Second Circuit Certifies Question Impacting "Bellefonte Rule"
Calling into question the continued validity of the so-called “Bellefonte Rule,” on December 8, 2016, the United States Court of Appeals for the Second Circuit certified to the New York Court of Appeals the question whether a facultative reinsurance contract limit is presumptively all-inclusive and “caps” the reinsurer’s total exposure even where the reinsured policy pays defense costs in addition to the limit. Global Reinsurance Corporation v. Century Indemnity Company Docket No. 15-2164-cv (December 8, 2016).
In Bellefonte Reinsurance Company v. Aetna 903 F.2d 910 (2d Cir. 1990), the court ruled that a reinsurer was not liable to pay defense costs above the stated reinsurance contract limit. Although litigants argued that this ruling was dependent on the fact that the reinsured policy limits were defense cost-inclusive, a later panel of the Second Circuit applied the “cap” ruling in Bellefonte to a situation where the reinsured policy limit was not cost-inclusive and where the insurer was obligated to pay defense costs in addition to the policy limit. Unigard Security Insurance Company v. North River Insurance Company 4 F.3d 1049 (2d Cir. 1993).
The existence of an all-inclusive “cap” was challenged by the insurer in Global v. Century. Relying on Bellefonte and Unigard, the United States District Court for the Southern District of New York granted the reinsurer’s motion for partial summary judgment on the “cap” issue and Century timely appealed. On appeal, Century argued that Bellefonte and Unigard had been wrongly decided and that, regardless, small but material differences in contract wording required a different result. Specifically, Century argued that its reinsurance contract, which applied the limit “as original,” and the contract’s “follow the form” provision, which provided that the reinsurer’s liability “shall follow that of [Century]” and except as specifically provided is “subject in all respects to the terms and conditions of [the reinsured policy],” required the reinsurer to pay its share of all policy obligations, including its share of defense costs that were paid in addition to the policy limit.
The Second Circuit agreed that the insurer’s argument (as supported by four major reinsurance brokers) that Bellefonte and Unigard were wrongly decided “is not without force.” Global v. Century, Slip. Op. at 15. It reasoned that reinsurance is intended to spread risk of loss and that an absolute cap on the reinsurer’s liability could deprive the reinsured company of coverage for which it had paid premium. While it recognized economic arguments both in favor of and reversing the status quo, the court ultimately certified to the New York Court of Appeals the question whether there is a rule of construction under New York law which renders the reinsurance contract limit “all-inclusive” regardless of whether the reinsured policy limit, likewise, was “all-inclusive.”
The so-called “Bellefonte Rule” has been roundly criticized by insurance and reinsurance industry practitioners since the original case was decided in 1990. While several recent cases have reached “no cap” results based on differing reinsurance contract wordings, the Second Circuit’s opinion in Global v. Century represents the first time the court has squarely addressed and questioned the underpinnings of the original “cap” cases.
White and Williams' Reinsurance Group represented Century Indemnity Company in this case.
If you have questions or would like more information, please contact Ellen Burrows (firstname.lastname@example.org; 215.864.7028), Daryn Rush (email@example.com; 215.864.6360) or another member of our Reinsurance Group.
 The certified question is as follows:
Does the decision of the New York Court of Appeals in Excess Insurance Company v. Factory Mutual Insurance Company, 3 N.Y.3d 577 (2004), impose either a rule of construction, or a strong presumption, that a per occurrence liability cap in a reinsurance contract limits the total reinsurance available under the contract to the amount of the cap regardless of whether the underlying policy is understood to cover expenses such as, for instance, defense costs?
Id. at 2.
 See, e.g., Utica Mut. Ins. Co. v. Munich Reinsurance Co., 2014 WL 6804553 (2d Cir. Dec. 14, 2014).