Second Circuit Reconsiders Bellefonte Re Reinsurance Doctrine

The fate of the so-called Bellefonte Re doctrine is now up to the New York Court of Appeals.  On December 8, the Second Circuit issued an opinion in Global Reinsurance Corp. v. Century Ind. Co., No. 15-2164 (2d Cir. Dec. 8, 2016) asking New York’s highest state court to answer whether a District Court erred in declaring that the dollar amount stated in the “Reinsurance Accepted” section of certain reinsurance certificates unambiguously caps the maximum amount that a reinsurer can be obligated to pay a cedent for “losses” and “expenses” combined.

In the underlying case, a court ruled that Century Indemnity was obliged to pay defense costs to Caterpillar in addition to the indemnity limits of its policies for the underlying asbestos suits.  Global Re contended (and the District Court agreed), however, that its obligations under these reinsurance certificates were capped by the limits of coverage, whereas Century Indemnity has argued that its reinsurer must also pay expenses in light of language in the certificates stating “the liability of [Global] specified in Item 4 above shall follow that of [Century] and, except as otherwise specifically provided herein, shall be subject in all respects to all the terms and conditions of [the underlying liability insurance policy].”

Whereas Global Re argued that the amount stated in the “Reinsurance Accepted” section caps the maximum amount that it can be obligated to pay for both loss and expenses combined and that the maximum amount that it can be required to pay under a particular certificate was the “occurrence” limit exceeding Century’s retention ($250,000), Century contended that the amount stated in the “Reinsurance Accepted” provision applies only to “loss” and that Global must pay all expenses that exceed that amount.

Although it would appear that the District Court’s analysis was consistent with the Second Circuit’s opinion in Bellefonte Reinsurance Co. v. Aetna Casualty & Surety Co., 903 F.2d 910 (2d Cir. 1990), which has been a cornerstone of reinsurance litigation for nearly three decades now, the Second Circuit expressed uncertainty with respect to whether it had correctly decided Bellefonte or had taken industry custom and usage into account in its analysis.  Accordingly, it agreed to certify the following question to the New York Court of Appeals:

Does the decision of the New York Court of Appeals in Excess Insurance Co. v. Factory Mutual Insurance Co., 3 N.Y.3d 577 (2004), 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?

In agreeing to reconsider Bellefonte, the Second Circuit was clearly influenced by amicus briefs filed by several large reinsurance brokers warning that continuing to follow Bellefonte could have “disastrous economic consequences” for the insurance industry and that “potentially massive exposures to insurance companies throughout the industry would be unexpectedly unreinsured.” creating a “gaping hole in reinsurance for many companies, and potentially threaten some with insolvency.”

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