Since the seminal case of Bellefonte Reins. Co. v. Aetna Cas. & Surety Co., 903 F.2d 910 (2d Cir. 1990), a controversy has raged over a facultative reinsurer's obligation to pay for expenses in excess of the limits stated on the certificate of facultative reinsurance.
The Bellefonte court construed the facultative certificate under New York law and determined that the stated limit was an all-in cap on the reinsurer's liability regardless of the operation of the underlying policy reinsured. At least that is how Bellefonte was interpreted by subsequent cases in New York and many other parts of the United States. While commentators and reinsurance arbitrators may have had differing views on the so-called Bellefonte rule, it remained viable in the courts for over 25 years.
Chipping Away at Bellefonte
Not all state and federal courts accepted the Bellefonte rule, however. In certain jurisdictions, Bellefonte was never accepted. In those jurisdictions, a following form facultative certificate reinsuring a costs-in-addition policy would often not result in the reinsurer's liability for costs being capped by the certificate limits. And, anecdotally, in reinsurance arbitrations, Bellefonte was rarely followed.
In the past few years, some courts in jurisdictions that followed the Bellefonte rule have begun to rethink whether the limits stated in the facultative certificate really cap all reinsurance liability. Not all facultative certificates use the precise Bellefonte language, and many courts have viewed different language as either being ambiguous or providing for a different result. Some courts also have recognized a difference between declaratory judgment expenses arising out of coverage disputes and defense costs associated with defending the underlying insured against third-party claims.
How Some Courts Deviated from Bellefonte
A good example is Century Indemnity Co. v. OneBeacon Ins. Co., No. 1280 EDA 2016, 2017 Pa. Super. LEXIS 810 (Super. Ct. Pa. Oct. 17, 2017). In Century Indemnity, the court found the certificates ambiguous and allowed the cedents to present extrinsic evidence. The court also rejected the reinsurer's argument that the cedents were collaterally estopped from asserting their claims based on prior decisions. A 3-day, non-jury trial resulted in a finding for the cedents. The reinsurer appealed.
The reinsurer relied on Bellefonte and its progeny, but the court noted that this was a case of first impression for Pennsylvania courts. The court analyzed Bellefonte in detail and discussed its history. The appellate court, while agreeing that the General Conditions language in the contract in dispute was almost identical to Bellefonte, agreed with the trial court that the "subject to" clause was materially different.
In Bellefonte, the "subject to" clause stated that the reinsurance was subject to the terms, conditions, and amount of liability set forth in the certificate. In Century Indemnity, the "subject to" clause stated that the reinsurance was subject to the general conditions set forth on the reverse side of the certificate. It did not expressly provide that all of the coverage was subject to the reinsurance accepted limit. The court found that, because the certificate followed the underlying policy, it would cover expenses above the liability limit.
Enter Global v. Century
In December 2016, the Second Circuit Court of Appeals, in Global Reinsurance Corp. of America v. Century Indemnity Co., 843 F.3d 120 (2d Cir. 2016), certified a question to the New York Court of Appeals to help it resolve a Bellefonte-type dispute. The question the Second Circuit asked the New York Court of Appeals to answer was:
Does the decision of the New York Court of Appeals in [Excess] 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?
Excess refers to Excess Ins. Co., Ltd. v. Factory Mutual Ins. Co., 3 N.Y.2d 577 (2004), a case that many observers believed put New York law squarely in the Bellefonte column.
On November 15, 2017, the New York Court of Appeals heard a very spirited argument in Global Reins. Corp. of Am. v. Century Indemnity Co., 30 N.Y.3d 508 (2017). On December 14, 2017, the New York Court of Appeals answered the Second Circuit's certified question in the negative.
The New York Court of Appeals Weighs in
The New York Court of Appeals, in saying no to the certified question, got right to the point:
Under New York law generally, and in Excess in particular, there is neither a rule of construction nor a presumption that a per occurrence liability limitation in a reinsurance contract caps all obligations of the reinsurer, such as payments made to reimburse the reinsured's defense costs.
