The Bellefonte Decision
Generally, reinsurance coverage is provided either proportionately or on an excess of loss basis to direct insurers, called ceding companies. The purpose of obtaining reinsurance coverage is to manage and redistribute risk given the terms and conditions of the underlying policies, and the type of coverage written by the ceding companies. There are typically two types of reinsurance contracts, reinsurance treaties and facultative certificates. Treaty reinsurance agreements are contracts between a ceding company and a reinsurer whereby the reinsurer agrees to provide reinsurance for a certain class of business or multiple classes of business risks. Treaty reinsurance usually attaches automatically upon any loss incurred by a policy issued by the ceding company during the treaty reinsurance period with respect to the diversified class of business it reinsures. With regard to facultative certificates, a reinsurer agrees to provide reinsurance coverage for a single risk or a specific type of exposure, which is based upon the existence of the actual ceding company policy at the time the reinsurance is placed. Therefore, with respect to facultative reinsurance the ceding company is seeking reinsurance of a single policy or individual risk.
It is in the specific area of interpretation of facultative reinsurance coverage that two recent decisions were rendered with respect to the issue of the recoverability of defense costs in excess of the facultative certificates’ limits of liability. In August of 2014, the Federal District in New York ruled that the limit of liability in the reinsurance facultative certificate at issue applied to expense and indemnity combined, even where the reinsurance certificate contained a “follow the fortunes” clause, and the ceding company was obligated to pay defense costs in excess of the limit of liability as provided in 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. August 15, 2014).
According to the facts of the Global case, from 1962 to 1981, Century Indemnity (“Century”) issued various primary and excess liability policies to Caterpillar Tractor Company, some of which were reinsured by facultative certificates issued by Global Reinsurance Corp. of America (“Global”). In the underlying case, Caterpillar brought a declaratory judgment action against demanding that Century be obligated to reimburse Caterpillar for defense expenses in addition to indemnity limits of the Century policies. As a result of the declaratory judgment action, Century became obligated to pay defense expenses in addition to the limit in its policies. Century paid more than $60 million to Caterpillar, most of which was for expenses rather than indemnity. Century continues to make indemnity and expense limits to Caterpillar with respect to asbestos related losses.
Following its payments to Caterpillar, Century sought reinsurance reimbursement from Global for amounts it believed Global owed with respect to indemnity and expense. Global maintained that the limits of liability within the applicable facultative certificates were the maximum amount it must pay under each certificate, inclusive of loss and expense. Century maintained that the Global certificate must follow the terms and conditions of the Century policy, and therefore, Global must pay expenses in addition to the limit of liability in the Global certificate. In its arguments, Century relied on the wording contained in the facultative certificate that provided as follows:
“The liability of the reinsurers specified in item 4 above shall follow that of (Century) and, accept as specifically provided herein, shall be subject in all respects to all terms and conditions of Century’s Policy (“the follow the fortune clause”).”
The certificate also allegedly contained the following clause which provided that:
“All claims involving this reinsurance settled by Century, shall be binding on the reinsurer, who shall bound to pay its proportion of such settlements, and in addition thereto, in the ratio the reinsurer’s loss payment bears to Century’s gross loss payment, its proportion of expenses, other than Century’s salaries and office expenses, incurred by Century in the investigation and settlement of claims and suits…”
In applying New York law, the Federal Court ruled that the reasoning in the Bellefonte v. Aetna decision, issued by the Second Circuit, should control in this manner. In Bellefonte, the Second Circuit found that the facultative reinsurer was not obligated to pay the direct insurer additional sums for defense costs over and above limits applied by the limits stated in the reinsurance certificate. Bellefonte, 903 F. 2d et. al. 910-913. The court further held that reinsurers total liability, for both loss and expenses, under reinsurance certificates at issue were capped at the dollar amount stated in the “Reinsurance Accepted” section of each certificate. Id. et. al. 913.
In the instant matter, the court found the relevant language in the Global certificates to be nearly identical to the language relied on by the Second Circuit in Bellefonte with respect to the limits of liability clause and “Reinsurance Accepted.” Century argued that the result in the instant case should be distinguished from the Bellefonte case because the underlying policies in this matter were required to pay expenses above and beyond limits of liability in the underlying policy, whereas the underlying policies in the Bellefonte did not. Century argued that it was obligated to pay defense costs of the insured in the underlying asbestos suits outside limits of underlying insurance policies and therefore, the reinsurer was also obligated to following the cedant’s fortunes. Relying on Bellefonte, the court rejected this argument, and was not persuaded by the argument that “following the fortunes” doctrine was common in the insurance industry and therefore created liability for the reinsurer above and beyond the liability cap stated in the certificate.
