Commercial Division Blog

Posted: February 9, 2017 / Categories Commercial, Insurance

Court of Appeals Accepts Certified Question on Interpretation of Reinsurance Contracts

On January 10, 2017, the Court of Appeals accepted a certified question from the Second Circuit in Global Reinsurance Corporation of America v. Century Indemnity Company, concerning the interpretation of reinsurance contracts. At issue is whether the amount specified in a "Reinsurance Accepted" clause of a reinsurance certificate is an absolute cap, applying both to "losses" and defense "expenses" paid by a liability carrier, or only to "losses." This distinction would have a massive financial impact in the case, since 90% of the amounts the liability carrier sought to recoup from the reinsurer were for expenses that were far in excess of the "Reinsurance Accepted" cap. Prior Second Circuit precedents suggested that the cap applies to both losses and expenses. However, the court found that contrary arguments advanced by Century Indemnity Company (the liability carrier), which were supported by amicus briefs from four large reinsurance brokers, were "not without force" and warranted consideration by the New York Court of Appeals. The Court explained:

The purpose of reinsurance is to enable the reinsured to spread its risk of loss among one or more reinsurers. If the amount stated in the "Reinsurance Accepted" provision is an absolute cap on the reinsurer's liability for both loss and expense,then Century's payments of defense costs could be entirely unreinsured. This seems to be in tension with the purpose of reinsurance. Further, Century and amici note that the premium Global received was "commensurate with its share of policy risk." Thus, under Certificate X, Global "received 50% of the net (risk) premium" because it "reinsured a 50% part of the [underlying policy] risk." Interpreting the "Reinsurance Accepted" provision as a cap for both losses and expenses, as we did in Bellefonte, could permit Global to receive 50% of the premium while taking on less than 50% of the risk.

Amici warn that continuing to follow Bellefonte could have "disastrous economic consequences" for the insurance industry. They contend that "potentially massive exposures to insurance companies throughout the industry would be unexpectedly unreinsured[,]" thereby, in amici's view, "create a gaping hole in reinsurance for many companies, and potentially threaten some with insolvency."

We find these arguments worthy of reflection. But there are other considerations as well. For example, the principle of stare decisis counsels against overruling a precedent of this Court, especially in cases involving contract rights, where considerations favoring stare decisis are at their acme. Here, reinsurers may have relied on this Court's opinions in Bellefonte and Unigard in estimating their exposure and in setting appropriate loss reserves. If the interpretive rule set out in those opinions were to shift, such reinsurers would be exposed to unexpected claims beyond their current reserves. . . .

Our intention, therefore, is to seek the New York Court of Appeals as to whether a consistent rule of construction specifically applicable to reinsurance contracts exists; we express no view as to whether such a rule is advisable or what that rule should be. The interpretation of the certificates at issue here is a question of New York law that the New York Court of Appeals has a greater interest and greater expertise in deciding than do we. Accordingly, we conclude that it is prudent to seek the views of the New York Court of Appeals on this important question.

(Citations omitted).