A recent opinion changes the rules for reinsurance

In a recent opinion, the United States Court of Appeals for the Second Circuit set forth a new standard for reinsurance limits. Reinsurers should no longer presume there’s a cap on their exposure to defense costs.

This means that the decisions from Bellefonte v. Aetna and Unigard v. North River Insurance are no longer good law. Indeed, the Second Circuit made it clear that its decision “undermined” those previous decisions, and they “no longer constitute the law of our circuit.”

Global Reinsurance v. Century Indemnity Company

The impetus for this reversal was Century’s claim against Global Reinsurance.

Century had insured Caterpillar Tractor Company with certificates that stated it would cover indemnity losses to its liability limits. These certificates also established that Century would help with Caterpillar’s defense costs, but these litigation expenses would not count toward Century’s liability limits.

Simultaneously, Century had purchased ten facultative reinsurance policies from Global. The certificates for these policies were “follow-form.” Accordingly, they followed the same structure as Century’s certificates with Caterpillar, except for where certain provisions carved out new limits or exclusions.

However, in Bellefonte, the Second Circuit had previously affirmed a decision siding with the reinsurers. Its opinion in that case held that Bellefonte Reinsurance Co. was not liable for defense costs above the liability limits set out in its contract. That decision had established precedent since 1990, and Global argued it did not need to pay Century for defense costs.

Initially, the District Court sided with Global, but Century appealed. Its argument followed two main points:

The reinsurance certificates were “concurrent with” its insurance policies, meaning they were designed to function the same way

The underlying policy Century had provided Caterpillar did not place a cap on defense costs and made litigation expenses separate from liability limits

The Second Circuit felt this argument “merited further consideration,” so it reached out to the New York Court of Appeals for clarification. The question was whether New York law presumed a cap on a reinsurer’s liability for both indemnity and defense costs. The New York Court of Appeals certified there was no such presumption. Instead, it stated that New York held reinsurance certificates to the same standards as other contracts.

Based on this information, the Second Circuit determined the case between Global and Century should follow the language of the contract, taken in the context of reinsurance. Here, the court found that Global’s certificate lacked any provision that would bar defense costs. It ruled that Global needed to help with Century’s defense costs.

What does this mean going forward?

The Second Circuit holds jurisdiction for six districts in Connecticut, New York and Vermont. This case sets a new precedent for all reinsurance claims in those districts. But its influence may yet reach beyond those districts. Even though courts outside the Second Circuit are not bound by this precedent, they may very well follow its logic.

As a result, there’s a new presumption for “follow-form” reinsurance. There is no de facto cap on liability limits that incorporates both indemnity and defense costs. The focus is on the language of the contract. This is now the law in the Second Circuit and may very well echo throughout other courts across the country.