York case law addressing the follow-the-fortunes doctrine in the reinsurance context.
New York courts construe reinsurance treaties under ordinary principles of contract interpretation. The terms of the treaty are given their plain and ordinary meaning, and the treaty is read as a whole to give effect to all of its provisions. Where the treaty language is clear and unambiguous, the court enforces the contract as written. Where ambiguity exists, extrinsic evidence — including industry custom and practice — may be consulted to determine the parties' intent.
The follow-the-fortunes clause in Article 11 is a contractual manifestation of the broader common-law follow-the-fortunes doctrine that New York courts have recognized as an implicit feature of the reinsurance relationship. Even in the absence of an express follow-the-fortunes clause, New York courts have held that the doctrine arises from the nature of the reinsurance contract and the parties' reasonable expectations. See, e.g., Vireo Life Insurance v. Certain Underwriters at Sundial Indemnity Co., 96 N.Y.2d 583, 596 (2001) (recognizing the follow-the-fortunes doctrine as integral to the reinsurance relationship). The presence of an express clause in Article 11 reinforces and confirms the doctrine's application to this Treaty, and courts will enforce the clause in accordance with its terms.
IV. The Follow-the-Fortunes Doctrine Under New York Law
A. General Principles
The follow-the-fortunes doctrine is a foundational principle of reinsurance law. It requires the reinsurer to indemnify the cedent for good-faith claims payments, even if the reinsurer disagrees with the cedent's coverage determination, claims-handling approach, or settlement amount. The doctrine rests on the recognition that the cedent — not the reinsurer — is in the best position to evaluate and manage the underlying claims, and that the reinsurer's obligation to follow the cedent's fortunes is an essential feature of the reinsurance relationship.
The doctrine serves two principal purposes. First, it promotes finality and efficiency in the reinsurance relationship by preventing the reinsurer from second-guessing every claims decision made by the cedent. If reinsurers were free to challenge individual settlements based on hindsight disagreements about value, the reinsurance relationship would become unworkable. Cedents would be unable to manage claims with the flexibility and discretion necessary for effective claims administration, and the ultimate costs of resolving underlying claims would increase as cedents were forced to defend their settlement decisions on two fronts — against the underlying claimants and against their own reinsurers.
Second, the doctrine reflects the economic reality that the cedent, by retaining a portion of the risk, has a built-in incentive to manage claims in a cost-effective manner. The cedent's retained interest aligns its interests with those of the reinsurer, making it rational for the reinsurer to defer to the cedent's claims-handling judgment.
New York courts have recognized and enforced the follow-the-fortunes doctrine both as a contractual obligation (where an express clause is present, as here) and as an implied obligation in the reinsurance relationship. The doctrine has been applied consistently in the context of aggregate excess-of-loss treaties, quota share treaties, and specific excess-of-loss treaties, and it encompasses both "follow the fortunes" (which addresses coverage determinations) and "follow the settlements" (which addresses settlement amounts). See British Int'l Ins. Co. v. Seguros La Republica, S.A., 342 F.3d 78, 85 (2d Cir. 2003) (applying New York law and affirming application of follow-the-fortunes doctrine); Westvale Insurance v. Sterling Reach Life Insurance, No. 93 Civ. 2534, 1997 WL 138816, at 5–6 (S.D.N.Y. Mar. 26, 1997) (same); Greaves Specialty Insurance v. Ace Am. Reins. Co.*, 361 F.3d 134, 140–41 (2d Cir. 2004) (discussing the follow-the-settlements doctrine under New York law).
The Second Circuit has described the doctrine as reflecting the principle that "the business of the reinsurer is to share the risk of the cedent's insurance business, including the risks inherent in claims handling and settlement," and that "the reinsurer bargains for the cedent's judgment, not for perfection." British Int'l Ins. Co., 342 F.3d at 85.
B. The Bad Faith / Gross Negligence Exception
The follow-the-fortunes doctrine is not without limits. New York courts have recognized a narrow exception to the doctrine: the reinsurer need not follow the cedent's fortunes if the cedent acted in bad faith or with gross negligence in handling or settling the underlying claim. This exception preserves the reinsurer's ability to resist payment where the cedent has acted dishonestly or recklessly, while ensuring that the exception does not swallow the rule.
