UPDATE: SECOND CIRCUIT REMANDS REINSURANCE LIMITS DISPUTE

In the latest opinion emanating from a high-profile reinsurance case that we have been chronicling in this blog, the United States Court of Appeals for the Second Circuit recently vacated a district court’s ruling premised upon the so-called “Bellefonte rule” applied in reinsurance law, and directed the district court to reassess the facultative reinsurance certificates at issue based on standard rules of contract interpretation.  Global Reinsurance Corp. v. Century Indem. Co., No. 15-2164, 2018 U.S. App. LEXIS 12121 (2d Cir. May 9, 2018).

Our blog posts on prior rulings in this matter can be found here and here.   To briefly recap, Global Re arose from a summary judgment ruling in which the underlying district court, relying largely upon the Second Circuit’s seminal decisions in Bellefonte Reinsurance Co. v. Aetna Casualty & Surety Co., 903 F.2d 910 (2d Cir. 1990) and Unigard Security Ins. Co., Inc. v. North River Ins. Co., 4 F.3d 1049 (2d Cir. 1993), held that the reinsurer was not obligated to pay defense expenses billed by the cedent over and above the amounts set forth in the “reinsurance accepted” clauses of the facultative certificates at issue. 

On appeal, the Second Circuit issued an initial opinion in which it undertook a detailed re-examination of its prior holdings in Bellefonte and Unigard.  The court specifically called into question the Bellefonte court’s conclusion that the reinsurance certificate in that case “unambiguously capped the reinsurer’s liability for both loss and expenses.”  The court noted that evidence of reinsurance industry custom and practice “might have shed light” on the relevant contract language.  The court also expressed uncertainty as to whether the New York Court of Appeals decision in Excess Insurance Co. Ltd. v. Factory Mutual Insurance Co., 3 N.Y.3d 577 (2004), which adopted the Bellefonte rationale, created a clear rule of contract construction or strong presumption that a per occurrence liability cap in a facultative certificate limited the total reinsurance available under the contract to the amount of that cap, regardless of whether the underlying reinsured policy covered defense costs outside of limits.  As a result, the court asked the New York Court of Appeals to weigh in on whether Excess imposed such a blanket rule.   

The Court of Appeals ultimately concluded that under New York law there was neither a rule of construction nor presumption that a limitation on liability clause in a facultative certificate capped all obligations owed by a reinsurer.  The court emphasized that its ruling in Excess “did not supersede the standard rules of contract construction otherwise applicable to facultative reinsurance contracts.”  The court stated that such contracts should be initially construed according to the specific language employed therein. 

After receiving the above guidance from New York’s highest court, the Second Circuit concluded in its opinion issued earlier this month that it was “required” to remand the case to the district court for “reconsideration of the contracts employing standard principles of contract interpretation.”  In particular, the Second Circuit directed the district court to “construe each reinsurance policy solely in light of its language and, to the extent helpful, specific context.”

We will continue to monitor and report on developments in this ongoing matter with potentially wide-ranging implications for the industry.

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