Locke Lord QuickStudy: Adding Fuel to the Bellefonte Fire? Second Circuit Asks New York’s Highest Court For Guidance as to Reinsurer’s Limit of Liability

In Global Reins. Corp. of Am. v. Century Indem. Co., 2016 WL 7156549 (Dec. 8, 2016), the U.S. Court of Appeals for the Second Circuit asked New York’s highest court, the New York Court of Appeals, to provide guidance as to the so-called “Bellefonte” rule, under which the stated limit of liability caps a reinsurer’s obligation and it is not obligated to pay any additional sums for defense costs above the limit of liability.      

Background
After litigating an asbestos coverage dispute with its insured, the cedant (Century Indemnity), became obligated to pay defense expenses in addition to the indemnity limits of its insurance policies and paid in excess of $90 million, 90% of which represented “expenses.”  The cedant sought reimbursement for portions of such payments from the reinsurer (Global Reinsurance Corp. of America).  In relevant part, the excess of loss reinsurance certificates stated that “all claims involving this reinsurance, when settled by [cedant] shall be binding on [reinsurer], who shall be bound to pay its proportion of such settlements, and in addition thereto, in the ratio that [reinsurer’s] loss payment bears to [cedant’s] gross loss payments, [reinsurer’s] proportion of expenses… incurred by [cedant] in the investigation and settlement of claims or suits.” 

The reinsurer asserted that its obligation to pay for both loss and expenses combined was capped but the cedant challenged this assertion on the grounds that the provision applied only to “loss” such that the reinsurer must pay all expenses, including amounts in excess of the limit of liability. The U.S. District Court for the Southern District of  New York, relying primarily on prior Second Circuit precedent in Bellefonte Reins. Co. v. Aetna Cas. & Sur. Co., 903 F.2d 910 (2nd Cir. 1990) and Unigard Security Ins. Co. v. North River Ins. Co., 4 F.3d 1049 (2nd Cir. 1993), found that the reinsurance certificates unambiguously cap the maximum amount that the reinsurer can be obligated to pay the cedant for both “losses” and “expenses” combined.

The cedant appealed the district court’s ruling.  In resolving the appeal, the Second Circuit reviewed its prior holding in Bellefonte and acknowledged that this decision held that the amount stated in the “Reinsurance Accepted” provision was an “explicit limitation on liability,” but noted that the decision “never explained why this was so.”  The court also recognized that the cedant’s argument that Bellefonte and Unigard were wrongly decided was “not without force.”  In this regard, the court found it difficult to understand Bellefonte’s conclusion that the reinsurance certificates “unambiguously” capped the reinsurer’s liability for both losses and expenses since “it is not entirely clear what exactly the ‘Reinsurance Accepted’ provision in Bellefonte meant.”  The court noted that the cedant’s argument that Bellefonte could have disastrous economic consequences for the insurance industry since potentially massive exposures would be unexpectedly unreinsured was “worthy of reflection.”  On the other hand, the court recognized that such concerns must be balanced against overruling prior court precedent where reinsurers may have relied on Bellefonte and Unigard in estimating exposure or setting reserves.

In order to promote a consistent rule of construction on this “important question,” the court certified the following question to the New York Court of Appeals:

Does the decision of the New York Court of Appeals in Excess Insurance Co. v. Factory Mutual Ins. Co., 3 N.Y.3d 577 (2004), impose either a rule of construction, or a strong presumption, that a per occurrence liability cap in a reinsurance contract limits the total reinsurance available under the contract to the amount of the cap regardless of whether the underlying policy is understood to cover expenses such as, for instance, defense costs?

The court noted that there was no dispute in Excess that the reinsurance policy contained a liability cap such that the case does not address the question of whether the stated limit represented an absolute coverage limit for losses and expenses combined.  The Second Circuit also noted that it expressed no view as to the construction of the contracts or what the rule should be since the New York Court of Appeals has a greater interest and greater expertise in deciding New York law. 

Analysis
Reinsurers and cedants will watch Global Re to see how New York’s highest court resolves the important question certified by the Second Circuit. The Court of Appeals can, of course, modify the question or even ask the parties to address other questions it deems relevant. In the meantime, the cost-inclusiveness debate continues and the Second Circuit’s opinion spotlights both sides of the debate in analyzing its own decisions, noting the importance of maintaining prior decisions such as Bellefonte and Unigard, and indicating that the reinsurer’s arguments against such precedent were “not without force.”  While many questions persist, one thing is certain: “stay tuned.”