Several critical features of the exception bear emphasis:
Burden of proof on the reinsurer. The burden of proof rests squarely on the reinsurer — here, Pinnacle Atlantic — to establish that the cedent's settlement falls outside the protection of the follow-the-fortunes doctrine. The cedent does not bear the burden of proving good faith; rather, good faith is presumed, and the reinsurer must affirmatively overcome that presumption by adducing proof of bad faith or gross negligence. See Adriatic Specialty Insurance v. Dunmore Indemnity Co., 882 F. Supp. 1355, 1365 (S.D.N.Y. 1995) (placing the burden on the reinsurer); Vireo Life Insurance, 96 N.Y.2d at 596. In this case, Pinnacle Atlantic bears the burden of demonstrating that QC&S's settlement of the Veridian claims was the product of bad faith or gross negligence.
Definition of bad faith. Bad faith in the follow-the-fortunes context means that the cedent acted with dishonest purpose, ill will, or a conscious disregard of the reinsurer's interests. It requires more than a showing that the cedent made an error of judgment, failed to obtain the best possible settlement, or reached a result with which the reinsurer disagrees. The reinsurer must demonstrate that the cedent's conduct was motivated by improper considerations — such as a deliberate intent to harm the reinsurer or to obtain reinsurance recoveries to which the cedent was not entitled — or that the cedent acted with a level of dishonesty or improper motive that renders the settlement unconscionable. See Vireo Life Insurance, 96 N.Y.2d at 596; In re Liquidation of Ridgeline Assurance, 16 N.Y.3d 536, 545 (2011).
Definition of gross negligence. Gross negligence, in the New York reinsurance context, requires conduct that evinces a reckless disregard for the rights of others — a failure to exercise even slight care in the handling and settlement of claims. Mere negligence — even a clear mistake — is insufficient. The cedent's conduct must be so far below the standard of ordinary care as to demonstrate a virtual indifference to the consequences of the settlement. See Coliseum Reins. Co. v. Granite Harbor Mutual Insurance, No. 96 Civ. 6271, 2000 WL 777935, at *4 (S.D.N.Y. June 15, 2000).
Narrowness of the exception. New York courts have consistently emphasized the narrowness of the bad faith / gross negligence exception. A cedent's settlement within a reasonable range of outcomes — even if the reinsurer would have settled for less — satisfies the good-faith and businesslike-manner standard. The doctrine does not require the cedent to be right; it requires only that the cedent act honestly and reasonably. As the Second Circuit has observed, "the threshold for establishing bad faith or gross negligence sufficient to overcome the follow-the-fortunes doctrine is a high one," and "courts have been reluctant to find that a cedent's settlement decisions were made in bad faith absent compelling evidence of dishonesty or improper motive." Greaves Specialty Insurance, 361 F.3d at 141; see also Dunmore Assurance v. Clearwater Ins. Co., 906 F.3d 12, 22 (2d Cir. 2018) (reaffirming that follow-the-fortunes protection is forfeited only by "egregious" conduct).
C. The "Businesslike Manner" Standard
The "businesslike manner" component of the Article 11 standard requires the cedent to investigate, evaluate, and settle claims using procedures consistent with ordinary insurance industry practice. This standard is process-oriented: it focuses on how the cedent handled the claim, not on whether the cedent achieved the optimal result.
The standard does not require the cedent to achieve the best possible settlement, to exhaust every avenue of investigation, or to consult with the reinsurer before settling. It requires that the cedent follow its ordinary claims-handling procedures, exercise reasonable judgment, and base its settlement decisions on a rational assessment of the underlying claim.
Factors that courts have considered in assessing whether a settlement was made in a businesslike manner include:
•  Whether the cedent investigated the claim through retained defense counsel or claims adjusters
•  Whether the cedent's claims committee or other internal review body authorized the settlement
•  Whether settlement evaluation memoranda or similar analyses were prepared
•  Whether the cedent participated in mediation or other structured settlement discussions before reaching agreement
•  Whether the settlement was the product of arm's-length negotiation with adversarial claimants and their counsel
•  Whether the settlement amount fell within a reasonable range of outcomes given the nature of the claims, the potential for adverse verdicts, and the costs of continued litigation
All of these factors support QC&S's position with respect to the Veridian settlement, as discussed in detail in Section V.A below.
Importantly, the businesslike-manner standard does not require the cedent to inform the reinsurer before settling or to obtain the reinsurer's approval. Article 11(b) of the Treaty expressly reserves sole and exclusive settlement authority to QC&S. The reinsurer's role is to follow the cedent's fortunes, not to supervise the cedent's claims-handling decisions.
