New York High Court Confirms No 'Blanket Rule' On Reinsurance Limits

Author:Mr Jason Lissy and Tyrone R. Childress
Profession:Jones Day
 
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The Situation: This past month, the New York Court of Appeals considered whether New York law imposes a "rule of construction" or "strong presumption" that a reinsurance contract's limit of liability provision caps the reinsurance available for defense costs.

The Result: Declining to adopt a blanket rule, the New York high court determined that the amount of reinsurance for defense costs provided by a reinsurance contract is to be determined on a case-by-case basis in accordance with traditional rules of insurance contract interpretation.

Looking Ahead: Reinsureds should not assume that generically titled "limitation of liability" and "reinsurance accepted" provisions cap the reinsurance available for defense costs and should instead carefully review the precise language of their reinsurance certificates.

Does a reinsurance contract's limit of liability cap the total amount of reinsurance available for defense costs, even where the reinsured policy covers defense costs outside of policy limits? In recent years, this question has generated considerable disagreement among reinsureds and their reinsurers, as well as differing outcomes by the courts to have addressed this issue.1 In December 2017, in the closely watched Global Reinsurance Corporation of America v. Century Indemnity Company, No. 124, 2017 WL 6374281 (N.Y. Dec. 14, 2017) ("Global Reinsurance"), the New York Court of Appeals confirmed that the answer under New York law continues to depend upon the particular language of the parties' reinsurance agreements.

Declining to adopt a blanket rule or presumption, the New York Court of Appeals cautioned that generically titled "limitation of liability" and "reinsurance accepted" provisions must not be assumed to cap the total reinsurance available for defense costs. Instead, the determination of the amount of reinsurance available for defense costs must be made upon an evaluation of the precise language of the reinsurance certificate, construed in accordance with traditional rules of insurance contract interpretation.

Background

Global Reinsurance Corporation of America ("Global") had issued a series of facultative reinsurance certificates to Century Indemnity Company ("Century") between 1971 and 1980, which reinsured part of Century's liability under general liability policies sold to its policyholder, Caterpillar Tractor Company ("Caterpillar").

When thousands of lawsuits were brought against Caterpillar alleging bodily injury resulting from asbestos exposure, Century became obligated to indemnify Caterpillar for its asbestos liability up to the policies' respective limits. Per the terms of the general liability policies, Century was also required to reimburse Caterpillar for its defense costs, which were not subject to the policies' limits.

After Century paid more than $60 million to Caterpillar—approximately 90 percent of which were for Caterpillar's defense costs—Century sought reimbursement from Global, when their reinsurance dispute ensued. Century and Global fundamentally disagreed as to whether the reinsurance certificates' per-occurrence limits of liability capped Global's reinsurance obligations for Caterpillar's defense...

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