New York Court of Appeals Disavows the “Bellefonte Rule”
The New York Court of Appeals issued its ruling in the closely-watched Global v. Century case, holding that New York law “does not impose either a rule, or a presumption, that a limitation on liability clause necessarily caps all obligations owed by a reinsurer, such as defense costs, without regard for the specific language employed therein.” With that ruling, New York’s highest court gutted the much-decried “Bellefonte Rule.”
Under Bellefonte, facultative reinsurers avoided paying their proportional share of expenses in addition to indemnity limits where the reinsured policy paid expense in addition. Bellefonte and its progeny were widely criticized by industry professionals and ignored by arbitrators, but were followed in New York state and federal courts, and in courts in some other jurisdictions. Although the New York Court of Appeals limited its ruling in Global v. Century to the specific certified question presented by the Second Circuit, the implications of the decision are clear. The “Bellefonte Rule” has been unrung.
What has become commonly known as the Bellefonte Rule originated from a 1991 decision by the Second Circuit. Exemplifying the adage that “bad facts make bad law,” the Bellefonte case involved complicated factual circumstances that have often been ignored, overlooked and forgotten by judges, lawyers and others. None of the decisions following Bellefonte, for example, acknowledged that the reinsured policy did not provide for the payment of expense in addition to indemnity and that many of the reinsurance contracts at issue contained endorsements expressly providing that the certificate limits, like the reinsured policy limits, were cost inclusive. Bellefonte was recognized by the industry as a decision that reached an arguably correct result for the wrong reasons. The decision prompted immediate concern that a future court might interpret that reasoning as adopting a broad rule that a reinsurer’s liability is subject to an overall cap, even where the underlying reinsured policy pays defense costs in addition.
Those fears materialized a few years later when the Second Circuit issued its ruling in Unigard v. North River. In a twenty-three page decision focused primarily on late notice, the Unigard court summarily concluded in less than one page that “Bellefonte’s gloss upon the written agreement is conclusive.” With those eight words, the Unigard court set in motion more than two decades of discord in the industry as some reinsurers seized upon the ruling and sought to escape liability for expenses. The subsequent New York Court of Appeals decision in Excess Insurance Company Ltd. v. Factory Mutual, which addressed reinsurance coverage for certain claim adjustment expenses not covered by the underlying first-party property policy, purported to follow Bellefonte and Unigard and was read by some courts as creating a presumption that all facultative certificate limits were cost inclusive unless specifically stated otherwise.
More recently, ceding companies’ renewed challenges to the Bellefonte Rule started to gain traction with the Second Circuit in Utica v. Munich Re declining to apply Bellefonte broadly where contract language differed, and a Pennsylvania appellate court affirming a trial court’s ruling that rejected the Bellefonte Rule and held that the reinsurer was liable for its share of expense in addition to indemnity limits. Global v. Century, however, presented a more direct attack on the Bellefonte Rule as reflected clearly in the Second Circuit’s ruling in which the court openly questioned whether Bellefonte and Unigard had been correctly decided, explaining that “we find it difficult to understand the Bellefonte court’s conclusion that the reinsurance certificate in that case unambiguously capped the reinsurer’s liability for both loss and expenses.” The Second Circuit concluded that the Excess decision did not control, but acknowledged the possibility that it created a presumption of cost inclusiveness under New York law. It therefore certified to the New York Court of Appeals the question whether Excess established a rule or presumption that a reinsurance certificate limit creates an overall cap on the reinsurer’s liability.
Answering that question in the negative, the New York Court of Appeals clearly rejected the existence of a “cost inclusiveness” rule or presumption that supersedes the traditional rules of contract interpretation. The Global v. Century case will now return to the Second Circuit to issue further rulings in accordance with the New York Court of Appeals’ decision.
White and Williams LLP represents Century in the Global v. Century case.