Updates on The Right to Independent Counsel and Bellefonte Reinsurance Rule

This will serve as an update on two significant decisions in the insurance coverage and reinsurance arenas that we blogged about last year:  (1) Mount Vernon Fire Insurance Company v. Visionaid Inc., in which the Massachusetts Supreme Judicial Court, answering certified questions from the First Circuit Court of Appeals, found that an insurer’s duty to defend does not include the duty to pay for the prosecution of counterclaims; and (2)  Global Reinsurance Corp. of America v. Century Indemnity Co., where the Second Circuit Court of Appeals certified a question to the New York Court of Appeals pertaining to the so-called “Bellefonte rule” applied in reinsurance law.  Click here for our prior post on Global Re and here for our prior post on Visionaid. 

Recently, the First Circuit returned to Visionaid to resolve the sole remaining issue involving the insured’s claimed right to independent counsel.  In an entertaining opinion replete with humorous asides (“[t]he case pits an insured … against its employment-practices liability insurer (say that ten times fast!)”), the court ruled that there was no conflict of interest between the parties justifying the appointment of independent counsel to defend the insured at the insurer’s expense.  And in Global Re, the New York Court of Appeals answered the Bellefonte-related certified question posed by the Second Circuit, finding that there was no presumption or rule of construction imposing a cap which limits the total amount of reinsurance available under a facultative reinsurance certificate.  We delve into both recent decisions more fully below.

(1) Mount Vernon Fire Ins. Co. v. Visionaid Inc., 875 F.3d 716 (1^st Cir. 2017).

After the Massachusetts Supreme Judicial Court answered the certified questions relating to coverage (or lack thereof) for prosecuting counterclaims, the First Circuit adjudicated the remaining issue of whether the insured had a right to independent counsel.  As discussed in our earlier post, the insurer had appointed an attorney on its panel to defend the insured against a wrongful termination suit brought by a former employee.  The insured subsequently requested that the insurer pursue and fund a counterclaim for embezzlement.  When the insurer declined to do so on coverage grounds, the insured claimed that the insurer’s position created a conflict of interest justifying the appointment of independent counsel, at the insurer’s expense.  The insurer then filed a declaratory judgment action in Massachusetts federal district court, which ultimately found in favor of the insurer.

On appeal, the insured argued that a conflict of interest existed because the insurer and its appointed lawyer, who represented both the insurer and insured, had an interest in “devaluing” the embezzlement counterclaim.  According to the insured, by diminishing the value of the counterclaim, the insurer could obtain a “walk away” settlement which would extinguish its obligation to defend and indemnify the insured.  The court initially agreed with the insured that under Massachusetts law, the attorney appointed by the insurer represents both the insurer and insured.  However, as the court put it, winning the “who-does-[attorney]-represent battle does not help [the insured] win the war.”   

Contrary to the insured’s assertions, the court found that the insurer’s and insured’s interests were aligned in attempting to defeat the former employee’s suit, and that a potent counterclaim would be helpful in that regard.  The court also pointed out that the insured would have its own lawyer handling the counterclaim, who would make sure that no one could “devalue” it.  According to the court, the insured’s concerns were further allayed by the employment practices liability policy’s consent to settle clause, which prohibited the insurer from settling the suit without the insured’s consent.   

Additionally, the court rejected the notion that having two attorneys represent the insured would be unworkable or impractical, noting that the insured alone would be responsible for resolving any disputes between them.  The court also pointed out that there was no evidence that the panel counsel would act unethically to harm the insured, let alone that the insurer wanted to “torpedo the counterclaim.”

In determining whether a duty arises on the part of an insurer to provide independent counsel, insurers and insureds should look to the jurisdiction involved and state’s law which governs the dispute.  Different jurisdictions have different rules triggering the right to appoint independent counsel.  As reflected in Visionaid, the issue often turns on whether a conflict of interest exists between the insurer and insured in the defense of the underlying action. 

(2) Global Reinsurance Corp. of America v. Century Indemnity Co., No. 1234 (N.Y. Dec. 14, 2017).

As set forth in our earlier blog post, Global Re arose from a summary judgment ruling in which the federal district court, relying upon the Second Circuit’s decision in Bellefonte Reinsurance Co. v. Aetna Casualty & Surety Co., 903 F.2d 910 (2d Cir. 1990), held that the reinsurer was not obligated to pay expenses billed by the cedent over and above the amounts set forth in the “reinsurance accepted” sections of the facultative certificates at issue.  The Second Circuit, prior to ruling on the merits of the appeal, asked the New York Court of Appeals to answer whether its previous ruling in Excess Insurance Co. Ltd. v. Factory Mutual Insurance Co., 3 NY3d 577 (2004), which adopted the Bellefonte rationale, created a presumption or rule of construction 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 policy covered expenses, such as defense costs.  Recently, New York’s high court, limiting its ruling to the certified question before it, found that Excess did not impose such a bright line rule.

In doing so, the court noted that the Excess court was never presented with the precise question before the Second Circuit, namely, whether there was a blanket presumption or rule of construction that a limitation on liability clause applied to all payments by a reinsurer.  Rather, the Excess court focused on interpreting the specific contract language before it, “giving meaning to every sentence, clause and word” in the agreement.  The court further distinguished Excess by noting that the loss adjustment expenses in question were incurred in coverage litigation between the insurer and its policyholder.  According to the court, whether defense costs that an insurer was obligated to pay under the terms of the underlying policy would be subject to a similar cap was never at issue.

Ultimately, the court held that Excess did not supersede the standard rules of contract construction otherwise applicable to facultative reinsurance contracts.  Thus, rather than “adopting a blanket rule, based on policy concerns,” the court stated that facultative reinsurance contracts should be initially construed according to the specific language employed therein. 

The New York high court’s ruling in Global Re may be the death knell for the controversial Bellefonte rule.  The case now reverts back to the Second Circuit for further proceedings guided by this decision.