D. Cedent's Retained Interest as Evidence of Good Faith
One of the most powerful indicators of good faith in the follow-the-fortunes analysis is the cedent's retention of significant economic exposure on the settled claim. Courts and commentators have consistently recognized that a cedent that bears a substantial share of the settlement cost has every incentive to settle for the lowest amount reasonably achievable, and that this alignment of economic interest between cedent and reinsurer is strong evidence that the settlement was made on the merits rather than for the purpose of generating reinsurance recoveries.
Here, QC&S retained $26.1 million — approximately 75.7% — of the total $34.5 million Veridian settlement after accounting for other reinsurance. Only $8.7 million, or approximately 25.2% of the total settlement, was ceded to Pinnacle Atlantic under the Treaty (and only because TY 2023 aggregate losses exceeded the $120 million retention). For every dollar of the Veridian settlement, QC&S bore approximately $0.76 of the cost, while Pinnacle Atlantic bore approximately $0.25 (with the remaining pennies attributable to recoveries from other reinsurers unrelated to the Treaty).
This ratio strongly undermines any inference that QC&S settled at inflated amounts to benefit from reinsurance recoveries. If QC&S had inflated the settlement by, say, $10 million — from a hypothetical "fair value" of $24.5 million to the actual $34.5 million, as Pinnacle Atlantic's unnamed consultant apparently suggests — QC&S would have borne approximately $7.6 million of the inflated amount while Pinnacle Atlantic would have borne only approximately $2.5 million. No rational economic actor would overpay $7.6 million to generate $2.5 million in additional reinsurance recoveries. The economics are decisively unfavorable to the theory of settlement inflation.
Courts have recognized this reasoning. See, e.g., Am. Ins. Co. v. N. Am. Co. for Prop. & Cas. Ins., No. 97 Civ. 3097, 2002 WL 31769417, at 6 (S.D.N.Y. Dec. 11, 2002) (crediting the cedent's retention of more than 70% of the settlement cost as strong evidence of good faith); Vireo Life Insurance*, 96 N.Y.2d at 596 (noting that the cedent's retained interest aligns the cedent's interests with those of the reinsurer).
E. Reinsurer's Knowledge and Acquiescence
Although not a formal element of the follow-the-fortunes analysis, the reinsurer's knowledge of the settlement and its conduct following that knowledge are relevant to the credibility and weight of its bad-faith allegation, and they bear independently on the waiver and voluntary payment defenses discussed in Section VII.
Pinnacle Atlantic paid all seven billing installments for TY 2023 cessions — including the final installment of $3.2 million paid on March 29, 2024 — without contemporaneous objection regarding the Veridian settlement. The billing transmittals from Broadreach included loss bordereau, aggregate loss computations, and claims summaries that, based on our preliminary understanding of Broadreach's standard practices, would have identified the Veridian settlement as a component of TY 2023 losses. Pinnacle Atlantic had the information necessary to evaluate the Veridian settlement and to raise concerns, yet it paid without comment.
Pinnacle Atlantic's reservation-of-rights letter was not sent until December 12, 2025 — approximately 26 months after the September 8, 2023 settlement and approximately 20 months after the final billing installment was paid on March 29, 2024. The pre-suit demand from HFC followed on February 14, 2026, approximately 29 months after the settlement. This extended period of silence, followed by payment without objection, followed by a further period of silence before the first indication of a dispute, undermines the urgency and sincerity of the bad-faith allegation.
While the passage of time alone may not constitute an estoppel or a definitive waiver under New York law — particularly where the reinsurer expressly reserves its rights — the practical effect of the delay is significant. If Pinnacle Atlantic genuinely believed that the Veridian settlement was the product of bad faith or gross negligence, one would expect Pinnacle Atlantic to have raised that concern promptly upon reviewing the billing transmittals that disclosed the settlement. The absence of any contemporaneous objection suggests either that Pinnacle Atlantic did not view the settlement as problematic at the time it paid, or that Pinnacle Atlantic has developed its bad-faith theory after the fact — perhaps in response to broader financial pressures or strategic considerations. Either inference favors QC&S.
The potential waiver argument is discussed in greater detail in Section VII.A below.
V. Application to the Veridian E&O Cluster Settlement
A. Was the Settlement Made in Good Faith and in a Businesslike Manner?
Applying the principles set forth in Section IV to the facts of the Veridian settlement, QC&S has strong grounds to establish that the settlement was made in good faith and in a businesslike manner within the meaning of Article 11.
