(Article from Insurance Law Alert, March 2020)
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Following a lengthy history including review and rulings by the Second Circuit and New York Court of Appeals (see December 2016 and 2017 Alerts), a New York federal district court ruled that facultative reinsurance contracts unambiguously cap both indemnity and expense payments when there are no losses but do not cap expense payments when there are losses. Global Reinsurance Corp. of Am. v. Century Indem. Co., 13 Civ. 6577 (S.D.N.Y. Mar. 2, 2020).
The dispute between Century and Global Reinsurance concerned the extent of Global Reinsurance’s obligations under certain facultative reinsurance contracts issued to Century. In 2014, a New York federal district court ruled that the certificates unambiguously capped Global Reinsurance’s liability at $250,000 (the amount set forth in the Reinsurance Accepted provision) for both losses and expenses. In so ruling, the district court relied on Bellefonte Reinsurance Co. v. Aetna Casualty & Surety Co., 903 F.2d 910 (2d Cir. 1990) and Unigard Security Insurance Co. v. North River Insurance Co., 4 F.3d 1049 (2d Cir. 1993), noting that the relevant language in the certificates at issue was nearly identical to that presented in Bellefonte.
On appeal, the Second Circuit “cast doubt on the continued force of Bellefonte and Unigard,” and, by certification, asked the New York Court of Appeals to decide whether New York precedent:
impose[s] 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.
The Court of Appeals answered the question in the negative, emphasizing that “the standard rules of contract interpretation apply” and that policy language must be interpreted on a case-by-case basis. Thereafter, the Second Circuit remanded the matter with directions to the district court to “construe each reinsurance policy solely in light of its language, and to the extent helpful, specific context.”
Upon remand and following an evidentiary hearing, the district court ruled that “the plain and unambiguous meaning of the reinsurance contracts is that the dollar amount stated on the facultative certificates caps indemnity payments and also caps expense payments when there are no losses, but does not cap expense payments when there are losses.”
The court relied on several contractual provisions in the certificates, including a Following Form clause, which stated that Global’s liability is “subject in all respects to all the terms and conditions of the Company’s policy.” The court deemed this provision “highly relevant” because under Century’s policies, the insurer must pay expenses in addition to limits of liability.
The court also cited a Payments Provision, which outlined Global’s payment obligations upon Century’s submission of a claim. The court concluded that a sentence in this provision carved out an exception to the “follow form” requirement for cases in which “there is no loss payment” because that sentence referenced the dollar amount that limits indemnity payments. The court therefore concluded that for instances in which no loss is paid, Global’s total liability for both indemnity and expenses is capped at the reinsurance limit. However, where loss payments are made, the court ruled that expense payments are not subject to a cap because a different sentence, which referred to loss payment scenarios, “does not limit the expense costs that Global owes by reference to a limit or dollar amount stated in the certificate.” Thus, the court ruled that for instances in which Global makes a loss payment, the certificates must “follow” the underlying insurance as to the payment of expenses in addition to indemnity.
The court rejected Global’s argument that the certificates’ Preamble, which stated that reinsurance is “subject to the terms, conditions and limits of liability set forth herein,” establishes an overall liability limit. The court stated: “This prefatory language is insufficiently detailed or explicit to override the Payments Provision’s specific directives as to expenses when there are loss payments and when there are no loss payments.” Finally, the court noted that its textual interpretation was confirmed by expert testimony regarding relevant industry custom and practice.