In a reinsurance contract dispute before a federal district court in New York, the court ruled recently that the limit of liability in a reinsurance certificate applies to expense and loss combined, even where the reinsurance certificate contains a “follow the fortunes” clause and the ceding insurer was obligated to pay defense costs outside the limit of liability of the underlying liability insurance policy.  Global Reinsurance Corp. of America v Century Indemnity Co., No. 13 Civ. 06577 (LGS), 2014 WL 4054260 (S.D.N.Y. Aug. 15, 2014).

The cedent paid more than $60 million to its insured in connection with thousands of lawsuits brought against the insured that alleged bodily injury from exposure to asbestos.  Most of the $60 million was for defense expenses as opposed to indemnity losses.  In addition to the $60 million, the cedent continues to incur defense costs and indemnity payments for new asbestos lawsuits brought against the insured.  The cedent issued various primary and excess liability insurance policies to the insured from 1962 to 1981.  The cedent had reinsured some of these underlying insurance policies with the reinsurer through reinsurance certificates.

Each reinsurance certificate stated that reinsurance was provided “subject to” an “amount of liability” or “limits of liability.”  Each certificate contained a “Reinsurance Accepted” section that listed a specific dollar amount ranging from $250,000 to $2 million.  The reinsurer asserted that both defense costs and indemnity payments were subject to the specific dollar amount listed in the “Reinsurance Accepted” section, which constituted its maximum liability under the certificate.  The cedent disagreed, asserting that the dollar amount in the Reinsurance Accepted section applied only to indemnity payments and that the reinsurer was obligated to reimburse defense costs above and beyond that amount.

The reinsurer brought a declaratory judgment action against the cedent, and filed a motion for partial summary judgment, seeking a declaration that the certificates’ limits of liability applied to both defense costs and indemnity payments.  The federal district court granted the reinsurer’s motion. 

Before addressing the merits of the reinsurance contract dispute, the court determined that New York law governed the dispute because the evidence indicated that the reinsurance certificates were issued in New York and because performance of the certificates was expected to occur in New York, the location of the reinsurer.

As to the merits of the dispute, the district court held that defense costs were included within, not excluded from, the limit of liability in the reinsurance certificate.  The court reasoned that the “unambiguous language” of the reinsurance certificate “does not differentiate between reinsurance accepted for loss versus reinsurance accepted for expenses . . . [the certificate] simply provides a total cap on liability.”

In reaching this holding, the court relied upon prior decisions of the US Court of Appeals for the Second Circuit and the New York Court of Appeals that held that expenses were included within the limit of liability in a reinsurance certificate.  Bellefonte Reinsurance Co. v. Aetna Cas. and Sur. Co., 903 F.2d 910 (2d Cir. 1990); Unigard Security Ins. Co. v. North River Ins. Co., 4 F.3d 1049 (2d Cir. 1993); Excess Ins. Co. Ltd. v. Factory Mut. Ins. Co., 3 N.Y.3d 577 (N.Y. 2004).

The cedent argued that Bellefonte was not controlling because it involved different certificate language.  Rejecting this argument, the court determined that the certificate language in the instant case was “nearly identical” to the certificate language in Bellefonte.  According to the court, the certificate language in both Bellefonte and the instant case expressly stated that the reinsurance was “subject to . . . limits of liability” set forth in the reinsurance certificate.  Emphasizing this “subject to” language, the court concluded that the reinsurer’s total liability was capped at the dollar amount stated in the certificate.

The cedent argued that it was obligated to pay the defense costs of its insured in the underlying asbestos suits outside the limits of the underlying insurance policies, and therefore, the reinsurer was obligated to follow the cedent’s fortunes.  The cedent pointed to a follow the fortune clause in the reinsurance certificates that provided, in part, that “the liability of the [r]einsurer . . . shall follow that of [the cedent].”  Relying on Bellefonte, the court rejected this argument, stating that the follow the fortunes clause was intended to “coexist” with the limit of liability rather than “supplant” the limit of liability.

The cedent argued that other language in the follow the fortunes clause demonstrated that defense costs were outside the limit of liability.  The follow the fortunes clause stated that the reinsurer shall pay its proportion of the settlements, “and in addition thereto,” the reinsurer shall pay its proportion of the expenses incurred by the cedent in the investigation and settlement of claims.  Relying on Bellefonte, the court rejected this argument, reasoning that the “in addition thereto” language must be read in conjunction with the “subject to” language and therefore all costs, whether loss or expense, were “subject to” the limit of liability in the reinsurance certificate. 

The court also drew upon the Excess Insurance Co. v. Factory Mutual Insurance Co. case, where the New York Court of Appeals held, according to the court, that in order to exempt expenses from the limit of liability in a reinsurance certificate, the language of the certificate must expressly state that expenses are excluded from the limit of liability.  The court concluded that “[n]othing in the Certificates at issue expressly states that expenses are to be excluded from the Certificate Limits.”

The Global Reinsurance Corp. v Century Indemnity Co. decision will be an important decision as courts and arbitrators continue to address reinsurance coverage for defense costs incurred by ceding insurers.  These disputes will raise issues concerning reinsurance contract language, follow the fortunes, and cedents’ obligations to underlying insureds.