Illinois State Circuit Court Rules That Limitation on Reinsurer’s Liability Covered Both Losses and Expenses

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Explore:  Reinsurance

Cont’l Cas. Co. v. MidStates Reinsurance Co., No. 12 CH 42911 (Ill. Cir. Ct. Sept. 10, 2013).

An Illinois state court granted a reinsurer’s motion for judgment on the pleadings in the case where the cedent sought a declaration that none of its facultative certificates contained limits on expenses and that the reinsurer therefore breached its certificates with the cedent by refusing to pay expenses in excess of the stated certificate limits.

The facultative certificates contained a provision titled “reinsurance assumed” that described the amount of coverage that the reinsurer agreed to provide. While both parties agreed that this provision limited the reinsurer’s liability to compensate for losses, they disagreed on whether the provision applied to expenses as well. The reinsurer argued that the “reinsurance assumed” provision acted as a limitation on a reinsurer’s obligations for both losses and expenses; in the reinsurer’s eyes, “reinsurance assumed” just meant the total amount of reinsurance assumed. Therefore, the reinsurer declined to pay any expenses in excess of the limits it perceived were set out in the certificate. The cedent, on the other hand, argued that the “reinsurance assumed” provision did not limit the reinsurer’s obligations to pay expenses. The cedent claimed that the reinsurer’s failure to pay expenses in excess of its perceived limit constituted a breach of contract.  

The court noted that while the “reinsurance assumed” provision did not distinguish between “losses” and “expenses” when discussing the reinsurer’s liability, a different provision in the reinsurance certificate did. The fact that the “reinsurance provision” only discussed the reinsurer’s liability in general terms indicated that the contracting parties had no intention of separating losses from expenses when calculating the amount for which  the reinsurer should be liable. The court also pointed out that the majority of cases that had dealt with this issue found that “reinsurance assumed” provisions limited all liability and not just losses and expenses. Therefore the court found that, as a matter of law, there was a limit on the reinsurer’s liability and that limit covered both losses and expenses.

In the alternative, the cedent argued that the certificates are ambiguous and that extrinsic evidence was needed. The court, however, was not persuaded by this argument; it pointed out that ambiguity does not exist simply because the parties disagreed on the meaning of a contractual provision. Here, the amount of reinsurance liability assumed was set at a total amount in the certificates without any indication that the amount referred only to losses or expenses respectively. 

The court found that there was no genuine issue of material fact and that the reinsurer was entitled to judgment as a matter of law. Consequently, the court granted the reinsurer’s motion for judgment on the pleadings.