The United States Court of Appeals for the Second Circuit rejected the Bellefonte Rule, which reinsurers relied upon to cap liability under certificates of facultative reinsurance for indemnity and expense.[1]
The Bellefonte Rule stemmed from a 1990 Second Circuit decision where the Court found that reinsurers were not obligated to pay additional sums for defense costs above the limits of liability specified in certificates of facultative reinsurance.[2] In effect, the Bellefonte Rule acted as a de facto cap for both indemnity and expense. Decades later, the Court ruled it “no longer good law”.
Background
From 1962 to 1981, Caterpillar Tractor Companies (“Caterpillar”) purchased several general liability insurance policies from Century Indemnity Company (“Century”), which were reinsured by Global Reinsurance Corporation of America (“Global”) through a series of facultative reinsurance certificates.
In the late 1980s, Century indemnified Caterpillar for extensive damages related to asbestos cases. The terms of the policies required Century to reimburse Caterpillar for its defense costs in addition to the policies’ limits.
When Century sought reimbursement from Global, a dispute ensued as to whether the reinsurance certificates’ limits of liability capped Global’s reinsurance obligations for Caterpillar’s defense costs.
The certificates included a “follow-form” clause, which provided that “the liability of the Reinsurer […] shall follow that of the Company and […] shall be subject in all respects to all of the terms and conditions of the Company’s policy.” In other words, Global’s reinsurance liability was to be “concurrent” with Century’s liability under the underlying policies.
Relying on Bellefonte and Unigard Sec. Ins. Co., Inc. v N. Riv. Ins. Co., 4 F3d 1049 [2d Cir 1993], the Southern District of New York determined that the “unambiguous language” of the Global certificates capped Global’s reinsurance obligations for both indemnity and defense costs to the certificates’ limit of liability.
On appeal, the Second Circuit found those decisions “inconsistent with the standard rules of contractual interpretation” and certified the question to the New York Court of Appeals which agreed in 2014 and held that “New York law imposes neither a rule of construction nor a presumption that a limitation on liability clause necessarily caps all obligations owed by a reinsurer, such as defense costs.”[3] The case was then remanded to the District Court which entered a judgment in favor of Century in April 2020 and Global appealed.
Second Circuit Decision
The Second Circuit affirmed the District Court’s decision, finding that nothing in the certificates specifically provided that they differed from the cedent’s policies concerning the payment of defense costs. The panel clarified that, in the event of conflict, “the general expression of Global’s promise to reinsure [set forth in the preamble and Reinsurance Accepted provision] is trumped by the [follow-form] clause that designates the specific terms on which that reinsurance is offered.”
Writing for the Second Circuit, Judge Menashi explained that “this conclusion follows not only from the unambiguous language of the certificates but also from evidence of custom and usage concerning the importance of concurrency to the reinsurance market when the certificates were issued”. Of particular note, Judge Menashi added that:
[a]s Century’s experts explained, “it is well known and universally understood in the insurance and reinsurance industry that premium follows risk”.[4] […] This principle requires concurrency as to the treatment of defense costs because otherwise, as one expert explained, the cedent “would be left with gaps in coverage and it would potentially end up keeping risk for its own account even though it had paid reinsurers all of the premium associated with that risks.”[5]
Comment
This case resolves a long-standing dispute between ceding companies and reinsurers. The court’s determination that the unambiguous language of the reinsurance contract was also consistent with well understood principles of the reinsurance relationship underscores the court’s departure from the reasoning of the Bellefonte decision. The case brings to light the relationship between the reinsurance contract and the business realities underlying the reinsurance transaction- risk transfer itself.
Given that many reinsurance contracts adopt New York law, the impact of the Global Reinsurance is consequential not only for existing reinsurance contracts in terms of how they will be interpreted, but also present-day contracts should be written. The parties should carefully consider the risks being assumed and transferred and the impact of those decisions on the obligations of the parties.
[1] Glob. Reins. Corp. of Am. v Century Indem. Co., 22 F4th 83 (2d Cir 2021) (citations omitted) (the "2021 Opinion").
[2] Bellefonte Reinsurance Co. v. Aetna Cas. & Sur. Co., 903 F.2d 910 (2d Cir. 1990) abrogated by Glob. Reinsurance Corp. of Am. v. Century Indem. Co., 22 F.4th 83 (2d Cir. 2021)
[3] Glob. Reins. Corp. of Am. v Century Indem. Co., 30 NY3d 508 (2017)
[4] 2021 Opinion at 306 (Hall Statement paragraph 58)
[5] Id. at 300-01 (Hall Statement paragraph 37)
