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(Article from Insurance Law Alert, June 2015)

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Our December 2014 Alert reported on a Second Circuit decision holding that a reinsurance certificate was ambiguous as to whether expenses were excluded from the reinsurance limits of liability.  Utica Mutual Ins. Co. v. Munich Reins. Am., Inc., 2014 WL 6804553 (Dec. 4, 2014).  The decision was significant in its analysis of New York precedent.  In particular, Munich distinguished a trio of cases that are widely cited for the proposition that facultative reinsurance limits presumptively include expenses.  See Unigard Sec. Ins. Co. v. North River Ins. Co., 4 F.3d 1049 (2d Cir. 1993); Bellefonte Reins. Co. v. Aetna Cas. & Sur. Co., 903 F.2d 910 (2d Cir. 1990); Excess Ins. Co. v. Factory Mutual Ins. Co., 822 N.E.2d 768 (N.Y. 2004).  This month, a New York federal district court followed suit and ruled that a reinsurance certificate with nearly identical language was ambiguous as to whether it was expense inclusive.  Utica Mutual Ins. Co. v. R&Q Reinsurance Co., No. 6:13-CV-1332 (N.D.N.Y. June 4, 2015).

Utica issued primary and umbrella policies to an underlying insured.  INA Reinsurance reinsured a portion of Utica’s liability pursuant to a facultative certificate that was later assumed by R&Q.  The certificate included a $1 million per occurrence limit and provided reinsurance “subject to the terms hereon and the general conditions set forth on the reverse side hereof.”  The parties disputed whether expenses were included in the $1 million limit.  Citing to Unigard, Bellefonte and Excess, R&Q argued that its liability was capped at $1 million, inclusive of expenses.  The court disagreed.  Employing the same reasoning as Munich, the court found that the certificate did not include the language at issue in Unigard and Bellefonte that expressly made all of the reinsurer’s obligations subject to the limit of liability.  Rather, the language was nearly identical to the language at issue in Munich – providing indemnification against “loss or damage which [Utica] is legally obligated to pay . . . subject to the Reinsurance Accepted limits shown in the Declarations . . . .”  Adhering to Munich’s rationale, the court reasoned that “the fact that ‘losses or damages’ [were] ‘subject to’ the limit of liability reasonably implie[d] that expenses [were] not.”  Although the certificate at issue did include an overarching “subject to” clause in its preamble (unlike the one at issue in Munich), the court found that this language did not expressly refer to the liability limit.  The court ruled that extrinsic evidence must be considered in deciding whether the reinsurance limit of liability includes expenses.