Claims investigation. QC&S investigated all three Veridian claims through retained defense counsel in the underlying litigation. Defense counsel conducted discovery, reviewed the factual record underlying the investor claimants' allegations, and prepared liability and damages assessments for each of the three claims. The investigation was thorough and consistent with QC&S's ordinary claims-handling practices for professional liability claims of this magnitude.
Claims committee process. QC&S's internal claims committee reviewed all three Veridian claims prior to authorizing settlement. The claims committee process is a standard industry practice designed to ensure that large settlements are not authorized by a single individual but are instead reviewed and approved by a group of senior professionals with relevant expertise. The claims committee received defense counsel's evaluations, considered the claimants' demand positions, and established settlement parameters for each claim. The claims committee's authorization of the settlement reflects institutional oversight and deliberation — the antithesis of the reckless or bad-faith conduct that Pinnacle Atlantic alleges.
Settlement evaluation memoranda. Settlement evaluation memoranda were prepared for each of the three claims prior to the September 8, 2023 settlement date. These memoranda documented the analysis underlying the settlement recommendation, including the assessment of liability exposure, the potential damages range, the costs and risks of continued litigation, and the recommended settlement ranges. The preparation of such memoranda is a hallmark of good-faith, businesslike claims handling and demonstrates that the settlement was the product of deliberate analysis rather than arbitrary decision-making.
Mediation. The parties participated in mediation before the settlement was reached. Mediation is a widely used and accepted method of resolving insurance and professional liability disputes, and the fact that the settlement followed a mediated negotiation supports the conclusion that the settlement was the product of an arm's-length process involving adversarial parties with competing interests. The mediator's involvement provides an independent check on the reasonableness of the settlement amounts and undermines any suggestion that the settlement was unilaterally inflated by QC&S.
Settlement within reasonable range. The individual claim settlement amounts — $14.2 million (Claim A), $12.8 million (Claim B), and $7.5 million (Claim C) — were within the range of reasonable outcomes given the nature of the E&O allegations. The claims involved allegations of misrepresentation in structured-product sales — a type of professional liability claim that historically has generated substantial verdicts and settlements, particularly where multiple investor claimants are involved and the allegations implicate systemic misconduct by the insured. The potential for punitive or exemplary damages in some jurisdictions, the reputational consequences for Veridian of a public trial, and the costs of protracted litigation all supported resolution within the settlement ranges established by the claims committee. While Pinnacle Atlantic's unnamed consultant reportedly estimated a "reasonable" range of $18 million to $24 million for the combined settlement, that estimate — even if credited — does not demonstrate that a $34.5 million settlement was outside the range of reasonable outcomes. The range of reasonable settlements in complex E&O cases is inherently broad, and a difference of $10 million to $16 million between competing estimates does not establish bad faith or gross negligence. It establishes, at most, a difference of opinion — which is precisely the type of disagreement that the follow-the-fortunes doctrine is designed to resolve in favor of the cedent.
Conclusion. The totality of the evidence strongly supports the conclusion that QC&S's settlement of the Veridian E&O cluster satisfied the good-faith and businesslike-manner standard of Article 11. Each element of the claims-handling process — investigation by defense counsel, claims committee review and authorization, settlement evaluation memoranda, mediation, and arm's-length negotiation — is consistent with ordinary industry practice and reflects the type of careful, deliberative claims handling that the doctrine protects.
B. Was the Settlement Amount Inflated?
Pinnacle Atlantic's central factual contention is that the $34.5 million combined settlement was inflated beyond what the claims were worth. This contention must be evaluated both on its own terms and in the context of the follow-the-fortunes doctrine.
Arm's-length negotiation with adverse parties. The settlement was negotiated at arm's length with adversarial claimants represented by their own counsel. The claimants had every incentive to maximize their recoveries, and QC&S had every incentive to minimize its settlement exposure — particularly given that QC&S bore 75.7% of the cost. The involvement of a neutral mediator further supports the arm's-length character of the negotiations. An inflated settlement typically arises in situations where the cedent is indifferent to the settlement amount because it expects to recover the entire cost from its reinsurer; that dynamic is absent here, where QC&S retained the vast majority of the economic exposure.
