The New York Court of Appeals recently answered in the negative a question certified to it by the U.S. Court of Appeals for the Second Circuit regarding prior precedent and whether per occurrence liability limits in facultative reinsurance contracts cap all obligations of the reinsurer, including for expenses such as defense costs. In doing so, the state's highest court reiterated that general principles of contract construction apply to reinsurance contracts.

Specifically, the Second Circuit asked whether the New York Court of Appeals' 2004 decision in Excess Ins. Co. v. Factory Mut. Ins. Co.:

"impose[d] 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?"

In the underlying Second Circuit case, the cedent ("Century") billed its reinsurer ("Global") over $82,000 in loss and over $244,000 in expenses for a particular claim, even though the certificate's stated limit was $250,000. Citing Excess, Global argued the $250,000 limit operated as a cap on its ultimate reinsurance obligations, while Century argued the cap applied only to loss (indemnity) and that Global was still responsible to cover expenses in addition to the limit.

The court began its analysis with a detailed explanation of its decision in Excess. There, the court interpreted the limitations clause in a facultative reinsurance certificate to operate an expense-inclusive cap. In the decade-plus since the Excess decision, however, some courts have interpreted the ruling to mean that third-party defense costs incurred by a cedent are unambiguously or presumptively subject to the amount of the stated liability limits in such certificates.

Answering the certified question in the negative, the court rejected that Excess established such a per se rule on expense-inclusive caps. It distinguished the issues presented in Excess and in the underlying Second Circuit case, with the former addressing whether the reinsurance contract at issue's limitations clause established a cap for both liability costs and expenses or merely liability costs. Specifically, the court noted, the Excess case read the limitations clause in context of the entirety of the reinsurance contract in line with general principles of contract construction. Additionally, the court distinguished Excess on the fact that the expenses incurred were in litigation between the insurer and its policyholder, not costs (such as third-party defense costs) the insurer was obligated to pay pursuant to the terms of the underlying contract itself. Thus, the court concluded that Excess did not address whether similar limitations clauses would require reinsurers cover third-party defense costs in excess of those limits.

The court "h[e]ld definitively" that Excess did not supersede the ordinary rules of contract interpretation that otherwise apply to reinsurance contracts. Thus, under the Court of Appeals holding, New York law does not impose a rule nor a presumption that a liability limitation clause automatically caps all obligations, including defense costs and other expenses, owed by a reinsurer without regard for the specific provisions in the reinsurance contract, and the court answered the Second Circuit's question in the negative. Global Reinsurance Corp. of Am. v. Century Indem. Co., No. 124 (N.Y. Dec. 14, 2017).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.