Prior to the 1990’s Bellefonte Reinsurance Co. v. Aetna Cas. & Sur. Co., 903 F.2d910 (2d Cir. 1990) (“Bellefonte”) decision, the insurance/reinsurance industry operated under the assumption that expenses in addition to loss, unless explicitly excluded, were included coverages under facultative reinsurance certificates. The Bellefonte decision, and its progeny, was a real ‘game changer’. Almost 30 years later, we appear to be returning to the same familiar playing field.

On May 9, 2018, the Second Circuit Court of Appeals issued the latest in a series of important opinions addressing whether the limitation on liability in the “Reinsurance Accepted” clause in a reinsurance facultative certificate caps a reinsurer’s obligation to pay expenses in addition to loss. See Global Reinsurance Corp. of Am. v. Century Indem. Co., 2018 WL 2122084,  --- F.3d ---- (2018).

This dispute arises out of nine reinsurance certificates Global Reinsurance Corporation of America (“Global”) issued in favor of Century Indemnity Company (“Century”), pursuant to which Global agreed to reinsure specified portions of general liability policies Century had issued to its insured, Caterpillar. Century later sought reimbursement from Global for portions of payments to Caterpillar for asbestos losses, arguing that its combined liability for loss and expense was capped at the specific dollar amount stated in the “Reinsurance Accepted” clause in the certificates. Century disagreed, arguing that clause applied only to loss and that Global must pay its proportionate share of expenses that exceeded that amount.  

Relying on the Second Circuit’s opinions in Bellefonte and Unigard Sec. Ins. Co. v. North River Ins. Co., 4 F.3d 1049 (2d Cir. 1993) (“Unigard”), Global successfully moved for summary judgment. The district court granted summary judgment. Century appealed to the Second Circuit, which revisited its decisions in Bellefonte and Unigard, and questioned whether they had been wrongly decided in the first instance. In addition, the Second Circuit considered the New York Court of Appeals’ decision in Excess Ins. Co. v. Factory Mut. Ins. Co., 3 N.Y.3d 577 (2004) (“Excess”), which had expanded on the Second Circuit’s ruling in Bellefonte and Unigard. The Second Circuit questioned whether the New York Court of Appeals in Excess established either a rule, or rebuttable presumption, that where facultative reinsurance is subject to a per occurrence liability cap, that cap limits the total reinsurance available regardless of whether the underlying insurance policy includes defense costs.  The Second Circuit certified the question to the New York Court of Appeals.  

The New York Court of Appeals held that under New York law 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. Accordingly, the Second Circuit remanded the case back to the trial court for consideration in the first instance of the terms of the reinsurance certificates at issue. The Second Circuit instructed that in interpreting the certificates, the trial court was to use standard principles of contract construction, and further should construe the certificates solely  in light of their language, and, to the extent helpful, the specific context.

Déjà Vu All Over Again
Is it 1990 again? The reinsurance industry has certainly changed in the last 28 years, which reflects a significant degree of adaptability. Reinsurers and cedents will carefully monitor the trial court’s decision on remand to see how it interprets the certificate at issue, as the trial court’s decision will likely have significant ramifications for the industry going forward, or backward, as the case may be!