“It ain’t over until it’s over.”1 but it appeared to be over, although, and it did come as a bit of a surprise for most of the industry. Capping the limits on defense costs/expenses under facultative certificates caught many off guard. The standard language (in use for decades) didn’t appear on its face to be particularly ambiguous, but apparently the USDC for the Southern District in 1990 had a different thoughts, and it was their opinion that counted. Fast forward 26 years:
The United States Court of Appeals for the Second Circuit recently asked the New York Court of Appeals to clarify what is included within the limits of liability in a reinsurance certificate. Global Reinsurance Corp. of America, et al. v. Century Indemnity Co., et al.
, ---F.3d--- (2d Cir. Dec. 8, 2016).
The dispute came before the Court of Appeals on the question of whether a reinsurer was required to cover defense costs and expenses in addition
to the reinsurer’s total liability limits in connection with underlying asbestos litigation. The reinsurer argued that based on the wording of the reinsurance certificate at issue, the maximum amount it could be required to pay was capped by the liability limits set forth in the certificate. The ceding insurer, however, argued that the amount stated in the certificate applies only to “loss” and, therefore, that the reinsurer was required to pay all expenses in excess of that amount. The United States District Court for the Southern District of New York agreed with the reinsurer and, relying on Bellefonte Reinsurance Co. v. Aetna Casualty & Surety Co.
, 903 F.2d 910 (2d Cir. 1990) and Unigard Security Insurance Co. v. North River Insurance Co.
, 4 F.3d 1049 (2d Cir. 1993), held that the certificates “unambiguously capped [the reinsurer’s] liability for both losses and expenses. Id
. at *2 (citation omitted).
The Court of Appeals, however, found it “difficult to understand the Bellefonte
court’s conclusion that the reinsurance certificate in that case unambiguously
capped the reinsurer’s liability for both loss and expense” nothing that it was not entirely clear what the “Reinsurance Accepted” provision before the court in Bellefonte
. at *5 Finding the “Reinsurance Accepted” provision to act as an absolute cap on the reinsurer’s liability for both loss and expense, the Court noted, seemed to be “in tension with the purpose of reinsurance” and would effectively leave a ceding insurer ‘s defense costs entirely unreinsured. Id
The Court of Appeals also disagreed with the reinsurer, which argued that the New York high court’s decision in Excess Insurance Co. v. Factory Mutual Insurance Co.
, 3 N.Y.3d 577 (2004) was controlling, explaining that Excess
never decided the question of whether the stated limits represented an absolute coverage limit for losses and expenses combined. Id
. at *6. The Court noted the distinction between the question of “whether a reinsurer is responsible to reimburse the ceding insurer for the cost of litigating with the insurerd over the insured’s claim” and “whether an insurer who has been held liable on the underlying policy for the expenses of defending claims against the insured may then demand that its reinsurers share their proportional cost of the underlying coverage.” Id
. Finding this a determination that should be made by New York, the Court of Appeals certified the following question to New York’s highest court:
Does the decision of the New York Court of Appeals in Excess Insurance Co. v. Factory Mutual Insurance 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? So 26 years of legal precedent may be at stake.
IT AIN’T OVER!
A copy of the opinion is available here
1 Yogi Berra
*Please note: this is a follow-up piece from the December 14 QuickStudy by Chicago Senior Counsel Mark Deptula