Nature of the claims. The Veridian claims involved allegations of misrepresentation in structured-product sales to investor groups. Such claims are among the highest-exposure categories of financial services E&O liability. Structured products are complex instruments whose risks are often not well understood by retail or mid-market investors, and claims alleging that the financial advisor misrepresented the nature, risk, or performance of such products have generated substantial verdicts and settlements across the industry. The combined settlement of $34.5 million for three interrelated claims — involving multiple investor groups and allegations of systemic misrepresentation — is not facially unreasonable.
Pinnacle Atlantic's competing valuation. Pinnacle Atlantic's assertion that the reasonable settlement range was $18 million to $24 million rests on the analysis of an unidentified reinsurance consultant. We do not know the methodology, assumptions, or qualifications underlying this estimate. At this stage, the estimate is entitled to no weight. Even if Pinnacle Atlantic retains a qualified expert to opine on settlement value, a difference of opinion on value — even a substantial one — does not establish bad faith or gross negligence. The follow-the-fortunes doctrine is designed precisely to prevent reinsurers from substituting their own claims valuation for that of the cedent. If a cedent's settlement falls within the broad range of reasonable outcomes, the reinsurer must follow it — even if the reinsurer would have settled for less.
Expert testimony. To counter Pinnacle Atlantic's valuation challenge, QC&S should consider retaining a professional liability claims valuation expert to provide an independent assessment of the reasonableness of the $34.5 million settlement. An expert opinion confirming that the settlement fell within the range of reasonable outcomes would be a powerful response to Pinnacle Atlantic's inflated-settlement theory. Additionally, a reinsurance industry practices expert could testify to the standard of care in cedent settlement practices and the significance of the cedent's retained economic interest.
Defense counsel assessments. A critical element of the analysis will be whether QC&S's own defense counsel's liability and damages assessments support the settlement values. If defense counsel's pre-settlement evaluations estimated liability exposure in the range of or in excess of the actual settlement amounts, that evidence would strongly corroborate the reasonableness of the settlement. Conversely, if defense counsel's assessments suggest that the claims were worth substantially less than the settlement amounts, Pinnacle Atlantic could use that evidence to support its inflated-settlement theory. Review of the defense counsel evaluations and settlement memoranda is therefore a high priority.
C. Was the Settlement Motivated by a Desire to Trigger Treaty Coverage?
This is the most sensitive element of Pinnacle Atlantic's challenge, and the area of greatest risk for QC&S. Pinnacle Atlantic's core theory is that QC&S recognized that TY 2023 aggregate losses were approaching but had not yet reached the $120 million retention, and that QC&S deliberately settled the Veridian claims at inflated amounts to push aggregate losses above the retention and trigger the $8.7 million cession to Pinnacle Atlantic.
Several powerful counterarguments are available to QC&S:
Rational economic actor analysis. As discussed in Section IV.D, QC&S's net retained share of the settlement ($26.1 million) dwarfs the ceded amount ($8.7 million) by a ratio of approximately 3:1. No rational economic actor would overpay $3 to recover $1. The economic incentive structure decisively undermines the inference that QC&S inflated the settlement for the purpose of generating reinsurance recoveries. If QC&S had settled the Veridian claims at Pinnacle Atlantic's suggested range of $18 million to $24 million, QC&S's net retained share would have been lower, and QC&S would have saved more on a net basis than it could possibly have recovered from Pinnacle Atlantic. The theory of economically motivated inflation is self-defeating.
Ordinary-course claims handling. The claims committee review, settlement evaluation, and mediation all occurred in the ordinary course of QC&S's claims-handling procedures before the September 8, 2023 settlement date. There is no evidence — at least none identified in HFC's demand letter — that QC&S reverse-engineered the settlement amounts to match or exceed a specific aggregate loss threshold. The settlement was the product of a process that began with the filing of the underlying claims, continued through defense counsel investigation and claims committee review, and culminated in a mediated negotiation. This process timeline is inconsistent with the theory that the settlement was manufactured to trigger treaty coverage.
Aggregate context. The TY 2023 aggregate net incurred loss of $128.7 million included numerous claims beyond the Veridian cluster. The Veridian settlement, while significant, was one component of a broader loss portfolio. The $8.7 million marginal breach of the retention is a modest amount relative to the total aggregate — approximately 6.8% of the retention amount. If QC&S had been engineering a treaty breach, one would expect a more substantial cession rather than a marginal breach that could easily have been eroded by favorable development on other claims during the remainder of TY 2023.
