Article: March 2018: Insurance Litigation Update

No “Security Blanket” Presumption on Facultative Liability Caps. One of the most frequently litigated insurance questions in recent years is whether “defense costs, insofar as they are reinsured by a facultative reinsurance policy, count towards the limit in the [policy’s] reinsurance accepted clause.” Global Reinsurance Corporation of America v. Century Indemnity Co., No. 124, 2017 WL 6374281 (N.Y. Dec. 14, 2017). Or, to put it differently, do reinsurers have a “security blanket” that caps the total reinsurance available to the policy limit. The question is particularly acute where the underlying policy covers defense costs outside policy limits. Unfortunately, courts have not been unanimous, or consistent, in answering.

In recent years, several district courts have held that a reinsurance policy cannot be expected to cover defense costs that go beyond policy limits. Other courts, interpreting the same cases and similar policy language, have held that the question must be addressed on a policy-by-policy basis. Even the Second Circuit Court of Appeals seems split on the issue, recently calling into question its own prior decisions. In December, however, the New York Court of Appeals decisively addressed the question. Declining to adopt any “rule of construction” or even “strong presumption,” the Court of Appeals held that “[r]insurance contracts are subject to the same rules that govern contracts generally”
and there is no bright line rule capping liability. Id.

The decision arose out of a certified question from the Second Circuit Court of Appeals in a case that has been closely watched due to its size and how clearly it presented this issue. In the federal courts, Global Reinsurance Company (“Global Re”) has been engaged in a reinsurance dispute with Century Indemnity Company (“Century”). Century insured Caterpillar, which was sued thousands of times in asbestos litigation. Century’s general liability policies obligated Century to pay both Caterpillar’s liability up to policy limits and defense costs. Those defense costs ran $50 million dollars. When Century sought payment, Global Re took the position that its facultative reinsurance policies were capped at the liability limits specified in the “limits of liability” sections and filed a suit in the Southern District of New York seeking a declaratory judgment.

The Southern District, relying on prior cases from the Second Circuit and the New York Court of Appeals, ruled that the reinsurance certificates capped Global Re’s obligations at the policy limits. When the case got to the Second Circuit, however, the Second Circuit cast doubt on its own earlier opinion in Bellefonte Reinsurance Co. v. Aetna Casualty & Surety Co., 903 F.2d 910 (2d Cir. 1990), and certified a question to the New York Court of Appeals: Does New York law “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?” At that point, the case went from closely watched to a bellwether. In December, a unanimous New York Court of Appeals answered in the negative.

The New York Court of Appeals decision is already being regarded as seminal. The opinion goes far toward resolving one of the most hotly contested issues of recent years. As a result of the ruling, reinsurance carriers should no longer assume that “reinsurance accepted” and “limits of liability” provisions will act as caps on the reinsurance available for defense costs. That does not mean that under New York law reinsurance companies will automatically be required to pay such costs. On the contrary, the Global Re case will be watched closely in the federal courts for an early look at how courts will deal with this question in the absence of a bright line rule. For the next few years, until reinsurers begin to clarify their policies by stating clearly whether defense costs are covered beyond policy limits, there will likely be some upheaval, as courts struggle with particular policies to determine when reinsurers should be liable for defense costs outside policy limits.