In a similar case, In December of 2014, the Illinois Appellate Court once again incorporated the analysis by the court in Bellefonte, and found that nothing in the facultative certificate or the provisions contained within the facultative certificate can be said to remove expenses from the overall liability cap provided to them in the limit of liability amount indicated on the declarations page. In the case entitled Continental Casualty Company v. Midstates Reinsurance Corporation, Continental Casualty Company (“Continental”) filed a complaint for declaratory judgment seeking a declaration of risks and obligations arising under multiple facultative reinsurance contracts issued by Midstates Reinsurance Corporation (“Midstates”). Midstates issued several facultative reinsurance certificates to Continental between 1981 and 1984, under which Continental sought coverage as a result of numerous claims resulting from environmental liabilities under its policies. The Continental policies provided for expenses to be paid in addition to limits. In its presentation for reinsurance recovery from Midstates, Continental sought expenses in excess of the indemnity limit. In arguing that the facultative reinsurer, Midstates, should pay for expenses in addition to the stated limit, Continental relied on the following language in its argument to the district court:
A…”The liability of the reinsurer in item 7D shall follow that of the company … and shall be subject in all respects to all the terms and conditions of the company’s policy…
The certificate further states:
D. “All claims involving this reinsurance, once settled by the company, shall be binding on the reinsurer, which can be found to proportion of such settlements, and in addition thereto, and to reinsure that the reinsurers loss ratio bears to the company’s gross loss payment with respect to business accepted on an excess of loss basis in the ratio that that reinsurers limit of liability bears to the company’s gross limit of liability with respect to business accepted on a pro rata basis, its proportion of expenses, other than company salaries and office expenses, incurred by the company in the investigation settlement of claims or suits and, with prior consent of the reinsurer to trial court proceedings, its proportion of court costs and interest on any judgment or award.”
In its initial opinion, the Circuit Court granted the defendant’s motion for summary judgment concluding that the aforementioned provisions A and D of the facultative certificate did not remove expenses from the amount of reinsurance liability assumed, but also did not specifically indicate that expenses were to be in addition to the limits as stated in the certificate. ” No. 12 CH 42911, 2013 WL 4807551 (Ill. Cir. Ct., Cook County August 29, 2013) The court cited Bellefonte and the line of cases following the “Bellefonte Principle that facultative reinsurance certificate limits cap the reinsurance limit available transferred both indemnity and expenses…”.
In concurring with the Circuit Court, the Illinois Appellate Court found that there is nothing in the provision item D which would render the terms of the limit of liability ambiguous, and thus imply a provision of allowing for expenses to be recovered in excess of the stated limits. Moreover, the court found that two of the five certificates at issue included language that specifically stated the limits were “inclusive of expenses,” although the others were silent on the issue. In commenting on the certificates that were silent on the issue, the court again concurred “that there was nothing in the plain reading of the certificate which would allow for a cedant to conclude that these policies provided for expenses in addition to the stated limit.”
Interestingly, in discussing the plaintiffs reliance on the International Surplus Lines Insurance Company v. Fireman’s Fund Insurance Company, No. 88 C 320 1990 WL 141464 (N.D. Illinois. Sup. 20,1990) (ISLIC), the court found that the ISLIC case was distinguishable as there was no stated aggregate in the certificates at issue in the ISLIC matter. The court in the instant case concluded that although the ISLIC court did find the reinsurance contract with language similar to the certificate at issue to be ambiguous, that certificate at issue did not contain aggregate limits. The court in the Continental case appeared to rely on that distinction to conclude that as there were aggregate limits within the certificates at issue, the limits of liability were clear and unambiguous. Thus, the court in the Continental case concluded that given that there is no ambiguity within the facultative certificate issued by Midstates, the facultative certificates at issue would be limited to providing coverage for loss and expense combined, subject to a single reinsurance limit.
In reviewing these recent decisions, it appears that the Bellefonte v. Aetna decision, which ruled that a facultative certificate’s limit of liability should be restricted to a single limit inclusive of expenses, is being followed by the courts today. The courts have generally followed the Bellefonte decision, and minus any specific ambiguity in the limit of liability stated within the facultative certificate, the courts will likely apply a single limit of liability to loss and expense. The irony of the Bellefonte decision appears to be that generally a facultative certificate is limited in its terms by design, as it is intended to follow the terms and conditions of the underlying policy. Traditionally, facultative certificates do not contain specific terms and conditions which would be contradictory to any terms and conditions in the underlying policy, as the coverage is intended to reinsure a specific risk or policy. However, as we saw in Bellefonte, which has been followed by various courts over the past 20 years, (including the two recent cases noted herein), even where underlying insurance policies provide for expenses in addition to limits, the courts are unwilling to extend the limits of liability provision and provide for expenses in addition to the stated limited within the facultative certificate. As this general rule continues to be supported in many recent decisions, it is only in the underwriting process where cedants can and should negotiate the terms of the certificate, and include specific language to provide for expenses and addition to limits if they intend to have expenses to be paid by the reinsurance in addition to the stated limit. Without a change in underwriting of these certificates, there will likely not be any change to the way facultative certificate limits are currently applied to losses.