Locke Lord QuickStudy: What Goes Around Comes Around

In 1990, the Second Circuit in Bellefonte Reinsurance Co. v. Aetna Casualty & Surety Co., 903 F.2d ‎‎910 (2d Cir. 1990), affirmed a District Court judgment that reinsurers were not obligated to pay ‎additional sums for defense costs over and above the limits of liability specified in a facultative ‎reinsurance certificate. Since then, the Bellefonte rule acted as a de facto cap for both indemnity and ‎expense under a facultative certificate. This issue of ‘limits’ had been hotly contested, and Bellefonte ‎seemed to put it to rest. ‎

BUT NOT SO FAST: After several intervening decisions cast doubt on the continued viability of the ‎Bellefonte rule, the Second Circuit recently ruled that Bellefonte “no longer constitute[s] the law” of ‎the Second Circuit.‎

In Global Reinsurance Corporation of America v. Century Indemnity Company, No. 20-1476, 2021 WL ‎‎6122136 (2d Cir. Dec. 28, 2021), cedent Century sought reinsurance payments from Global ‎Reinsurance under facultative reinsurance certificates. Global filed a declaratory judgment action for ‎application of the Bellefonte rule – that the stated policy limits of the reinsurance certificates “capped ‎Global’s reinsurance obligations with respect to both losses and defense costs.” Id. at *1. The District ‎Court applied the Bellefonte rule and the holding in Unigard Security Insurance Co. v. North River ‎Insurance Co., 4 F.3d 1049 (2d Cir. 1993) to hold in favor of Global.‎^[1] Century appealed, arguing that ‎the reinsurance certificates did not impose a cap on litigation expenses because the certificates ‎‎“were written to be ‘concurrent with,’ or the same as,” the policies that Century issued to its insured, ‎which provided that defense expenses were not subject to the policies’ limits. Id.‎

The Second Circuit certified the question to the New York Court of Appeals, and then remanded the ‎case to the District Court after the New York Court of Appeals answered that New York law does not ‎impose a rule of construction or presumption that “a reinsurance certificate’s liability limit caps the ‎reinsurer’s liability with respect to both indemnity losses and defense costs regardless of whether the ‎underlying policy being reinsured is understood to cover defense costs in excess of the policy’s ‎liability limit.” Id. at *2. On remand, and after conducting an evidentiary hearing that included ‎testimony from six industry experts, the District Court held that the language of the reinsurance ‎certificates did not cap Global’s obligation “to pay its proportionate share of Century’s defense costs ‎when Century suffers indemnity losses.” Id. The District Court explained that “concurrent treatment of ‎defense costs was incorporated into the certificates through each certificate’s ‘follow-form’ clause, ‎which made Global’s reinsurance subject to the same terms and conditions of the underlying ‎Century policies except as otherwise specifically provided.” ‎

Upon examination of the reinsurance certificates’ “unambiguous language as well as the testimony ‎of Century’s experts confirming that a strong presumption of concurrency prevailed in the ‎reinsurance market at the time the certificates were issued”, the Second Circuit affirmed the District ‎Court’s decision, and acknowledged that Bellefonte and Unigard “have been undermined” by the ‎answer of the New York Court of Appeals.‎

Following the Global Reinsurance decision, depending on the wording of a facultative certificate, ‎reinsurers may now find themselves at risk of increased exposure to payment of cedents’ defense ‎costs where the cedent has made an indemnity payment. This decision presents another ‎reminder that when negotiating the terms of reinsurance agreements, do not simply accept ‎boilerplate wording, but take care to be sure that the ‘wording’ reflects what both parties intend, ‎because you’ll never know in advance whether ‘what goes around comes around’.‎

^{[1] In Unigard, the Second Circuit applied the Bellefonte rule to conclude that the follow-form clause in a reinsurance certificate “did not ‎‎‘override the limitation on liability’ and that therefore the reinsurer was not liable for expenses in excess of the liability limit.” ‎4 F.3d ‎at ‎‎1070-71.‎}