Arm's-length adversarial process. The settlements were the product of arm's-length negotiations with adversarial claimants and their counsel. The claimants were not affiliated with QC&S, and the claimants' counsel had no interest in accommodating QC&S's purported desire to inflate the settlement. The mediation process provided an additional layer of independent oversight. The involvement of multiple adverse parties in the settlement negotiation is fundamentally inconsistent with a theory that the settlement amounts were unilaterally inflated by QC&S.
Risk factor — internal communications. The most significant risk to QC&S on this issue is the potential discovery of internal communications — emails, instant messages, claims committee minutes, or other documents — that reference the Treaty retention, TY 2023 aggregate loss levels, or reinsurance recovery implications in connection with the Veridian settlement evaluation. If, for example, an email from Diana Kessler-Hoff or another claims professional were to state something to the effect of "the Veridian settlement will push our TY 2023 aggregate above the $120 million retention" or "settling at $34.5 million will allow us to cede $8.7 million to Pinnacle Atlantic," Pinnacle Atlantic could use such a communication to argue that reinsurance-recovery considerations improperly influenced the settlement decision.
Such a communication would not necessarily be fatal to QC&S's position — a cedent is entitled to be aware of the reinsurance implications of its settlement decisions without that awareness converting a good-faith settlement into a bad-faith one. But a communication that suggested the settlement amount was driven by the desire to trigger reinsurance coverage, rather than by the merits of the underlying claims, could be damaging. It is therefore critical that all claims file materials, internal communications, and electronic records be reviewed promptly and thoroughly to identify any such documents and to assess their implications for QC&S's litigation strategy.
D. Allocation of Ceded Losses to TY 2023
The $8.7 million ceded to the Treaty under TY 2023 represents the marginal amount by which aggregate net incurred losses exceeded the $120 million retention. The allocation of the Veridian settlement to TY 2023 follows from the standard mechanics of the aggregate excess-of-loss treaty structure.
The settlement date of September 8, 2023 falls squarely within TY 2023 (July 1, 2023 through June 30, 2024). Under Article 5, the settlement constitutes a loss incurred during TY 2023 and is properly included in the aggregate loss computation for that treaty year. There is nothing improper or unusual about the timing of the settlement: the underlying claims matured during TY 2023, the claims-handling process (including investigation, claims committee review, and mediation) proceeded during TY 2023, and the settlement was reached during TY 2023.
Pinnacle Atlantic has not alleged that the settlement was artificially timed — i.e., that QC&S delayed or accelerated the settlement to ensure that it fell within a particular treaty year. Pinnacle Atlantic's challenge is directed solely at the settlement amounts, not at the timing of the settlement. The absence of a timing allegation further supports the conclusion that the settlement was made in the ordinary course.
The aggregate loss calculation under Articles 5 and 6 is mechanical: losses incurred during TY 2023 are aggregated, and the amount in excess of the $120 million retention is ceded to Pinnacle Atlantic. The Veridian settlement contributed to the aggregate, but the allocation to TY 2023 follows automatically from the settlement date and is not the product of any discretionary allocation decision by QC&S. There is no allocation dispute with respect to TY 2023 (as there is with respect to TY 2022 and the IBNR issue); the only question is whether the settlement amounts were valid under Article 11.
VI. Pinnacle Atlantic's Burden and Evidentiary Challenges
A. Burden of Proof on Pinnacle Atlantic
Under New York law, the reinsurer bears the burden of establishing that the cedent's settlement falls outside the protection of the follow-the-fortunes doctrine. This allocation of the burden is consistent with the doctrine's purpose: good faith is presumed, and the reinsurer must affirmatively overcome that presumption by proving bad faith or gross negligence.
The applicable standard of proof is a subject of some debate in the case law. Several courts have suggested that the reinsurer must prove bad faith by clear and convincing evidence, reflecting the heightened standard applicable to claims of fraud and dishonesty. See, e.g., Christiania Gen. Ins. Corp. v. Aldermere Assurance, 979 F.2d 268, 280 (2d Cir. 1992) (applying a heightened burden). Even under a preponderance-of-the-evidence standard, however, the burden is heavy because of the substantive requirements of the bad-faith and gross-negligence standards themselves. The reinsurer must demonstrate dishonest purpose, ill will, or reckless disregard — not merely that the cedent made a poor judgment or reached a result with which the reinsurer disagrees.
