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In the latest twist regarding the efficacy of the so-called “Bellefonte” rule applied in reinsurance law, the United States Court of Appeals for the Second Circuit has asked the New York Court of Appeals, the state’s highest court, to weigh in on whether there is a hard “cap” on the amount of combined “losses” and “expenses” that a reinsurer may be obligated to pay under a facultative reinsurance certificate even when the reinsured policy paid defense expenses outside of limits.

In Global Reinsurance Corp. v. Century Indem. Co., No. 15-2164 (2d Cir. Dec. 8, 2016), the cedent claimed in the underlying federal district court action that the reinsurer was obligated to pay a share of more than $60 million in defense expenses incurred in connection with thousands of underlying asbestos bodily injury suits.  The reinsurer argued that the dollar amounts set forth in the “reinsurance accepted” sections of the nine facultative reinsurance certificates issued to the cedent (ranging from $250,000 to $2 million) unambiguously capped the amount that the reinsurer was obligated to pay for both losses and expenses combined.  The cedent countered that those limits applied only to “loss” (i.e. settlements and damages), and that the reinsurer was required to pay all expenses in addition to such limits, just as the cedent was obligated to do under the reinsured policy.  On summary judgment, the district court sided with the reinsurer, and, in so doing, relied upon the Second Circuit’s landmark reinsurance decisions in Bellefonte Reinsurance Co. v. Aetna Casualty & Surety Co., 903 F.2d 910 (2d Cir. 1990) and Unigard Security Ins. Co. v. North River Ins. Co., 4 F.3d 1049 (2d Cir. 1993).  In both cases (Unigard relied upon the reasoning of Bellefonte), the Second Circuit ruled that the reinsurers were not obligated to pay expenses over and above the limits of liability stated in the certificates. 

On appeal, the cedent, supported by an amicus brief filed on behalf of four prominent reinsurance brokers, argued that Bellefonte and Unigard were wrongly decided, and that at a minimum, the district court erred by ruling that the reinsurance certificates were unambiguous.   The Second Circuit indicated that these arguments were “not without force,” noting that it was “not entirely clear” from its perspective what the “reinsurance accepted” provision set forth in the certificate at issue in Bellefonte meant.  The court also found “worthy of reflection” the brokers’ arguments that continued adherence to Bellefonte would result in “disastrous economic consequences” if ceding insurers were left without reinsurance for substantial defense cost payments, while acknowledging that maintaining the status quo was still a viable option.

The court also disagreed with the reinsurer’s argument that because New York law applied in this case, the New York Court of Appeals’ reinsurance decision in Excess Insurance Co. v. Factory Mutual Insurance Co., 3 N.Y.3d 577 (2004), which adopted the rationale of Bellefonte and Unigard, was controlling.  The court noted that in contrast to Global Re, the parties in Excess had agreed that there was a capped limit of liability in the reinsurance certificate, and that the question of whether the stated limit represented an “absolute coverage limit” for losses and expenses combined was never decided.  However, because the court was uncertain whether Excess imposed a clear rule of contract construction or rebuttable presumption relative to the cap issue, the court asked the New York Court of Appeals to decide the following question, after which the court would resume its deliberations:

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?

Global Re is the latest in a myriad of challenges to the Bellefonte rule, the outcome of which could have huge financial implications on the insurance/reinsurance industry and change the way in which cedents and reinsurers conduct business.  Although the court held its ruling on the merits in abeyance pending the outcome of the certified question, this opinion is notable for the court’s detailed examination of its own longstanding precedents and acknowledgement that overturning Bellefonte and Unigard is at least “worthy of reflection”.