Global Reins. Corp. of Am. V. Century Indemn. Co., No. 15-2164-cv, 2016 U.S. App. LEXIS 21822 (2d Cir. Dec. 8, 2017).
In a highly anticipated decision, the US Court of Appeals for the Second Circuit has certified an important question of reinsurance law to the New York Court of Appeals. The appeal had amicus briefs from reinsurance intermediaries supporting the cedent’s argument that the so-called “Bellefonte Principle” should not apply.
The Second Circuit was faced with a cedent’s appeal of a district court’s determination that the dollar amount stated in the “Reinsurance Accepted” section of certificates of facultative reinsurance unambiguously capped the amount the reinsurer was obligated to pay the cedent for both loss and expense combined. The district court’s determination was based upon the Second Circuit’s well-known precedents, Bellefonte Reins. Co. v. Aetna Cas. & Sur. Co., 903 F.2d 910 (2d Cir. 1990), and Unigard Sec. Ins. Co. v. N. River Ins. Co., 4 F.3d 1049 (2d Cir. 1993).
What makes this opinion important and interesting is the court’s analysis of its precedent and its willingness to accept that there was validity to the cedent’s and amici’s arguments that Bellefonte and Unigard were wrongly decided. The court, after indicating that the brokers’ argument was “not without force,” stated that it “found it difficult to understand the Bellefonte court’s conclusion that the reinsurance certificate in that case unambiguously capped the reinsurer’s liability for both loss and expenses. Looking only to the language of the certificate, we think it is not entirely clear what exactly the ‘Reinsurance Accepted’ provision in Bellefonte meant.” While the court did not suggest an outcome or state whether it would overrule its precedents, the opinion, while certifying a question to New York’s highest court for resolution, for the first time outlined the competing arguments and the issues underlying them.
Because the question of how these facultative certificates (“fac certs”) should be interpreted is one of state law – here New York law – the court certified the question below to the New York Court of Appeals for an answer before resolving this appeal:
Does the decision of the New York Court of Appeals in Excess Insurance Co. v. Factory Mutual Insurance Co., 3 N.Y.3d 557 (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?
Most interesting is that the court did not limit the question to fac certs, but used the words “reinsurance contract” in describing the question. Second, the circuit court stated that by certifying this question “we do not bind the Court of Appeals to the particular question stated. The Court of Appeals may modify the question as it sees fit and, should it choose, may direct the parties to address other questions it deems relevant.” The latter suggestion may give rise to the New York Court of Appeals giving consideration to evidence of custom and practice or pattern and practice between the cedent and the reinsurer.
Even more interesting is the circuit court’s analysis of its own decisions (both relied upon by the New York Court of Appeals in Excess). The opinion goes on to state that in neither Bellefonte nor Unigard did the court explain why the “Reinsurance Accepted” provision was an explicit limitation on liability. The court merely described the amount stated in that provision as a cap, but was never asked to adjudicate why it was a cap. The court noted that in Excess, the parties agreed that there was a liability cap in the fac cert and that the court never addressed the question of whether the stated limit represented an absolute coverage limit for losses and expenses combined. Because the Second Circuit was uncertain whether Excess imposed a rule or presumption on the cap issue, it was appropriate to ask the New York Court of Appeals to weigh in.
On January 10, 2017, the New York Court of Appeals accepted the certified question. 2017 N.Y. LEXIS 28 (N.Y. Ct. of App.). The appellant’s brief is due March 13; the respondent’s brief is due April 27; and a reply brief, if any, is due May 12. Notably, the court welcomes motions for amicus curiae participation from those qualified and interested in the subject matter of these certified questions. You can bet that a few amici will be filed now that the New York Court of Appeals has accepted the certified question.