Mere disagreement with settlement amounts is insufficient as a matter of law. The follow-the-fortunes doctrine exists precisely because reasonable minds can differ on the appropriate settlement value of complex claims. If a cedent's settlement falls within the broad range of reasonable outcomes — even at the high end of that range — the reinsurer cannot establish bad faith simply by offering a competing (lower) valuation. Pinnacle Atlantic must affirmatively demonstrate that QC&S's settlement was driven by dishonest purpose, ill will, or a conscious disregard of Pinnacle Atlantic's interests — and that the settlement amounts were not merely high, but so far outside the range of reasonableness as to be explicable only by improper motive.
B. Evidentiary Challenges Facing Pinnacle Atlantic
Pinnacle Atlantic faces significant evidentiary challenges in sustaining its burden of proof on the follow-the-fortunes issue:
No contemporaneous objection. Pinnacle Atlantic did not object to the Veridian settlement at the time it was reported or at the time the TY 2023 billing installments were paid. The absence of contemporaneous objection suggests that Pinnacle Atlantic did not view the settlement as problematic when it had the opportunity to raise concerns, and that its current challenge is a product of hindsight reassessment.
QC&S's substantial retained interest. QC&S's retention of $26.1 million — 75.7% of the settlement — provides powerful evidence of good faith and undermines any inference that the settlement was inflated for the benefit of reinsurance recovery. Pinnacle Atlantic will need to explain why a cedent that bore three-quarters of the settlement cost would deliberately overpay on the claims.
Claims-handling process. The Veridian claims were investigated by defense counsel, reviewed by the claims committee, evaluated in settlement memoranda, and resolved through a mediated negotiation. This process is fully consistent with ordinary industry practice and satisfies the businesslike-manner standard. Pinnacle Atlantic will need to identify specific deficiencies in the process — not merely dispute the result — to overcome the inference of good faith.
Mediation. The involvement of a neutral mediator in the settlement process provides an independent check on the reasonableness of the outcome and undermines any suggestion that the settlement was unilaterally dictated by QC&S at inflated amounts.
discovery into internal communications — Pinnacle Atlantic's primary avenue. Pinnacle Atlantic will likely seek discovery into QC&S's claims files, internal communications, and claims committee minutes related to the Veridian settlement. This is the primary risk area for QC&S. If Pinnacle Atlantic can identify internal communications linking the settlement to treaty-recovery considerations, it could argue that the settlement was motivated by reinsurance recovery rather than by the merits of the underlying claims. Conversely, the absence of such communications would significantly strengthen QC&S's position.
Expert evidence. Pinnacle Atlantic may seek to engage an expert to opine that the settlement amounts were excessive. QC&S can counter with its own expert evidence establishing the reasonableness of the settlement, the significance of the retained economic interest, and the conformity of QC&S's claims-handling process with industry practice. Expert opinions on claims valuation are inherently subjective, and a battle of experts on settlement value is unlikely to satisfy the heightened standard for bad faith or gross negligence.
VII. Potential Waiver and Estoppel Arguments
A. Waiver by Payment
Pinnacle Atlantic paid all billing installments for TY 2023 — totaling $8.7 million — through March 29, 2024 (the final installment of $3.2 million) without raising any objection to the Veridian settlement. Under New York law, a reinsurer that pays claims with knowledge of facts giving rise to a defense may be held to have waived that defense. See, e.g., Albert J. Schiff Assocs., Inc. v. Flack, 51 N.Y.2d 692, 698 (1980) (waiver is the voluntary relinquishment of a known right); Fundamental Portfolio Advisors, Inc. v. Tocqueville Asset Mgmt., L.P., 7 N.Y.3d 96, 104 (2006) (same).
The critical question for the waiver analysis is whether Pinnacle Atlantic had sufficient knowledge of the Veridian settlement at the time it paid the billing installments. If the billing transmittals from Broadreach included detailed claims data — such as loss bordereau identifying the Veridian settlement, the settlement amounts, and the contribution of those amounts to TY 2023 aggregate losses — then Pinnacle Atlantic was on notice of the facts underlying its current challenge and had the ability to raise objections before paying. Its decision to pay without objection could constitute a waiver of the follow-the-fortunes defense.
We must obtain and review all billing transmittals from Broadreach to Pinnacle Atlantic for TY 2023 cessions. Specifically, we need to determine: (i) whether the transmittals included loss bordereau or claims summaries identifying the Veridian settlement and the individual claim amounts; (ii) whether the transmittals inclu

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