The opinion, written by Judge Feinman who asked several questions at oral argument, was unanimous. The opinion is a minitreatise on reinsurance law and insurance and reinsurance contract interpretation. If you are involved in construing insurance contracts under New York law, you must read the decision.
A couple of interesting points come out of the New York Court of Appeals' decision. First, although the certified question did not explicitly limit itself to facultative reinsurance—a concern that arises from the Second Circuit's decision—the New York Court of Appeals took the question to be solely about facultative reinsurance and not about reinsurance treaties, "which do not have a single 'underlying policy.'"
Second, the New York Court of Appeals never mentioned Bellefonte. The opinion hewed closely to Excess and what Excess held under New York law. The court recognized that, while in Excess it did not say that defense costs under a facultative certificate are unambiguously or presumptively capped by the liability limits of the certificate, some courts read Excess that way. As stated by the New York Court of Appeals, "[w]e now dispel any intimation that Excess established such a rule."
The New York Court of Appeals explained that, in Excess, it focused on the limited context of that case and the specific contract wording and was not faced with the question of whether there was some blanket rule or presumption. "Critically, we did not read the limit clause in isolation, but in light of the entire agreement as an integrated whole, 'giv[ing] meaning to every sentence, clause and word' thereof" (citations omitted). The court also noted that the expenses in Excess were incurred in coverage litigation and not as third-party defense costs, so the issue of whether the following form clause subjected the reinsurer to the same terms as the original policy so as to require the reinsurers to cover defense costs in excess of the limit was not at issue.
To be clear, the New York Court of Appeals stated, "We hold definitively that Excess did not supersede the 'standard rules of contract interpretation' … otherwise applicable to facultative reinsurance contracts." (Citation omitted.) The court read Excess in harmony "with the traditional rules of contract interpretation reiterated numerous times by this Court." The latter comment preceded a string of New York Court of Appeals citations but also alluded to its recent decision, In re Viking Pump, Inc., 27 N.Y3d 257 (2016), where the court rejected another attempt at a different blanket rule.
The court concluded with several important statements. First, it reiterated, "New York law does not impose either a rule, or a presumption, that a limitation on liability clause necessarily caps all obligations owed by a reinsurer, such as defense costs, without regard for the specific language employed therein." That, of course, does not mean that reinsurers now lose and ceding companies now win. It means that New York courts have to look at the words and context of the specific contract, read those words in harmony as a whole, and determine on a specific basis whether defense costs are payable outside the facultative certificate's liability limit. Second, the court emphasized that it was asked only to decide a narrow issue—the certified question about Excess—and nothing else. Thus, the lack of mention of Bellefonte, a federal case and not a state case.
The next step is for the Second Circuit, now that it has its certified question answered, to determine how the facultative certificate will be interpreted in Global, not based on a presumption but based on the specific words of the specific contract. To help it make that determination, the Second Circuit asked the parties to submit 10-page briefs on how the New York Court of Appeals' answer to its certified question applies to the case before the circuit. The parties did so on February 9, 2018, and, not surprisingly, the views are diametrically opposed.
The cedent focused on the following clause and how the court should now interpret the language in the facultative certificate and the underlying insurance contract to allow the cession of costs in addition to the certificate's limits. The reinsurer relied on the preamble language in the facultative certificate and argued that the certificate, in fact, did provide "otherwise" and that, therefore, the limit of liability is a cap on the reinsurer's liability. In other words, the "amount of liability," together with the "subject to" language, is viewed by the reinsurer as demonstrating the specific intent of an all-in cap.
The Second Circuit will either decide the case or remand it back to the district court to take evidence and rule on the facultative certificate language using the New York contract interpretation rules provided for by the New York Court of Appeals. But, given the self-critical analysis applied by the Second Circuit in its decision certifying the question to the New York Court of Appeals, one has to question whether Bellefonte will be relegated to the "limited by its facts" pile of legal precedent.
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