For those old enough to remember, Abbott & Costello had a  routine  where the famous comedy duo debated the confusing question of “Who’s On First”.  The evasive answer appeared to be in the eyes of the beholder.

In this case, the beholder is a federal court in New York that recently ruled that the dollar amounts stated on certain facultative certificates cap indemnity payments and also caps expense payments when there are no losses, but do not cap expense payments when there are losses. In Global Reinsurance Corporation of America v. Century Indemnity Company, No. 13 Civ. 6577, 2020 WL 995860 (S.D.N.Y. Mar. 3, 2020), Century issued insurance policies to Caterpillar Tractor Company, which faced liability arising from asbestos claims.  Global ceded facultative reinsurance to Century for a portion of the policies, which policies contain a “Supplementary Payments Provision” that require Century to pay defense costs in addition to the applicable limits for indemnity payments.

The reinsurance certificates contain a Payments Provision, which states:

All loss settlements made by the Company, provided they are within the terms and conditions of the original policy(ies) and within the terms and conditions of the certificate of reinsurance, shall be binding on the Reinsurer. Upon receipt of a definitive statement of loss, the Reinsurer shall promptly pay its proportion of such loss as set forth in the Declarations. In addition thereto, the Reinsurer shall pay its proportion of expenses [agreed by the parties in this case to include defense costs] … incurred by the Company in the investigation and settlement of claims or suits and its proportion of court costs and interest on any judgment or award, in the ratio that the Reinsurer’s loss payment bears to the Company’s gross loss payment. If there is no loss payment, the Reinsurer shall pay its proportion of such expenses only in respect of business accepted on a contributing excess basis and then only in the percentage stated in Item 4 of the declarations in the first layer of participation.

Item 4 of the reinsurance certificates identifies the layer of reinsurance in which Global participates and the part of that layer covered by the certificates.  For example, Item 4 of one certificate states: “$1,000,000 each occurrence and in the aggregate where applicable part of $10,000,000 which is in turn excess of the limits as stated in Item #3 above.”

Global sought a declaration that the amount stated in the certificates was the maximum that it must pay on each reinsurance contract. Century contended that the amount stated in the certificates capped indemnity payments but not the reinsurer’s obligation to pay defense expenses.

The court had previously granted summary judgment to Global on the issue, relying on Second Circuit precedent in Bellefonte Reinsurance Co. v. Aetna Cas. & Sur. Co., 903 F.2d 910 (2d Cir. 1990) (affirming a judgment that reinsurers “[are] not obligated to pay … any additional sums for defense costs over and above the limits on liability stated in the reinsurance certificates.”) and Unigard Sec. Ins. Co. v. North River Ins. Co., 4 F.3d 1049 (2d Cir. 1993) (underlying policies paid expenses above and beyond the limits for loss).  On appeal, the Second Circuit cast doubt on the decisions in Bellefonte and Unigard and certified the issue to the New York Court of Appeals, which ultimately  held that courts must use the “traditional rules of contract interpretation” to interpret reinsurance contract provisions.  On remand, the District Court for the Southern District of New York held that the amount stated in Item 4 of the reinsurance certificates caps Global’s obligation to pay losses and expenses when there are no losses, but does not cap Global’s obligation to pay expenses when there are covered losses.

In reaching this decision, the trial court observed that the Follow Form clauses in the reinsurance certificates state that Global’s liability is “subject in all respects to all the terms and conditions of the Company’s policy.” This includes the Century policies’ Supplementary Payments provisions, which state that expenses are in addition to the limits of liability.  Thus, the Payments Provision and Item 4 in the reinsurance certificates set forth the method with which to calculate Global’s share of loss as well as the maximum amount of such loss.

Relying on this language, the court held that Payments Provision and Item 4 set Global’s obligation to pay its proportion of expenses when it makes no loss payment, and caps the maximum amount of such expenses to be the same dollar amount that limits indemnity payments.  In reaching this conclusion, the court observed that Item 4 contains an “implied percentage of the reinsurer’s proportionate share of the relevant layer of reinsurance.”  The court also found that the Payments Provision dictated that, when there are loss payments, there is no cap on expenses.

Given the Second Circuit’s direction to “construe each reinsurance policy solely in light of its language and, to the extent helpful, specific context”, the District Court  acknowledged that even if the decisions in Bellefonte and Unigard had not been overruled, their “continued applicability may be scrutinized,” and observed that the court’s prior decision relying on these cases had been reversed and remanded with the direction, as noted above, to “construe each reinsurance policy solely in light of its language and, to the extent helpful, specific context.”

Given the protracted history of this case, its commentary on Bellefonte and Unigard, and the effect it has on how caps on indemnity and expense payment may be interpreted, this decision will likely not be the last word on the subject.  It will be interesting to see “who will be on first” the next time this issue is batted around by the courts!